Basic Legal Concepts

Financial Intermediation

The process by which banks transfer money from savers (depositors) to users (borrowers) by lending funds held on deposit.

Asset Transformation

The creation of additional money or market liquidity by banks through extending loans out of customer deposit reserves.

Reserve Requirement Ratio (RRR)

The proportion of deposit liabilities that banks are legally required to maintain as reserves, usually held as deposits with the central bank.

Universal Bank

A category of bank in the Philippines authorized to exercise commercial banking powers alongside the powers of an investment house and equity investments in non-allied enterprises.

Head Office Minimum Capital for Universal Banks (BSP Circular $854$)

$$\text{PHP } 3.00\text{ billion}$$

Liquidity Coverage Ratio (LCR)

A Basel III requirement ensuring banks hold adequate High Quality Liquid Assets (HQLA) to cover total net cash outflows over a $30$-calendar-day period of liquidity stress.

Liquidity Risk

The risk of financial loss arising from a bank's inability to meet its maturing obligations or deposit outflows when due without incurring unacceptable costs.

Credit Risk

The probability that a debtor or counterparty will fail to satisfy the terms of a debt contract or perform as agreed, causing financial loss to the bank.

Pre-Settlement Risk (PSR)

A form of credit risk incurred on forward-settled contracts where a counterparty defaults prior to settlement date, measured as replacement cost.

Value-at-Risk (VaR)

A statistical technique used in market risk management to estimate the predicted worst-case loss of a portfolio at a specific confidence level over a given timeframe.

Operational Risk

The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.

First Line of Defense in Risk Governance

Business lines and support units responsible for directly owning, identifying, and managing material risks in day-to-day operations.

Placement

The initial phase of money laundering where illicit physical cash is introduced into the financial system.

Layering

The second stage of money laundering involving complex series of financial transactions designed to obscure the audit trail and origin of illicit funds.

Integration

The final stage of money laundering in which laundered funds re-enter the economy through legitimate business transactions or asset acquisitions.

Covered Transaction Report (CTR) Threshold

A transaction in cash or equivalent monetary instrument exceeding $\text{PHP } 500,000.00$ within $1$ banking day.

Suspicious Transaction Report (STR) AMLC Submission Window

Within $1$ working day following the approval date of the AML Management Committee.

Legal Classification of Bank Deposits

Loans under the Civil Code where the depositor acts as the creditor and the bank acts as the debtor, transferring ownership of the money to the bank.

Standard of Diligence Required of Banks

Extraordinary diligence, requiring the highest degree of meticulous care and utmost fidelity due to the fiduciary nature of banking.

P.D. 734 Account Opening Exception for Minors

Permits minors at least $7$ years of age who can read and write and possess sufficient discretion to open savings or time deposit accounts in their own name.

Check Image and Clearing System (CICS)

An electronic check clearing process implemented in $2017$ and administered by the Philippine Clearing House Corporation (PCHC).

Bank Secrecy Act (R.A. 1405)

Philippine statute declaring all bank deposits of whatever nature to be absolutely confidential, barring unauthorized disclosure without statutory exceptions.

Financial Intermediation

The process by which banks transfer money from savers (depositors) to users (borrowers) by lending funds held on deposit.

Asset Transformation

The creation of additional money or market liquidity by banks through extending loans out of customer deposit reserves.

Reserve Requirement Ratio (RRR)

The proportion of deposit liabilities that banks are legally required to maintain as reserves, usually held as deposits with the central bank.

Universal Bank

A category of bank in the Philippines authorized to exercise commercial banking powers alongside the powers of an investment house and equity investments in non-allied enterprises.

Head Office Minimum Capital for Universal Banks (BSP Circular $854$)

$$\text{PHP } 3.00\text{ billion}$$

Liquidity Coverage Ratio (LCR)

A Basel III requirement ensuring banks hold adequate High Quality Liquid Assets (HQLA) to cover total net cash outflows over a $30$-calendar-day period of liquidity stress.

