0

2 0

4 0

6 0

8 0

10 0

12 0

1 99 6 1 99 7 1 99 8 19 99

P

P

P

FN 190: E-Bank Management Operation & Mktg.

UNIVERSAL BANK(Expanded Commercial Bank)

AUMENTADO, Ivy FayeDIALINO, Rachel

GOMEZ, Sherina MayPUNZAL, Michael

TANTIANGCO, Jonathan

BBF 4 – 9

Polytechnic University of the PhilippinesCOLLEGE OF ECONOMICS, FINANCE AND POLITICS

Bachelor in Banking and FinanceSta. Mesa, Manila

CONTENT

THE UNIVERSAL BANK

FUNCTIONS AND SERVICES OF UNIVERSAL BANK

LOANS AND INVESTMENT POLICIES

THE BANK’S STATEMENT CONDITION

THE BANK’S CAPITAL ACCOUNTS

THE ADMINISTRATION OF BANK FUNDS

BRANCH BANKING

AUDITING AND CONTROL

DIFFERENT EXAMPLE AND EXISTING UNIVERSAL BANKS IN THE PHILIPPINES

REFERENCES

UNIT 1 – THE UNIVERSAL BANK

NATURE OF UNIVERSAL BANK

UNIVERSAL BANK – is a multiple service bank. It is a commercial bank with expanded commercial functions. It does the commercial bank functions as well as the investment house functions. It offers all sorts of financial services. In the Philippines today universal banks are capitalized at P4.95 Billion. Other banks can be converted into a commercial bank if they can comply with the minimum capital required and other such requirements that the monetary board of the central bank deems necessary.

Expanded commercial bank or commonly known as universal banks which emerged with the introduction of financial reforms of 1980. Expanded commercial banking can be briefly defined as the combination of commercial banking (full domestic and international banking) with the powers of an investment house (underwriting, securities dealership, and equity investment). The investment house operations may be discharged by an expanded commercial bank either (a) in house, that is, by establishing a separate department therefore in the bank; or (b) through the establishment of a separate subsidiary.

While expanded commercial banks may directly or indirectly exercise the functions of an investment house subject only to certain conditions, they may not directly go into the finance company business or leasing. It is a requirement that these two undertakings be engaged in by expanded commercial banks through subsidiary companies.

An expanded commercial bank or any other unibank may acquire 100% of the equity of an investment house, thrift banks, rural banks and other financial undertakings. It may also invest in equities of Commercial banks and non-related undertakings with certain limitations. This concept in banking which is known as “one-stop banking” or “department store banking” enables the clients to avail of all banking services they need from only one bank.

Any bank can be a unibank provided it complies with all the requirements imposed by the Central Bank. This is also true with investment houses, which already in operation as of April 1, 1980. As unibanks, these institutions are required by the Central Bank to put up P1.5 Billion in capital with at least 10% of such capital listed in the stock exchanges for public offering. To be able to comply with the above- mentioned requirements, the proposed unibank may acquire 100% of the equity of an investment house. It may resort to merger or consolidation of a commercial bank and an investment house or a merger or consolidation of banks.

UNIVERSAL BANKING OPERATIONS

THE OPERATIONS OF UNIVERSAL BANK IN ACCORDANCE WITH THE NEW GENERAL BANKING ACT OF 2000CHAPTER IV: Deposits, Loans and Other Operations

Article I. Operations of Universal Banks

SEC. 23. Powers of a Universal Bank. - A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. (21-B)

ORGANIZING UNIVERSAL BANK

An expanded commercial bank is organized like an ordinary commercial bank, except that the minimum paid-in capital of the former before it starts operations is P 1.5 billion.

CHAPTER IIIOrganization, Management and Administration of Banks, Quasi-Banks and Trust Entities

SEC. 8. Organization. - The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions:

8.1. That the entity is a stock corporation (7);

8.2. That its funds are obtained from the public, which shall mean twenty (20) or more persons (2-Da); and

8.3. That the minimum capital requirements prescribed by the Monetary Board foreach category of banks are satisfied. (n)

No new commercial bank shall be established within three (3) years from the affectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank's ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.

SEC. 9. Issuance of Stocks. - The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks: Provided, That banks shall issue par value stocks only.

SEC. 10. Treasury Stocks. - No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan, except when authorized by the Monetary Board: Provided, That in every case the stock so purchased or acquired shall, within six months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (24a)

SEC. 11. Foreign Stockholdings. - Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. (12a; 12-Aa)

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. (n)

SEC. 12. Stockholdings of Family Groups or Related Interests. - Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank. (12-Da)

SEC. 13. Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. (12-Ba)

SEC. 14. Certificate of Authority to Register. - The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued unless the Monetary Board is satisfied from the evidence submitted to it:

14.1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with;

14.2. That the public interest and economic conditions, both general and local, justify the authorization; and

14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. (9)

The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral. (10)

SEC.15. Board of Directors. - The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board of directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (n)

Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 7, RA 7721)The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and video-conferencing. (n)

SEC. 16. Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence. (9-Aa)

SEC. 17. Directors of Merged or Consolidated Banks. - In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21). (13a)

SEC. 18. Compensation and Other Benefits of Directors and Officers. - To protect the funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or

18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or

18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition. (n)

SEC. 19. Prohibition on Public Officials. - Except as otherwise provided in the Rural Banks Act, no appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank or unless otherwise provided under existing laws. (13)

BANGKO SENTRAL NG PILIPINASSUPERVISION AND EXAMINATION SECTOR - Office of Supervisory Policy Development (OSPD)

BASIC GUIDELINES IN ESTABLISHING BANKS

A. GUIDING PRINCIPLE

The new banking organization must have suitable shareholders, adequate financial strength, a legal structure in line with its operational structure, and a management with sufficient expertise and integrity to operate the bank in a sound and prudent manner. Where the proposed owner or parent organization is a foreign bank, the prior consent of its home country supervisor should be obtained.

B. THE APPLICATION

1. The Application for Authority to Establish a Bank (For m No. 1) shall be accomplished in triplicate. The original copy and duplicate copy shall be submitted to the Office of Supervisory Policy Development, Bangko Sentral ng Pilipinas (BSP). The third copy shall be retained by the organizers.

2. The required papers/documents and other information in support of the application are, as follows:

a. “Agreement to Organize a Bank” (Form No. 2).

b. Accomplished bio-data sheet of each of the incorporators, proposed directors and officers, and subscribers (Form No. 3).

1/ Except those to be established under R.A. No. 7721 which shall continue to be governed by Circular No. 51 dated 14 October 1994, as amended. The authority to operate as an expanded commercial bank, on the hand, may be granted only to a non -expanded commercial bank with satisfactory performance for the last two (2) years preceding its application for such authority.

c. Evidence of Filipino citizenship of each of the incorporators, proposed directors and officers, and subscribers if he/she claims to be a Filipino citizen.

1) In case of a natural-born Filipino citizen, original or certified true copy of birth certificate from issuing office. In case the birth certificate cannot be produced by reason of destruction or otherwise, an affidavit to that effect by the civil registrar concerned should be submitted accompanied by an affidavit of the incorporator, director, officer or subscriber himself stating, among other things, the date and place of his birth and the names of his parents and their citizenship at the time of the affiant’s birth; and joint affidavit of two (2) disinterested/unrelated persons stating, among other things, the date and place of the subject’s birth and the names of his parents and their citizenship at the time of the subject’s birth; or

2) In case of a naturalized citizen of the Philippines, the naturalization certificate, certificate of registration thereof with the civil registrar and other pertinent papers; or

3) In the absence of the abovementioned documents, a photocopy of the passport (with original to be presented for verification).

d. Statement of Assets and Liabilities as of a date not earlier than ninety (90) days prior to the filing of application of each of the subscribers, sworn to by the subscriber himself and duly notarized, or certified by a Certified Public Accountant, with supporting schedules showing the following information:

1) In the case of cash in banks: (a) name of depository bank, (b) nature of deposit, and (c) amount of deposit with each bank as of balance sheet date;

2) In the case of securities: (a) name and address of issuing corporation/entity, (b) number of shares owned as of balance sheet date, (c) par value, (d) date and cost of acquisition, and (e) information as to whether the securities are actively traded in the stock market and, if so, their current market price;

3) In the case of land: (a) description (agricultural, etc); (b) area; (c) location; (d) date and cost of acquisition;(e) transfer certificate of title or tax declaration number; (f) amount of encumbrance or lien, if any; (g) assessed value; and (h) current market value (state basis of valuation);

4) In the case of real estate improvements: (a) description of improvement (residential house, etc.) (b) Location; (c) date and cost of acquisition/construction; (d) assessed value; and (e) current market value (state basis of valuation);

5) In the case of accounts receivable, state the name and address of each debtor and the amount due from each; and

6) In the case of accounts payable or other liabilities, state the name and address of each creditor and the amount owed to each. (Evidences of asset ownership such as bank certification/statement, savings passbook, certificate of time deposit, bond or stock certificate, transfer certificate of title, tax declaration, etc. and waiver of rights under Republic Act. No. 1405, as amended, shall be submitted/presented for verification).

e. Statement of Income and Expense for the last three (3) calendar years of each of the subscribers, sworn to by the subscriber himself and duly notarized, or certified by a Certified Public Accountant.

f. Certified photocopies of Income Tax Returns for the last three (3) calendar years of each of the incorporators, proposed directors and officers, and subscribers.

g. Clearances from the National Bureau of Investigation (NBI) and Bureau of Internal Revenue (BIR) of each of the incorporators, proposed directors and officers, and subscribers.

h. For corporate subscribers:

1) Copy of the Board Resolution authorizing the corporation to invest in such bank; and designating the person who will represent the corporation in connection therewith;

2) Copy of the latest Articles of Incorporation and By- Laws;

3) List of directors and principal officers;

4) List of major stockholders, indicating the citizenship and the number, amount and percentage of the voting and non-voting shares held by them;

5) A copy of the corporation’s audited financial statements for the last two (2) years prior to the filing of application;

6) A copy of the corporation’s annual report to the stockholders for the year immediately preceding the date of filing of application;

7) Certified photocopies of Income Tax Returns for the last two (2) calendar years; and

8) BIR clearance.

i. For foreign bank subscribers:

1) A copy of the Board Resolution authorizing the bank to invest in a bank in the Philippines, and designating the person who will represent the bank in connection therewith;

2) Historical background of the bank, as follows:

a) Date and place of incorporation;

b) List of domestic branches, agencies, other offices, subsidiaries and affiliates and their line of business (if different from banking) in the home country;

c) List of foreign branches, agencies, other offices, subsidiaries and affiliates, and their location and line of business (if different from banking);

d) Range of banking services offered; and

e) Financial and commercial relationship with the Philippine Government, local banks, business entities and residents, past or present;

3) A copy each of the bank’s latest Amended Articles of Incorporation and By-Laws;

4) List of the bank’s directors and their citizenship;

5) List of principal officers of the bank’s head office;

6) List of major stockholders, indicating the citizenship and the number, amount and percentage of the voting and non-voting shares held by them;

7) A copy of the bank’s audited financial statements for the last two (2) years prior to the filing of application;

8) A copy of the bank’s annual report to the stockholders for the year immediately preceding the date of filing of application; and

9) A certification from the bank’s home country supervisory authority that the bank’s home country supervisory authority has no objection to the bank’s investment in a bank in the Philippines, and that adequate information on the bank and its subsidiaries will be provided to the Bangko Sentral ng Pilipinas to the extent allowed under existing laws.

j. Detailed Plan of Operation and Economic Justification for Establishing the Bank.

The plan of operation should:

1) Describe and analyze the market area from which the bank expects to draw the majority of its business and establish a strategy for the bank’s ongoing operations;

2) Describe how the bank would be organized and controlled internally;

3) Include a brief discussion about the credit program, systems and procedures as envisioned by the organizers.

The economic justification for establishing the bank should provide information on the economic profile of the region, e.g., population, agricultural/industrial/service projects to be financed).

k. Projected monthly financial statements for the first three (3) years of operations, together with reasonable assumptions. (The financial projections should be consistent and realistic in relation to the bank’s proposed strategic plan, and should show sufficient capital to support the bank’s strategy, especially in the light of start-up costs and possible operational losses in the early stages. Also the projections should be supported by reasonable assumptions and should

include a plantilla of organization, the salaries and allowances of the officers and employees as well as the members of the board of directors, a schedule of proposed banking premises, furniture, fixtures and equipment indicating their estimated cost and monthly depreciation and such other information as may be necessary. See suggested forms.)

l. Proposal by each of the subscribers on how they will raise the amount to pay for their proposed paid-up capitalization in the bank.

3. The application shall be considered filed on a first-come, first-served basis, provided all the required documents are complete and properly accomplished.

4. Pursuant to Section 26 of R.A. No. 7653, approval of application shall be subject, among others, to the condition that any director, officer or stockholder who, together with his related interest, contracts a loan or any form of financial accommodation from: (1) his bank; or (2) from a bank (a) which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the share s of his bank, in excess of five percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held in strict confidence and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account.

