New Central Bank Act (RA 7653)

1: THE NEW CENTRAL BANK ACT (RA 7653)

2: Bangko Sentral ng Pilipinas (BSP)

BSP, acting thru its Monetary Board (MB), is the government agency charged with the responsibility of administering the MONETARY, BANKING and CREDIT SYSTEM of the country.

3: It is granted with the power of SUPERVISION and EXAMINATION over banks and non‐bank financial institutions performing quasi‐banking functions, including savings and loan associations. (Busuego vs. CA)

4: STATE POLICIES

5: Policies of the State with

Respect to the Creation of the BSP

1. The BSP is the State's central

monetary authority that shall function and operate as an INDEPENDENT and ACCOUNTABLE body corporate in the discharge of its mandated responsibilities concerning MONEY, BANKING and CREDIT.

6: 2. The central monetary authority, while being a government‐owned corporation, shall ENJOY FISCAL and ADMINISTRATIVE AUTONOMY (Sec. 1.)

7: CREATION OF THE BANGKO SENTRAL NG PILIPINAS

8: Salient Considerations on the Creation of BSP

1. It is established as an INDEPENDENT

central monetary authority.

2.Its capital shall be P50,000,000,000, to be fully subscribed by the Philippine Government.

9: 3. The P10,000,000,000 of the capital shall be fully PAID for by the Government upon the effectivity of this Act and the balance to be paid for within a period of 2 years from the effectivity of this Act. (Sec. 2)

10: RESPONSIBILITY AND PRIMARY OBJECTIVE

11: Responsibilities of BSP

1. To provide POLICY directions in the areas of money, banking, and credit;

2. To SUPERVISE bank operations;

3. To REGULATE the operations of finance companies and non-bank financial institutions performing quasi‐banking functions, and similar institutions (Sec. 3).

12: Primary Objectives of BSP

1. To maintain PRICE STABILITY conducive to a balanced and sustainable growth of the economy.

2. To promote and maintain monetary stability and the CONVERTABILITY of the peso. (Sec. 3).

13: Functions of BSP

1. ISSUER of currency. (Sec. 49-60);

2. CUSTODIAN of reserves. (Secs. 64-66, 94, 103);

3. CLEARING channel or house; especially where the PCHC does not operate. (Sec. 102);

4. BANKER of the government - the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings (Secs. 110-116);

14: 5. Financial ADVISOR of the government (Secs. 123‐124) - Under Article VII, Sec. 20 of the 1987 Constitution, the President may contract or guarantee foreign loans but with the prior concurrence of the Monetary Board.

6. SOURCE of credit (Secs. 61‐63, 81‐89, 109)

15: 7. SUPERVISOR of the banking system (Sec. 25) - which includes the following:

a. Examine, extending to enterprises wholly or majority‐owned or controlled by the bank (Sec. 7, RA 8791); this power may not be restrained by a writ of injunction unless there is proof that the action of the

BSP is plainly arbitrary (Sec. 25);

16: b. Place a bank under RECEIVERSHIP or LIQUIDATION (Sec. 30);

c. Initiate criminal PROSECUTION of erring officers of banks;

8. Government AGENT (Secs. 117‐122).

17: MONETARY BOARD

18: Monetary Board

The body through which the powers and functions of the Bangko Sentral are exercised. (Sec. 6)

Composition of the Monetary Board

Composed of 7 members appointed by the President, as follows:

1. Governor of the BSP - Chairman;

2. A member of the Cabinet to be designated by the President of the Philippines;

3. 5 members who shall come from the private sector, all of whom shall serve full-time (Sec. 6).

19: Powers and Functions of the Monetary Board

1. Issue rules and regulations necessary to discharge its responsibilities and exercise its powers;

2. Direct the management, operations, and administration of the BSP, reorganize its personnel;

3. Establish a human resource management system.

4. Adopt an annual budget for and authorize such expenditures by the BSP

22: 5. Indemnify its members and other officials performing supervision and examination functions against all costs and expenses incurred in connection with any civil or criminal action to which he may be made a party by reason of the performance of his functions, unless adjudged to be liable for negligence or misconduct (Sec. 15)

25: Liabilities of the Members of the Monetary Board

Members of the Monetary Board, officials, examiners, and employees of the BSP who:

1. Willfully violate the Act (RA 7653);

2. Are guilty of negligence, abuses or acts of malfeasance or misfeasance; or

26: 3. Failure to exercise extraordinary diligence in the performance of his duties.

27: Shall be held liable for any loss or injury suffered by the BSP or other banking institutions as a result thereof (NCBA, Sec 16).

28: HOW BSP HANDLES BANKS IN DISTRESS

29: How BSP Handles Banks in Distress?

In case of a distressed bank, the BSP appoints a conservator or receiver or closure of the bank.

