The Banking Regulation Review: Philippines


Banks in the Philippines are classified into (1) universal banks, (2) commercial banks, (3) thrift banks, (4) rural banks, (5) cooperative banks, (6) Islamic banks, (7) government-owned banks and (8) other banks as may be classified by the Bangko Sentral ng Pilipinas (BSP).2 Universal and commercial banks are the dominant groups, representing approximately 70 per cent of the resources of the banking system.3 Under the General Banking Law of 2000 (GBL), a universal bank is defined as a commercial bank with the additional authority to exercise the powers of an investment house and invest in non-allied enterprises.4 An ordinary commercial bank does not have that authority.

There are branches, subsidiaries and affiliates of foreign banks in the Philippines that are licensed either as universal or commercial banks. Others have offshore banking units with more limited functions.5

The BSP, which is the Philippine central bank, acting through its Monetary Board, is mandated by law to ensure that the control of 60 per cent of the resources or assets of the banking system is held by domestic banks that are at least majority-owned by Philippine nationals.6

The regulatory regime applicable to banks

The GBL governs universal and commercial banking. Special laws or charters regulate the operations of the other banks,7 but the GBL still applies to them insofar as it is not in conflict with those laws or charters. In fact, the Philippine Cooperative Code of 2008 recognises the primacy of the GBL in the regulation of cooperative banks.8

The rules implementing the various banking laws are embodied in the Manual of Regulations for Banks issued by the BSP. From time to time, additional circulars and other issuances are promulgated by the BSP to regulate new matters, if not to amend, repeal or otherwise modify existing rules.

The New Central Bank Act,9 which is the BSP charter, is applicable as it contains provisions on banking regulation in line with the mandate of the BSP as the primary overseer of banks in the Philippines. Relevant too is the Charter of the Philippine Deposit Insurance Corporation (PDIC),10 the insurer of bank deposits.

Prudential regulation

i Relationship with the prudential regulator

An effective prudential regulator is central to a safe and sound banking system. In the Philippines, that role is fulfilled entirely by the BSP. Section 4 of the GBL expressly states that the 'operations and activities of banks shall be subject to supervision of the Bangko Sentral'. Supervision, as defined in Section 4, not only contemplates the promulgation by the BSP of rules of conduct and standards of operations for banks (now set out in the Manual of Regulations for Banks, as supplemented or modified by the BSP from time to time), but also visitorial powers; that is, the conducting of examinations and investigations of the activities of banks with a view to determining their compliance with those rules and standards, and enforcing prompt and corrective action in cases of breaches of the same. Ultimately, the aim is to ensure the continued solvency and liquidity of banks.

As a rule, the BSP conducts regular investigations of banks not more than once a year. However, the Monetary Board, by an affirmative vote of five members, may order a special examination of a bank.11 In this regard, the BSP is required to immediately address findings of irregularities or deficiencies. When examining a bank, the BSP also has the authority to examine an enterprise that is wholly or majority-owned by the bank.12

Under the PDIC Charter, the PDIC can also examine banks once a year with the prior approval of the BSP. To avoid the overlapping of efforts, the PDIC has to 'maximise the efficient use of relevant reports, information and findings of the Bangko Sentral which it shall make available to the [PDIC]'.13 Under the amendments to the PDIC Charter made by Republic Act No. 10846, if the PDIC has submitted to the Monetary Board a report of examination asking that corrective action be taken against a bank determined by the PDIC to be conducting unsafe and unsound banking practices, and no corrective action is taken by the Monetary Board within 45 days of submission of the report, the PDIC can, motu proprio, institute the necessary corrective action and thereafter inform the Monetary Board of the action taken.

ii Management of banks

The management of a locally incorporated bank (such as a subsidiary of a foreign bank) is vested in a board of directors with five to 15 members, at least two of whom must be independent directors. Foreign nationals may become directors to the extent of the foreign equity in the bank concerned.14

The Monetary Board has prescribed the criteria for individuals to be elected as bank directors, in line with the fit and proper rule, to maintain the quality of bank management, and better protect depositors and the public in general. Here, the Monetary Board considers the integrity, experience, education, training and competence of the individual concerned. The election of bank directors must be confirmed by the Monetary Board.15

Board meetings may be conducted via teleconferencing or videoconferencing.16 Accordingly, directors of a bank need not all be physically present in one room to hold a valid meeting. A bank director must, however, participate in at least 50 per cent of all board meetings every year and physically attend at least 25 per cent of all such meetings.17

As in other domestic corporations, all corporate powers of a locally incorporated bank are exercised by its board of directors.18 After the election of the directors, the shareholders can participate in the management of the bank only in certain fundamental matters, such as the amendment of the articles of incorporation or by-laws of the bank, its dissolution, or its merger or consolidation with another bank.19