5. Prescribed application form, together with other forms, is available at the Office of Supervisory Policy Development Studies and Chartering Group, Supervisory Reports and Studies Office.

C. CAPITAL REQUIREMENT/STOCKHOLDINGS

1. Banks to be established shall comply with the required minimum capital enumerated below or as may be prescribed by the Monetary Board:

Revised: (In Million Pesos)a. Universal Banks - 4,950.0b. Commercial Banks - 2,400.0c. Thrift Banks

- With head office within Metro Manila - 325.0- With head office outside Metro Manila - 52.0

d. Rural Banks- Within Metro Manila - 26.0- Cities of Cebu and Davao - 13.0- In 1st, 2nd & 3rd class cities and 1st class Municipalities - 6.5

- In 4th, 5th & 6th class cities and in 2nd, 3rd & 4th class municipalities - 3.9- In 5th & 6th class municipalities - 2.6

2. At least 25% of the total authorized capital stock shall be subscribed by the subscribers of the proposed bank, and at least 25% of such subscription shall be paid-up, provided that in no case shall the paid-up capital be less than the minimum required capital stated in Item 1 above.

3. The Stockholdings of an individual, family, corporate or business group in any bank shall be subject to the following limits:

a. Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank: Provided, That the aggregate foreign-voting stocks owned by the foreign individuals and non-bank corporations in a domestic bank shall not exceed forty percent (40%) of the outstanding voting stock of the bank. The percentage of foreign owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in that bank.

b. 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 by such individuals and corporations in a domestic bank.

c. The citizenship of the 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. For purposes hereof, the term “controlling stockholders” shall refer to individuals holding more than fifty percent (50%) of the voting stock of the corporate stockholders of the bank.

4. At least 60% of voting stock of any commercial bank shall be owned by Filipino citizens. For any thrift bank, at least 40% of its voting stock shall be owned by Filipino citizens. Subject to Section 4 of Republic Act. No. 7353, all of the capital stock of any rural bank shall be fully owned and held, directly or indirectly, by Filipino citizens or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock.

INCORPORATORS/SUBSCRIBERS, DIRECTORS AND OFFICERS

1. The incorporators /subscribers and proposed directors and officers must be persons of integrity and of good credit standing in the business community. The subscribers must have adequate financial strength to pay for their proposed subscriptions in the bank.

2. The incorporators/subscribers and proposed directors and officers must not have been convicted of any crime involving moral turpitude, and unless otherwise allowed under the provisions of existing laws are not officers and employees of a government agency,

instrumentality, department or office charged with the supervision of, or the granting of loans to banks.

3. A bank may be organized with not less than five (5) or more than fifteen (15) incorporators. In case there are more than fifteen (15) persons initially interested in organizing and investing in the proposed bank, the excess may be listed among the original subscribers in the Articles of Incorporation.

4. The number of members of the board of directors of the bank shall not be less than five (5) nor more than fifteen (15) and shall always be in odd numbers and at least two (2) of the directors are “independent directors”. An independent director shall mean a person who –

a. Is not or has not been an officer or employee of the bank/quasibank/ trust entity, its subsidiaries or affiliates or related interests during the past three (3) years counted from the date of his election;

b. Is not a director or officer of the related companies of the institution’s majority stockholder;

c. Is not a majority shareholder of the institution, any of its related companies, or of its majority shareholder;

d. Is not a relative within the fourth degree of consanguinity or affinity, legitimate or common-law of any director, officer or majority shareholder of the bank/quasi-bank/trust entity, or any of its related companies;

e. Is not acting as a nominee or representative of any director or substantial shareholder of the bank/quasi-bank/trust entity, any of its related companies or any of its substantial shareholders; and,

f. Is free from any business or other relationship with the institution or any of its major stockholders which could materially interfere with the exercise of his judgment, i.e., has not engaged and does not engage in any transaction with the institution, any of its related companies or any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arm’s length and could not materially interfere or influence with the exercise of his judgments.

5. At least two-thirds (2/3) of the members of the board of directors of any commercial bank shall be Filipino citizens; at least a majority of the members of the board of directors of any thrift bank shall be Filipino citizens; and all members of the board of directors of a rural bank shall be Filipino citizens.

6. No appointive or elective public official, whether full-time or part-time shall at the same time serve as officer of a commercial bank or a thrift bank except in cases where such service is

incident to financial assistance provided by the government or a government-owned or – controlled corporation to the Bank.

7. The proposed directors and officers of the bank shall be subject ct to qualifications and other requirements of existing laws, rules and regulations of the BSP, as follows:

a. Qualifications of a director. A director shall have the following minimum qualifications:

1. He shall be at least twenty-five (25) years of age at the time of his election or appointment;

2. He shall be at least a college graduate or have at least five (5) years experience in business;

3. He must have attended a special seminar for board of directors conducted or accredited by the BSP: Provided, That incumbent directors as well as those who will be elected after the approval of this circular must attend said seminar within a period of six (6) months from the date of this circular or from the date of their election, as the case may be; and

4. He must be fit and proper for the position of a director of the bank/quasi-bank/trust entity. In determining whether a person is fit and proper for the position of a director, the following matters must be considered:

- integrity/probity; - competence; - education; - diligence; and - experience/training .

For commercial banks, the President must, in addition to the abovementioned minimum qualifications, have at least two (2) years experience in banking and/or finance. For thrift banks and rural banks, any one of the President, Chief Operating Officer or General Manager must, in addition to the abovementioned minimum qualifications, have at least two (2) years experience in banking and/or finance.

The foregoing qualifications for officers shall be in addition to those already required or prescribed under existing laws.

Disqualifications of a director. Without prejudice to specific provisions of law prescribing disqualifications for directors, the following are disqualified from becoming directors:

a. Permanently disqualified

Directors / officers / employees permanently disqualified by the Monetary Board from holding a director position:

1. Persons who have been convicted by final judgment of the court for offenses involving dishonesty or breach of trust such as estafa, embezzlement, extortion, forgery, malversation, swindling and theft;

2. Persons who have been convicted by final judgement of the court for violation of banking laws;

3. Persons who have been judicially declared insolvent, spendthrift or incapacitated to contract; or

4. Directors, officers or employees of closed banks/quasi-banks/trust entities who were responsible for such institution’s closure as determined by the monetary board.

b. Temporarily disqualified

Directors/officers/employees disqualified by the Monetary Board from holding a director position for a specific/indefinite period of time. Included are:

1. Persons who refuse to fully disclose the extent of their business interest to the appropriate supervising and examining department when required pursuant to a provision of law or of a circular, memorandum or rule or regulation of the BSP. This disqualification shall be in effect as long as the refusal persists;

2. Directors who have been absent or who have not participated for whatever reasons in more than fifty percent (50%) of all meetings, both regular and special, of the board of directors during their incumbency, or any twelve (12) month period during said incumbency. This disqualification applies for purposes of the succeeding election;

3. Persons who are delinquent in the payment of their obligations as defined hereunder:

a. Delinquency in the payment of obligations means that an obligation of a person with a bank/quasi bank/trust entity where he/she is a director or officer, or at least two obligations with other banks/financial institution, under different credit lines or loan contracts, is past due pursuant to Secs. X306 and 4308Q of the Manual of Regulations;

b. Obligations shall include all borrowings from a bank/quasi bank obtained by:

i. A director or officer for his own account or as the representative or agent of others or where he/she acts as a guarantor, endorser, or surety for loans from such financial institutions;

ii. The spouse or child under the parental authority of the director or officer;

iii. Any person whose borrowings or loan proceeds were credited to the account of, or used for the benefit of a director or officer;

iv. A partnership of which a director or officer, or his/her spouse is the managing partner or a general partner owning a controlling interest in the partnership; and

v. A corporation, association or firm wholly owned or majority of the capital of which is owned by any or a group of persons mentioned in the foregoing Items (i), (ii) and (iv); This disqualification shall be in effect as long as the delinquency persists.

4. Persons convicted for offenses involving dishonesty, breach of trust or violation of banking laws but whose conviction has not yet become final and executory;

5. Directors and officers of closed banks/quasibanks/ trust entities pending their clearance by the Monetary Board;

6. Directors disqualified for failure to observe/discharge their duties and responsibilities prescribed under existing regulations. This disqualification applies until the lapse of the specific period of disqualification or upon approval by the Monetary Board on recommendation by the appropriate supervising and examining department of such directors’ election/re-election;

7. Directors who failed to attend the special seminar for board of directors required under item 3 of subsecs. X141.2/4141Q.2. This disqualification applies until the director concerned had attended such seminar;

8. Persons dismissed/terminated from employment for cause. This disqualification shall be in effect until they have cleared themselves of involvement in the alleged irregularity;

9. Those under preventive suspension; or

10. Persons with derogatory records with the National Bureau of Investigation (NBI), court, police, interpol and monetary authority (central bank) of other countries (for foreign directors and officers) involving violation of any law, rule or regulation of the Government or any of its instrumentalities adversely affecting the integrity and/or ability to discharge the duties of a bank/quasi bank/trust

entity director/officer. This disqualification applies until they have cleared themselves of involvement in the alleged irregularity.

Disqualifications of an Officer

1. The disqualifications for directors mentioned in Subsecs. X143.1 and 4143Q.1 shall likewise apply to officers, except that stated in Items b.2 and b.7.

2. Except as may be authorized by the Monetary Board or the Governor, the spouse or a relative within the second degree of consanguinity or affinity of any person holding the position of Chairman, President, Executive Vice President or any position of equivalent rank, General

Manager, Treasurer, Chief Cashier or Chief Accountant is disqualified from holding or being elected or appointed to any of said positions in the same bank/quasi-bank; and the spouse or relative within the second degree of consanguinity or affinity of any person holding the position of Manager, Cashier, or Accountant of a branch or office of a bank/quasi-bank/trust entity is disqualified from holding or being appointed to any of said positions in the same branch or office.

3. In the case of Universal Banks, Commercial Banks, and Thrift Banks, any appointive or elective officials whether full time or part time, except in cases where such service is incident to financial assistance provided by the government or government-owned or controlled corporations or in cases allowed under existing law.

4. In the case of Cooperative Banks, any officer or employee of the Cooperative Development Authority or any elective public official, except a barangay official.

5. Except as may otherwise be allowed under C.A. No. 108, otherwise known as “The Anti-Dummy Law”, as amended, foreigners cannot be officers or employees of banks The foregoing disqualifications for officers shall be in addition to those already required or prescribe under existing laws.

UNIT 2 – FUNCTIONS AND SERVICES OF UNIVERSAL BANK

THE DEPOSIT FUNCTION

Importance of deposits; sources of deposits

One of the major functions of commercial and universal banks is the deposit function. Bank deposits are the life blood and chief source of funds of a bank. Without it the banking institution will never survive, without deposit it cannot be considered as a bank. “Only entities duly authorize by the monetary board of the central bank may engage in lending of funds obtain from the public through receipts of deposits of any kind, and all entities regularly conducting such operation shall be considered as banking institution”

Types of deposit and their characteristics

Savings deposit- this deposit is made for the purpose of accumulating saving, this is an interest earning deposit which is evidence by a passbook. Withdrawals are made through the use of deposit slip. Interest earned is subject to withholding tax

Characteristics of Savings Deposits

Institution reserves the right to require 7 days notice prior to a withdrawal

No specified maturity date

Limits on transfers

Limits on withdrawals

Demand deposit- this deposit is made payable on demand. Checks are presented for encashment upon endorsement. This is non-interest earning deposit evidence by checkbook.

Time deposit- this deposit are withdrwable at a fixed determinable future time. It is an interest earning deposit higher than savings deposit and evidence by time deposit certificate. Interest earned is subject to withholding tax.

Characteristics of Time deposits

Interest varies on the amount and term `It has maturity date The term must be 30 days above

Opening of new account

Who may open a account requirementsSingle name individual account

Proof of identity ID/SSSS/drivers license/passport

Joint individual account Proof of identity ID/SSSS/drivers license/passportSole proprietorship DTI license Partnership SEC license/ articles of co-partnership Corporation SEC license/ articles of incorporation ,by-laws, board

resolution, authorize signatoriesFiduciaries/ in trust for Proof of identity ID/ individual/ corporation/ authority to

administer the property for the benefit of the otherUnincorporated group Resolution/ official signatories

Procedure in opening of bank account

1.Prepare at least two (2) valid IDs: Passport

Current Driver's License (accompanied by OR) Professional Regulation Commission (PRC) ID Major Credit Cards with picture Permit to Carry Firearms New/Laminated Social Security System (SSS) / Government Services Insurance

System (GSIS) / Tax Identification Number (TIN) Card Company ID Postal ID Current School ID, for students ***

2.Go to any Bank Branch. 3.When you get to the branch, proceed to the new accounts section. You will be asked to

fill out the account opening form and sign on the signature cards. The Bank Officer will guide you through the whole process.