30: Grounds of Conservatorship, Receivership and Liquidation

1. Conservatorship:

a) Continuing inability; or

b) Unwillingness to maintain a condition of liquidity.

2. Liquidation:

a) Insolvency; or

b) Bank cannot be rehabilitated.

3. Receivership:

a) Inability to pay liabilities as they fall due;

b) Assets are less than its liabilities;

c) Cannot continue business without causing damage;

d) Violation of a cease and desist order;

e) "Bank holiday" for more than 30 days. (Sec. 30).

32: Effects of Conservatorship, Receivership and Liquidation

1. Conservatorship:

a) Juridical personality is retained;

b) Perfected transactions cannot be repudiated.

2. Liquidation: Same with conservatorship;

3. Receivership:

a) Juridical personality is retained;

b) Suspension of operation /stoppage of business;

c) Assets deemed in custodia legis (Domingo v. NLRC).

34: CONSERVATORSHIP

35: Conservator

One appointed by the MB if a bank or quasi-bank is in the state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of its depositors and creditors.

3 Requisites in Placing an Institution under Conservatorship

1. There must be a report submitted by the appropriate supervising or examining department of the BSP;

2. The Board of Directors must be informed in writing of the order of the MB directing conservatorship;

3. There must be a finding by the Monetary Board based on the report that a bank or quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors;

37: Powers of a Conservator

1. To take charge of the assets, liabilities, and the management thereof;

2. Reorganize the management thereof;

3. Collect all monies and debts due to the said bank;

4. Exercise all powers necessary to preserve its assets;

5. Restore its viability with power to overrule or revoke the actions of the previous management and board;

6. Bring court actions to assail or repudiate contracts entered into by the bank. (First Philippine International Bank v. CA).

39: Powers of a Conservator to Revoke Contracts

The law merely gives the conservator power to revoke contracts that are deemed to be defective - void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of the bank's board. His power is not unilateral and he cannot simply repudiate valid obligations of the bank (First Philippine International Bank v. CA, supra.)

40: When is Conservatorship Terminated?

The conservatorship shall not exceed one (1) year. The conservatorship can be terminated when the Monetary Board is satisfied that the institution can continue to OPERATE on its OWN and the conservatorship is no longer necessary.

41: When shall Receivership or Liquidation Apply?

Should the MB, on the basis of the report of conservator or of its own findings, determine that the continuance in business of the institution would involve PROBABLE LOSSES to its depositors or creditors, the bank will go under RECEIVERSHIP and LIQUIDATION.

42: CLOSURE

Closure of Bank

The sanction of closure could be imposed upon a bank by the BSP even without a notice and hearing. The apparent lack of procedural process would not result in the invalidity of action by the MB. It is well-settled that the closure of a bank may be considered as an exercise of police power.

Close Now Hear Later Doctrine

The MB may summarily and without need for prior hearing FORBID the bank from doing business for causes enumerated under Sec. 30 and appoint the PDIC as receiver of the bank.

Purpose of Close Now Hear Later Doctrine

The purpose is to PREVENT DISSIPATION of the bank's assets and as a valid exercise of POLICE POWER to protect the depositors, creditors, stockholders and the general public. (Central Bank of the Philippines v. CA)

Is the Close Now Hear Later Doctrine Final and Executory?

General Rule: The action of the MB on the matter is final and executory, and may not be set aside by the court.

Exception: May be subject to judicial inquiry thru a Petition for Certiorari filed by a majority stockholders of the capital stock and can be set aside if found to be in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.

Requisites to be Complied with Before an Insolvent Bank can be Ordered Closed

1. An examination shall be conducted by the examining department of the BSP as to the condition of the bank;

2. Report by said department to the MB; and

3. Prima facie showing that its continuance in business would involve probable loss to its depositors or creditors (Central vs. CA).

43: When may the Monetary Board Close a Bank or Quasi Bank?

1. Cash Flow Test - This is the inability to pay liabilities as they become due in the ordinary course of business (Sec. 30 [a] NCBA).

2. Balance Sheet Test - Insufficiency of realizable assets to meet its liabilities (Sec 30 [b] NCBA).

44: 3. Inability to continue business without involving probable losses to its depositors and creditors (Sec 30 [c] NCBA).

45: 4. Willful violation of a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets (Sec 30 [d] NCBA).

46: 5. Notification to the BSP or public announcement of a bank holiday (Sec 53, GBL).

6. Suspension of payment of its deposit liabilities continuosly for more than 30 days (Sec 53, GBL).

7. Persisting in conducting its business in an unsafe or unsound manner (Sec 56, GBL).

49: Can the closure and liquidation of a bank, which is considered an exercise of police power, be the subject of judicial inquiry?

