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FEDERAL RESERVE BOARD
WASHINGTON
X-3102
_,\pril 26, 192L
SU~JECT:
Authority of !Jation~l Janks to Guarantee Letters
of Credit ru1i .~cceptu.nccs, a.Tld to appoint correspondent bunks as agent to issue the same.
rear Sir:
It recently has been brought to the attention of the Federal Reserve Board tbd.t national banks for some time have been accustomed to guarantee letters of credit issued at their request by correspondent banks in large centers on benalf of the national bank's
customers. For inst~nce, it appears that where the custorrer of an interior na.tional bdnk desires to obtain a letter of credit in connection with his foreign business, the national bank, instead of issuing
the letter itself, will get one of its large city correspondents to
issue a letter for the .customer's account, which the national bank
guarantees, that is, the r~tional bank agrees that in the event the
customer for whose account the letter is issued fails to put the issuing bank in funds to rr.eet the acceptdnces, the ~ranteeing bank
will do so. The transaction does not always involve tne issuance of
a letter of credit, for the correspondent bank sometirr£s si~ly accepts a draft drawn upon it by the !ld.tional bank's customer, ani tne
national bank, in a collateral agreement with the correspondent bank,
~suarantees the customer's obligation to put the corresponient bank
in funds to meet the acceptance. Under the latter arrangement, the
national bank's liability is the same as the ul ti;r.ate liability which
drises out of guaranteeing a letter of credit, so that the two transactions will be considered as one and the same for the purposes of
this discussion. It also appears that some national banks, in considBrJ.tion of a fee or cormrission, are acc"~stomed to endorse acceptances
for the accommodation of their customers or bill brokers. In connection w: th such pr.:tctices, the 'question has arisen as to vwhether o. nat~onal bank has authority to Uld.ke such gua.rcmtees or accom"!lodation
endorsements, or ·;~hether such acts are beyond the powers which national banl<:s lawfully may ex.erci s e.
Whether or not a ncitiona.l bank has authority to guarantee
a letter of crali t or to endorse cin accer-t~mce for accommodation is a
question of law which in the last a:r..alyzis must be detenn:ined by the
courts. So r:. . r ;;.s the Doari is aware there are no decisions directly
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471
-2involving t&J.s· point, ani in View o:Z ;;:.e impor~e of the matters involved. it seems ~·1i:aa.ble ~or tA8 ~~i · to s ta.te in some detail its
views a.s . to tb.e letp.l MPec.ts of :;:...e situation. ·
·
@re ·is :.10 ex.;1·~s.:; aut..:.ori ty o£ law which a:u.tborizes a.
n&.tiona.l bc..nk to len.i i 3 credit by and.orsing an .J.cceptmce or b7
~teein,s 01.. Mting a.s surety on a letter· of cr.a.rlt.
'.!be National
Balk A.et .J~.ut::ori zall n&tion.:~ ba,nks to discount and negotiate notes •
drafts and bills of eA::::....U;t:e, ani to :'.l...::ke .loans on personal e~ity,
wAile Section 13 of tC.~ :YtU6ral Reserve Act more recently bas conferred 'Upon national ban::a t=a.e power to a.oeept drafts gl'QWing out of certain S}feeified. t~actions. It is settled, ilaweve~, tl:la.t a. national
bank• s pow~r to CU.scount negotiable paper and to loan money does not
carry wit!. it the power to ~tee, or act as surety upon, the obligation ot ¬h&r, nor is sucil a. power ~ncidental to tb4 b15ine&s of bank~·
ing. Cor;paercia1 National ll~ v. Pirie, g2 Fed. 799; Bowen v. lf!edles
1iUQ.lliH. Bank.· S.. ?e.i. 925; (Cited witA approval in §popge lxclltni!
Bank v. C&l'lll!ercia]. COLlQ9!lY, 263 Fed.. 20,. 26.) knk of Valdosta T.
lltJ.rd, .160
·.
Fed. 542•.
f.
In 3cwen v.
:le~s\lts,
sw;ra; p. 927, the. court scd1. in part:
It "'-7 be a tis. ted in general that no 'banking corporation ~ tho power to become a guarantor of tG&
obligation of c:.nother, o:: to lend. its credit to i:J1¥
person or corporation, unleas its charter or governing statute eJq)resaly permite it. ~rs• i':.~le~c•'
~· v. &ttc}lers' & Drovers' Ba.nt~ lb ~.Y. '!. lG5; !igriO(d
v. ilcmk, 26 i3a.rb. 508; ~· Corp. f!ec. 5721. Under
eections 5136· of the Revised Statutes. Mti.or.a.l banking
a.Ssoc.iationa are given the power to 'make coutr~ets'
a."\d. 'to exercise by its board of directors, vr .iuly
tl.Ut4:.bri zed officers or agents. subject to law. all 8\'I.Ch
inc.idental pc:wters as shsJ.l be necessary to carry on the
business of ba.nk:ing; by discounting and negotiating
prOIDissory notes, drc~.fts, bills of exchange • and other
· evidences of debt; by receiVing deposits; b7 buy!Dg
and selling exchange, coin, and bu.llion; b7 loaning
mone7 on personal security; and by obtaining, is~ng.