Receiving of deposit; duties of the receiving teller

On currencies:

1. Examine the coins/notes/bills are note fake, counterfeited, or demonetarized or the identification of which is impossible. Notes, which have lost more than 2/5 of its surface; coins which show sign of clipping or perforation are not accepted as deposits.

2. Count check and denominations if it tallies with the amount as shown in a deposit slip.3. If the amount agrees, validate the deposit slip in the teller’s machine as “cash in”,

retained the currencies and rubber stamp and sign the deposit slips for purposes of identification and forward the same to the bookkeeper for posting to the depositors account.

4. Incorrect total or wrong machine validation should be avoided.5. Sort and bundle monies according to denomination.6. Turn over the money to the cashier which will form cash in vault.

On check deposit:

1. Examine the important features as it appears on the face of the check.2. Recheck recomputed the particulars of the check as written in the deposit slip.3. Validate the deposit slip in the teller’s machine as ”cash in” and forward to the proof

section and to the bookkeeper section for posting to subsidiary ledger 4. The grand total of the deposit made for the day must be summarized and

transferred into debit ticket which will be taken in proof section.

Paying operation l duties of the paying teller:

On “on us” check

1. Accept the check and forward it to the bookkeeper.

2. The beekeeper if the balance is sufficient will attach the check to the ledger and forward the same to the sig nature verifier who shall examine whether the signature is authentic or legitimate by comparing signature cards. Otherwise, it will be returned if it appears irregular with signature officially submitted in the bank.

3. The approving official shall act on the encashment after; a. verification of signature;b. balance verification net of uncollected deposit, free from any hold out or hold

payment order; c. checking if date in the is note post-dated or antedated;d. properly endorse ande. Free from alteration or alteration duly signed.

4. The ledger and check are returned to the bookkeeper for posting for the ledger.5. The check is sent back to the teller for payment.6. The teller will ask the payee to present his/her credential for the purpose of

identification or somebody in the bank that can identify in the latter.7. The teller ask the payee to endorse the check, give the money and validate the

check as in the teller’s machine as “cash out”.

The purpose of clearing house

Bank may pay checks drawn from other bank ort or accept deposit to credit to the account. These checks are claimed by sending their representative to the drawee bank and vice versa, for their respective counter claims. These process is tedious, inconvenient and costly... check deposit can be withdrawn/ encashed by only after it has been cleared in order for the check to be cleared it must be presented to the drawee bank known as special clearing or through the clearing house also known as regular clearing

Thus, a clearing house has been designs to make interbank settlement faster, easier and convenient all banks authorize by the Bangko Sentral ng Pilipinas are member of the clearing house. In metro manila, checks are cleared in the Philippine Clearing house Corporation, a private firm owned by member banks located at the BSP. The clearing process is done through computerization Reserve requirement. The detail of the checks is encoded to the computer which is hook online to the clearing house. At the end of the day the physical check is brought to thee bangko sentral for confirmation/verification together with the clearing statement. Regional check drawn in metro manila is processed through the regional clearing unit of BSP.

Objective of clearing operation:

1. To eliminate costly process of presenting checks to individual drawee bank;2. To have one instead of many bank settlement;3. To expedite settlement of ban k through offsetting by means of crediting/debiting

their account in the BSP with the minimum cash payment for the balance.

Deposit liability subject to reserve:

Reserve requirement in percenta. Peso deposit

1.demand deposit 10%-50% 2 savings deposit 5%-25% 3 time deposit 5%-25%

b. Foreign currency 1.demand deposit 50%-100% 2 savings deposit 50%-100% 3 time deposit 50%-100%

Rationale of the reserve requirement

The law has required that all bank must have a reserve deposit to the Banko Sentral ng Plipinas the computation is base on the percentage prescribe by the Monetary board on various deposit liabilities. The rate may vary to the amount of money supply. If there is more money in the circulation, which will result to inflation, the rate will be increased. Conversely if the money supply is less the rate is reduced. Banking institutions increase money supply through grants of credit. To control the money in circulation, the statutory reserve requirements were impose by the central bank.

Reserve requirement

In order to control the volume of money created by the credit operation of the banking system all banks operating in the Philippines shall be require to maintain reserve against their deposit liabilities.

Since the requirement to maintain bank reserves is imposed to control the volume of money, the Bangko Sentral ng Pilipinas shall not pay interest on the reserve maintain on it, unless the monetary board decided otherwise warranted by the circumstances.

The Monetary Board may fix and when it deems necessary, alter the minimum reserve ratio to peso deposit and such ratio shall apply to all bank of the same category.

The reserve portion of each bank shall be calculated daily on the bases of the amount at the close of business for the day off institutions reserve and the amount of its liability account against which reserves are required to be maintained

THE LENDING FUNCTION

What Is a Bank Loan?

A bank loan is a monetary loan received from a commercial lender. The loan may have a specific purpose, such as a car loan or a home loan. It will have a predetermined duration, and the loan will have an interest rate that is either fixed or adjustable. Generating loans and

charging interest on those loans is the very purpose of a modern bank. Banks even loan money to one another occasionally through a facility known as the Fed funds rate.

Significance

The significance of bank lending cannot be overstated. Bank loans drive the United States economy. Bank loans provide the capital for businesses to start and expand. Bank loans also meet the payrolls that keep America working. Home ownership would be almost nonexistent if it weren't for bank loans. Credit cards are a type of unsecured bank loan, and they help to drive retail sales. In 2008, the collapse of the sub-prime mortgage industry caused a massive constriction in bank lending, leading to a 40+ percent drop in the stock market and the onset of a recession.

Function

The function of a bank loan is to provide the bank customer with the necessary funds to accomplish the purpose of the loan, and to provide the bank interest income. Most bank loans are made on collateral in one way or another, and therefore protect the bank from loss in the case of loan default. The majority of bank loans will be for a set duration at a fixed rate of interest.

The first step in attaining a bank loan is for a bank customer to fill out a loan application. The application will include personal information, financial information and questions about the purpose of the loan. Once submitted, the application will go into underwriting, where the bank will make a decision on whether or not to loan the money and at what rate of interest. The bank will investigate the customer's credit rating. If it is acceptable, the bank will issue the loan with an interest rate corresponding to the customer's credit score. The higher a customers credit score, the lower the interest rate.

Some loans carry adjustable interest rates. These loans usually begin with a low, fixed rate of interest for a predetermined period of time. Once that period of time elapses, the adjustable rate interest provision of the loan is triggered. The rate of the loan adjusts up or down at predetermined intervals for the life of the loan, based upon the loan's underlying index. Adjustable rate loans almost always contain a maximum interest rate cap. Once that cap is reached, the interest rate cannot adjust any higher.

Types

There are many types of bank loans available. The most common types are car loans (both new and used), home loans (both fixed and adjustable rate), credit cards, student loans, business loans in several different forms, and personal loans.

Loans made on collateral--such as car loans and home mortgages--have a security attached to the loan. For example, if a customer stops paying on his car loan, the bank will

repossess the car to protect their interest. The car is then sold to recover the outstanding balance of the loan. The same thing happens when a home goes into foreclosure.

Unsecured loans have no security attached to the loan, and therefore the bank is less protected. Unsecured loans include credit cards, signature loans and student loans. In the case of default on an unsecured debt, the bank may sue the customer to recover the funds. Yet, in reality, the only legal recourse the bank really has is to damage the defaulting customer's credit rating.

For a new business, any business loans attained will probably require a personal guarantee, known as a PG. Even though the loan is in the name and tax ID number of the business, the business owner or business officers must personally guarantee the repayment of the loan. In other words, if the business defaults on the loan, the business owner or officers become personally liable for the repayment of the loan.

Considerations

Before applying for a bank loan, a bank customer must consider how much the loan will ultimately cost by totalling the principal and interest payments over the term of the loan. He should decide whether it would be a better idea to just save the money and not take out the loan. In the case of a home loan, this is not realistic for most people, but saving money for a larger down payment can lower the interest rate on a home loan.

Warning

Do not take out a bank loan if you do not have the ability to repay the loan. In the case of home loans, delinquent payments can result in foreclosure. Likewise, in the case of car loans, delinquent payments can result in the repossession of the vehicle. Aside from the obvious embarrassment a situation like these causes, it also does lasting damage to your credit rating. A home foreclosure can stay on your credit report for up to ten years.

Credit Department

It is the authority concerned with reviewing and auditing the loans and credit facilities.

The Department carries out the following tasks:

Credit Policy:

The department defines and plans the Bank's general policies in the field of credit as well as establishing explicit rules and instructions pertaining to granting credit within the framework of the policies which aim at realizing sound lending status.

Loans:

The department supervises the loan applications from the time they are submitted to the Bank and processed in the concerned departments and sections to be approved in accordance with the guarantees submitted and the credit studies and research of such loans.The loans and credit facilities activity is closely monitored and followed-up and settled in coordination and cooperation with the other departments.

Importance in Bank

If it can be said that one department is more important in a commercial bank than another, surely the credit department is that one. A great deal has been written of late in regard to the systematic gathering of credit information. In a small country bank, the need for classified information regarding borrowers is not so essential to success; but even if the banker feels that he knows each one of his borrowers and just what he is worth, a memorandum file of what has transpired in the loaning account of a customer in the past five or ten years may cause a slightly different decision in regard to a new application. Statements are hard to get in rural communities; because all business men do not keep accounts. Many men who do thousands of dollars worth of business in a year depend entirely upon their check books and stubs as their sole book records. With this class of borrower it will be impossible to obtain more than an estimated statement, but if such facts as can be gathered in this way are reduced to writing and signed by the prospective borrower, they will prove valuable to a tired memory or to the successors or substitute for the incumbent of the presidential chair.

When the community is of such a size that personal acquaintance with every borrower is impossible, or where the population is changing or increasing rapidly, the establishment of a credit department should not be regarded as a useless expense. In large cities such a department is absolutely essential.

The first requisite of a good credit department is an efficient credit man to take charge. To state the qualities that go to make up such a credit man would seem like naming all the virtues and saying these he must have. Some things are essential. The man must have a fair knowledge of accounts so as to be able to read between the lines of a statement. He should be a man of pleasing address, able to meet with and draw out of men the information he desires to know in determining the credit a borrower should have. He should never give offense to a debtor under any circumstances. Knowledge of shorthand would be useful, but it should be used with caution. It is a serious mistake to take a conversation down verbatim. Men dislike to be quoted on such matters and the feeling that every word is being recorded has the effect of sealing their lips rather than opening them. The credit man should keep posted regarding conditions of trade, assignments, judgments, conveyances, mortgages, petitions in bankruptcy, etc., and anything that may concern the bank or its customers. It may seem like sacrilege to suggest that banks should exchange information regarding borrowers, but it frequently happens that two or three banks within a stone's throw of each other loan money to the same borrower and each thinks it is the only creditor.

Credit has been defined as "A question of ability to pay coupled with an intention to pay." Both ability and intention must be assured in order that the credit may be considered a safe proposition. The latter of these requisites is one that must be settled on the basis of past experience, habits of life, character, etc. If a man always has paid his debts and is not living beyond his means, his intention to pay will be practically assured. The ability to pay is quite another matter and more difficult to determine. It is in this end of the credit work that the credit man is able to display his genius. The information that a credit man obtains from others often compares with the following anecdote:

Credit investigation

There are certain facts that a credit man must know in order to determine whether or not the bank will extend credit to a borrower:

1. The character of the management of the business.

2. The character of the business.

3. What the competition is.

4. How the concern is organized to do business.

5. What are their business methods?

6. Do they pay their bills.

7. What are they worth.

8. What do other people think of them.

He must obtain these facts from various sources, and from the information gathered from his conclusions.

Types of loans granted by UNIVERSAL banks

Secured loan

A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral (i.e., security) for the loan.

Mortgage loan

A mortgage loan is a very common type of debt instrument, used to purchase real estate. Under this arrangement, the money is used to purchase the property. Commercial

banks, however, are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.

In the past, commercial banks have not been greatly interested in real estate loans and have placed only a relatively small percentage of their assets in mortgages. As their name implies, such financial institutions secured their earning primarily from commercial and consumer loans and left the major task of home financing to others. However, due to changes in banking laws and policies, commercial banks are increasingly active in home financing.

Changes in banking laws now allow commercial banks to make home mortgage loans on a more liberal basis than ever before. In acquiring mortgages on real estate, these institutions follow two main practices. First, some of the banks maintain active and well-organized departments whose primary function is to compete actively for real estate loans. In areas lacking specialized real estate financial institutions, these banks become the source for residential and farm mortgage loans. Second, the banks acquire mortgages by simply purchasing them from mortgage bankers or dealers.