Yes. While considered an exercise of police power, such exercise is SUBJECT to JUDICIAL INQUIRY and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust or a denial or due process and equal protection clauses of the Constitution (Central Bank v. CA, G.R. No. L50031‐32, July 27, 1981).

50: Upon maturity of the time deposit, the bank failed to remit. Hence, the BSP prevented the bank from performing banking operations. Is the bank obligated to pay the time deposits despite the fact that its operations were suspended by the Central Bank?

The suspension of operations of a bank cannot excuse non‐compliance with the obligation to remit the time deposits of depositors which matured before the bank's closure. (Overseas Bank of Manila v. CA, G.R. No. 45886, Apr. 19, 1989)

51: RECEIVERSHIP

52: Receiver

One appointed if bank is already insolvent which means that its liabilities are greater than its assets.

When are Receivership Proceedings Instituted?

Whenever the MB finds that a bank or quasi-bank:

1. Is unable to pay its liabilities in the ordinary course of business, but shall not include those caused by extraordinary demands induced by panic in the banking community;

2. Has insufficient realizable assets to meet its liabilities;

3. Cannot continue in business without involving probable losses to its depositors or creditors; or

4. Has willfully violated a final cease and desist order, involving acts or transactions which amount to fraud or dissipation of assets of the institution;

the MB may SUMMARILY and WITHOUT PRIOR HEARING FORBID the institution from doing business in the Philippines, and designate the PDIC as receiver of the banking institution.

53: Duties of a Receiver

1. Immediately gather and take charge of all the assets and liabilities of the institution and administer the same for the benefit of the creditors;

2. Exercise the general powers of a receiver;

3. Determine ASAP but not later than 90 days from takeover, whether the institution may be rehabilitated or placed in such condition so that it may be permitted to resume business with safety to its depositors and creditors, and the general public;

54: 4. Shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided that the receiver may deposit or place the funds of the institution in non‐speculative investments (Sec. 30, NCBA).

Effects of Appointment of a Receiver

1. The bank's assets pass beyond its control into the possession and control of the receiver;

2. Suspends the authority of the bank and of its directors and officers over its property, and such authority being reposed in the receiver;

3. Equivalent to an injunction to restrain the bank officers from intermeddling with the property of the bank in any way (Villanueva vs. CA).

Distinguish Conservator vs. Receiver

1. Conservator - is appointed to take charge of the assets, liabilities, and the management of a bank or a quasi-bank in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors or creditors;

2. Receiver - is appointed to manage a bank or quasi-bank that is:

a) Unable to pay its liabilities in the ordinary course of business;

b) Has insufficient realizable assets to meet its liabilities;

c) Cannot continue business without probable losses to its depositors or creditors;

d) Has willfully violated a final cease and desist order, involving acts or transactions amounting to fraud or a dissipation of the assets of the institution.

55: Is the receiver authorized to transact business in connection with the bank's assets and property?

No, the receiver only has authority to administer the same for the benefit of its creditors. (Abacus Real Estate Development Center, Inc. v. Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005)

56: Should the issue of whether or not the Monetary Board's resolution is arbitrary be only raised in a separate action?

No. While such resolutions of the Monetary Board are by law "final and executory", they can still be SET ASIDE by the court if the action is plainly ARBITRARY and made in BAD FAITH. Such contention can be asserted as an AFFIRMATIVE DEFENSE of a COUNTERCLAIM in the LIQUIDATION proceedings. (Salud v. Central Bank, G.R. No. L17630, Aug. 19, 1986).

57: LIQUIDATION

58: Liquidation

It is an act of settling a debt by payment or other satisfaction. It is also the act or process of converting assets into cash especially to settle debts.

Circumstances to Justify the Liquidation of a Bank

1. The condition of the bank is one of insolvency or that its continuance would involve probable loss to its depositors and creditors;

2. A determination by the MB thay the bank cannot resume business with safety to its creditors.

May the Assets of an Institution under Receivership or Liquidation be Subjected to Garnishment, Levy, Attachment or Execution?

NO. The assets of an institution under receivership or liquidation shall be deemed in CUSTODIA LEGIS, in the hands of receiver, and shall be EXEMPT from any order of garnishment, levy, attachment or execution.

59: Can the liquidator of a distressed bank prosecute and defend suits against the bank and foreclose mortgages for and in behalf of the bank while the issue on receivership and liquidation is still pending?

Yes. Even if the bank is questioning the validity of its closure, during the pendency of the case the liquidator can continue prosecution suits for collection and foreclosure of mortgages, as they are acts done in the usual course of administration of the bank. (Banco Filipino v. Central Bank, G.R. No. 70054, Dec. 11, 1991)

How is Liquidation Instituted?

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the MB shall notify in writing the Board of Directors of its findings, and direct the receiver to proceed with the liquidation of the institution.