The BSP published the Handbook on Corporate Governance 'to improve corporate governance in the Philippine banking system'. The BSP also issued the rules of procedure on administrative cases involving directors and officers of banks.20 It is also aligning its rules with international best practices that foster good corporate governance in the banking sector, such as the Principles for Enhancing Corporate Governance promulgated by the Basel Committee on Banking Supervision.21 In this regard, the BSP has required each bank to appoint a full-time chief compliance officer to manage a compliance system designed to identify and mitigate business risks that may erode the franchise value of the bank.22

To protect the funds of the depositors and creditors of banks, the Monetary Board may regulate the payment of compensation, allowances, fees, bonuses, stock options, profit-sharing and fringe benefits to bank directors and officers, in exceptional cases and when circumstances warrant, such as when a bank is under comptrollership or conservatorship, when it is found to be conducting business in an unsafe and unsound manner, or when it is in an unsatisfactory financial condition.23 Towards this end, the Monetary Board requires that the total amount of unbooked valuation reserves and deferred charges be deducted from the net income of the bank in the event of profit sharing.24 Further, when the total compensation package (including salaries, allowances, fees and bonuses) of directors and officers is significantly excessive when compared with peer group averages, the Monetary Board may order a reduction of the package to a more reasonable level.25 It must also be noted that the compensation of directors in general is regulated by Section 29 of the Revised Corporation Code, which mandates that the total annual compensation of directors must not exceed 10 per cent of the bank's net income before tax during the preceding year.

Philippine branches of foreign banks are bound by the pertinent provisions of the GBL and the Manual of Regulations for Banks, except those providing for (1) the creation, formation, organisation or dissolution of corporations, and (2) the fixing of the relations, liabilities, responsibilities or duties of shareholders, directors or officers of corporations.26 These excluded matters will be governed by the applicable law in the jurisdiction of the foreign bank. Apart from the aforementioned in items (1) and (2), branches of foreign banks are required to conduct their operations subject to the same standards required of domestic banks. A branch does not have a board of directors. It is usually managed by an individual appointed by the head office, and his or her authority is normally set out in a power of attorney from the head office.

iii Regulatory capital and liquidity

Section 34 of the GBL enjoins the BSP to conform the 'minimum ratio which the net worth of a bank must bear to its total risk assets' to 'internationally accepted standards, including those of the Bank of International Settlements relating to risk-based capital requirements'.

In the case of non-compliance by a bank with the prescribed minimum ratio, the Monetary Board may, until that ratio is met or restored by the bank:

  1. limit or prohibit the distribution of net profits by the bank, and require that those profits be used, in full or in part, to increase the capital accounts of the bank;
  2. restrict or prohibit the acquisition of major assets by the bank; and
  3. restrict or prohibit the making of new investments by the bank, with the exception of purchases of readily marketable evidence of indebtedness of the government and the BSP, and other evidence of indebtedness or obligations, the servicing and the repayment of which are fully guaranteed by the government.27

Universal and commercial banks are subject to the capital adequacy standards under Basel III. The Basel Committee on Banking Supervision had outlined a staggered implementation of Basel III up to the end of 2018 to allow internationally active banks time to raise capital organically. However, the BSP decided to adopt Basel III-based capital standards in full on 1 January 2014 on a non-staggered basis. This is in recognition of the strong capital position of the Philippine banking industry.28 Under the rules, the risk capital ratio, expressed as a percentage of qualifying capital to risk-weighted assets, is 10 per cent for solo bases (head office plus branches) and consolidated bases (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). The Common Equity Tier 1 (CET1) ratio is 6 per cent, while the Tier 1 capital ratio is 7.5 per cent. Moreover, there is a capital conservation buffer of 2.5 per cent, composed of CET1 capital. In addition, the BSP subjects domestically systematically important banks to a higher loss absorbency by requiring them to have a higher share of their balance sheets funded by instruments that increase their resilience as a going concern. To restrict the build-up of leverage, banks must meet a leverage ratio of not less than 5 per cent on both a solo and consolidated basis. Finally, there is a required liquidity coverage ratio, which is the ratio of high-quality liquid assets to total net cash outflows. As a minimum, the stock of liquid assets should enable the bank to withstand significant liquidity shocks that last 30 calendar days, which would give time for corrective actions to be taken by the bank management or the BSP, or by both.