Liquidity Risk

The risk of financial loss arising from a bank's inability to meet its maturing obligations or deposit outflows when due without incurring unacceptable costs.

Credit Risk

The probability that a debtor or counterparty will fail to satisfy the terms of a debt contract or perform as agreed, causing financial loss to the bank.

Pre-Settlement Risk (PSR)

A form of credit risk incurred on forward-settled contracts where a counterparty defaults prior to settlement date, measured as replacement cost.

Value-at-Risk (VaR)

A statistical technique used in market risk management to estimate the predicted worst-case loss of a portfolio at a specific confidence level over a given timeframe.

Operational Risk

The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.

First Line of Defense in Risk Governance

Business lines and support units responsible for directly owning, identifying, and managing material risks in day-to-day operations.

Placement

The initial phase of money laundering where illicit physical cash is introduced into the financial system.

Layering

The second stage of money laundering involving complex series of financial transactions designed to obscure the audit trail and origin of illicit funds.

Integration

The final stage of money laundering in which laundered funds re-enter the economy through legitimate business transactions or asset acquisitions.

Covered Transaction Report (CTR) Threshold

A transaction in cash or equivalent monetary instrument exceeding $\text{PHP } 500,000.00$ within $1$ banking day.

Suspicious Transaction Report (STR) AMLC Submission Window

Within $1$ working day following the approval date of the AML Management Committee.

Legal Classification of Bank Deposits

Loans under the Civil Code where the depositor acts as the creditor and the bank acts as the debtor, transferring ownership of the money to the bank.

Standard of Diligence Required of Banks

Extraordinary diligence, requiring the highest degree of meticulous care and utmost fidelity due to the fiduciary nature of banking.

P.D. 734 Account Opening Exception for Minors

Permits minors at least $7$ years of age who can read and write and possess sufficient discretion to open savings or time deposit accounts in their own name.

Check Image and Clearing System (CICS)

An electronic check clearing process implemented in $2017$ and administered by the Philippine Clearing House Corporation (PCHC).

Bank Secrecy Act (R.A. 1405)

Philippine statute declaring all bank deposits of whatever nature to be absolutely confidential, barring unauthorized disclosure without statutory exceptions.

Terrorism Financing (TF)

The provision or collection of funds or financial services, directly or indirectly, with the intention or knowledge that they will be used to support individual terrorists or terrorist organizations.

Proliferation Financing (PF)

The provision of funds or financial services used for the manufacture, acquisition, possession, export, or transport of nuclear, chemical, or biological weapons and their delivery systems.

Anti-Money Laundering Act of 2001 (R.A. 9160)

The primary Philippine statutory framework criminalizing money laundering and establishing reportorial and compliance requirements for financial institutions.

Terrorism Financing Prevention and Suppression Act of 2012 (R.A. 10168)

Philippine legislation that penalizes the financing of terrorism as a distinct crime and grants legal authority to freeze terrorist assets.

Covered Persons under AMLA

Entities regulated by the BSP, IC, or SEC, along with Designated Non-Financial Businesses and Professions (DNFBPs) like casinos and real estate brokers, required to enforce AML/CFT policies.

Customer Due Diligence (CDD)

The ongoing risk assessment process of verifying a customer's true identity, establishing beneficial ownership, and monitoring transaction activities against their profile.

Enhanced Due Diligence (EDD)

An intensified risk mitigation procedure applied to high-risk customers or transactions, requiring senior management approval and deep background verification of funds and wealth.

Record Retention Period for Closed Accounts under AMLA

A statutory requirement to preserve all customer identity records and transaction documents for at least $5$ years from the date of account closure.

Covered Transaction Report (CTR) Submission Deadline

The requirement for covered institutions to submit CTRs to the AMLC within $5$ working days from occurrence, unless otherwise extended up to $15$ working days.

Court of Appeals Authority in AMLA

The sole judicial authority empowered to issue a Freeze Order (FO) on bank accounts or monetary instruments upon verified application by the AMLC.

