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F ederal reserve Ba n k of Dallas DALLAS. TEXAS 75222 Circular No. 7^-223 August 15, 197^ AMENDMENTS TO REGULATIONS F AND H (Standby Letters of Credit) To All Member Banks and Others Concerned in the Eleventh Federal Reserve District: The Board of Governors of the Federal Reserve System announced on August 9 , 197^> the adoption of amendments to Regulation F, "Securities of Member State Banks," and Regulation H, "Membership of State Banking Institutions in the Federal Reserve System." These amendments, which become effective on September l6 , 197^? require certain disclosures and limit the use of standby letters of credit and ineligible acceptances by State banks that are members of the Federal Reserve System. This action adopts in substantial measure the proposals announced by the Board in January and distributed to member banks in our Circular No. 7^-28 dated January 23 , 197^-? and Circular No. 7^-37 dated January 31? 197^. Similar action is being taken by other Federal Regulatory agencies which will affect national banks and insured nonmember banks. Attached is a copy of the Board's press release. Copies of the two amendments are enclosed for insertion in the binder of Regulations of the Board of Governors of the Federal Reserve System and Bulletins of the Federal Reserve Bank of Dallas. Yours very truly, P. E. Coldwell President Enclosures (2 ) This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) For use in morning papers Monday, August 12, 1974 August 9 , 1974 The Board o f Governors of the Federal Reserve System today announced the adoption o f two re g u la to ry amendments which re q u ire d is c lo s u re and l im i t the use o f s o -c a lle d standby l e t t e r s o f c r e d it and i n e l i g i b l e acceptances by S tate banks th a t are members o f the Federal Reserve. S im ila r actions are being taken by o th e r Federal bank re g u la to ry agencies to inclu d e n a tio n a l banks and non-member S tate banks th a t are F e d e ra lly insured. The a c tio n by the Board adopts the substance o f proposals fo r such lim ita t io n s th a t were made in January. A number o f language changes have been made fo r c l a r i f i c a t i o n . The lim ita t io n s on the use o f standby le t t e r s o f c r e d it and i n e l i g i b l e acceptances, as adopted, apply to instrum ents issued, renewed, extended or amended on o r a f t e r September 16, 1974. In g e n e ra l, the revised re g u la tio n s re q u ire th a t S ta te member banks t r e a t standby le t t e r s o f c r e d it and i n e l i g i b l e acceptances in the same manner as they t r e a t o rd in ary loans. That i s , the instrum ents w i l l be sub ject to S tate r e s t r ic t io n s on amounts o f c r e d it th a t may be provided to any one borrower and to Federal requirements on loans to a f f i l i a t e s . The amendments - - to R egulation H (Membership o f S tate Banking In s t it u t io n s in the Federal Reserve System) and R egulation F (S e c u ritie s o f S tate Member Banks) - - w i l l become e f f e c t iv e September 16, 1974. - 2 - Standby l e t t e r s o f c r e d it c re a te an o b lig a tio n o f a bank th a t in vo lves a c r e d it r is k and could r e s u lt in an o u tflo w o f funds from the bank a t a l a t e r d a te . Standby l e t t e r s o f c r e d it are sometimes issued by a bank to businesses th a t use them to support t h e i r own notes - - s o -c a lle d documented discount notes - - th a t are sold in money markets to r a is e funds. In a d d itio n , standby l e t t e r s o f c r e d it may be issued by a bank to support a customer's o b lig a tio n to perform under a co n s tru c tio n c o n tra c t. An i n e l i g i b l e acceptance is a time d r a f t , accepted by a bank, which does not meet the requirem ents fo r discount by a Federal Reserve Bank. I n e l i g i b l e acceptances and standby l e t t e r s o f c r e d it are s im ila r in terms o f c r e d it r is k because the tim in g , amount and degree o f exposure can be about id e n t ic a l in the two types o f tra n s a c tio n s . As defined in the Board's o rd e r, a "standby l e t t e r o f c r e d it " does not inclu d e (1 ) commercial l e t t e r s o f c r e d it and s im ila r instrum ents not in v o lv in g a guaranty o f payment o f a money o b lig a tio n or (2 ) a guaranty or s im ila r o b lig a tio n issued by a fo re ig n branch o f a S ta te member bank in accordance w ith and subject to the lim ita t io n s o f R egulation M (Foreign A c t i v i t i e s o f N