Thrift banks, rural banks and cooperative banks, which are not subsidiaries of universal and commercial banks, are covered by a separate risk-based capital adequacy system labelled by the BSP as the Basel 1.5 framework – a simplified version of Basel II that takes into account the simple operations of those banks.

iv Recovery and resolution

Under Section 29 of the New Central Bank Act, the Monetary Board may appoint a conservator for a bank that is in a 'state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors'. The conservator will:

  1. have such powers as the Monetary Board deems necessary to take charge of the assets and liabilities of the bank;
  2. manage the bank or reorganise its management;
  3. collect all monies and debts due to the bank; and
  4. exercise all powers necessary to restore its viability.

The conservator must be competent and knowledgeable in bank operations and management. There is a one-year limit to conservatorship.29

The Monetary Board will terminate the conservatorship when the bank can continue to operate on its own. Termination is also an option if the Monetary Board determines that the continuance in business of the bank would involve probable loss to the depositors and other creditors of the bank, in which case Section 30 of the New Central Bank Act would apply.30

Under Section 30, the Monetary Board may summarily forbid a bank from doing business and designate the PDIC as a receiver of the bank if that bank 'has insufficient realisable assets, as determined by the Bangko Sentral, to meet its liabilities'. The appointment of a receiver is also warranted without prior hearing in the event that the Monetary Board finds that a bank is unable to pay its liabilities as they become due in the ordinary course of business; cannot continue in business without involving probable losses to its depositors or creditors; or has wilfully violated a final BSP cease-and-desist order involving acts or transactions that amount to fraud or dissipation of bank assets.31

The receiver must determine, as soon as possible but not later than 90 days after the takeover, whether the bank may be rehabilitated or otherwise placed in a condition that would permit it to resume business with safety to its depositors and other creditors, and the general public. Any such determination for the resumption of business is subject to prior Monetary Board approval. In the event that the receiver determines that the bank cannot be rehabilitated or permitted to resume business, the Monetary Board will notify the board of directors of the bank accordingly, and instruct the receiver to liquidate the bank. The receiver will then file an ex parte petition in court for assistance in the liquidation of the bank pursuant to a liquidation plan adopted by the PDIC for general application to all closed banks and convert the assets of the bank to money, disposing of the same to creditors and other parties, for the purpose of paying the debts of the bank in accordance with the rules on concurrence and preference of credits under the Civil Code of the Philippines, and institute actions to collect and recover accounts and assets of, or defend any action against, the bank.32

The actions of the Monetary Board taken under Section 30 of the New Central Bank Act are final and executory, and may not be restrained or set aside by a court, except for on petition for certiorari on the ground that the action in question was in excess of jurisdiction or done with such grave abuse of discretion as to amount to lack or excess of jurisdiction.33

Under the amended PDIC Charter, a bank ordered to be closed by the Monetary Board will no longer be rehabilitated. The PDIC, as the designated receiver, will proceed with the takeover and liquidation of the closed bank, without the consent of the stockholders, board of directors, depositors and the other creditors of the closed bank.

Conduct of business

Section 2 of the GBL requires banks to exercise 'high standards of integrity and performance'. A breach of this fiduciary duty could make the erring bank liable for damages to its customers, and result in the conduct of banking business in an unsafe and unsound manner that may lead to a bank run and eventual insolvency. To minimise this systemic risk, prudential measures have been put in place in the GBL and the Manual of Regulations for Banks. Apart from the capital adequacy discussed earlier, these measures include the reserve requirement, single borrower's limit (SBL), the directors, officers, stockholders and related interests (DOSRI) limit, loan-loss provisioning and equity investment limit.

The BSP is also reinforcing prudential measures to minimise systemic risk, as exemplified by its adoption of a stress test for the real estate exposures of local banks. Further, Part Ten of the Manual of Regulations for Banks sets forth the minimum standards of consumer protection in the areas of disclosure and transparency, confidentiality of client information, fair treatment, effective recourse and financial education. BSP-supervised financial institutions must adhere to the highest service standards in their dealings with their customers. They are required to have a consumer protection risk management system whereby they are able to identify, measure, monitor and control consumer protection risks inherent in their operations. The BSP considers consumer protection as a core function complementary to its prudential regulation and supervision, and to its agenda for financial stability, inclusion and education.

i Reserves

Banks are required to maintain reserves against their deposit and deposit-substitute liabilities.34 The reserve requirements are not static, as they may be varied from time to time by the Monetary Board. The BSP imposed a unified reserve (initially of 18 per cent) for the deposit and deposit-substitute liabilities of universal and commercial banks.35 These reserves, aside from being an instrument of monetary policy of the BSP, have a prudential purpose, since they serve as a ready source of funds that will respond to an unusually large number of withdrawals of deposits taking the shape of a bank run. Under manageable circumstances, the reserves and other funds at the bank's disposal should stem the run.