In addition, dealer service companies, which were originally used to obtain car loans for permanent lenders such as commercial banks, wanted to broaden their activity beyond their local area. In recent years, however, such companies have concentrated on acquiring mobile home loans in volume for both commercial banks and savings and loan associations. Service companies obtain these loans from retail dealers, usually on a nonrecourse basis. Almost all bank/service company agreements contain a credit insurance policy that protects the lender if the consumer defaults.

Unsecured loan

Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e., no collateral is involved).

Meanings and Importance of Financial Statement Analysis

All financial statements are essentially historically historical documents. They tell what has happened during a particular period of time. However most users of financial statements are concerned about what will happen in the future. Stockholders are concerned with future earnings and dividends. Creditors are concerned with the company's future ability to repay its debts. Managers are concerned with the company's ability to finance future expansion. Despite the fact that financial statements are historical documents, they can still provide valuable information bearing on all of these concerns.

Financial statement analysis involves careful selection of data from financial statements for the primary purpose of forecasting the financial health of the company. This is accomplished

by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios.

Managers are also widely concerned with the financial ratios. First the ratios provide indicators of how well the company and its business units are performing. Some of these ratios would ordinarily be used in a balanced scorecard approach. The specific ratios selected depend on the company's strategy. For example a company that wants to emphasize responsiveness to customers may closely monitor the inventory turnover ratio. Since managers must report to shareholders and may wish to raise funds from external sources, managers must pay attention to the financial ratios used by external inventories to evaluate the company's investment potential and creditworthiness.

Although financial statement analysis is a highly useful tool, it has two limitations. These two limitations involve the comparability of financial data between companies and the need to look beyond ratios. Comparison of one company with another can provide valuable clues about the financial health of an organization. Unfortunately, differences in accounting methods between companies sometime make it difficult to compare the companies' financial data. For example if one company values its inventories by the LIFO method and another firm by average cost method, then direct comparisons of financial data such as inventory valuations are and cost of goods sold between the two firms may be misleading. Sometimes enough data are presented in foot notes to the financial statements to restate data to a comparable basis. Otherwise, the analyst should keep in mind the lack of comparability of the data before drawing any definite conclusion. Nevertheless, even with this limitation in mind, comparisons of key ratios with other companies and with industry averages often suggest avenues for further investigation.

An inexperienced analyst may assume that ratios are sufficient in themselves as a basis for judgment about the future. Nothing could be further from the truth. Conclusions based on ratio analysis must be regarded as tentative. Ratios should not be viewed as an end, but rather they should be viewed as a starting point, as indicators of what to pursue in greater depth. They raise may questions, but they rarely answer any question by themselves. In addition to ratios, other sources of data should be analyzed in order to make judgments about the future of an organization. They analyst should look, for example, at industry trends, technological changes, changes in consumer tastes, changes in broad economic factors, and changes within the firm itself. A recent change in a key management position, for example, might provide a basis for optimism about the future, even though the past performance of the firm may have been mediocre.

Few figures appearing on financial statements have much significance standing by themselves. It is the relationship of one figure to another and the amount and direction of change over time that are important in financial statement analysis. How does the analyst key in on significant relationship? How does the analyst dig out the important trends and changes in a company? Three analytical techniques are widely used; dollar and percentage changes on statements, common-size statements, and financial ratios formulas.

UNIT 3 – LOANS AND INVESTMENT POLICIES

THE IMPORTANCE OF A LOAN POLICY

A written loan policy, approved by a bank's board of directors and adhered to in practice, is of critical importance in ensuring that the bank operates within prescribed risk tolerances. In today's fiercely competitive and challenging lending environment, an up-to-date policy, appropriate to an institution's lending function and business plan, may be more important than ever.

ELEMENTS OF AN EFFECTIVE LOAN POLICY

Written loan policies vary considerably in content, length, and specificity, as well as style and quality. No two institutions share the same tolerance for risk, offer the same product mix, and face the same economic conditions. An effective loan policy should reflect the size and complexity of a bank and its lending operations and should be tailored to its particular needs and characteristics. Revisions should occur as circumstances change, and the policy should be flexible enough to accommodate a new lending activity without a major overhaul.

During risk management examinations, examiners make a determination about the adequacy of an institution's loan policy. Bank examiners are guided in their review by regulations, examination guidelines, and common sense.

A loan policy should include more detailed guidelines for each lending department or function. For example, the real estate lending department should comply with specific guidelines appropriate to the size and scope of its operations.

Loan policies should take into account the size and complexity of a loan, the purpose and source of repayment, and the borrower's ability to repay the indebtedness in a timely manner. And among other things, underwriting practices should include a system of independent, ongoing credit review and appropriate communication to management and the board of directors.

When a board sets forth its expectations clearly in writing, management is better positioned to control lending risks, ensure the institution's stability and soundness, and fulfil oversight responsibilities. Furthermore, a well-conceived policy clearly and comprehensively describes management's system of controls and helps examiners identify high-risk areas and prioritize and allocate examination time.

A current and effective loan policy is a tool to help management ensure that a bank's lending function is operating within established risk tolerances. Such a policy is more likely to be consulted and followed by staff and contributes to uniform and consistent board-approved

practices. Therefore, insured institution staff, borrowers, and regulators will be well served by the implementation of a process that helps ensure that a bank's loan policy remains comprehensive, effective, and up to date.

LOAN CEILING

1. Single borrower’s limit – 25% of banks unimpaired capital accounts.2. DOSRI

a. Individual ceiling – not exceed its outstanding deposits and book value of the paid-in capital contribution in the lending bank.

- unsecured loans; not to exceed 30% of total credit accommodations.

b. Aggregate ceiling – not to exceed 15% of loan portfolio or 100% of net worth (as adjusted), whichever is lower.

- Unsecured loans not to exceed 30% of allowable aggregate ceiling or the outstanding direct/indirect loans, whichever is lower.

LOAN TO DEPOSIT RATION - 75% of total deposits (net of required reserves against deposit liabilities and total amount of cash in vault, accumulated by branches, etc. In particular regional grouping)

LOAN PORTFOLIO MANAGEMENT SUPERVISION

Examiners draw conclusions about the quality of a bank’s loan portfolio management from their on-site reviews and from continual supervision of the bank’s lending departments. The purpose and scope of those reviews are discussed briefly in the sections that follow. During their reviews, examiners should focus on identifying a product’s or process’s sources and levels of risk rather than on gathering data. Examiners should identify prospective risks as well as existing ones because prospective risks must be evaluated if long-term safety and soundness is to be ensured.

Asset Quality Reviews

In asset quality reviews, examiners test individual loans for quality. Using a sample of loans, they draw conclusions about the quality of loan supervision, the adequacy of the loan infrastructure, and the level of risk in the portfolio.Traditionally, the analysis of individual loans has been used to determine whether risk ratings are accurate and to build conclusions about loan portfolio management. A more dynamic and efficient approach is to simultaneously use the testing to verify risk ratings and test the lending function itself. For example, a review of newly underwritten credits should be structured to assess the risk in the new transactions as well as to test the effectiveness of loan approval and

other policies and processes that govern credit quality. While this approach requires careful planning and design, the results provide more comprehensive information.

Asset quality reviews can be used to draw conclusions about underwriting practices, compliance with policy, loan administration, the accuracy of loan information systems, the adequacy of financial and collateral documentation, and the effectiveness of loan control functions. These reviews also reveal whether the bank’s lending department is complying with banking law and regulation. The frequency and scope of asset quality reviews should be based on the level and direction of risk and the quality of risk management. The procedures section of this booklet describes factors that should be considered when designing asset quality and other credit examinations.

BANK’S INVESTMENT POLICIES

SEC. 23. Powers of a Universal Bank. - A universal bank shall have the authority to exercise, in addition to the powers authorized for a commercial bank in Section 29, the powers of an investment house as provided in existing laws and the power to invest in non-allied enterprises as provided in this Act. (21-B)

SEC. 24. Equity lnvestments of a Universal Bank. - A universal bank may, subject to the conditions stated in the succeeding paragraph, invest in the equities of allied and non-allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:

24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net worth of the bank; and

24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (25%) of the net worth of the bank.

As used in this Act, "net worth" shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.

The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments. (21-Ba)

SEC. 25. Equity lnvestments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a financial allied enterprise.

A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank. (21-B; 21-Ca)

SEC. 26. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises. - A universal bank may own up to one hundred percent (100%) of the equity in a non-financial allied enterprise. (21-Ba)

SEC. 27. Equity Investments of a Universal Bank in Non-Allied Enterprises.- The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent (35 %) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. (21-B)

SEC. 28. Equity Investments in Quasi-Banks. - To promote competitive conditions in financial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks. (12-E)

UNIT 4 – THE BANK’S STATEMENT OF CONDITION

ARTICLE V - REPORTS AND PUBLICATIONS

SECTION 39. Reports and Publications. — The Bangko Sentral shall publish a general balance sheet showing the volume and composition of its assets and liabilities as of the last working day of the month within sixty (60) days after the end of each month except for the month of December, which shall be submitted within ninety (90) days after the end hereof.

The Monetary Board shall publish and submit the following reports to the President and to the Congress:

(a) Not later than ninety (90) days after the end of each quarter, an analysis of economic and financial developments, including the condition of net international reserves and monetary aggregates;

(b) Within ninety (90) days after the end of the year, the preceding year's budget and profit and loss statement of the Bangko Sentral showing in reasonable details the result of its operations;

(c) one hundred twenty (120) days after the end of each semester, a review of the state of the financial system; and

(d) as soon as practicable, abnormal movements in monetary aggregates and the general price level, and, not later than seventy-two (72) hours after they are taken, remedial measures in response to such abnormal movements.

SECTION 40. Annual Report. — Before the end of March of each year, the Bangko Sentral shall publish and submit to the President and the Congress an annual report on the condition of the Bangko Sentral including a review of the policies and measures adopted by the Monetary Board during the past year and an analysis of the economic and financial circumstances which gave rise to said policies and measures.

The annual report shall also include a statement of the financial condition of the Bangko Sentral and a statistical appendix which shall present, as a minimum, the following data:

(a) The monthly movement of monetary aggregates and their components;

(b) The monthly movement of purchases and sales of foreign exchange and of the international reserves of the Bangko Sentral;

(c) The balance of payments of the Philippines;

(d) Monthly indices of consumer prices and of import and export prices;

(e) The monthly movement, in summary form, of exports and imports, by volume and value;

(f) The monthly movement of the accounts of the Bangko Sentral and of other banks;

(g) The principal data on government receipts and expenditures and on the status of the public debt, both domestic and foreign; and

(h) The texts of the major legal and administrative measures adopted by the Government and the Monetary Board during the year which relate to the functions or operations of the Bangko Sentral or of the financial system.

The Bangko Sentral shall publish another version of the annual report in terms understandable to the layman.

Failure to comply with the reportorial requirements pursuant to this article without justifiable reason as may be determined by the Monetary Board shall cause the withholding of the salary of the personnel concerned until the requirements are complied with.

SECTION 41. Signatures on Statements. — The balance sheets and other financial statements of the Bangko Sentral shall be signed by the officers responsible for their preparation, by the Governor, and by the auditor of the Bangko Sentral.

UNIT 5 – THE BANK’S CAPITAL ACCOUNTS

NATURE AND FUNCTIONS OF BANK’S CAPITAL ACCOUNTS

Sec. X106 Bank Capitals. The following provisions shall govern the capital requirements for banks.

The term capital shall be synonymous to unimpaired capital and surplus, combined capital accounts and net worth and shall refer to the total of the unimpaired paid-in capital, surplus and undivided profits, less:

a. Unbooked valuation reserves and other capital adjustments as may be required by the BSP;

b. Total outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders, and their related interests (DOSRI) granted by the bank proper;

c. Unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates;

d. Deferred income tax;

e. Appraisal increment reserve (revaluation reserve) as a result of appreciation or an increase in the book value of bank assets;

f. Equity investment of a bank in another bank or enterprise, whether foreign or domestic, if the other bank or enterprise has a reciprocal equity investment in the investing bank, in which case, the investment of the bank or the reciprocal investment of the other bank or enterprises, whichever is lower; and

g. In the case of RBs/Coop Banks, the government counterpart equity, except those arising from conversion of arrearages under the BSP rehabilitation program.

With respect to Item “b” hereof, the provisions in Subsec. X326.1 shall apply except that in the definition of stockholders in said Subsection, the qualification that his stockholdings, individually and/or together with his related interest in the lending bank should at least amount to two percent (2%) or more of the total subscribed capital stock of the bank shall not apply for the purpose of this Item.(As amended by Circular No. 560 dated 31 January 2007)

REQUIREMENTS FOR THE MINIMUM PAID-UP CAPITAL

§ X106.1 Minimum capitalization. The minimum capital of Universal Bank (Expanded commercial bank) shall be P 5.4 billion each.