a tio n a l Banks). R e s tr ic tio n s , in a d d itio n to those alread y s p e c ifie d , in c lu d e : - - R ecip ien ts o f a standby l e t t e r o f c r e d it or an i n e l i g i b l e acceptance must be sub ject to c r e d it a n a ly s is e q u iv a le n t to th a t a p p lic a b le to an o rd in a ry borrow er. - - Where s ev eral banks p a r t ic ip a te in issu in g a standby l e t t e r o f c r e d it or i n e l i g i b l e acceptance the S tate member bank must re p o rt the e n t ir e -3amount o f the l e t t e r o f c r e d it as an extension o f c r e d it unless th e re are provisio n s s p e c if ic a lly lim it in g the exposure o f in d iv id u a l p a r tic ip a n ts , in which case only the amount o f the p a r t ic ip a tio n need be re p o rte d . Issuers must also adequately d isc lo s e the amount o f outstanding l e t t e r s o f c r e d it i n t h e i r f in a n c ia l statements and keep records making i t po s sib le to determ ine r e a d ily the amount o f p o te n tia l l i a b i l i t y o f the is s u e r , and h is compliance w ith the r e g u la tio n . The Board made two exceptions w ith respect to standby l e t t e r s o f c r e d it. They w i l l not be sub ject to the r e s t r ic t io n s o f the re v is e d re g u la tio n s i f : . - - The issu in g bank i s paid an amount equal to the bank's maximum l i a b i l i t y under the l e t t e r o f c r e d i t , or - - The is s u e r sets aside a c le a r ly earmarked dep osit account covering the Is s u e r 's l i a b i l i t y . The Board's orders in these m atters are a tta ch ed . - 0 - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM AM ENDMENT TO REGULATION H t MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM Effective September 16, 1974, Regulation H is amended in the following respects: SECTION 208.8— BANKING PRACTICES * * * * * (c) E ffe c t o n O ther B a n k in g P ra ctices. Nothing in this section shall be construed as restricting in any manner the Board’s authority to deal with any banking practice which is deemed to be unsafe or unsound or otherwise not in accordance with law, rule, or regulation or which violates any condition imposed in writing by the Board in connection with the granting of any application or other request by a State member bank, or any written agreement entered into by such bank with the Board. Compliance with the provisions of this section shall neither relieve a State member bank of its duty to conduct all operations in a safe and sound manner nor pre vent the Board from taking whatever action it deems necessary and desirable to deal with gen eral or specific acts or practices which, although perhaps not violating the provisions of this sec tion, are considered nevertheless to be an unsafe or unsound banking practice. ( d ) L etters o f C redit a n d A c c e p ta n c e s. (1) D e fin itio n s. For the purpose of this paragraph, “standby letters of credit” include every letter of credit (or similar arrangement however named or designated) which represents an obligation to the beneficiary on the part of the issuer (i) to repay money bor rowed by or advanced to or for the account of the account party or (ii) to make payment on account of any evidence of indebtedness under taken by the account party, or (iii) to make payment on account of any default by the account party in the performance of an obligation.6* An “ineligible acceptance” is a time draft accepted by a bank, which does not meet the requirements for discount with a Federal Reserve Bank. (2) R e str ictio n s. (i) A State member bank shall not issue, renew, extend, or amend a standby letter of credit (or other similar arrangement, however named or described) or make an ineligible acceptance or grant any other extension of credit if, in the aggregate, the amount of all standby letters of 6a As defined, “standby letter of credit” would not include (1) commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer and which do not “ guaranty” payment of a money obli gation or (2) a guaranty or similar obligation issued by a foreign branch in accordance with and subject to the limitations of Regulation M. tFor this Regulation to be complete as amended effective September 16, 1974 retain: 1) Printed Regulation pamphlet as amended effective March 18, 1969. 2) Amendment to § 208.10(b) and (c) effective December 21, 1973. 3) Amendments adding a new § 208.8 and renumbering succeeding sections effective March 2, 1974. 