ii SBL

The SBL serves to allocate bank resources to different sectors of the economy. It prevents banks from making excessive loans and other credit accommodations to a single borrower or corporate group. Thus, banks are prohibited from placing all their eggs in the basket of a single client, thereby safeguarding them from too large a risk exposure to a single client. Currently, the SBL is 25 per cent of the net worth of a bank.36 There could be an incremental SBL of 10 per cent of the net worth of the bank, provided that the additional liabilities of the borrower are adequately secured by documents of title to goods that are readily marketable, non-perishable and fully insured.37

iii DOSRI limit

The general policy behind the DOSRI limit is to level the lending field between insiders (namely, directors, officers, stockholders and their related interests) and outsiders. The rules require that loans and other credit accommodations to DOSRI are to be in the regular course of business and upon terms no less favourable to the bank than those offered to those outside the DOSRI circle. The aim is to prevent banks from becoming a captive source of finance of the DOSRI.38

The existing DOSRI rules have three ceilings: an individual ceiling, an aggregate ceiling and a ceiling on unsecured loans. The individual ceiling relates to the total allowable outstanding direct credit accommodation to a DOSRI, which is an amount equivalent to the individual's unencumbered deposits in the lending bank plus the book value of the paid-capital contribution therein. It is also required that the unsecured credit accommodations must not exceed 30 per cent of the total DOSRI credit accommodations. On the other hand, the aggregate ceiling refers to the total credit accommodations to DOSRI: this is 15 per cent of the total loan portfolio of the bank or 100 per cent of its net worth, whichever is lower.39

Before a bank can extend a DOSRI loan, a specific resolution must be passed by the board of directors, without the participation of the interested director. The resolution must be entered into the records of the bank, and a copy of the entry must be transmitted to the BSP within 20 banking days of board approval.

iv Loan-loss provisioning

Appendix 15 to the Manual of Regulations for Banks contains the basic minimum guidelines for setting up allowances for credit losses (ACL) in respect of banks 'with operations that may not economically justify a more sophisticated loan loss estimation methodology or where practices fell short of expected standards'. Loans and other credit accommodations with unpaid principal or interest are to be classified (as pass, especially mentioned, substandard, doubtful or loss, as the case may be) and provided with ACL based on the number of days of missed payments.40

v Equity investment limit

There are limits as to how much universal and commercial banks can invest in equities of enterprises. Under Section 24 of the GBL, the total investment by a universal bank in equities of allied and non-allied enterprises must not exceed 50 per cent of its net worth, while its equity investment in any one enterprise is not to exceed 25 per cent of its net worth.41 On the other hand, the total investment by a commercial bank in equities of allied enterprises must not exceed 35 per cent of its net worth, while the individual limit is 25 per cent of its net worth. It must be stressed that only universal banks can invest in non-allied enterprises. In all cases, the approval of the Monetary Board is required.

A breach of any of the foregoing prudential measures would constitute a violation of the GBL or the Manual of Regulations for Banks. Under Section 36 of the New Central Bank Act, any person responsible for a breach or violation may be criminally prosecuted, and if convicted may be punished with a fine ranging from 50,000 to 2 million Philippine pesos, with imprisonment for a period ranging between two and 10 years, or with a combination of a fine and imprisonment, at the discretion of the court. Further, whenever a bank persists in carrying on its business in an unlawful or unsafe manner, the Monetary Board may take action under Section 30 of the New Central Bank Act for its receivership and liquidation, without prejudice to the penalties provided above and the administrative sanctions provided in Section 37 of the New Central Bank Act, namely:

  1. fines in amounts determined by the Monetary Board, but in no case to exceed 1 million pesos for each transactional violation or 100,000 pesos per calendar day for violations of a continuing nature;
  2. suspension of rediscounting privileges or access to BSP credit facilities;
  3. suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments;
  4. suspension of interbank clearing privileges; and
  5. suspension or revocation of quasi-banking or other special licences.

The bank is subject to certain confidentiality obligations. Any information relating to the funds or properties of clients of a bank are to be kept confidential by that bank and its directors, officers, employees and agents. Under Subsection 55.1(b) of the GBL, this information cannot be disclosed to any unauthorised person without a court order. However, under Section 11 of the Anti-Money Laundering Act of 2001,42 no court order is required if:

  1. the funds or property involved consist of investments (other than those in bonds issued by the government or its political subdivisions and instrumentalities, as those are governed by the Secrecy of Bank Deposits Law mentioned below); and
  2. the said investments are related to:
    • kidnapping for ransom;
    • unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the Comprehensive Dangerous Drugs Act of 2002;
    • hijacking and other violations under Republic Act No. 6235; and
    • destructive arson and murder, including that perpetrated by terrorists against non-combatants and similar targets.