§ X106.2 Capital build-up program

a. Universal Banks (UBs) and Commercial Banks (KBs) which are existing, or which are newly authorized but not yet operating, or banks from which completed applications to operate under an UB/KB authority have been received as of 12 March 1998 but pending action by the BSP, are hereby allowed the following time frame within which to meet the above minimum capital requirement:

(1) P4.5 billion for UBs and P2.0 billion for KBs on or before 24 December 1998;

(2) P4.95 billion for UBs and P2.4 billion for KBs on or before 31 December 1999; and

(3) P5.4 billion for UBs and P2.8 billion for KBs on or before 31 December 2000:*Provided, That for the P 4.95 billion/ P2.4 billion and P5.4 billion/P2.8 billion minimum capital, UBs/KBs shall submit to the BSP a capital build-up program for this purpose within three (3) months from 12 March 1998.

*The target level of capitalization prescribed for banks as of end-2000 has been set aside. The level of required capitalizationas of end-2000 shall be the same as that prescribed as of end-1999.

§ X106.3 Memorandum of Understanding; Prompt Corrective Action Program; sanctions. The following are the policy guidelines and the corresponding sanctions for banks failing to comply with the minimum capital requirements and the corresponding sanctions:

a. Memorandum of Understanding; Prompt Corrective Action Program

(1) The adoption of the Memorandum of Understanding between the bank and the BSP;

(2) The implementation of the Prompt Corrective Action Program as detailed below:

2.1 For undercapitalized banks of up to twenty percent (20%) –

(i) Require the bank to execute a Memorandum of Understanding (MOU) with the BSP, binding itself, among others, to implement a viable capital restoration plan acceptable to the BSP within thirty (30) days from date of notice;

(ii) Require the intensified monitoring by BSP of bank’s financial condition; and

(iii) BSP to conduct a special examination of the bank.

2.2 For significantly undercapitalized banks of up to sixty percent (60%) -

(i) BSP to call a meeting with bank directors/principal officers to discuss and agree on remedial measures to be taken and the timetable for implementation;

(ii) Intensify monitoring by the Supervision and Examination Sector (SES) of the bank’s financial condition;

(iii) BSP to conduct immediately an extensive on-site examination;

(iv) Require the bank to execute an MOU with the BSP, binding itself, among others, to implement a viable capital restoration plan acceptable to the BSP within thirty (30) days from date of discussion. Among the options to be considered are:

- disposition of a majority shareholder’s interest;- sale of assets;- issuance of additional stock/capital infusion;- sale of bank to highest bidder subject to terms set by BSP; and- merger (assisted or unassisted) or consolidation with a stronger bank;

(v) Require the creation of a separate unit in the bank – remedial asset management group which will take care of bank’s bad assets and make progress reports to the BSP;

(vi) Appoint an external auditor at the expense of the bank to perform a financial or operational audit under the terms of reference provided by BSP; and

(vii) If necessary, appoint a consultant specialist to diagnose the problem and to recommend the appropriate remedial measures (i.e., introduce new profit opportunities, improve internal and accounting controls, etc.) to restore bank’s viability.

2.3 For critically undercapitalized banks of more than sixty percent (60%) -

(i) Place the bank under Prompt Corrective Action Unit since this requires more than normal bank supervision;

(ii) BSP to call a meeting with bank’s principal shareholders/directors;

(iii) BSP to conduct immediately an extensive on-site examination;(iv) BSP to conduct an intensive monitoring of bank’s financial condition;

(v) Require the bank to execute an MOU with the BSP, binding itself, among others, to implement a viable capital restoration plan acceptable to the BSP within thirty (30) days from date of meeting. Among the options to be considered are:

- disposition of a majority shareholder’s interest;- sale of assets; - issuance of additional stock/capital infusion;- sale of bank to highest bidder subject to terms set by BSP; and- merger (assisted or unassisted) or consolidation with a stronger bank;

(vi) Create a BSP Ad Hoc Committee to oversee the implementation of the action plan;

(vii) Require the creation of a separate unit in the bank – remedial asset management group to take care of bank’s bad assets and make progress reports to the BSP;

(viii)Appoint an external auditor at the expense of the bank to perform financial or operational audit under the terms of reference of the BSP;

(ix) If bank’s condition further deteriorates to the extent that depositors and creditors protection is at stake and its capital base is already deficient by more than eighty percent (80%), appoint/ assist a resident examiner/comptroller or conservator, if legally feasible, to oversee/ take over management of the bank; and

(x) If necessary, appoint a consultant specialist to diagnose the problem and to recommend the appropriate remedial measures (i.e., introduce new profit opportunities, improve internal and accounting controls, etc.) to restore bank’s viability.

b. Sanctions . The following sanctions for non-compliance with the minimum capital requirements are hereby prescribed:

(1) Monetary penalty - For delayed or non-submission of the capital build-up program reckoned from the time bank was notified in writing up to the time the program has been submitted, per banking day of delay, a monetary penalty of P10,000.00 for Universal Banks and Commercial Banks

(2) Non-monetary penalty - Non-monetary penalties shall depend on the degree of capital deficiency incurred by the Universal banks as follows:

2.1 Up to twenty percent (20%)

- Suspension of authority to invest in non-allied undertakings (for UBs only)- Suspension of authority to invest in allied undertakings- Suspension of securities and dealership functions (for UBs only)- Suspension of branching privileges- Suspension of declaration of cash dividends

2.2 Up to forty percent (40%) - Suspension of authority to invest in non-allied undertakings (for UBs only)- Suspension of authority to invest in allied undertakings- Suspension of securities and dealership functions (for UBs only)- Restrictions on lending to affiliates- Suspension of branching privileges- Suspension of declaration of cash dividends- Restrictions on overall loan growth/investments (new loans to the extent of collections only)- Denial of access to BSP rediscounting facilities- Suspension of authority to accept or handle government deposits

2.3 Up to sixty percent (60%) - Suspension of authority to invest in non-allied undertakings (for UBs only)- Suspension of authority to invest in allied undertaking- Suspension of securities and dealership functions (for UBs only)- Suspension of branching privileges- Suspension of declaration of cash dividends- Restrictions on overall loan growth/investments (new loans to the extent of collections only)- Restrictions on lending to affiliates- Denial of access to BSP rediscounting facilities- Suspension of authority to accept or handle government deposits- Suspension of authority to engage in quasi-banking activities- Suspension of authority engage in derivatives activities- Suspension of FCDU/ EFCDU activities- Suspension of trust operations

2.4 Up to eighty percent (80%) - Suspension of authority to invest in non-allied undertakings (for UBs only)- Suspension of authority to invest in allied undertakings- Suspension of securities and dealership functions (for UBs only)- Suspension of branching privileges- Suspension of declaration of cash dividends- Denial of access to BSP rediscounting facilities- Suspension of authority to accept or handle government deposits- Suspension of authority to engage in quasi-banking activities- Suspension of authority to engage in derivatives activities

- Suspension of FCDU/ EFCDU activities- Suspension of trust operations - Suspension of international banking activities- Suspension of lending activities

2.5 More than eighty percent (80%) - Suspension of clearing privileges- Suspension of granting of bonuses/profit-sharing not covered by existing contracts or By-Laws- Cease and desist

(As amended by Circular No. 585 dated 15 October 2007)

CAPITAL TO RISK ASSETS RATIO

RISK-BASED CAPITAL ADEQUACY RATIO

Sec. X116 Minimum Ratio. The guidelines implementing the revised risk-based capital adequacy framework for the Philippine banking system to conform to Basel II recommendations is provided in Appendix 63b. These guidelines apply to all UBs and KBs, as well as their subsidiary banks and QBs.

TBs, RBs, as well as QBs that are not subsidiaries of UBs and KBs shall continue to be subject to the risk-based capital adequacy framework, as provided below, as well as Subsecs. X116.1 to X116.8.

The risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than ten percent (10%) for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The ratio shall be maintained daily.

(As amended by Circular Nos. 588 dated 11 December 2007, M-2007-019 dated 21 June 2007, 560 dated 31 January 2007 and 538 dated 04 August 2006)

§ X106.4 Prompt corrective action framework. A bank may be subject to Prompt Corrective Action (PCA) whenever any or all of the following conditions obtain:

(1) When either of the Total Risk-Based Ratio [otherwise known as Capital Adequacy Ratio (CAR)], Tier 1 Risk-Based Ratio, or Leverage Ratio (total capital/total assets) falls below ten percent (10%), six percent (6%) and five percent (5%), respectively, or such other minimum levels that may be prescribed for the said ratios under relevant regulations, and/or the combined capital account falls below the minimum capital requirement prescribed under Subsec. X106.1;

(2) The Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk (“CAMELS”) composite rating is less than three “3” or a Management component rating of less than three “3”; and

(3) A serious supervisory concern has been identified that places a bank at more than- normal risk of failure in the opinion of the Director of the examination department concerned, which opinion is confirmed by the Monetary Board. Such concerns could include, but are not limited, to any one (1) or a combination of the following;

(a) Finding of unsafe and unsound activities that could adversely affect the interest of depositors and/or creditors;

(b) A finding of repeat violations of law or continuing failure to comply with Monetary Board directives; and

(c) Significant reporting errors that materially misrepresent the bank’s financial condition.

(Circular No. 523 dated 23 March 2006)

Art. VIII Sec. 108. Minimum Capital Ratios - the Monetary Board may Prescribed minimum ratios which the capital and surplus of the banks must bear to the volume of their assets, or to specific categories thereof and may alter said ratios whenever it deems necessary.

Ratio- is the relationship in quantity/amount or size between two or more things proportion.

The Monetary Board may prescribe minimum ratios on capital and surplus in relation to volume of the assets of the bank as well as to the volume and distribution of bank credit. Higher ratio of capital and surplus will give a better cushion to the bank’s creditors. Italso regulates the distribution of dividends and ensures that the capital and surplus are adequate to protect the depositors, creditors and stockholders.

The most commonly used indicator of a bank’s solvency is the debt equity ratio.

The capital and surplus (equity) assures to protect the interest of the creditors by absorbing the losses that it may incur from its operations.

Sec. 22. The combined capital accounts of each commercial bank shall not be less than an amount equal to ten percent (10%) of its risk assets which is defined as its total assets minus the following assets:

a. Cash on hand;

b. Amounts due from the Central Bank;c. Evidences of indebtedness of the Republic of the Philippines and of the Central Bank,

and any other evidences of the indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines;

d. Loans to the extent covered by hold-out on, or assignment of, deposits maintained in the lending bank and held in the Philippines;

e. Loans or acceptances under letters of credit to the extent covered by margin deposits; and

f. Other non-risk items which the Monetary Board may from time to time; authorize to be deducted from total assets.

The Monetary Board may, consistent with prudent banking and the general economic conditions obtaining at the time, prescribed: Provided, That such ratios shall not be less than five percent (5%): Provided, further, That the reduction from the ratio will apply uniformly to all banks, regardless of category, beyond a certain minimum size with respect to the level of their capital accounts: Provided, finally, That the Monetary Board may subsequently raise a ratio but any such upward adjustment shall be made effective only after a reasonable period of time. The Monetary Board may, at its discretion, require that the ratio of net worth to risk assets be determined on the basis of the combined risk assets of the parent bank and its subsidiaries, financial or otherwise.

Whenever the capital accounts of a bank are deficient with respect to the requirements of this Act, the Monetary Board, after considering a report of the appropriate supervising department on the state of solvency of the institution concerned, shall limit or prohibit the distribution of net profits and shall require that part or all of net profits be used to increased the capital accounts of the institution until the minimum requirement has been met. The Monetary Board may, furthermore, after considering the aforesaid report of the appropriate supervising department and if the amount of the deficiency justifies it, restrict or prohibit the making of new investments of any sort by the bank with the exception of purchases of readily marketable evidences of indebtedness included under Subsection of this Section, until the minimum required capital ratio has been restored.

Where in the process of a bank merger or consolidation, the merged or constituent bank may not be able to comply fully with the net worth to risk assets ratio herein prescribed, the Monetary Board may, at its discretion, temporarily relieve the bank from full compliance with this requirement under such conditions as it may prescribe.

Illustration: The capital of a Universal bank shall not be less than ten percent (10%) of the risk assets minus the non-risk assets. Non-risk assets, as enumerated, refer to those assets the collections of which are guaranteed.

Total Asset P 900 MNon-risk Asset 300 MRisk Asset 600 M

10%

Capital Requirement P 60 M

Generally the prescribe ratios on net worth to risk assets is ten percent (10%). This may be lowered but to not less than five percent (5%).

However, when the capital account of the bank is deficient, the Monetary Board shall:1. Prohibit the bank from distributing dividend;2. Require part of the profit of the bank to be used to increase the capital account until the

minimum requirement has been met; and3. Prohibit the bank from making new investment except purchases of readily marketable

evidence of indebtedness.