4) This slip sheet. SEP T E M B E R , 1974 credit and ineligible acceptances issued, renewed, extended, or amended on or after the effective date of this amendment, when combined with other extensions of credit issued by the bank would exceed the legal limitations on loans im posed by the State (including limitations to any one customer or on aggregate extensions of credit) or exceed legal limits pertaining to loans to affiliates under federal law (12 U.S.C. 371(c) ); provided that, if any State has a separate limita tion on the issuance of letters of credit or accep tances which apply to a standby letter of credit or to ineligible acceptances respectively, then the separate limitation shall apply in lieu of the standard loan limitation. (ii) N o State member bank shall issue a standby letter of credit or ineligible acceptance unless the credit standing of the account party under any letter of credit, and the customer of an ineligible acceptance, is the subject of credit analysis equiv alent to that applicable to a potential borrower in an ordinary loan situation. (iii) If several banks participate in the issuance of a standby letter of credit or ineligible accep tance under a bona fide binding agreement which provides that, regardless of any event, each par ticipant shall be liable only up to a certain per centage or certain amount of the total amount of the standby letter of credit or ineligible acceptance issued, a State member bank need only include the amount of its participation for purposes of this section; otherwise, the entire amount of the letter of credit or acceptance must be included. (3) Disclosure; Recordkeeping. The amount of all outstanding standby letters of credit and ineligible acceptances, regardless of when issued, shall be adequately disclosed in the bank’s published financial statements. Each State member bank shall maintain ade quate control and subsidiary records of its standby letters of credit comparable to the records main tained in connection with the bank’s direct loans so that at all times the bank’s potential liability thereunder and the bank’s compliance with this section (d) may be readily determined. (4) Exceptions. A standby letter of credit is not subject to the restrictions set forth above in the following situations: (i) prior to or at the time of issuance of the credit, the issuing bank is paid an amount equal to the bank’s maximum liability under the standby letter of credit or (ii) prior to or at the time of issuance, the bank has set aside sufficient funds in a segregated, clearly earmarked deposit account to cover the bank’s maximum liability under the standby letter of credit. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM SECURITIES OF MEMBER STATE BANKS AM ENDM ENT TO REGULATION F t account of the account party, or (2) to make payment on account of any evidence of indebted ness undertaken by the account party, or (3) to make payment on account of any default by the SECTION 206.7— FORM AND CONTENT account party in the performance of an obliga OF FINANCIAL STATEMENTS tion,2 except that, if prior to or at the time of issuance of a standby letter of credit, the issuing * * * * * bank (1 ) is paid an amount equal to the bank’s maximum liability under the standby letter of (c) P ro v isio n s o f g en era l a p p lic a tio n .* * * credit, or (2) has set aside sufficient funds in a segregated, clearly earmarked deposit account to ( 9 ) G e n e r a l n o te s to b a la n ce sh ee ts.* * * cover the bank’s maximum liability under the standby letter of credit, then the amount of that (viii) Standby letters of credit. State the standby letter of credit need not be stated. amount of outstanding “standby letters of credit.” For the purpose of this paragraph, “standby let ters of credit” include every letter of credit (or 2 As defined, “standby letter of credit” would not include similar arrangement however named or desig (1) commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer nated) which represents an obligation to the and which do not “guaranty” payment of a money obligation beneficiary on the part of the issuer (1) to repay or (2) a guaranty or similar obligation issued by a foreign branch in accordance with and subject to the limitations of money borrowed by or advanced to or for the Regulation M. Effective September 16, 1974, section 206.7 is amended in the following respects: tFor this Regulation to be complete as amended effective September 16, 1974 retain: 1) Printed Regulation pamphlet as amended effective December 31, 1969. 2) Amendments to § 206.4 and § 206.5 effective February 4, 1971. 3) This slip sheet. SEPTEMBER, 1974
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