60: An intra‐corporate case was filed before RTC. On the other hand, another complaint was filed before BSP to compel a bank to disclose its stockholdings invoking the supervisory power of the latter. Is there a forum shopping?

None. The two proceedings are of different nature praying for different relief. The complaint filed with the BSP was an invocation of its supervisory powers over banking operations which does not amount to a judicial proceeding. (Suan v. Monetary Board, A.C. No. 6377, Mar. 12, 2007)

Procedure During Liquidation

1. Receiver files ex parte with the RTC a petition for assistance in the liquidation of the institution;

2. Receiver converts the assets of the institution to money;

3. Receiver shall pay the debts of the institution in accordance with the rules on concurrence and preference of credit as provided in the Civil Code;

4. Receiver shall pay the costs, fees and expenses of the institution in the order of their legal priority;

5. The BSP, if public interest so requires, awards to an institution as approved by the MB the banking franchise of a bank under liquidation to operate in the area where said bank or its branches were previously operating.

Requisites in Restraining the Closure Made by BSP of a Bank

1. The action should be filed by stockholders of record representing majority capital stock;

2. The action of the MB was in excess of jurisdiction or with grave abuse of discretion amounting to lack of jurisdiction;

3. The petition should be filed within 10 days from receipt by the Board of Directors of the order directing receivership, liquidation or conservatorship.

61: Where will the claims against the insolvent bank be filed?

Where liquidation is undertaken with judicial intervention, all claims against the insolvent bank should be filed in the liquidation proceeding. Regular courts have no jurisdiction over actions filed by claimants against an insolvent bank other than in the liquidation proceedings (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).

62: Note: The judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank. Where it is the bank that files a claim against another person or legal entity, the claim should be filed in the regular courts.

63: Rule on Promissory Estoppel

If the BSP thru its MB has promised to rehabilitate the distressed bank, and the stockholders on said assurance proceeded to mortgage their real properties to guarantee BSP promised loan advances to said bank, BSP cannot RENEGE on said promise and cannot insist in its liquidation.

64: As a result, the BSP acquires ADDITIONAL SECURITY for its own advances to the detriment of the bank's stockholders, depositors and creditor.

65: Can a final and executory judgment against an insolvent bank be stayed?

Yes, after the Monetary Bank has declared that a bank is insolvent and has ordered it to cease operations, the assets of the insolvent bank are held in trust for the equal benefit of all creditors.

66: One cannot obtain an advantage or preference over another by attachment, execution or otherwise. The final judgment against the bank should be stayed as to execute the judgment would unduly deplete the assets of the banks to the obvious prejudice of other depositors and creditors. (Lipana v. Development Bank of Rizal, G.R. No. L‐73884, Sept. 24, 1987)

67: HOW BSP HANDLES EXCHANGE CRISIS

68: Legal Tender

All notes and coins issued by the Bangko Sentral are fully guaranteed by the Republic and shall be legal tender in the Philippines for all debts, both public and private (Sec. 52)

69: Legal Tender Power of Coins

1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not exceeding P1,000.00;

2. 25 centavo coin or less: In amounts not exceeding P50.00 or P100.00 (Circular No. 537, 2006);

3. 10 centavos or less: in amounts not exceeding P20.00.

Period of Replacement

BSP shall have the sole authority to replace currency unfit for circulation and retire or call in for replacement all types of:

1. NOTES which are more than 5 years old; and

2. COINS which are more than 10 years old.

Replacement of Currency Unfit for Circulation

General Rule: BSP shall withdraw from circulation, and shall demonetize all notes and coins which are UNFIT for circulation and shall replace them by adequate notes and coins.

Exception: Except those MUTILATED in condition which shall also be withdrawn in circulation without compensation to bearer (Sec. 56 and 57).

70: Rules on BSP's Authority to Replace Legal Tender

1. Notes and coins called in for replacement shall remain legal tender for ONE YEAR FROM the DATE of CALL;

2. After that period, they shall CEASE to be LEGAL TENDER but during the following year or for such longer period as MB may determine, they may be EXCHANGED at PAR and without charge.

71: 3. After the expiration of this latter period, the notes and coins not exchanged shall CEASE to be a LIABILITY of BSP and shall be DEMONETIZED. (Sec. 57)

Demand Deposits

It means all those liabilities of BSP and of other banks which are denominated in Philippine currency, and are subject to payment in legal tender upon demand by presentation of checks.

Only banks duly authorized may accept funds, or create liabilities payable in pesos, upon demand by presentation of checks, and such operations shall be subject to the control of MB.

72: Legal Character of Checks

Checks representing demand deposits have no LEGAL TENDER POWER and their acceptance in the payment of debts is at the option of the creditor.

But a CLEARED CHECK and credited to the account of the creditor is equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account (Sec. 60).

RATE OF EXCHANGE