UNIT 6 – THE ADMINISTRATION OF BANK FUNDS

RESERVE PROJECTION BY THE BANK MANAGEMENT

ARTICLE VII - BANK RESERVES

SECTION 94. Reserve Requirements. — In order to control the volume of money created by the credit operations of the banking system, all banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities: Provided, That the Monetary Board may, at its discretion, also require all banks and/or quasi-banks to maintain reserves against funds held in trust and liabilities for deposit substitutes as defined in this Act. The required reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in the Bangko Sentral. Reserve requirements shall be applied to all banks of the same category uniformly and without discrimination.

Reserves against deposit substitutes, if imposed, shall be determined in the same manner as provided for reserve requirements against regular bank deposits, with respect to the imposition, increase, and computation of reserves.

The Monetary Board may exempt from reserve requirements deposits and deposit substitutes with remaining maturities of two (2) years or more, as well as interbank borrowings.

Since the requirement to maintain bank reserves is imposed primarily to control the volume of money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances.

SECTION 96. Required Reserves Against Peso Deposits. — The Monetary Board may fix and, when it deems necessary, alter the minimum reserve ratios to peso deposits, as well as to deposit substitutes, which each bank and/or quasi-bank may maintain, and such ratio shall be applied uniformly to all banks of the same category as well as to quasi-banks.

SECTION 97. Required Reserves Against Foreign Currency Deposits. — The Monetary Board is similarly authorized to prescribe and modify the minimum reserve ratios applicable to deposits denominated in foreign currencies.

SECTION 98. Reserves Against Unused Balances of Overdraft Lines. — In order to facilitate Bangko Sentral control over the volume of bank credit, the Monetary Board may establish minimum reserve requirements for unused balances of overdraft lines.

The powers of the Monetary Board to prescribe and modify reserve requirements against unused balances of overdraft lines shall be the same as its powers with respect to reserve requirements against demand deposits.

SECTION 99. Increase in Reserve Requirements. — Whenever in the opinion of the Monetary Board it becomes necessary to increase reserve requirements against existing liabilities, the increase shall be made in a gradual manner and shall not exceed four percentage points in any thirty-day period. Banks and other affected financial institutions shall be notified reasonably in advance of the date on which such increase is to become effective.

SECTION 100. Computation on Reserves. — The reserve position of each bank or quasi-bank shall be calculated daily on the basis of the amount, at the close of business for the day, of the institution's reserves and the amount of its liability accounts against which reserves are required to be maintained: Provided, That with reference to holidays or non-banking days, the reserve position as calculated at the close of the business day immediately preceding such holidays and non-banking days shall apply on such days.

For the purpose of computing the reserve position of each bank or quasi-bank, its principal office in the Philippines and all its branches and agencies located therein shall be considered as a single unit.

SECTION 101. Reserve Deficiencies. — Whenever the reserve position of any bank or quasi-bank, computed in the manner specified in the preceding section of this Act, is below the required minimum, the bank or quasi-bank shall pay the Bangko Sentral one-tenth of one percent (1/10 of 1%) per day on the amount of the deficiency or the prevailing ninety-one-day treasury bill rate plus three percentage points, whichever is higher: Provided, however, That banks and quasi-banks shall ordinarily be permitted to offset any reserve deficiency occurring on one or more days of the week with any excess reserves which they may hold on other days of the same week and shall be required to pay the penalty only on the average daily deficiency during the week. In cases of abuse, the Monetary Board may deny any bank or quasi-bank the privilege of offsetting reserve deficiencies in the aforesaid manner.

If a bank or quasi-bank chronically has a reserve deficiency, the Monetary Board may limit or prohibit the making of new loans or investments by the institution and may require that part or all of the net profits of the institution be assigned to surplus.

The Monetary Board may modify or set aside the reserve deficiency penalties provided in this section, for part or the entire period of a strike or lockout affecting a bank or a quasi-bank as defined in the Labor Code, or of a national emergency affecting operations of banks or quasi-banks. The Monetary Board may also modify or set aside reserved deficiency penalties for rehabilitation program of a bank.

LIQUIDITY AND SOLVENCY

What is Liquidity?

Liquidity means sufficient cash to meet the normal withdrawals of the depositors or obligations to the creditors as they mature. It is the capacity of the bank to meet all its current obligation as they matures.

In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in the sense that these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks, borrowing from a central bank, such as the US Federal Reserve bank, and raising additional capital. In a worst case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run. Most banks are subject to legally-mandated reserve requirements intended to help banks avoid a liquidity crisis.

Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank's value and success is the cost of liquidity. A bank can attract significant liquid funds, but at what cost? Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators.

When is a bank said to be liquid? When there is sufficient cash to meet the withdrawals.

What is liquidation?Liquidation means closing or winding the affairs of business.

Who designates liquidation?

The Monetary Board designates an official of the Bangko Sentral is liquidator.

What is solvency?

Solvency means the adequacy of assets over liabilities. It is the ability of an entity to pay its debts with available cash. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth. The better a company's solvency, the better it is financially. When a company is insolvent, it means that it can no longer operate and is undergoing bankruptcy.

Solvency is a different concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without being solvent (e.g. when they are expanding rapidly). Businesses can be solvent even while losing money (e.g. when they cannibalize future cash flows, like selling accounts receivable). A business is bankrupt when it is unprofitable and insolvent.

CONCEPTS OF LIQUIDITY

Sec. 31. Distribution of assets – in case of liquidation of a bank or quasi-bank, after payment of the cost proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code.

Sec. X196 Voluntary Liquidation. The following guidelines shall be observed when a bank decides to undertake voluntary liquidation as a consequence of voluntary dissolution, such as (i) by vote of the board of directors and stockholders, where no creditors are affected; (ii) judgment of the SEC after hearing the petition for voluntary dissolution; (iii) amending the articles of incorporation to shorten the corporate term.

§ X196.1 Prior Monetary Board approval. Upon voluntary dissolution of a bank pursuant to the provisions of the Corporation Code, voluntary liquidation may be undertaken by the bank itself through its board of directors, by a trustee appointed by the bank, or by a receiver appointed to the bank: Provided, however, That no voluntary dissolution shall be undertaken by a bank without prior approval of the Monetary Board: Provided, further, That requests for approval of a voluntary dissolution shall be accompanied by a liquidation plan which lays down the procedure to be adopted by the bank in the event of liquidation: Provided, finally, That written notice shall be sent to the Monetary Board before actual liquidation is undertaken in accordance with the liquidation plan previously approved by the Monetary Board.

§ X196.2 Liquidation plan. The minimum requirements to be set forth in a liquidation plan are the following:

a. Inventory/Appraisal of assets and liabilities. Submission to the Monetary Board within thirty (30) days from written notice of liquidation, a schedule/inventory and status/appraisal reports on assets and liabilities of the bank.

b. Notice to creditors requirement. Notice by registered mail to all recorded claimants of the bank, and notice by\ publication in a newspaper of general circulation at least once a week for two (2) consecutive weeks, to be made within thirty (30) days from submission of aforesaid inventory of assets and liabilities.

c. Conversion of assets into money. Projected timetable in the conversion, manner of sale (public auction, sealed bidding, or on negotiated basis), notice by publication requirement, and report on liquidation to be submitted to the Monetary Board.

d. Final notice to claimants/creditors. Undertaking of the board of directors/ trustee/receiver to cause, within thirty (30) days from conversion into money of all or substantially all of the assets of the bank, the publication in a newspaper of general circulation at least once a week for two (2) consecutive weeks of a notice giving claimants/creditors fifteen (15) days within which to file their claims.

e. Inventory of remaining claims against the bank. Submission to the Monetary Board of a complete list of all remaining claims against the bank, within thirty (30) days from the deadline given in the final notice to claimants/ creditors.

f. Plan for distribution of proceeds of sales and distribution of liquidating dividends. Submission to the Monetary Board of a distribution plan of assets within thirty (30) days from conversion of all or substantially all of the assets of the bank.

PROVIDING LIQUIDITY FOR LOANS AND LIQUIDITY FOR DEPOSITS

Liquidity for loans

Sec. 83. Loans for liquidity purposes – the BSP may extend loans and advances to banking institutions for a period of not more than seven (7) days without any collateral for the purpose of providing liquidity to the banking system in times of need.

Liquidity means sufficient cash to meet the normal withdrawals of the depositors or obligations to the creditors as they mature. It is the capacity of the bank to meet all its current obligation as they matures. Stability means taht the assets are more than the liabilities. It is synonymous to solvency.

Banks must not only be stable but must always remain liquid.

Does it follow that when a bank is stable it is also liquid?

Not necessarily. It may be stable but short of cash to meet the withdrawals. Henceforth, the bank is illiquid.

The BSP, known as the bank of all banks, as well as the bank of last resort, extend loans and advances to banking institutions suffering liquidity problem for a period of not more than seven (7) days without collateral in the interbank call loan market of the BSP, call money are traded that corresponds to the excess or deficiency of each bank in terms of reserves. These transactions are done primarily to correct reserve requirements.

Liquidity for deposit

The liquidity reserves for commercial banks and NBQBs with respect to deposits and deposit substitutes will now be at 11 percent, up from 9 percent. Meanwhile, the liquidity reserves for CTF and TOFA will now be at 12 percent, from 10 percent. The regular reserve requirements are maintained at 9 percent for deposits and deposit substitutes, and 6 percent for CTF and TOFA. The move is expected to further siphon off another P27 billion. It will be recalled that the Monetary Board earlier raised liquidity reserves by the same percentage effective 27 July.

Given indicators of economic growth for the second quarter, it appears that excess liquidity could still build up in the months ahead. To avoid this and its subsequent impact on inflation either directly or through the impact of peso volatility on inflation, the Board decided to raise anew the liquidity reserve requirement. At the same time, it maintained the regular reserve requirement at its current level to ensure that there will be minimal impact on banks’ intermediation costs. This is so because liquidity reserves may be held in government securities that earn market interest rates.

The Monetary Board added that it will reassess its monetary policy stance, including liquidity reserves, as firmer data on GNP growth become available.

At the same time, the Monetary Board approved the implementing guidelines for the expansion in the coverage of the Currency Risk Protection Program (CRPP). This expansion, which was approved in principle by the Board earlier, is expected to relieve the pressure on the spot market created by market players wanting to frontload their future foreign currency requirements, and by borrowers wanting to cover unmatured foreign currency obligations. The expanded CRPP now covers BSP-registered medium/long-term FCDU loans and bonds with remaining tenor of up to five (5) years booked as of 30 June 2001; and OA/DA obligations of clients other than oil companies. The expansion is not expected to lead to a drain on the international reserves of the BSP, since the settlement of the forward contracts will be in pesos and will cover only the net difference between the contracted forward rate and the prevailing spot rate at maturity.

UNIT 7 – BRANCH BANKING

NATURE OF BRANCH BANKING

It is a retail location where a bank, credit union or other financial institution offers a wide array of face to face and automated services to its customers.

Universal and commercial banks may open branches or other offices within or outside the Philippines upon prior approval of the Bangko Sentral ng Pilipinas.

A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and / or sale of the financial products of its allied undertaking or of its investment house units.

A bank authorized to established branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office. A bank and its branches and offices shall be treated as one unit.

