Chapter II

REVIEW OF RELATED LITERATURE

Local Literature

Urban Bank

Urban Bank opened on 1980s as a thrift bank in Pasig. In 1981, Urban Bank was one of

twelve monetary institutions legalized to trade government securities. By 1982, the bank was

licensed by the Bangko Sentral to accept checking accounts and accept foreign currency deposits

and was also accredited by the Bureau of Internal Revenue as one of its tax collecting agents. By

1985, it became the largest originating bank for loans to the Pag-IBIG Fund for its National

Shelter Program. In 1988, Urban Bank opened a subsidiary approved by the SEC with the

Bangko Sentral. Urbancorp Investments was granted license to operate as an investment house

which was accredited later on to engaged in the trust and funds management businesses. (Urban

Bank Info, 2000)

In 1994, Urban Bank was entitled Asia’s best performing small bank by Thomson

BankWatch, and by 1996, Urban Bank became the first Philippine bank to offer online banking.

The Virtual Banking project was ISO 9001-certified from 1996 to meet international quality

standards, making Urban Bank the first and only Philippine bank to earn this merit. In 1997,

Urban Bank became a commercial bank and incorporated another subsidiary, Urbancorp

Development Bank based in Cebu. By 1998, UBI was cited by the Bangko Sentral for its overall

performance. The SLIP ratings system of BSP gave Urban Bank a score higher than the industry
average which made the Urban Bank to become one of the most solvent banks in the Philippines.

(Urban Bank Info, 2000)

In early 2000, Urban Bank planned to merge with its rival, Panasia Banking Corp. of the

Tan Yu group but was failed since the parties did not agree on the terms and conditions of the

union. This was also the year when the BSP set new requirements for the mergers which was not

met by the two institutions. Due to this, Urban Bank strategized on a new strategy which is to

convert the bank into a public holding company while still retaining its subsidiaries. The holding

company would then immediately infuse an additional equity of 1-2 billion pesos into the

existing P50 million equity of UDB, thereby increasing its capital by 20-40 times, making it one

of the biggest thrift banks in the country. (Batino, 2000)

Legal crisis faced by Urban Bank

According to Clarissa Batino from Philippine Inquirer (2000), Urban Bank declared a

bank holiday on the 25th of April. The declaration happened after the failed merging of Banco de

Oro and Urban Bank that was rejected by the BSP for the merging will not produce a bigger and

stronger bank. Teodoro Borlongan, President and Chief Executive of Urban Bank, said that the

decision they made was triggered by the heavy cash withdrawals over the past four weeks which

rose to Php 1-2 million made by Filipino-Chinese clients. (Ebias, 2000)

In the five weeks leading up the bank holiday, Urban Bank remained solvent without any

assistance from the BSP or the Philippine Deposit Insurance Corporation (PDIC), which is

almost impossible for a financial institution of a comparable size.

Monetary Board of BSP ordered the summary closure of Urban Bank and its subsidiaries. (Ebias,

2000) The BSP explained that this action was done to prevent the dissipation of its assets and to

protect the integrity of bank records. For the declaration of voluntary bank holiday means that

the owners themselves voluntarily closed the bank. (Closure of Urban Bank, 2003) The PDIC, as

a mandatory receiver of closed banks served upon UBI the closure order right after the Monetary

Board met to deliberate on the voluntary bank holiday declared by Urban Bank citing the

resolution number therein. The decision made by the board was based on the failed attempt of

the Urban Bank on securing its investments which was tackled on their previous meetings with

the senior officers of the bank. Urban Bank claims that the three SES reports submitted were

false. (Batino, 2000)

After the closure of Urban Bank, several criminal cases like estafa and banking regulation

were filed against its officers and the president himself accusing them of aiding in the

termination of the bank.