~ circulating notes according to the pl'ovid ?US of this
title. • T!:.ai..e is· in these provisi91~ no ~;,) ~t c-f power to
guaranty tae .®bt of another, nor or.:.n ~U(•A gv.dranty 'be
sa.i.i to be incidental to the busir..e,1.1:, CJi oanking. It
bas been 3~ luld ).n Seqli~ v. ·Bank, 3 Ifugh&a. 647; Fed.
Cas. :lo. 12542; l!orton v. Bank, 61 N.. H. 589; and~
v. Pirie, a? c.c.A. 171; 82 res. ?99."
11
SitJilarl7, a1 though. the power coilferred 1.-::pon n«tlonal bank&
to aecept drafts c..:.rr~es witb. it the powe!' to hsue lett9rt of cttedit as
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472
X-3102
ineidentdl tb!:lreto, it weald seem that sueh p~1ers do t~ot carry With:
them the pow~u· to. gwrantee, · or ~t a» surety ·~on, acceptances ·or
letters of cred.i t j ssued by other banka.
tn view of these consider~tionQ.the Federal Reserve Board
is ?f the opmic,n t~t a. na~ional bank has no authori ~Y to g.1arantee
or ~.ct as surety upon Q. letter of credit, o1· to etld,orse ar. acceptance
for acr.omrto.i:.i.tion; that ~h actt: are nl1(ra. .vires; a11d. tbclt if the
direc~orG of .::.. n1.tiona1 1'ank enter into such contracts of p.rantl!e
or s.uretyahi.P, thtiy d.Saume in their persotl41 capacity t;he risk of itll.1
loss the t may occur.
·~
J{{Wf6vEsr, While a. national bank cannot gua.r.;Uttee an acceptance which it does. not own, a national bank may l)Ul"c.base an a.cceptC&DCe
c.nd im:Jiediately re-sell it with its endor.sement, since the l-OWer to
endorse acceptances ie incidental to the power to Aegoti.a.te acceptancea.
BO!tm !'· Needles Natiopa.l Bgk, ~wra; Bank of. Va].dost9, v. Ba.ird,
aul?ra. bre appears to be no authority of low, however, which permi. ts a national bank to lend its creJi t by endorsing an aec:epta.nce
whexe the transaction does not invovle an a.et'u.al transfer of title
to ~ fr·om a. natiQna.l bcmk.
As to the practiee oi ~ranteeing lett•ns of c~t, it 18
that if, a.s =:;t.ate:l above, a. national b..s:nl!: he.::. no d.Uthori t7
to guarantee or act as $JIUJ'~t,y ~n sace lettel"B• !MAy national ba.nks
~ntended
w~ll
be
c~elled
to toreg< a business which is very
d~~ird.ble
bo\h
from the standpoint of the banks ·tl.e111$tr.hes a.nd fr'ltn t.nt~ s~ndpoint ·.
of their customers~ The rcs,u t will be, 1 t i;; r~1·, t.t.s.:l, r.r.a"' the cus•
tomer himself nuat necessarily go to a l.;.r-6e .:.i. t 7 b~·l. ~'\LJ., as his
financia.l standing perhaps is not generaj,ly lri.,..v,~~ :..:.....> :-&\}.'leSt tor
credit in many instances lUll be retus~d and M "',;, ~.4. 1~e conpelled to
~eek other and less. des1ra.ble means for. .financinf! ::dt1 i;,;~lnoss ..
·.
Realizing the pr~?tical force of these eonsiderdtions, \be
Board desire$ to suggest an alternative method of fi~~cing the busineas 4eretofore financed by means of letters of credit gucu-an1;eed by
the national bc.mks cil.t wh0$e re~est the letters tae isS'Ued. The Boa:rd
is of the oj>inion tba.t this course, if adopted, ~ill enable a. na,tiona.l
bank, wit4 only slight modifications as to tho tnan."lor :.i handling the
\l)lsiness, to continue to carry i~ on without ent.er1.ng iQ.to an !1ltrt
rl,.._s transaction.