BSP’S REQUIREMENTS FOR THE OPENING OF BRANCHES

Subsec. X151.2 Prerequisites for the grant of authority to establish a branch/banking office. WITH PRIOR APPROVAL OF THE MONETARY BOARD, BANKS MAY ESTABLISH BRANCHES SUBJECT TO THE FOLLOWING PRE-QUALIFICATION REQUIREMENTS:

1. COMPLIANCE WITH THE MINIMUM CAPITAL REQUIRED OR AS MAY BE REQUIRED UNDER EXISTING REGULATIONS, WHICH AT PRESENT ARE AS FOLLOWS:

Bank Category Minimum Capital(In Millions)

Expanded Commercial Banks P 4,950Non-expanded Commercial Banks P 2,400Thrift Banks:

With Head Office within Metro Manila With Head Office outside Metro Manila

P 325P 52

Rural Banks:

Within Metro ManilaCities of Cebu and Davao1st/2nd/3rd class cities and 1st class

P 26 P 13P 6.5

municipalities4th/5th/6th class cities and 2nd/3rd/4thclass municipalities5th and 6th class municipalities

P 3.9

P 2.6

2. THE BANK’S RISK-BASED CAPITAL ADEQUACY RATIO AT THE TIME OF FILING THE APPLICATION IS NOT LOWER THAN TWELVE PERCENT (12%);

3. THE BANK’S CAMELS COMPOSITE RATING IN THE LATEST EXAMINATION IS AT LEAST “3”, WITH MANAGEMENT COMPONENT SCORE NOT LOWER THAN “3”;

4. The bank has established a risk management system appropriate to its operations, characterized by clear delineation of responsibility for risk management, adequate risk measurement system, appropriately structured risk limits, effective internal control system and complete, timely and efficient risk reporting system;

5. NO MAJOR SUPERVISORY CONCERNS OUTSTANDING ON SAFETY AND SOUNDNESS, I.E., THE BANK HAS COMPLIED, DURING THE PERIOD IMMEDIATELY PRECEDING THE DATE OF APPLICATION WITH THE FOLLOWING REGULATORY CHECKPOINTS:

a) No unbooked valuation reserves as of date of application

b) Regular and liquidity reserve requirements on deposits and deposit substitutes

12 weeks

c) Asset and liquidity cover for EFCDU/FCDU liabilities

3 months

d) Ceilings on loans to DOSRI 3 months e) Liquidity floor on government deposits 3 months f) Loans-to-deposits ratio 2 quartersg) Past due loans ratio does not exceed twenty percent (20%) of total loan portfolio

as of date of application

h) No outstanding violation on single borrower’s loan limit and limit on total investment in real estate and improvements including bank equipment

as of date of application

i) No past due obligation with the BSP or with any financial institution

as of date of application

j) No float items outstanding in the “Due From/To Head Office/Branches/ Offices” and “Due from BSP” accounts exceeding 1% of the total resources as of end of

3 months

preceding monthk) Mandatory allocation of credit resources to small and medium enterprises

2 quarters

l) Mandatory allocation of loanable funds for agrarian reform and agricultural credit in general

2 quarters

m)Real estate loans ratio does not exceed twenty percent (20%) of total loan portfolio (for EKBs/KBs only)

as of date of application

n) No findings of unsafe and unsound banking practices

6 months

o) Accounting records, systems, procedures and internal control are adequate

as of date of application

p)The applicant bank has generally complied with banking laws, rules and regulations, orders or instructions of the Monetary Board and/or BSP Management

as of date of application

q)Member in good standing of the Philippine Deposit Insurance Corporation

as of date of application

6. FOR PURPOSES OF EVALUATING BRANCH APPLICATIONS, THEORETICAL CAPITAL SHALL BE ASSIGNED TO EACH BRANCH TO BE ESTABLISHED, INCLUDING APPROVED BUT UNOPENED BRANCHES/OFFICES, AS FOLLOWS (IN MILLIONS):

LOCATION/TYPE OF Bank UB/KB TB/ NATIONAL COOP

RB/LOCAL COOP

1) National Capital Region and the Cities of Cebu and Davao

P 50 P 15 P 5

2) 1st to 3rd class cities P 25 P 5 P 2.53) 4th to 6th class cities P 25 P 5 P 1.54) 1st to 3rd class municipalities

P 20 P 5 P 1.0

5) 4th to 6th class municipalities

P 15 P 2.5 P 0.5

THE ASSIGNED THEORETICAL CAPITAL SHALL BE DEDUCTED FROM EXISTING QUALIFYING CAPITAL AS DEFINED UNDER SUBSEC.. X116.1 FOR PURPOSES OF DETERMINING COMPLIANCE WITH THE TEN PERCENT (10%) RISK-BASED CAPITAL ADEQUACY RATIO.

IF THE APPLICANT BANK’S RISK-BASED CAPITAL ADEQUACY RATIO AFTER DEDUCTING THE ASSIGNED CAPITAL FOR THE PROPOSED BRANCH FROM THE EXISTING QUALIFYING CAPITAL WOULD BE LESS THAN TEN PERCENT (10%), ITS APPLICATION SHALL NOT BE PROCESSED UNLESS IT INFUSED SUCH AMOUNT AS MAY BE NECESSARY TO MAINTAIN ITS RISK-BASED CAPITAL ADEQUACY RATIO TO AT LEAST TEN PERCENT (10%).

7. The bank has been operating profitably FOR THE YEAR IMMEDIATELY PRECEDING THE DATE OF APPLICATION, or in the case of newly-established banks, the submitted projection showed that profitability will be attained on the third year of operations, at the latest;

8. Additional requirements for the establishment of branches of microfinance-oriented banks and/or microfinance-oriented branches of regular banks:

a) Manual of operations on microfinancing duly approved by the board of directors (for microfinance-oriented branches of regular banks only); b) The branch shall have an adequate loan tracking system that allows daily monitoring of loan releases, collections and arrearages, and any restructuring and refinancing arrangements; c) The proposed branch shall be managed by a person with adequate experience or training in microfinancing ACTIVITIES; and d) At least seventy percent (70%) of the deposits generated by the branch to be established shall be actually lent out to qualified microfinance borrowers and the microfinance loans of said branch shall at all times be at least fifty percent (50%) of its gross loan portfolio (for microfinance-oriented branches of regular banks only).

Subsec. X151.3 Application for authority to establish branches. An application for authority to establish a branch shall be signed by the president of the bank or officer of equivalent rank and shall be accompanied by the following information/documents:

1. Business plan detailing the primary banking activities/products and services to be offered; competition analysis to show that its application will not lead to overbanking in the target market; and financial projections for the first three years of operations showing sustained viability, as may be required by the appropriate supervising and examining department. In the evaluation of the business plan, due consideration shall be given to banks that are able or are committed to invest or deploy branch resources in their area of operations;

2. Certified true copy of the resolution of the bank’s board of directors authorizing the establishment of the branch and indicating its proposed site;

3. Organizational set up of the proposed branch showing the proposed staffing pattern; and

4. Certification/Undertaking signed by the president or the executive vice president that the bank has complied or will comply, as the case maybe, with the prerequisites for the grant of authority to establish a branch/banking office under Subsec. X151.2.

Subsec. X151.7 Requirements for opening a branch. After a bank’s application to establish a branch has been approved, it may open the same subject to the following conditions:

a) Submission of the personal information sheet (bio-data) of the proposed manager and other officers of the branch at least thirty (30) days prior to the intended date of opening; and

b) A certification signed by the officer-in-charge of the Branches Department with the rank of a vice president, or its equivalent or by a higher officer that:

1) Installation of the required security devices under Subsec. X165.4 has been complied with; and 2) Requirements enumerated under Subsec. X151.2 have been complied with up to the time of actual opening.

§ X151.8 Relocation/transfer of branches. Transfer/relocation of branches shall be allowed without prior BSP approvalsubject to the following conditions:

a. Notice of transfer to depositors and other creditors by registered mail or Proof of Delivery (POD) Service by the Philippine Postal Corporation (PhilPost) or other mail couriers and posters in conspicuous places in the premises of the banking office to be transferred at least three (3) months prior to the transfer: Provided, That said notification period may be reduced to forty-five (45) days under any of the following circumstances:

(1) As an incentive to merger or consolidation of banks;

(2) As an incentive to purchase or acquisition of majority or all of the outstanding shares of stock of a distressed bank for the purpose of rehabilitating the same; or

(3) The proposed transfer site is within the same barangay or district of the same city or municipality of the branch to be relocated.

b. A certification signed by the head of the Branches Department with the rank of Vice President or its equivalent or by a higher ranking officer informing the appropriate SED of the BSP of the transfer and that the above requirements have been complied with, which shall be submitted not later than five (5) banking days from the date of transfer. The certification shall be accompanied by a certified true copy of the resolution of the bank’s board of directors authorizing the transfer;

c. Branches located in the cities of Makati, Mandaluyong, Manila, Parañaque,Pasay, Pasig and Quezon, and the Municipality of San Juan, Metro Manila may be relocated/transferred anywhere; and

d. Branches located in other areas may be relocated/transferred anywhere except in the cities of Makati, Mandaluyong, Manila, Parañaque, Pasay, Pasig and Quezon, and the Municipality of San Juan, Metro Manila: Provided, That branches of RBs and local coop banks may be relocated/transferred only in areas where they are allowed to establish branches: Provided, further, That existing RBs and local coop banks in cities and municipalities of Metro Manila other than Makati, Mandaluyong, Manila, Parañaque, Pasay, Pasig, Quezon, and San Juan may be relocated/ transferred anywhere, except in the aforementioned cities and municipality.

§ X151.9 Voluntary closure/sale of banking officesa. Voluntary closure. Voluntary closure of banking offices may be affected only with

prior approval of the Bangko Sentral and shall be subject to the following conditions:

(1) Notice of closure to depositors and other creditors by registered mail or Proof of Delivery (POD) Service of the Philippine Postal Corporation (PhilPost) or other mail couriers and posters in conspicuous places in the premises of the banking office to be closed at least three (3) months prior to the closure;

(2) A certification signed by the head of the Branches Department with the rank of vice president or its equivalent or by a higher ranking officer informing the appropriate SED of the BSP of the closure and that the above requirements have been complied with, which shall be submitted at least ten (10) banking days prior to the date of closure. The certification shall be accompanied by a certified true copy of the resolution of the bank’s board of directors authorizing the closure.

b. Sale of branches.

(1) Sale of branches may be allowed with prior approval of the Monetary Board and subject to the following conditions:

(a) The selling and purchasing banks shall secure the prior written consent of the PDIC in the transfer of assets and assumption of liabilities as provided under Section 21 of the PDIC Charter (R.A. No. 3591), as amended by R.A. No. 9302;

(b) The selling bank shall get the prior approval of the BSP to close the branches to be sold subject to the following conditions:

(i) Notice of sale to depositors and other creditors by registered mail or POD Service of the PhilPost or other mail couriers and posters in

conspicuous places in the premises of the banking office at least three (3) months prior to the closure: Provided, That said notification period may be reduced to forty-five (45) days when there is no actual branch closure or disruption of branch operations. The depositors shall likewise be informed of their option to withdraw their deposits or to maintain the same with the acquiring bank;

(ii) A certification signed by its president or executive vice president (EVP) informing the appropriate department of the SES of the closure and that the above requirements have been complied with, which shall be submitted at least ten (10) banking days prior to the date of closure. The certification shall be accompanied by a certified true copy of the resolution of the bank’s board of directors authorizing the closure.

(2) The acquiring bank shall pay a licensing fee per branch as follows:

Type of Bank Within Metro Manila Outside Metro ManilaUBs and KBs - P 1.0 million P 0.5 millionTBs P 0.5 million P 0.25 million

SERVICES OFFERED IN A BRANCHDEPOSIT PRODUCTS

Regular Savings Account

An interest bearing peso-account which requires presentation of a passbook for deposit and withdrawal transactions. Regular Current Account - A non-interest bearing peso account, also known as “Checking or Demand Deposit” Account wherein deposits are made over-the-counter whereas withdrawals are made through the issuance of a check.

Savings Account with ATM Access - An interest bearing peso account wherein deposit and withdrawal transactions are done via Automated Tellering Machines (ATM) 24 hours a day, seven days a week. Deposit and withdrawal transactions may also be done over-the-counter but only during official banking hours/days. Withdrawals may also be made at any Expressnet ATM.

Current Account with ATM Access - A non-interest bearing peso account, also known as “Checking or Demand Deposit” Account wherein deposits are made either through the issuance of a check, via ATM, or over-the-counter in case ATM is not available. Deposits are done either over-the-counter or via ATM.

LOANS FOR COOPERATIVES

1. Loans for Cooperatives 2. Housing Loans 3. Loans for SMEs 4. Loans for LGUs 5. Loans for Countryside Financial Institutions 6. Salary Loan Program

REGULAR LENDING PROGRAM FOR COOPERATIVES

A wholesale credit facility available to agricultural cooperatives, which can either, be relenting to individual members as production loans or utilized to implement income-generating cooperative projects. Eligible Borrowers Cooperatives whose majorities of members are small farmers, fisher folks and small livestock raisers.

Eligible Projects· Agricultural production such as crop, poultry, fishing and livestock · Other agri-based projects

UNIT 8 – AUDIT AND CONTROL

DEFINITION

Audit is an examination and verification of a company’s financial and accounting records and supporting documents by a professional

Audit is a process of evaluation and to measure performances that are based on Standards & Guidelines, identifies the compliance & non-compliance based on Standards and is neutral.

Control is the situation of being under the regulation, domination, or command of another to exercise authoritative or dominating influence over; dire

FORMS OF AUDITING, INTERNAL AND EXTERNAL EXAMINATION

Internal Audit Function

The primary role of internal auditors is to independently and objectively review and evaluate bank activities to maintain or improve the efficiency and effectiveness of a bank’s risk management, internal controls, and corporate governance. They do this by:

1. Evaluating the reliability, adequacy, and effectiveness of accounting, operating, and administrative controls.

2. Ensuring that bank internal controls result in prompt and accurate recording of transactions and proper safeguarding of assets.

3. Determining whether a bank complies with laws and regulations and adheres to established bank policies.

4. Determining whether management is taking appropriate steps to address current and prior control deficiencies and audit report recommendations.

Internal auditors must understand a bank’s strategic direction, objectives, products, services, and processes to conduct these activities. The auditors then communicate findings to the board of directors or its audit committee and senior management.

§ X426.1 Internal audit. The bank’s internal auditor shall include among his functions, the conduct of periodic audits of the trust department or investment management department at least once every twelve (12) months. The board of directors, in a resolution entered in its minutes, may also require the internal auditor to adopt a suitable continuous audit system to supplement and/or to replace the periodic audit. In any case, the audit shall ascertain whether the institution’s trust and other fiduciary business and investment management activities have been administered in accordance with laws, BSP rules and regulations, and sound trust or fiduciary principles.