The term 'unauthorised person' in Subsection 55.1(b) of the GBL does not include BSP officials involved in the periodic or special examination of a bank, or other persons authorised by the bank to undertake certain activities on its behalf (e.g., a service provider under an outsourcing arrangement allowed under Subsection 55.1(e) of the GBL). It must also be noted that the persons entitled to protection under Subsection 55.1(b) are 'private individuals, corporations, or any other entity'. Thus, the protection would not extend to non-private persons, such as public officials.

With regard to bank deposits in pesos (as well as investments in bonds issued by the government or its political subdivisions and instrumentalities), the Secrecy of Bank Deposits Law applies.43

Under this Law, those deposits and investments may not be examined, enquired about or looked into by any person, government official, bureau or office, except:

  1. upon written permission of the depositor or investor;
  2. in cases of impeachment;
  3. upon an order of a competent court regarding bribery;
  4. for dereliction of duty by public officials; or
  5. where the money deposited or invested is the subject of the litigation.

The following cases are additional exceptions to the Secrecy of Bank Deposits Law:

  1. prosecution for unexplained wealth under Republic Act No. 3019, as amended (otherwise known as the Anti-Graft and Corrupt Practices Act);44
  2. upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 when it has been established that there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laundering offence under the said Act, except that no court order is required in cases of:
    • kidnapping for ransom;
    • unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the Comprehensive Dangerous Drugs Act of 2002;
    • hijacking and other violations under Republic Act No. 6235; and
    • destructive arson and murder, including that perpetrated by terrorists against non-combatants and similar targets;45
  3. the BSP's enquiry into or examination of deposits or investments with any bank when the enquiry or examination is made during the course of the BSP's periodic or special examination of a bank;46
  4. an enquiry by the Commissioner of Internal Revenue into the deposits of a decedent for the purpose of determining the gross estate of the decedent;47 and
  5. disclosure of certain information about bank deposits, which have been dormant for at least 10 years, to the Treasurer of the Philippines in a sworn statement, a copy of which is posted in the bank premises.48

On the other hand, deposits in foreign currency deposit units of banks may be examined in any of the following instances:

  1. upon the written permission of the depositor;49
  2. upon an order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001, when it has been established that there is probable cause that the deposits involved are in any way related to an unlawful activity or a money laundering offence under the said Act, except that no court order is required in cases of:
    • kidnapping for ransom;
    • unlawful activities under Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15 and 16 of the Comprehensive Dangerous Drugs Act of 2002;
    • hijacking and other violations under Republic Act No. 6235; and
    • destructive arson and murder, including that perpetrated by terrorists against non-combatants and similar targets;50
  3. an enquiry by the Commissioner of Internal Revenue into the deposits of a decedent for the purpose of determining the gross estate of the decedent;51 and
  4. the BSP's enquiry into or examination of deposits with any bank when the enquiry or examination is made during the course of the BSP's periodic or special examination of the bank.52

Notwithstanding the provisions of the Secrecy of Bank Deposits Law, the Foreign Currency Deposit Act and Subsection 55.1(b) of the GBL, the BSP and the PDIC may enquire into or examine deposit accounts and all information related thereto in cases where there is a finding of unsafe or unsound banking practices.53

Further, under the Terrorism Financing Prevention and Suppression Act 2012, the Anti-Money Laundering Council is authorised, in connection with an investigation of financing of terrorism, to enquire into or examine deposits and investments with any bank and any of its subsidiaries or affiliates without a court order.54


Funding for banks comes from equity contributions from its shareholders, and from loans and credit accommodations from the BSP and other lenders.55

The BSP has prescribed certain minimum levels of capitalisation for banks. For instance, a universal bank (with more than 100 branches) must have a minimum paid-in capital of 20 billion pesos at the time of its establishment, while a commercial bank (with the same number of branches) must have 15 billion pesos.56 Furthermore, the risk-based capital adequacy ratio of universal and commercial banks has continued to be above the BSP's minimum ratio of 10 per cent and the Basel Accord's standard ratio of 8 per cent, despite global financial uncertainties.57

The BSP, for its part, provides rediscounting and other credit facilities to banks, including loans for liquidity purposes and emergency loans during periods of financial panic that directly threaten monetary and banking stability.58

Control of banks and transfers of banking business

i Control regime

Under Section 122 of the Manual of Regulations for Banks, the shareholdings of an individual or a corporation in any bank are subject to the following limits:

