Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

TWENTIETH CONGRESS
First Regular Session

802

House Bill No.

Introduced by Representative EDUARDO R. RAMA, JR.

AN ACT AUTHORIZING LOCAL GOVERNMENT UNITS TO ENGAGE
IN BANKING ACTIVITIES AND OTHER FINANCIAL TRANSACTIONS
WITH PRIVATE UNIVERSAL AND/OR COMMERCIAL BANKS

EXPLANATORY NOTE

‘The 1987 Philippine Constitution enshrines the principle of local autonomy, acknowledging the
intrinsic rights of Local Government Units (LGUs) to exercise authority within their respective
jurisdictions. This authority extends to fiscal management and is governed by the Local
Government Code of 1991, as amended. Nevertheless, the current banking regulations for LGUs
constrain their fiscal independence and operational efficiency, limiting them to transactions with
government financial institutions (GFls) alone.

s in the Philippines, such as the Development Bank of the Philippines (DBP) and Land Bank
of the Philippines (LBP), are obligated to focus their financial support on designated priority
sectors. Consequently, their investment portfolios may not offer the same breadth of options as
those of private banking institutions, which cater to a more diverse clientele. A more expansive
range of financial options from private banks could potentially offer distinct benefits to LGUs.

‘This legislative proposal argues for extending the freedom to LGUs to engage with a variety of
private banking institutions, This will not only diversify their financial options but also enhance
their revenue-generating capabilities and overall efficacy within their jurisdictions, Such an
approach stands to henefit not only the LGUs hut also the fiscal health of the national government
as a whole.

It is worth noting that other countries allow their local governments to deposit public funds in
private financial institutions, while implementing adequate safeguards to protect these funds. For
example, in the United States, the Federal Reserve System (FRS) collaborates with the Federal
Deposit Insurance Corporation (DIC) to insure local government deposits. Sumularly, in the
United Kingdom, the Chartered Institute of Public Finance and Accountancy (CIPFA) issues
guidelines to promote transparent, accountable, and sound financial management by local
government. Accordingly, this bill mandates the Department of Finance (DOF) and the Bangko
Sentral ng Pilipinas (BSP) to establish a comparable framework for the safekeeping of public
funds in the Philippines.


Given that this bili introduces an innovative approach, the establishment of an Oversight
Committee is deemed necessary to ensure its implementation aligns with the intended policy
objectives.

Summarily, this legislative measure seeks to empower LGUs with the choice to conduct banking
activities with private financial institutions, while instituting adequate safeguards to protect public
funds. It also secks to bolster local economic development and service delivery by widening access
to various financial options and encouraging investment.

‘Thus, support for the enactment of this measure is hereby earnestly solicited.

ao

REP. EDUARDO R. RAMA, JR.
Second District, City of Cebu


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Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

‘TWENTIETH CONGRESS
First Regular Session

House BillNo.__802 _

Introduced by Representative EDUARDO R. RAMA, JR.

AN ACT AUTHORIZING LOCAL GOVERNMENT UNITS TO ENGAGE
IN BANKING ACTIVITIES AND OTHER FINANCIAL TRANSACTIONS
WITH PRIVATE UNIVERSAL AND/OR COMMERCIAL BANKS

Be it enacted by the Senate and House of Representatives of the Pbilippines in Congress assembled:

SECTION 1. Short Title. — ‘This Act shall be
to Bank Act”.

ywn as the “LGU /

thority

SECTION 2. _ Declaration of Policy. — It is the policy of the State to uphold
and strengthen the local autonomy of local government units (LGUs). The State recognizes the
vital role of LGUs as partners of the national government in nation building and national
development goals.

Towards this end, the State also recognizes the role of the private banking sector in
aiding the LGUs to enhance its local and fiscal autonomy, and to improve efficiency and
innovation in financial management leading to improved service and economic development at
the local level.