Estafa

Atty. Rainier Mamañgun (2011), former lawyer for the Department of Foreign Affairs,

explained in his blog the meaning and difference of estafa from other crimes. According to him,

estafa is the legal term used to describe certain forms of deception causing the other to suffer

damage by means of unfaithfulness, deceit, or fraud. Estafa by means of unfaithfulness is done

by altering or misappropriating anything of value that you are obliged to produce. Estafa by

means of deceit is done by deceiving other people of possessing power which you do not have.
Estafa by means of fraud is done by removing or destroying documents, inducing another to sign

a paper, and doing fraudulent practices for gambling. (Imbong, 2015)

Estafa is a punishable crime under Article 315 of the Revised Penal Code of the

Philippines. The following are the punishment for infringement Article 315:

1st. The penalty of prison correctional in its maximum period to prison mayor in its

minimum period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000

pesos, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be

imposed in its maximum period, adding one year for each additional 10,000 pesos; but the total

penalty which may be imposed shall not exceed twenty years. In such cases, and in connection

with the accessory penalties which may be imposed under the provisions of this Code, the

penalty shall be termed prison mayor or reclusion temporal, as the case may be.

2nd. The penalty of prison correctional in its minimum and medium periods, if the

amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arrest mayor in its maximum period to prison correctional in its

minimum period if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arrest mayor in its maximum period, if such amount does not exceed 200 pesos.

(Philippines Revised penal code, 2010)

Most of the filed estafa cases against the Urban Bank officers were dismissed for not

having enough evidences to prove it. The Supreme Court however had a final ruling of Php 4.5
billion estafa case against the Urban Bank’s 4 officers namely Nida S. Santos, Milagros

Santiago, Rowena Punzalan, Chulla Formanes, Loida O. Payonga and Amalia Ordas.

Banking regulation

Aside from the estafa cases filed against the Urban Bank, the officers were also accused

of violating the Section X303 of the BSP Manual of Regulations for Banks. These are the

fragments from Section X303 which constitutes on the violated law that states the limitation of

money that can be borrowed by a single client.

X303.1 Definition of Terms (part) - Commercial or business papers actually owned and

discounted by the person negotiating the same, which are past due or the maturity of which have

been extended, shall be considered as money borrowed and shall be subject to the limitation of

twenty-five percent (25%) provided in the first paragraph of this Section: Provided, That

commercial or business papers purchased by banks from SMEs which became past due or the

maturities of which have been extended, shall be considered additional loan by the bank to the

purchaser of goods or services from the SME and shall be entitled to an increased SBL

equivalent to ten percent (10%) of the net worth of the concerned bank if the purchasers are

companies with credit ratings of at least “AA-” or equivalent from a Bangko Sentral recognized

rating agency.

X303.5 Sanctions. - Violations of the provisions of this Section shall be subject to the following:

a. Monetary penalties - Fines of one tenth of one percent (1/10 of 1%) of the excess over the

ceiling but not to exceed P30,000.00 a day for each SBL violation shall be assessed on the bank

to be reckoned from the date the excess started up to the date when such excess was eliminated:
Provided, That a maximum fine of P500.00 a day for each violation shall be imposed against

banks with total resources of less than P50.0 million at the time of granting of loan/credit

accommodation.

b. Other sanctions First offense – Reprimand for the directors/officers who approved the credit

availment which resulted in the excess with a warning that subsequent violations will be subject

to more severe sanctions. Subsequent offenses –

(1) Fine of P 1,000.00 for directors/ officers who approved the credit availment which resulted in

the excess.

(2) Suspension of the bank’s branching privileges and access to Bangko Sentral rediscounting

facilities until the excess is eliminated.

(3) Other penalties as the Monetary Board may impose depending on the gravity of the offense.

(Manual of Regulations, 2004)

Foreign Literature

Banking regulation

In the Philippines that role of prudential regulator is fulfilled completely 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 conduct of examination and
investigation of the activities of banks with a view to determining their compliance with those

rules and standards, and enforcing prompt and corrective action in case of breach of the same.

(Morales, 2013)

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 such bank. Under the PDIC Charter, the PDIC can also

examine banks once a year, with the prior approval of the BSP.

