BANKING REGULATIONS

Banking and Financial Institutions 3 711

FIN 2132 TTh 5:40PM to 7:10PM
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OUTLINE:
• Bank regulations
• Major US Banking Laws
• Major Philippine Banking Laws
• Bank Failures

OUTLINE:
• Bank regulations
• Major US Banking Laws
• Major Philippine Banking Laws
• Bank Failures

 Banking Regulations
• As bankers work to supply loans, accept deposits, and provide other nancial
services to their customers, they must do so within a climate of extensive federal
and state rules designed primarily to protect the public interest.

• Banks are among the leading repositories of the public’s savings, especially the
savings of individuals and families. Many savers lack the nancial expertise and
depth of information needed to correctly evaluate the riskiness of a bank or
other nancial-service provider. Therefore, regulatory agencies are charged with
the responsibility of gathering and evaluating the information needed to assess
the true condition of banks and other nancial rms to protect the public against
loss.
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 Banking Regulations
• Banks are closely watched because of their power to create money in the form
of readily spendable deposits by making loans and investments. Changes in the
volume of money created by banks and competing nancial rms appear to be
closely correlated with economic conditions, especially the growth of jobs and
the presence or absence of in ation.

• Banks are also regulated because they provide individuals and businesses with
loans that support consumption and investment spending.

• Finally, banks have a long history of involvement with the state, and local
government.
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 Banking Regulations
PRINCIPAL REASONS FINANCIAL-SERVICE FIRMS ARE SUBJECT TO GOVERNMENT
REGULATION

1. To protect the safety of the public’s savings ‘‘caveat emptor’’ (‘‘let the buyer beware’’)
2. To control the supply of money and credit in order to achieve a nation’s broad economic goals (such
as high employment and low in ation)
3. To ensure equal opportunity and fairness in the public’s access to credit and other vital nancial
services
4. To promote public con dence in the nancial system, so that savings ow smoothly into productive
investment, and payments for goods and services are made speedily and ef ciently
5. To avoid concentrations of nancial power in the hands of few individuals and institutions
6. To provide the government with credit, tax revenues, and other services
7. To help sectors of the economy that have special credit needs (such as housing, small business, and
agriculture)

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 Banking Regulations
• The banking system is particularly vulnerable to contagion effects, when lack of
con dence associated with one poorly performing bank spreads to other, healthy banks.
• The vulnerability of banking to contagion creates systemic risk; the risk that disturbances
in a nancial institution or market will spread across the nancial system, leading to
widespread bank runs by wholesale and retail depositors, and possibly, collapse of the
banking system.
• Bank failures can create substantial negative externalities or social costs, in addition to
the obvious private costs of failure.
• So in most countries, to minimize the chance of governments having to rescue a bank or
banks, the national banking systems are singled out for special regulation, known as
prudential regulation, which is typically more comprehensive than regulation of other
sectors of the economy, even other parts of the nancial sector.
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OUTLINE:
• Bank regulations
• Major US Banking Laws
• Major Philippine Banking Laws
• Bank Failures

 Major US Banking Laws

• Please refer to the previous report.
OUTLINE:
• Bank regulations
• Major US Banking Laws
• Major Philippine Banking Laws
• Bank Failures

 Major Philippine Banking Laws

The New Central Bank Act (RA 7653, “The BSP Law”)

• Establishes the Bangko Sentral ng Pilipinas (“BSP”)

• Key roles:
a. Central money authority with the sole power to issue currency and legal
tender and to regulate the supply of money and credit in the system;
b. As government banker with the power to represent the national
government in all dealings with international nancial institutions;
c. As a central bank with regulatory and supervisory power over all banks
and nancial institutions exercising quasi-banking functions
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 Major Philippine Banking Laws

The General Banking Law of 2000 (RA 8791, “GBL”)

• Provides different modes of entry by foreign banks into the Philippines

• Foreign banks among the top 150 in the world or the top ve in their
country of origin are allowed to invest in up to 60% of the voting stock in a
Philippine bank or to establish branches with full banking authority,
provided they can only opt for one mode of entry and provided that only 14
foreign banks may establish branches with full banking authority

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 Major Philippine Banking Laws

Thrift Banks Act (RA 7906)