  1. foreign individuals and non-bank corporations may collectively own or control up to 40 per cent of the voting stock of a domestic bank;
  2. qualified foreign banks59 may own or control up to 100 per cent of the voting stock of a domestic bank;
  3. a Filipino individual and a domestic non-bank corporation may each own up to 40 per cent of the voting stock of a domestic bank, but there is no ceiling on the aggregate ownership by such individuals and corporations in a domestic bank; and
  4. an individual and corporations wholly or majority-owned by him or her can own or control only up to a combined 40 per cent of the voting stock of a domestic bank.

ii Transfers of banking business

The prior approval of the Monetary Board is required for transactions involving voting shares of a bank if they will result in ownership or control of more than 20 per cent of voting shares of stock of a bank by any person (whether natural or juridical), or will enable that person to elect or be elected as a director of the bank; or effect a change in the majority ownership or control of the voting shares of stock of the bank from one group of persons to another.

The transaction will not be approved by the Monetary Board unless the bank concerned immediately complies with the prescribed minimum capital requirement for new banks.60

Under the Philippine Competition Act, a bank merger or consolidation whose value exceeds 1 billion pesos is to be notified to the Philippine Competition Commission. However, a favourable or no-objection ruling by the Commission will not dispense with the Monetary Board and PDIC approvals for a merger or consolidation.61 Further, without PDIC consent, no insured bank can assume another bank's liability to pay deposits.62

The year in review

The Philippine banking system remained relatively sound and stable during 2020, despite the covid-19 pandemic. Local banks are projecting growth of between 10 per cent and 15 per cent in their loan portfolio over the next two years, and bad debts remained manageable with non-performing loans settling at 3.5 per cent as at October 2020, with capital adequacy well above national and international thresholds.63

Year-on-year headline inflation significantly rose to 4.2 per cent in January 2021, higher than the 3.5 per cent in December 2020.64 At the end of 2020, gross international reserves (GIR) stood at US$110.12 billion, which provides an adequate external liquidity buffer for 2021 equivalent to 11.8 months' worth of imports of goods and payment of services.65

After 84 consecutive quarters of growth, the economy contracted in the first three quarters of 2020, resulting in an average real GDP decline of 10 per cent.66 The country's balance of payments position posted a surplus of US$16.02 billion in 2020.67 Foreign direct investments in the first 11 months of 2020 reached US$5.8 billion.68 The GIR is equivalent to 9.5 times the country's short-term external debt based on original maturity and 5.4 times based on residual maturity.69

Outlook and conclusions

The outlook for the Philippine banking system remains positive, as the economy is projected to recover and expand by between 6.5 per cent and 7.5 per cent in 2021 and by between 8 per cent and 10 per cent in 2022, as the Philippine economy gradually reopens.70 The capital adequacy ratio of universal and commercial banks is well above the 10 per cent regulatory requirement of the BSP and the international standard of 8 per cent.71

As the economy recovers, the BSP will continue to encourage mergers and consolidations of domestic banks, as well as require them to raise their capital, to make them more competitive with their regional counterparts.


1 Rafael A Morales is managing partner at Morales & Justiniano.

2 The banks in categories (1) to (5) may be described as follows (see Section 101 of the Manual of Regulations for Banks):

Universal and commercial banks represent the largest single group, resource-wise, of financial institutions in the country. They offer the widest variety of banking services among financial institutions. In addition to the function of an ordinary commercial bank, universal banks are also authorised to engage in underwriting and other functions of investment houses, and to invest in equities of non-allied undertakings.

The thrift banking system is composed of savings and mortgage banks, private development banks, stock savings and loan associations and microfinance thrift banks. Thrift banks are engaged in accumulating savings of depositors and investing them. They also provide short-term working capital and medium- and long-term financing to businesses engaged in agriculture, services, industry and housing, and diversified financial and allied services, and to their chosen markets and constituencies, especially small and medium-sized enterprises and individuals.

Rural and cooperative banks are the more popular types of banks in rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production, from buying seedlings to marketing their produce. Rural banks and cooperative banks are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organised or owned by cooperatives or federations of cooperatives.

With regard to category (6), the Act Providing for the Regulation and Organisation of Islamic Banks (the Islamic Banking Law) (Republic Act No. 11439) authorised the establishment of Islamic banks and Islamic banking units within conventional banks. The government-owned banks in category (7) are the Development Bank of the Philippines and the Land Bank of the Philippines. Belonging to category (8) are digital banks authorised by BSP Circular No. 1105 (2 December 2020).