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 such breach or violation may be criminally prosecuted and, if

convicted, may be punished by a fine ranging from 50,000 pesos to 200,000 pesos or

imprisonment for the responsible bank personnel of not less than two years but not more than 10

years, or a combination of 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. (Morales, 2013)

Causes of Banking Crises

There are many reasons which can cause crisis to a bank. Thus, an article entitled “Fundamentals

of Banking Crises” have listed some causes that may occur as a reason for the crisis of a bank.
These are the following:

 Bank Run: This occurs when a large group of bank users withdraw their deposits at the

same time. As much of the capital in a bank is secured in investments, the bank’s

liquidity will sometimes fail to meet the consumer demand. When this happens, it can

quickly induce panic in the public thus everyone will try to get their money back from a

system that they are increasingly skeptical of. This can result in a systemic banking crisis,

which simply means that all of the free capital in the banking system is withdrawn.

 Stock Market Positive Feedback Loops: One particularly interesting cause of banking

disasters is a similar positive feedback loop effect in the stock markets, which was a

much more dynamic factor in more recent banking crises (i.e. 2007-2009 sub-prime

mortgage disaster). John Maynard Keynes once compared financial markets to a beauty

contest, where investors are merely trying to pick what is attractive to other investors.

There is a profound truth to this, creating an interdependent and potentially self-fulfilling

investment thought process. This can create dramatic rises and falls (bubbles and

crashes), which in turn can throw banks with poorly designed leverage into huge losses.

 Regulatory Failure: Banks often force themselves in capturing advances despite having

extremely high risks. Thus, this lack of administrative oversight is one of the simplest

ways where bank crises occur.

 Contagion: From the name itself, contagion which means spreading of market changes or

disturbances from one region to others (Investopedia), bank crises can also occur when an

economy of another has failed which creates a domino effect.

Since banks play a critical role in economic growth, banking crises have a dramatic negative

effect on the overall economy, often resulting in an eventual financial and economic crisis in a

given economic system. From the listed causes above, consequences of the bank crises were

listed in the article too.

Domestic Consequences

Banks coordinate and economy’s savings and investment: the act of pooling money to capture

higher returns for everyone while simultaneously funding business dependent upon leveraging

debt and equity. With this in mind, a banking crises can have a variety of averse individual and

economic consequences within the system.

First and foremost, investment suffers. When banks lack liquidity to invest, businesses that

depend upon loans struggle to raise the capital required to execute upon their operations. When

these businesses cannot produce the capital required to operate optimally, sales decline and

prices rise. The overall economic performance of any debt-dependent industries becomes less

dependable, driving down consumer and investor confidence while reduce overall economic

output. Banks also perform more poorly, due to the fact that they have less capital to invest and

returns to acquire.

This drives down the overall economic system, both in the short term and the long term, as

companies struggle to succeed. The fall in liquidity and investment drives up unemployment,

drives down governmental tax revenues and reduces investor and consumer confidence

(damaging equity markets, which in turn limits businesses access to capital). There is a
distinctive cyclical nature to these adverse effects, as each are interconnected in a way that

creates a domino effect across the domestic economic system.

Global Consequences

While these domestic consequences are expected and, in many ways, intuitive, the global

dependency upon foreign trade in modern markets has exacerbated these effects. Imports and

exports play an increasingly large role in the health of most developed economies, and as a result

the relative well-being of trade partners plays an increasingly critical role in the success of

domestic economies.

A good example of this is to look at the way in which the U.S. (and to some extent, European)

banking disasters in 2008 and 2009 led to a complete global financial meltdown, destroying

economies not involved in the irresponsible investing practices executed by banks in these

specific regions. identifies the critical importance of economic well-being in trading partners, as

the U.S. banking and financial crises spread rapidly (within the course of just one year) across a

substantial portion of the globe (though there are certainly other factors that contributed to the

financial crisis and its consequences). The domestic reduction of capital for businesses, income

for consumers and tax revenue for governments ultimately results in a reduction of trade and

economic activity for other economies.