• Creation of a new class of bank - the thrift bank - which are savings and mortgage banks,
stock savings and loan associations, and private development banks
• May exercise similar powers as those of a commercial bank, but with prior approval of
the Monetary Board for particular activities, such as:
a. Opening of current accounts
b. Engaging in Trust, quasi-banking, and money market operations
c. Acting as collection agent for government entities
d. Acting as of cial depository of national agencies where the thrift banks is located
e. Issuing of mortgage and chattel mortgage certi cates, and
f. Investing in the equity of allied undertakings
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 Major Philippine Banking Laws

Investment Houses Law (Presidential Decree No 129)

• Corporations engaged in underwriting of securities of other corporations are

required to be licensed as investment houses under the Investment Houses Law.
• Investment houses are also allowed to act as nancial consultant, investment
adviser, portfolio manager, nancial agent, and broker.
• Foreigners are allowed to own up to 60% of the voting stock of an investment
house.
• Universal banks are allowed to perform the functions of an investment house
on an in-house basis.

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 Major Philippine Banking Laws

Financing Company Act (RA 7906)

• A corporation primarily engaged in extending credit facilities by direct

lending, discounting or factoring commercial papers or accounts
receivable, buying and selling evidences of indebtedness, or nancial
leasing is required to be licensed as a nancing company under the
Financing Company Act, unless the corporation is a bank, investment house,
insurance company, or other nancial institution with a secondary license.
• Foreigners are allowed to own up to 60% of the voting stock of a nancing
company.
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 Major Philippine Banking Laws

Secrecy of Bank Deposits Act (RA 1405)

• This law prohibits the examination and inquiry into all bank deposits and investments in government securities with
Philippine banks by any person, government of cial, bureau, or of ce, and prohibits the disclosure by any bank of cial or
employee to any unauthorized person of any information concerning the said deposits, subject to certain exceptions.
a. Where the depositor has given written permission of the depositor;
b. Cases of impeachment;
c. Cases where a competent court otherwise orders the disclosure in cases or bribery or dereliction of duty of public
of cials, or cases where the money deposited or invested is the subject matter of litigation;
d. In cases of unexplained wealth of public of cials;
e. Upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a decedent, or for compromise
of tax liabilities of a taxpayer;
f. Upon order of the court in cases led by the Ombudsman,
g. In cases of unclaimed balances;
h. Upon order of the court, if the Anti-Money Laundering Council is related to certain unlawful activities; and,
i. In the course of periodic examination by the BSP
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 Major Philippine Banking Laws
Anti-Money Laundering Act (RA 9160, “AMLA”)

• The AMLA criminalizes money laundering and identi es the predicate crimes
from which money laundering can arise.
• In order to prevent money laundering, the AMLA created the Anti-Money
Laundering Council (“AMLC”) and granted it such powers ranging from requiring
reports from covered institutions (including banks and other nancial
institutions), rule-making, prosecution, and actual imposition of sanctions. In
addition, the AMLA requires covered institutions to adopt Know-Your-Customer
guidelines and to report transactions involving at least PhP500,000 as well as
suspicious transactions to the AMLC.

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 Major Philippine Banking Laws
Foreign Currency Deposit Act (RA 6426, and
Presidential Decree No. 1035; the “FCDU Law”)

• By virtue of the FCDU Law, banks with a Foreign Currency Deposit Unit (“FCDU”) license
are authorized to accept foreign currency deposits, to issue certi cates to evidence such
deposits, to discount said certi cates, and to accept deposits as collateral for loans, while
banks with an expanded FCDU license are authorized to obtain foreign currency loans
from and conduct foreign currency transactions with non-residents, offshore banking units,
and other depository banks with expanded FCDU licenses.
• Interest earnings from such foreign currency deposits are granted absolute tax
exemptions. It is also provided that there shall be no restriction on the withdrawal or
transfer by the depositor of his deposits, except upon mutual agreement with the bank.
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OUTLINE:
• Bank regulations
• Major US Banking Laws
• Major Philippine Banking Laws
• Bank Failures

 Bank Failures
De nition:
• a bank is deemed to have ‘‘failed’’ if it is liquidated, merged with a healthy bank (or purchased
and acquired) under central government supervision/pressure, or rescued with state nancial
support.

There are three ways regulators can deal with the problem of failing banks.
1. Put the bank in receivership and liquidate it. Insured depositors are paid off, and assets sold.
2. Merge a failing bank with a healthy bank. The healthy bank is often given incentives, the most
common being allowing it to purchase the bank without the bad assets. Often this involves the
creation of an agency which acquires the bad assets, then attempts to sell them off.
3. Government intervention, ranging from emergence of lending assistance, guarantees for
claims on bad assets or even nationalization of the bank.
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