SECTION 3. _ Definition of Terms. — For purposes of this Act, the following
terms shall be defined as follows:

a. “Universal Bank” shall refer to an entity engaged in the lending of funds obtained
in the forms of deposits and has the authority to exercise, in addition to the powers
authorized for a commercial banks as defined in Sec. 3(b) of this Act, the powers
of an investment house as provided in existing laws, the power to invest in non-
allied enterprises as provided in Republic Act No. 8791 o the General Banking
Act of 2000, and under the Bangko Sentral ng Pilipinas Manual of Regulations of
Banks (BSP MORB), the power to own up to one hundred percent (100%) of the
equity in a Thrift Bank, a Rural Bank, a financial allied enterprise, of a non-financial
allied enterprise, and in case of publicly-listed universal banks, the power to own
up to one hundred percent (100%) of the voting stock of only one (1) other
Universal Bank or Commercial Bank.

b. “Commercial Bank” shall refer to an entity engaged in the lending of funds obtained
in the form of deposits and have, in addition to the general powers incident to
corporations, all such powers as may be necessary 10 carry on the business of

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commercial banking such as accepting drafts and issuing letters of credit;
discounting and negotiating promissory notes, drafts, bills of exchanges, and other
evidences of debt; accepting or creating demand deposits; receiving other types of
deposits and deposit substitute; buying and selling foreign exchange and gold or
silver bullion; acquiring marketable bonds and other debt securities; and extending
credit, subject to such rules as the Monetary Board may promulgate. These rales
may include the determination of bonds and other debt securities eligible for
investment, the maturities and aggregate amount of such investment. Commercial
Banks, as provided for under the BSP MORB, may also exercise or perform any
or all of the following: (a) invest in the equities of allied enterprises as provided in
Sections 31 and 32 or Republic Act No. 8791; (b) purchase, hold and convey real
estate as specified under Sections 51 and 52 of R.A. 8791; (¢) receive in custody
funds, documents, and valuable object; (d) act as financial agent and buy and sell,
by order of and for the account of their customers, shares, evidences of
indebtedness and all types of securities; (¢) make collections and payments for the
account of other and perform such other services for their customer as are not
incompatible with banking business: () upon prior approval of the Monetary
Board, act as managing agent, adviser, consultant or administrator of investment
management/advisory/consultancy accounts; (g) rent out safety deposit boxes;
and (h) engage in quasi-banking functions.

“Government Financial Institution” (GFT) shall refer to financial institutions or
corporations in which the government directiy or indirectly owns majority of the
capital stock and which are either: (1) registered with or directly supervised by the
Bangko Sentral ng Pilipinas; or are (2) collecting or transacting funds or
contributions from the public and thereafter placing them in financial instruments
or assets such as deposits, loans, bonds and equity, as defined under Section 3(m)
of Republic Act No, 10149 or the GOCC Governance Act of 2011.

SECTION 4. Authority of Local Government Units to Engage in Activities
and Other Financial Transactions with Preferred Private Universal Commercial Banks or
Government Financial Institutions. — LGUs shall be authorized to engage in banking and
other financial transactions with their preferred banking or financial institution, whether it is a
private Universal and/or Commercial Bank (UCB), or a qualified Government Financial
Institution (GF1). Provided, that the private UCB meets the defined criteria set by the Bangko
Sentral ng Pilipinas (BSP) to qualify for the authority to bank with LGUs

SECTION 5. __ Selection of Private Universal and/or Commercial Banking
Institutions. — The Department of Finance (DOF) and the BSP shall define specific stringent
criteria that private banking institutions must comply with to be cligible for consideration. In
addition to a high compliance rating as set by the BSP, the selection shall include factors such as
the UCB's financial stability, reputation, experience, technological capabilities, customer service,
and adherence to regulatory requirements on consumer protection, data privacy, risk management,
and cybersecurity.

Based on the predetermined criteria and the operational capacity of the UCBs, the
BSP shall create an initial shortlist of private banks chat mect the established eligibility
requirements. The shortlist of banks authorized to transact with LGUs shall be published on the
BSP’s official website, The shortlist shall be subject to periodic review and updates as decmed
necessary by the BSP.