3 The five largest privately owned universal banks in terms of assets, as well as their subsidiaries that are thrift banks, account for approximately 50.2 per cent of the resources of the banking system. See Nestor A Espenilla Jr, 'Financial Regulation and the Central Bank', in Central Banking in Challenging Times: The Philippine Experience (BSP: 2009), p. 469. As at June 2020, these five universal banks were BDO Unibank, Inc, Bank of the Philippine Islands, Metropolitan Bank and Trust Company, Land Bank of the Philippines and Philippine National Bank (see

4 Section 23 of the General Banking Law of 2000 (GBL) (Republic Act No. 8791).

5 See Sections 45 to 60 of the BSP Manual of Regulations on Foreign Exchange Transactions.

6 Section 3 of Republic Act No. 7721 (as amended by Republic Act No. 10641).

7 These special laws or charters are the Thrift Banks Act (Republic Act No. 7906), the Rural Banks Act (Republic Act No. 7353, as amended), the Philippine Cooperative Code of 2008 (Republic Act No. 9520), the Charter of the Al-Amanah Islamic Investment Bank of the Philippines (Republic Act No. 6848), the 1986 Revised Charter of the Development Bank of the Philippines (Executive Order No. 81), the Charter of the Land Bank of the Philippines (Republic Act No. 3844, as amended) and the Islamic Banking Law (Republic Act No. 11439).

8 Article 104 of the Philippine Cooperative Code of 2008.

9 Republic Act No. 7653, as amended.

10 Republic Act No. 3591, as amended.

11 Section 28 of the New Central Bank Act.

12 Section 7 of the GBL.

13 Section 8 (Paragraph 8) of the Philippine Deposit Insurance Corporation (PDIC) Charter.

14 Section 15 of the GBL.

15 In determining whether a person is fit and proper to be a bank director, the following matters are to be considered: 'integrity/probity; physical/mental fitness; relevant education/financial literacy/training; possession of competencies relevant to the job, such as knowledge and experience, skills, diligence and independence of mind; and sufficiency of time to fully carry out responsibilities' (Section 132 of the Manual of Regulations for Banks). The Monetary Board has to confirm the election or appointment of directors, as well as chief executive officers of universal and commercial banks (Section 137 of the Manual of Regulations for Banks).

16 Section 15 of the GBL.

17 Section 138 of the Manual of Regulations for Banks.

18 Section 22 of the Revised Corporation Code of the Philippines.

19 See Sections 15, 47, 76, 134 and 135 of the Revised Corporation Code of the Philippines.

20 BSP Circular No. 477.

21 BSP Circular No. 757.

22 BSP Circular No. 747; the BSP also issued Circular No. 766, 'Guidelines in Strengthening Corporate Governance and Risk Management Practices on Trust, Other Fiduciary Business, and Investment Management Activities'.

23 Section 18 of the GBL.

24 Section 135 of the Manual of Regulations for Banks.

25 ibid.

26 Section 77 of the GBL.

27 Section 34 of the GBL.

28 See 'BSP to Fully Implement Basel 3 Capital Adequacy Rules for U/KBs in 2014' (BSP media release, 5 January 2012), The current Basel III-based rules are embodied in Section 125 of the Manual of Regulations for Banks.

29 Section 29 of the New Central Bank Act.

30 ibid.

31 Section 30 of the New Central Bank Act.

32 ibid.

33 ibid.

34 Section 94 of the New Central Bank Act.

35 BSP Circular No. 753.

36 Section 362 of the Manual of Regulations for Banks.

37 Subsection 35.2 of the GBL.

38 Section 36 of the GBL.

39 Sections 341 to 350 of the Manual of Regulations for Banks.

40 Under Section 143 of the Manual (cited above), the pass category includes loans and other credit accommodations (such as accounts receivables, sales contract receivables, accrued interest receivables and advances) that 'do not have a greater-than-normal credit risk', as distinguished from those 'especially mentioned' that have 'potential weaknesses that deserve management's close attention'. Loans and other credit accommodations become substandard if they have 'well-defined weakness that may jeopardize repayment/liquidation in full, either in respect of the business, cash flow or financial position, which may include adverse trends or developments that affect willingness or repayment ability of the borrower'. They become doubtful when they 'exhibit more severe weaknesses than those classified as substandard' and 'on the basis of currently known facts, conditions and values make collection or liquidation highly improbable', although 'the exact amount remains undeterminable as yet'. They are not classified as loss yet, since there are 'specific pending factors which may strengthen the assets'. However, they are to be classified as loss once they are considered as 'uncollectible or worthless and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value'.