Shell Banks

Banks that have no physical presence in any jurisdiction and are unaffiliated with a regulated financial group, which are strictly prohibited from maintaining relationships with covered institutions.

Legal Definition of a Bank (General Banking Law, Sec. 3.1)

An entity organized as a stock corporation engaged in the lending of funds obtained from the public in the form of deposits.

Three Legal Requisites to Form a Bank

1. Organized as a stock corporation. 2. Sourcing of deposit funds from the public (defined as $20$ or more persons). 3. Utilization of obtained funds for lending operations.

Legal Relationship in a Bank Deposit Contract

A loan contract under the Civil Code where the depositor acts as the creditor and the bank acts as the debtor, transferring ownership of the deposited cash to the bank.

Standard of Diligence Required of Banks

Extraordinary diligence, requiring the highest degree of meticulous care, utmost fidelity, and fiduciary responsibility due to banking being heavily impressed with public interest.

Financing Company (R.A. 8556)

A financial entity organized primarily to extend credit through direct lending, factoring, or financial leasing, which is strictly prohibited from accepting deposits from the public.

Lending Company (R.A. 9474)

An entity engaged in granting direct loans solely out of its own capital or funds sourced from not more than $19$ persons, prohibited from accepting public deposits.

Mandatory Disposal Period for Acquired Real Properties

A statutory limit requiring banks to sell or dispose of real property acquired through debt settlement or foreclosure within $5\text{ years}$ to prevent speculative holding and maintain liquidity.

Statutory Redemption Window for Foreclosed Real Estate

Exactly $1\text{ year}$ from registration of sale for natural persons, and until registration of sale not exceeding $3\text{ months}$ for juridical persons.

Qualification of a Debtor (General Banking Law, Sec. 40)

The statutory obligation requiring banks to conduct creditworthiness evaluations to ascertain that a borrower has reliable cash flow to service and amortize debt.

P.D. 734 Exception for Minors

A legal exception allowing minors at least $7\text{ years}$ of age who can read and write and possess sufficient discretion to open savings or time deposit accounts in their own name.

Ownership of In Trust For (ITF) Deposit Accounts

Legal ownership resides strictly with the principal depositor (the parent or legal guardian) who opened the account, not with the minor beneficiary.

Ultra Vires Acts (Revised Corporation Code, Sec. 44)

Corporate acts performed beyond the powers conferred by law or articles of incorporation, which are unenforceable if merely beyond corporate powers or void if for an illegal purpose.

Self-Dealing Corporate Transactions

Contracts executed between a corporation and its own directors, officers, or trustees, which are voidable unless specific conditions regarding fair terms, quorum, and approvals are met.

Manager's Check or Cashier's Check

A bank-guaranteed payment instrument drawn by the bank against its own reserve funds, eliminating default risk associated with personal customer checks.

Check Image and Clearing System (CICS)

An electronic check clearing framework implemented in $2017$ and administered by the Philippine Clearing House Corporation (PCHC) using digitized check images and data.

Negotiation of Bearer Checks vs. Order Checks

Bearer checks are negotiated by mere delivery, whereas order checks require both delivery and proper endorsement by the specified payee.

Primary Liability of Drawee Bank upon Check Acceptance (NIL, Sec. 62)

By accepting or certifying a check, the drawee bank becomes primarily liable to pay according to the tenor of acceptance and warrants the genuineness of the drawer's signature.

Clearing Warranties of a Presenting/Collecting Bank

The collecting bank guarantees that the instrument is genuine, that all prior endorsements are valid, and that no material alterations occurred during clearing.

Crossed Check Restriction

An explicit notation on a check instructing that it cannot be encashed over the counter and must only be deposited into the account of the named payee.

Second-Endorsed Check Policy Requirements

High-risk transactions requiring Enhanced Due Diligence (EDD), execution of a Standard Agreement on Check Deposits, and senior management approval at minimum Vice President rank.