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‘The predetermined criteria mentioned above is a continuing requirement for a UCB
to be authorized to transact with an LGU. The BSP shall establish a monitoring and review
mechanism to ensure that the UCBs on the shortlist continue to meet the established criteria
Subject to Section 8 hereof, the BSP shall have the authority to remove a UCB from the shortlist
once it is found to be non-compliant with the established criteria.

SECTION 6. Roles of Private Universal and/or Commercial Banking
Institutions. — Private banks, by engaging in transactions with LGUs, hereby undertake to fulfill
these roles and responsibilities to ensure transparency, accountability, and prudent financial
management. They shall prioritize the protection of LGUs' funds and assets and uphold the
highest standards of integrity in their dealings with LGUs.

UCBs shall implement robust risk management measures to safeguard against
unauthorized access, fraud, and cybersecurity threats. Further, they shall maintain accurate records
of LGUs’ financial transactions and make them available for examination and audit by the
appropriate regulatory bodies or oversight committees. Finally, private banking institutions shall
cooperate with the oversight committee, regulatory bodies, and IGUs in providing necessary
information, reports, and data related to LGUs’ transactions, ensuring transparency, and
facilitating effective monitoring and evaluation.

SECTION 7. Authorized Bank Reporting Requirement. — Private banking
institutions conducting transactions with LGUs shall be mandated to submit regular reports to the
BSP. These reports shall include detailed records of transactions, interest rates, fees, and other
relevant financial data,

SECTION 8. _ Revocation of Bank Authority; Removal from Shortlist;
Continuation of Pending Transactions. — In the event that a private banking institution is
removed from the list of authorized banks to engage with LGUs, the removed private banking
institution shall promptly notify all affected LGUs of the revocation of its authority to conduct
banking transactions. This notification shall include a proposed plan for the completion of any
pending transactions within one (1) year from the date of revocation, and the procedures necessary
for the transfer of funds and financial records.

‘The pian for completion of pending transactions must comply with existing
contractual obligations under Philippines law and shall be subject to approval by the BSP. Failure
to complete pending transactions within the stipulated one-year period will result in additional
actions and/or penalties as prescribed by the BSP.

For any financial transactions initiated prior to the revocation of banking authority
which cannot be completed within the one-year period, the affected 1.GU shall have the option to
select an alternative accredited private banking institution to assume responsibility for these
pending transactions. Such a transition shall also be in strict compliance with existing contractual
obligations and commercial laws, and with prior notification to the BSP.

In the event that the affected LGU shooses to transition to an alternative authorized
private banking institution, the removed private banking institution is mandated to cooperate fully
in transferring all pending transactions, funds, and financial records to the selected alternative
institution.


Any outstanding balance must be transferred to the alternate authorized private
banking institution, following procedures approved by the BSP, within the remaining period of
the stipulated one-year timeframe.

Upon the successful transfer of all responsibilities and outstanding balances to the
alternative authorized banking institution, or upon completion of all pending transactions within
the one-year period, the removed private banking institution must submit a comprehensive report
to the BSP, the Commission on Audit (COA), and the affected LGUs. This report shall detail the
status of all pending and completed transactions, any outstanding balances, and the final
disposition of funds.

SECTION 9. Provision of a Regulatory Framework. — The Department of
Finance (DOP), in coordination with the Bureau of Local Government Finance (BLGF), and the
BSP, independently or jointly, shall provide for the regulatory framework under which LGUs shall
be authorized to enter into banking and other financial transactions with their preferred UCB or
GFI, in compliance with the declared policies of this Act.

SECTION 10. Oversight Committee. — In alignment with existing
constitutional and statutory provisions, an Oversight Committee shall be established to ensure the
proper implementation, monitoring, and enforcement of the provisions of this Act.