!a.ke' tbe ca$e of' a na.t i~J;-~a.J bank in an
int-iifor-cc;tm;mf~:· ~OS& c.,"\tS.tomer wishes li~ ¢bt.!tt; .~ ).~ .... ter of credit
which will be sa ~factory to his foreign .le:41; '-. Th" n.:s.tional bank,
il;;.vinY. no internati.on&l st;anding, or being vntncut any d.~rl.ment
ca:pabie of handling foreign business, does not ··1ish to iss~ the letter itself bu~ is willi~ to extend its credit to. its CQntomer. ~~
tb»se circurostancef\, it enters into ~ e.rr.:tngetum"' wit~:~, say. its
New York correspondent. whereby the New fork corre91Jondeut. agrees !f.
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473
:C-3102
-4-
!Sent of the interior bank tv issue a letter of c~dit for the
account of
interior.bank'~ ~qtoroer, the letter tc be issued
in the natro 2f. the New York correspondent, lmt in isstti.~ it.
the New York correspondent is acting, as a matter c£ fact, a.s ·
a.~nt for an undiaclo,eci prir..cipal, nan:e~y, tb.e interior bank.
The intel'io1· bClllk' s nan:e v.till not appear on tilz let,ter o£ cre41t,
but its 1-;e'.t Yo1'k• corrc.sj::ondent ma,y look to it. for reimburseu.ent
wier the colla1ieral agancy agreement, n,pl; cond.i tionally upon the
fo:Ulure '.)f. t·r.a cut>to!l'.&r !.O put the isseing bank in funds but directly and utlcond.i tior.~lls a.z. the real i&suer of the letter. Tht
bencf!.oi-.lry vf tbe letter end. the holdera of the aeeeptancas drawn
tile1•euuJ.er Will look co and rely on the credit of the; N'elv York bank,
for its nar::.9 alone \Vill appeor on tD.e letter ani tlle acceptances,·
but the interior bc.mk wj 11 in fact l:e the real acceptor and the
customer will be under obligation to put the intsrier b~Jk, not tbe
New York bank. in funds to meet the acceptances as they mature.
The or.J.y chE:mge neces$ary in t.be present Jt.ethod is tbat the interior
bank~ inst~~ of'guar~teeing the letter of credit, will·exeaute
a separate contract app~~rtting its ~ York correspondent its
agent, and t4greein; Wl~"·::.ai t1or.ally to reim~e the a.ger"t as such .
~or any moneys pai.i cr.:.t. oz:, if desired, to P\lt the agent in
·
funds ~o meet tl:e a.cce,t:*.~ances as t4ey rr.ature. 1t would seetQ tbat
this proee:!l.u·e will !1»'3 t the practical requl reJMnts of ~e si tua.tion and at tbo s.tattkl titr.e avoid i'LW nec,ssit,- of arty contract of
guarantee.
tne
· .
After ca.ref·ul consi.deration.; tbe 'Bo!t.td corusid~rs- ~t ·
·national bai:Uts ma:r properly finance tM C,us'!.ne:.,t 1.n qud&tion in
the manner suggested W! thou.t exceeding their s ~* t·::. ~ y pO\ten.
A national bank unquestionably
legitimately flt::.nce ih cus. tomer• s business 'by issuing a let tar Qf credit ih its own name.
I!' a. national ba.nlt my issue a'letter it(el.f, iii wo-..~1! Mt-'m that·
a. national' bank'ma.y isaue a letter throngb. ~1 a.gen~. pro.Viled
that· tile national bank has autbor1\y to a.proint .::\n ·:a.gEll".t tor that
Ptcr.Posa. It is tit"J.e that iit a. ruling a.ppea.rir.g cr.. page 835 of
the l920·Bu.lletin, the Comptroller or tbe C'urranc;r ruled tba.t a
natiow bank cannot ap:roint an agent at a rlace other than its
place of busineu to t\Ccept drafts in tlk~ ~ of his ;trincipal
ba.r.k and to p4l.T such cU-ofts as they lm:\.ttn·~. «!'his rolin~ was
based on the C\)nstruction of Section 5190 of the ii~·.r~ ted Statutes
whlch provides in p!:a.rt:
..
,r
may
"Tile usual D-J.liliness
.'
Th~
aQ..ul be
<Jf
each
nt!~ :c:~J.
ban'b.n.g
rJ ofzice
or bar.king ·bou.ze loca.te.i iu tn, !=lace ~pacified
in its organi~a.tion eerti ticate. ,:
~socia.t1on
trr-.nsactt~d
::. t.