Bank Secrecy Act (R.A. 1405)

A Philippine statute establishing that all bank deposits of whatever nature with Philippine banking institutions are absolutely confidential.

Foreign Currency Deposit Act (R.A. 6426)

A Philippine statute declaring all authorized foreign currency deposits to be of an absolutely confidential nature, exempt from court order or garnishment except under explicit statutory conditions.

Prohibited Disclosure under General Banking Law (R.A. 8791, Sec. 55.1)

Prohibits any bank director, officer, employee, or agent from disclosing information relative to funds or properties in bank custody without a competent court order.

Key Exception Difference Between Local and Foreign Currency Bank Secrecy

Court orders for pending litigation or competent authority orders in cases like impeachment or bribery apply to local currency deposits but do not apply as exceptions to foreign currency deposits without client written permission.

Primary Objective of the Bangko Sentral ng Pilipinas (RA 7653)

To promote and maintain price stability and provide proactive leadership in bringing about a strong financial system conducive to balanced and sustainable economic growth.

Three Primary Tools of Central Bank Monetary Control

1. Open-market operations. 2. Reserve requirements. 3. Discount rate.

Head Office Minimum Capital Requirement for Commercial Banks (BSP Circular $854$)

$$\text{PHP } 2.00\text{ billion}$$

Minimum Capitalization Requirement for Digital Banks (BSP Circular $1154$)

$$\text{PHP } 1.00\text{ billion}$$

Minimum Capital Requirement for Rural Banks with Head Office in NCR (BSP Circular $1151$)

$$\text{PHP } 50.00\text{ million}$$

Minimum Capital Requirement for Thrift Banks with Head Office in NCR (BSP Circular $854$)

$$\text{PHP } 500.00\text{ million}$$

Objective of the ASEAN Banking Integration Framework (ABIF)

To allow Qualified ASEAN Banks (QABs) to operate as local banks within member states under equal regulatory treatment.

Three Basic Economic Interactions

1. Gifts (transfer without return expectation). 2. Involuntary Transfers (forced transfers like taxes or theft). 3. Reciprocal Exchange (voluntary and equal exchange of value).

Four Functions of Money in Economics

1. Medium of exchange. 2. Store of value. 3. Unit of account. 4. Standard of deferred payment.

Potential Money Multiplier Formula

The reciprocal of the Reserve Requirement Ratio ($\text{Multiplier} = \frac{1}{\text{RRR}}$).

Net Interest Income (NII) in Banking

The net revenue derived by subtracting the total interest paid on deposits and borrowings from the total interest earned on loans and securities.

Fundamental Principle in Bank Liquidity Management

Liquidity above profitability, ensuring that available liquid funds always take precedence over potential earning returns.

Liquidity Gap Report

A risk monitoring tool that translates balance sheet assets and liabilities into prospective cash inflows and outflows across specific time buckets.

Direct Credit Risk

The risk that an actual customer debt obligation, such as a disbursed promissory note loan, will not be repaid on time or at all.

Contingent Credit Risk

The risk that potential customer obligations, such as outstanding Letters of Credit, will convert into actual liabilities that fail to be repaid.

Issuer Risk

The probability that an issuer of a debt security, such as a corporate bond, will default on interest or principal payments owed to the holder.

Settlement Risk (SR)

The risk that a counterparty will fail to deliver funds or instruments on a settlement date after the bank has fulfilled its side of the exchange, equal to $100\%$ of the contract amount.

Five Assessment Parameters of the Credit Risk Rating System

1. Industry Risk. 2. Competitiveness. 3. Management. 4. Financial Ratios. 5. Financial Flexibility.

Foreign Exchange (FX) Risk

The market risk of financial loss resulting from adverse movements in currency exchange rates affecting open foreign currency positions or liabilities.

Interest Rate Risk

The market risk resulting from interest rate fluctuations that adversely impact a bank's net interest margin or asset values.