‘The Oversight Committee shall be comprised of the following:

a. One (1) representative from the DOF, designated by the Secretary of Finance;

b. One (1) representative from the BSP, designated by the Governor of the BSP;

c. One (1) representative from the Department of the Interior and Local
Government (DILG), designated by the Secretary of the DILG;

d. One (1) advisory representative from the COA, desiynated by the Chairperson of
the COA, to provide expertise on best practices for auditing and accountability;

©. One (1) advisory participant from private banking institutions, nominated by the
Bankers Association of the Philippines, to offer industry expertise and insights;
and

£ One (1) advisory participant from a recognized non-yovernmental organization or
advocacy group focusing on financial inclusion and consumer protection,
nominated by the DOF, BSP, and DILG, to ensure good governance and
transparency.

‘The Oversight Committee shall have the following functions and responsibilities:

a. Monitor the compliance of private banking institutions and LGUs with the
provisions of this Act and any implementing guidelines or regulations.

b. Except representatives acting in an advisory capacity, coordinate with the BSP and
other involved agencies to conduct regular audits of the authorized private banking
institutions and their transactions with LGUs to ensure transparency,
accountability, and prudent financial management. Provided, that the audits and
monitoring of the Oversight Committee are supplementary to, and not a
replacement for, the independent audits conducted by constitutional and
regulatory bodies.

c. Collaborate with relevant government agencies, regulatory bodies, and
stakeholders to promote knowledge sharing, capacity building, and the
dissemination of best practices in LGUs' engagement with UCBs.



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4. Recommend penalties for non-compliance and provide advisory notices for
corrective measures, in line with constitutional and statutory limitations.

€. Review and suggest amendments to this Act, as necessary, to ensure relevance and
effectiveness.

f. Provide annual reports to the relevant legislative bodies, outlining the
performance, challenges, and recommendations related to the implementation of
this Act.

SECTION 11. Transparency and Accountability. — ‘The successful
implementation of this Act relies on the collective commitment to transparency and accountability
by all parties involved, including private banking institutions, LGUs and the relevant government
agencies.

LGUs shall ensure transparency and accountability in their financial transactions with
private banking institutions. They shall adopt proper financial management practices, maintain
accurate records, and submit necessary reports to regulatory bodies or oversight committees, as
required.

‘There shall be regular reporting, disclosure, periodic audits, and dissemination of
information shall be encouraged among all parties involved to foster a culture of transparency and
accountability in LGUs' banking activities.

SECTION 12, _ Prohibition on Conflict of Interest. — No private banking
institution shali be granted authority to engage in financial transactions with an LGU if any elected
official of the relevant LGU is within the fourth civil degree of consanguinity or affinity with any
official or major sharcholder of the private banking institution. Any private banking institution
authorized to transact with LGUs but has subsequently violated this provision shall have its
authority revoked.

SECTION 13. Financial Literacy and Capacity-Building. — The DOF, in
coordination with the BLGF, shall provide capacity-building programs, training, and technical
assistance to LGUs to enhance their financial management skills, and to enable LGUs to make
informed decisions, effectively manage their finances and engage in productive partnerships with
the qualified private banking institutions.

SECTION 14. Implementing Rules and Regulations. — The DOF, in
coordination with the BLGF and the BSP, shall promulgate the rules and regulations to implement
this Act within ninety (90) days from the effectivity of this Act.

SECTION 15. _ Repealing Clause. — All laws, decrees, executive orders, rules
and regulations, or parts thereof inconsistent with the provisions of this Act are hereby repealed
or modified accordingly.

SECTION 16. _ Separability Clause. — If, for any reason, any section of this Act
shall be deemed unconstitutional or invalid, the other sections or provisions shall not be affected
and shall remain in force and in effect.

SECTION 17. _ Effectivity Clause. — This Act shall take effect after fifteen (15)

days from its publication in the Official Gazette or in at least two (2) national newspapers of
general circulation, whichever comes earlier.

Approved.