:..
Comptroller sdid tha.t the d.CCsptance ea.ttd {i&.yaent ot
r 474
-5dra.fte is x:.at of the usw.J. business of a n.a.Uor.a.l bank within the
meaning of Ut!.'.t s~ction, cand therefora ruled ~nerally ~bet such.
busiuess ma.y be transacted only at the na.tional bank's principal
office or banldn~ house anJ. not in d.JlOther place through an agent.
Tf..e .Eoi'ri is of the opinion, however. tnat the provisi9ns
of Section 5190 .!-> n·'>t ne~essarily prevent ~ ru.tiollal bar:k from
appointing ano~har ~.w.k
banl.ml' as its .J.gent to issua &. letter of
cre:J.it in tho ..-~.o::t 1 u 6.\~. It it? well recogr..ized tbJ.t, wb:Lle a
ru.tion..i:l bank rr.a.y ::lot tl·ar.~a.et any part of i te "us·,lt!l busin,sa" at
ano.the:: plt\'}e tb.T ~Ui!L. an a~t, 'neverthelss s, it nny. appoint an ,
&gent tcr specific purp~tea or to transact porticular )ind$ of busir.ess.· t:n<i~r tne:oe c.irc'U1L6tances • it wonlci seem th::lft ~ national
bank, for t.be ptU'ptJse ·of financing its eustomer 1 15 businsss 1n the
manner herein GllgSested,. may appoint a. Q.on:estic or foJ"eign bank
or banlan:· u ita agen~ to issue in tiJB a.g9nt •s· own nama a. loatter
of credit and t.o acce~t du.tts drawn thereunier, providei t!iat the
authority con!erred is sp.cifica~ly limited to tm pa.rt:i\!ul:t.r trans•
a.cti~n involved and thbt a definit~ li.Drlta.tiot• is iJI!Posad. 'l4pcll tbe
aJDO!.mt of each letter of credit.
·
o!'
'"!
In caJ~e t!'lrJ l!v\~rt.e suggested should ·be adopted. the a~nt
\Vbic.h issues th~ ·lQ,t.er and whiCh is pri~llt:U'ilf an.i un\}onditionaJ.ly liabl~ uJ?on tt.~t e.cc&ptanees made thero\U1d6r nuet include
the lia.bilit.t crt. suc.h .acc<:ptancea. as and wh.~n i."!&CUt'reli, among its
. · general acceptu.nc~ liabili tiee su'bje¢t ·co tha 1:.m1 tati:::ns on tlla
acceptance power ;t:rescri:X::l by la.wr ..1T.:l.. ill·.~~..,ch ~ ~~ l.Y~t:#r~or
bank is by bwothesis the raal ~ceptot atiJ. iQ. :...~ ::t:,;:t!.j' ...-r::. \\nOon-.
~ tionally liable to the .::.gont b¢1k. for any iOO!l~vt ; :~:1 out.· t;
fleet tbe acceptances " they mature ~r to pu't t!":• t:•::~t;:I:t.h.&g oanJt
in fund.s to meet such ac~tances, the principal vl.lu~ .lto m..11t
include. ·the amount of th.l aocept.ances, as and wher. I'!L~d , ~ ita
genet:c.\1 ~eptance liabilities subject to the limitatior.s of law.
bank
It shoulti be relreJilbered tllat tb& foregoins merely re-.
presents tha· B9ard•t opinio~ aa to the legality. of the proposed
plan. ani as to the requirement$ whi~h ~t be c~l1ed wit~ if
national banks see fit to adopt the plan In the last ar.alyais",
.the question whether a. nation&l b~ legally may aPfoint a corre$.Pondent as its ag~ut in particular t.-ansaet.ions to iss~ a letter
of credit and to ;!c~~t drafts dr~ therewtler, • .:.n..: w':.t! ther in
other reapecti? a l·:atiof4t1 benk legally may t""~:~...tCt t.oo ·business
in the m:mner aug~este~. is a. qnestion 'fer t~ ..laten:.i.n.::.ticn of
.the courts. It r.eei:;JS udvis,\ble. JlOWSV'er, for t.o!'l bo-.ll.r.i r,o set forth
its views with rega.t'd to the matter 'tlllder diSC\lSI!ion i•'l order that
its J)Odticr. ma7 be clea.t~~Y under~tood.
·'
!'.
t
~-
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.
This letter hai. been submitted .to the Co!Iptroiler of the
(};ll'rencr an.i re conc'JIS in the views expressed, herein.
V"r1 t:ruly
yours~
Vl c e
...
G o v e r n o r.
475
@FedFRASER