External Audit Function

An external audit program encompasses engaging an independent auditor to perform a full-scope financial statement audit, a balance-sheet-only audit, an attestation of internal controls over financial reporting, or other agreed-upon external audit procedures. Outsourced or co-sourced internal audit activities are not considered part of an external audit program.

An effective external audit function often provides the board of directors and management with:

1. Reasonable assurance about the effectiveness of internal controls over financial reporting, the accuracy and timeliness in recording transactions, and the accuracy and completeness of financial and regulatory reports.

2. An independent and objective view of a bank’s activities, including processes relative to financial reporting.

3. Information useful to directors and management in maintaining a bank’s risk management processes.

§ X426.2 External audit. The trust and other fiduciary business and investment management activities of a bank shall be included in the annual financial audit by independent external auditors required under Sec. X164. The audit of the assets and accountabilities of the trust department/ investment management department of a bank authorized to engage in trust and other fiduciary business, investment management activities, which shall cover at the minimum a review of the trust/investment management operations, practices and policies, including audit and internal control system, shall be subject to auditing standards to the extent necessary to express an opinion on the financial statements. The audit of the trust/investment management department of a bank authorized to engage in trust and other fiduciary business/investment management activities shall be covered by a separate supplemental audit report to be submitted to the bank’s board of directors and to the BSP within the prescribed period containing, among others things, the statements of condition of trust funds and managed funds and the related statements of earnings of both funds presented separately.

AUDIT REPORTS AND REQUIREMENT OF THE BSP

The external auditor (Included in the List of BSP Selected External Auditors) shall start the audit not later than thirty (30) calendar days after the close of the calendar/fiscal year adopted by the bank. AFS of banks with subsidiaries shall be presented side by side on a solo basis and on a consolidated basis (banks and subsidiaries). The FINANCIAL AUDIT REPORT shall be submitted BY THE BANK to the appropriate supervising and examining department of the BSP not later than one hundred twenty (120) calendar days after the CLOSE OF THE CALENDAR YEAR OR FISCAL YEAR ADOPTED BY THE BANK, together with the following: Information/Data Required Deadline for submission

1. Certification BY THE EXTERNAL AUDITOR on the following:

a. The dates of commencement and termination of audit.

a. For submission together with the FINANCIAL AUDIT REPORT not later than ONE HUNDRED TWENTY (120) calendar days after the CLOSE OF THE CALENDAR YEAR OR FISCAL YEAR ADOPTED BY THE BANK.

b. The date when the FINANCIAL AUDIT REPORT AND CERTIFICATION UNDER OATH STATING THAT NO MATERIAL WEAKNESS OR BREACH IN THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS WAS NOTED IN THE COURSE OF THE AUDIT OF THE BANK were submitted to the board of directors or country head, in the case of foreign bank branches.

c. That the external auditor, partners, associates, auditor-in-charge of the engagement and the members of their immediate family do not have any direct or indirect financial interest with the bank, its subsidiaries and affiliates and that their independence is not considered impaired under the circumstances specified in the Code of Professional Ethics for Certified Public Accountants.

2. Reconciliation STATEMENT for the differences in amounts between the AFS and the submitted Balance Sheet and Income Statement for bank proper (regular and FCDU) and trust department, including copies of adjusting entries effected by the external auditor.

For submission together with the FINANCIAL AUDIT REPORT not later than ONE HUNDRED TWENTY (120) calendar days after the CLOSE OF THE CALENDAR YEAR OR FISCAL YEAR ADOPTED BY THE BANK.

3. Letter of Comments (LOC) indicating the external auditor’s findings and comments on the material weakness noted in the internal control and risk management systems and other aspects of operations.

Within thirty (30) CALENDAR DAYS AFTER SUBMISSION OF THE FINANCIAL AUDIT REPORT. In case no material weakness is noted\ to warrant the issuance of an LOC, a CERTIFICATION UNDER OATH STATING THAT NO MATERIAL WEAKNESS OR BREACH IN THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS WAS NOTED IN THE COURSE OF THE AUDIT OF THE BANK shall be submitted by the EXTERNAL AUDITOR. FOR SUBMISSION TOGETHER WITH THE FINANCIAL AUDIT REPORT NOT LATER THAN ONE HUNDRED TWENTY (120) CALENDAR DAYS AFTER THE CLOSE OF THE CALENDAR YEAR OR FISCAL YEAR ADOPTED BY THE BANK.

4. Copies of the board resolutions showing the:

a. Action taken on the FINANCIAL AUDIT REPORT AND, WHERE APPLICABLE, ON THE CERTIFICATION UNDER OATH including the names of the directors present and absent, among other things.

Within thirty (30) banking days after the receipt of the FINANCIAL AUDIT REPORT and Certification under oath by the Board of Directors..

b. Action taken on the findings and recommendations in the LOC, and the names of the directors present and absent, among other things.

c. WITHIN THIRTY (30) BANKING DAYS AFTER THE RECEIPT OF THE LOC BY THE BOARD OF DIRECTORS.

5. IN CASE OF FOREIGN BANKS WITH BRANCHES IN THE PHILIPPINES, IN LIEU OF THE BOARD RESOLUTION:

a. A REPORT BY THE COUNTRY HEAD ON THE ACTION TAKEN BY MANAGEMENT (HEAD OFFICE, REGIONAL OR COUNTRY) ON THE FINANCIAL AUDIT REPORT AND, WHERE APPLICABLE, ON THE CERTIFICATION UNDER OATH STATING THAT NO MATERIAL WEAKNESS OR BREACH IN THE INTERNAL CONTROL AND RISK MANAGEMENT SYSTEMS WAS NOTED IN THE COURSE OF THE AUDIT OF THE BANK.

WITHIN THIRTY (30) BANKING DAYS AFTER THE RECEIPT OF THE FINANCIAL AUDIT REPORT AND CERTIFICATION UNDER OATH BY THE COUNTRY HEAD.

b. A REPORT BY THE COUNTRY HEAD ON THE ACTION TAKEN BY MANAGEMENT (HEAD OFFICE, REGIONAL OR COUNTRY) ON THE LOC.

6. Certification of the external auditor on the date when the LOC was submitted to the board of directors OR COUNTRY HEAD.

WITHIN THIRTY (30) BANKING DAYS AFTER THE RECEIPT OF THE LOC BY THE COUNTRY HEAD. WITHIN THIRTY (30) BANKING DAYS AFTER THE RECEIPT OF THE LOC BY THE BOARD OF DIRECTORS OR COUNTRY HEAD.

7. All the required disclosures in the AFS provided under Subsecs. X166.4.

FOR SUBMISSION TOGETHER WITH THE FINANCIAL AUDIT REPORT NOT LATER THAN ONE HUNDRED TWENTY (120) CALENDAR DAYS AFTER THE CLOSE OF THE CALENDAR YEAR OR FISCAL YEAR

8. Reports required to be submitted by the external auditor under Section 7 of Circular No. 410:

a. To enable the BSP to take timely and appropriate remedial action, the external auditor must report to the BSP Within thirty (30) calendar days after discovery.

1) Any material finding involving fraud or dishonesty (including cases that were resolved during the period of audit); and

2) Any potential losses the aggregate of which amounts to at least one percent (1%) of the capital.

b. The external auditor shall report directly to the BSP the following: Within fifteen (15) calendar days after the occurrence/discovery.

1) Termination or resignation as external auditor and stating the reason therefor;

2) Discovery of a material breach of laws or BSP rules and regulations such as, but not limited to:

a) Capital adequacy ratio; and

b) Loans and other risk assets review and classification..

3) Findings on matters of corporate governance that may require urgent action by the BSP.

DIFFERENT EXAMPLE AND EXISTING UNIVERSAL BANK IN THE PHILIPPINES

Example of Universal Bank in the Philippines

Development Bank of the Philippines

The Development Bank of the Philippines (Filipino: Bangko sa Pagpapaunlad ng Pilipinas), commonly known by its initials, DBP, is a state-owned development bank in Makati City, Philippines.

It is the seventh-largest bank in the Philippines in terms of assets, and is the second-largest government-owned bank, next only to Landbank. It is also one of the largest government-owned and/or controlled corporations (GOCCs) in the Philippines.

Core functions

DBP services various sectors of Philippine society, from farmers to businessmen. Although the Philippines has an economy largely dependent on agriculture, something that Landbank addresses, DBP aims for national development through financing the various businesses and economic sectors that keep the Philippine economy afloat. Like Landbank, it provides the services of a regular universal bank; however, it is officially classified as a "specialized government bank" with a universal banking license.

Also like Landbank, DBP also has a large rural branch network. However, the aim of DBP's rural branch network is not the same as Landbank's. Instead, DBP diversifies banking choices whenever an area's banking sector is either dominated by one or a few banks, regardless of status.

Landbank of the Philippines

Land Bank of the Philippines, also known as Landbank or by its initials, LBP, is a bank in the Philippines owned by the Philippine government. Landbank services mainly rural farmers and fisherman|fishermen since the Philippines largely has an agriculture-based economy. It provides the services of a universal bank; however, it is officially classified as a "specialized government bank" with a universal banking license. Landbank is the fourth largest bank in the Philippines in

terms of assets and is the largest government-owned bank. It is also one of the biggest government-owned and/or controlled corporations in the Philippines.

Unlike most Philippine banks, Landbank has an extensive rural branch network. It services many rural sector clients in areas where banking is either limited to rural banks or is non-existent.

Banco de Oro Universal Bank

Banco de Oro is a universal bank, which provides a wide range of corporate, commercial, retail, and investment banking services in the Philippines. These services include traditional loan and deposit products, as well as treasury, private banking, trust, cash management, insurance, remittance and credit card services.

The Bank's strategic focus is on becoming a leading full-service bank in select markets in the Philippines. The Bank's principal markets consist of a select niche in the corporate market, the middle-market banking segment (consisting of mid-size corporations and small- and medium-sized enterprises), and the retail/consumer market. The Bank plans to pursue its growth strategy through selective acquisitions and/or organic growth. BDO aims to achieve above-industry growth rates through its superior execution abilities, innovative products, and expansion into new markets, while maintaining a focused approach to its various businesses.

The Bank has expanded its network of branch offices in the Philippines to 228 branches primarily in key business and commercial centers in Metro Manila, Northern and Southern Luzon, Metro Cebu, Iloilo-Bacolod and Mindanao, including SM Group malls, in order to increase access and exposure to high-quality clients.

As of the first half of 2006, BDO was ranked 5th in terms of resources, loans and deposits, and 8th in terms of capital according to industry data. The Bank's consolidated total assets as of the first half was at P284.3 billion, up from year-end 2005 level of P233.8 billion. Net loans and receivables for the first half stood at P115.4 billion while deposits and capital funds were at P200.7 billion and P21.3 billion, respectively. Asset quality indicators (NPL & NPA) are among the best in the industry.

In the first half of 2006, BDO was judged by AsiaMoney as Best Domestic Bank for 2005. AsiaMoney also awarded the Bank as Best Managed Company - Mid-Cap Corporate for the Philippines in 2005, while EuroMoney cited BDO as the Best Commercial Bank in the Philippines. Likewise, wholly owned subsidiary BDO Capital & Investment Corporation (BDO Capital) was also awarded the Best Equity House and Best Debt House by AsiaMoney while Finance Asia cited the investment bank as Best Equities House and Best Investment House in its recent 2005 Country Awards for Achievement.

Aside from BDO Capital, other subsidiaries of BDO include: BDO Financial Services, Inc., BDO Insurance Brokers, Inc., BDO Realty Corporation, BDO Private Bank, Inc., BDO Securities Corporation, BDO Remittance, Ltd., and Onshore Strategic Assets, Incorporated. BDO also

maintains two other affiliated undertakings: Generali Pilipinas Holding Company, Inc., and SM Keppel Land, Inc.

OTHER EXISTING EXPANDED COMMERCIAL BANKS (Private)

1. Allied Banking Corporation2. BANCO DE ORO Universal Bank3. Bank of the Philippine Islands4. China Banking Corporation5. ING Bank6. Metropolitan Bank and Trust Co.7. Philippine National Bank8. Prudential Bank9. Rizal Commercial Banking Corp.10. Security Bank Corporation11. Standard Charterd Bank12. The Hongkong and Shanghai Banking Corporation LTD.13. Union Bank of the Philippines14. United Coconut Planters Bank

Government Universal Bank

1. Al-Amanah Islamic Investment Bank of the Philippines2. Development Bank of the Philippines3. Land Bank of the Philippines

REFERENCES

www.bsp.gov.ph

www.wikipedia .com

www.msnencarta.com

Cezar, Augustus. The New Central Bank Act and The General Banking Act. 2007. PUP Printing Press

Laman, R. Money Credit and Banking. Fifth edition. Conanan Printing Press.