41 Section 372 of the Manual of Regulations for Banks lists the following as possible financial allied enterprises of a universal bank: (1) leasing companies, (2) banks, (3) investment houses, (4) financing companies, (5) credit card companies, (6) financial institutions catering to small and medium-sized industries, including venture capital corporations, (7) companies engaged in stock brokerage or securities dealership, (8) companies engaged in foreign exchange dealership or brokerage, (9) insurance companies and (10) holding companies investing in allied or non-allied enterprises. Category (1) includes enterprises engaged in the 'leasing of stalls and spaces in a commercial establishment'. However, a bank's entry into these leasing enterprises should be through 'conversion of outstanding loan obligations into equity'. On the other hand, Section 375 of the Manual classifies the following enterprises as non-financial allied: warehousing companies; storage companies; safe deposit box companies; companies primarily engaged in the management of mutual funds but not in mutual funds themselves; management corporations engaged in an activity similar to the management of mutual funds; companies engaged in providing computer services; insurance agencies or brokerages; companies engaged in house building and home development; companies providing drying or milling facilities for agricultural crops; service bureaus organised to perform for banks and non-bank financial institutions the services allowed to be outsourced under Section 112 of the Manual; the Philippine Clearing House Corporation; the Philippine Central Depository, Inc; and the Fixed Income Exchange (i.e., Philippine Dealing and Exchange Corp). Health maintenance organisations are also classified as non-financial allied enterprises in which universal banks may invest. All enterprises not otherwise specified as allied (whether financial or non-financial) would be classifiable as non-allied. Thus, investments in mutual funds (as opposed to their management companies) would be considered as non-allied. In addition, Section 376-A of the Manual identifies the following as non-allied enterprises: enterprises engaged in physically productive activities in agriculture, mining and quarrying, manufacturing, public utilities, construction, wholesale trade, and community and social services following the industrial groupings in the Philippine Standard Industrial Classification as enumerated in Appendix 22 of the Manual; industrial park projects or industrial estate developments; and financial and commercial complex projects (including land development and buildings constructed thereon) arising from or in connection with the government's privatisation programme. An airport terminal company is a non-allied enterprise (see Agan, Jr, v. Philippine International Air Terminals Co, Inc, 402 SCRA 612, 651–652 (2003); see also Agan, Jr, v. Philippine International Air Terminal Co, Inc, GR No. 155001, 21 January 2004).

42 Republic Act No. 9160, as amended.

43 Republic Act No. 1405, as amended.

44 See Philippine National Bank v. Gancayco, 15 SCRA 91 (1965); and Banco Filipino Savings and Mortgage Bank v. Purisima, 161 SCRA 576 (1988).

45 Section 11 of the Anti-Money Laundering Act of 2001.

46 ibid.

47 Section 6(F) of the National Internal Revenue Code of 1997 (Republic Act No. 8424).

48 Section 2 of the Unclaimed Balances Law (Act No. 3936, as amended).

49 Section 8 of the Foreign Currency Deposit Act.

50 Section 11 of the Anti-Money Laundering Act of 2001.

51 Section 6(F) of the National Internal Revenue Code of 1997 (Republic Act No. 8424).

52 Section 11 of the Anti-Money Laundering Law of 2001.

53 Section 8 (Paragraph 8) of the PDIC Charter, as amended by Republic Act No. 9576.

54 Section 10 of the Republic Act No. 10168.

55 Banks have raised Basel-based capital through subordinated debt issuances.

56 BSP Circular No. 854.

57 See 'PH Economic Outlook: Toward a Solid Recovery' (BSP media release, 6 January 2021),

58 Sections 81 to 88 of the New Central Bank Act.

59 Under Republic Act No. 7721 (as amended by Republic Act No. 10641), the BSP considers only those foreign banks that are widely owned and publicly listed in their country of origin, if not owned or controlled by the government. Further, the BSP will '(i) ensure geographic representation and complementation; (ii) consider strategic trade and investment relationships between the Philippines and the trade and investment relationships between the Philippines and the country of incorporation of the foreign bank; (iii) study the demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant; (iv) see to it that reciprocity rights are enjoyed by Philippine banks in the applicant's country; and (v) consider willingness to fully share their technology'.

60 Section 122 of the Manual of Regulations for Banks.

61 Section 16 of the Philippine Competition Act; Section 104 of the Manual of Regulations for Banks; Section 21(c) of the PDIC Charter.

62 Section 21(c) of the PDIC Charter.

63 See the BSP Governor's Opening Remarks at the Tuesday Club Press Event (BSP media release, 4 January 2021),

64 See 'Inflation Rises to 4.2 Percent in January' (BSP media release, 5 February 2021),

65 See 'BOP in December 2020 Posts US$4.24 Billion Surplus; Full-Year 2020 BOP Surplus at All-Time High of US$16.02 Billion & End-2020 GIR Level Rises to US$110.12 Billion' (BSP media release, 31 January 2021),

66 See footnote 57.

67 ibid.

68 ibid.

69 See footnote 65.

70 See footnote 57.

71 ibid.

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