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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 9594
December 8, 1983
~l
J
BANKERS’ ACCEPTANCES
Final Ruling on Participations in Acceptances
To All Depository Institutions, and Others Concerned,
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has clarified the meaning of participations in bankers’ acceptances for purposes of the
bankers’ acceptance limitations of the Bank Export Services Act. The Board’s final action becomes effective June 10,
1984.
The Bank Export Services Act (BES A) raised the limits on the aggregate amount of eligible1bankers ’ acceptances that
may be created by a member bank of the Federal Reserve System. The Act also applied these limits to U.S. branches and
agencies of foreign banks where the parent bank has, or is controlled by a company or companies with, over $1 billion of
consolidated bank assets worldwide.
The BES A also provided that any portion of an eligible bankers’ acceptance created by a member bank or by a U.S.
branch or agency of a foreign bank covered by the BESA that is conveyed through a participation agreement to another
covered2 bank should not be included in the calculation of the creating bank’s limit on bankers’ acceptances. Instead, the
amount of the acceptance conveyed through the participation is to be applied to the limitations applicable to the covered
bank receiving the participation.
Under the Act, the Board is authorized to define the term “participation” for purposes of the bankers’ acceptances
limitations of the BESA. In June 1983, the Board issued for comment a proposed definition of participations for purposes
of the BESA acceptance limits.
In its final rule, the Board today determined that, for purposes of the BESA limits, a participation must satisfy the
following two minimum requirements:
1. A written agreement must be entered into between the junior and senior bank3 under which the junior bank acquires
the senior bank’s claim against the account party to the extent of the amount of the participation that is enforceable
in the event that the account party fails to perform in accordance with the terms of the acceptance; and
2. The agreement between the junior and senior bank must provide that the senior bank obtains a claim against the
junior bank to the extent of the amount of the participation that is enforceable in the event the account party fails to
perform in accordance with the terms of the acceptance.
After reviewing comments received, the Board determined not to adopt the proposed requirement that the senior bank
and the account party specifically agree that the senior bank’s rights are assignable.
1. “Eligible” bankers’ acceptances are not subject to Federal reserve requirements. They must meet criteria in Section 13 of the Federal Reserve Act,
including requirements that the acceptance (1) grow out of a trade transaction involving exporting, importing or domestic shipment of goods or storage of readily
marketable staples and (2) have a maturity of less than six months.
2. “Covered banks ” are those institutions subject to the BESA acceptance limits. All other institutions — “noncovered banks” — are not subject to BESA
quantitative limits on eligible acceptances.
3. The ‘‘senior bank” is the institution that creates the eligible bankers’ acceptance and conveys the participation. The ‘'junior bank” is the institution that
receives the participation.
Enclosed— for member banks and branches and agencies of foreign banks— is a copy of the Board’s official
notice in this matter. It will be published in tht Federal Register, and additional copies will be furnished upon request
directed to our Circulars Division (Tel. No. 212-791-5216). Questions on participations in bankers’ acceptances
should be directed to Walker F. Todd, Assistant Counsel (Tel. No. 212-791-5041).
A
nthony
M.
S olom on,
President.
FEDERAL RESERVE SYSTEM
[12 CFR Part 250]
[Docket No. R-0474]
M I S CELLA N E O US INTERPRETATIONS
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final rule.
SUMMARY:
The Board has clarified the meaning of participations
in b a n k e r s ' acceptances for purposes of the b a n k e r s ' accep t a n c e
limitations of the Bank Export Services Act.
EFFECTIVE DATE:
June 10, 1984.
FOR
F URTHER
INFORMATION
CONTACT:
Gilbert T. Schwartz,
Associate General Counsel (202/452-3625), or Robert G. Ballen,
A t t o r n e y (202/452-3265), Legal Division, Board of Governors of
the Federal Reserve System, Washington, D. C.
20551.
S U P PLEMENTARY I N F O R M A T I O N : a.
The BESA.
Section 207 of the
Bank Export Services Act (Title II of Pub. L. 9 7 - 2 9 0 ) ( " B E S A " )
provides that a member bank or a Federal or State branch or
agency in the United States whose parent foreign bank has, or
is controlled by a foreign company or companies that have, more
than $1 b i l l i o n in total w o r l d w i d e consoliated bank assets,
m a y create eligible bankers' acceptances ("BAs")^/ in the
aggregate up to 150 per cent of its paid up and unimpaired
capital stock and surplus ("capital") and, with the p e r m i s s i o n
of the Board, up to 200 per cent of its capital (12 U.S.C.
§ 372).
Section 207 also pr o h i b i t s these institutions from
creating eligible BAs for any one person in the aggregate in
excess of 10 percent of the institution's capital.
E l igible
BAs growing out of domestic transactions are not to exceed 50
percent of the aggregate of all eligible acceptances a u thorized
for such an institution.
!/
The institutions subject to the BA limitations
will hereinafter be referred to as "covered banks.**
of
BESA
.?/ An eligible BA includes a BA that meets the criteria of
the seventh p aragraph of section 13 of the Federal Reserve Act
(12 U.S.C. § 372).
[Enc. Cir. No. 9594]
- 2 -
This section of the BESA also p r o v i d e s that any
p o r tion of an eligible BA c r e ated by a c o v e r e d bank ("senior
bank") that is conveyed through a "parti c i p a t io n agreement" to
another covered bank ("junior bank") shall not be included in
the c a l c u l a t i o n of the senior b ank's bankers' accept a nc e
limits. 3/
However, the amount of the p a r t i c i p a t i o n i_s to be
included in the BA limits ap p l i c a b l e to the junior bank.
The language of the statute does not d e f i n e what
c o n s t itutes a p a r t i c i p a t i o n agr e e m e n t for p u r p o s e s of the
a p p l i c a b i l i t y of the BESA limitations.
The stat u t e author i z e s
the Board to further define any of the terms used in
section 207 of the BESA (12 U.S.C. § 372(g)).
b.
The Board's p r o p o s a l . The Board issued for p ubl
comment a p roposed defini t i o n of a p a r t i c i p a t i o n a g r e ement for
purposes of deter m i n i n g compli a n c e w ith the B ESA limits that
included the following mi n i m u m requirements:
1.
A w r i tten agreement entered into b e t w e e n
the junior and senior b ank under w h i c h the
junior bank acquires the senior ba n k ' s claim
against the account p a r t y to the e xtent of
the amount of the p a r t i c i p a t i o n that is
e n f o r c e a b l e in the event that the account
p a r t y fails to p e r f o r m in a c c o r d a n c e with
the terms of the acceptance.
The a g r e ement
b e t w e e n the senior bank and the account
p a r t y must indicate that the rights that the
senior bank acquires under the agr e e m e n t are
assi g n a b l e by the senior bank; and
2.
The agreement b e t w e e n the junior and
senior bank pr ovides that the senior b ank
obtains a claim against the junior bank to
the
extent
of
the
amount
of
the
p a r t i c i p a t i o n that is e n f o r c e a b l e in the
event the account p a r t y fails to p e r f o r m in
a c c o r d a n c e with the terms of the acceptance.
In its proposal, the Board stre s s e d that b o t h the
junior bank ' s c laim on the a c c ount p a r t y and the senior ba n k ' s
claim on the junior bank involve risk.
Acc o r d i n g l y , the Board
p r o p o s e d that the junior bank review the c r e d i t w o r t h i n e s s of
each account p a r t y on a c a s e - b y - c a s e b a s i s b e f o r e it a c q u i r e s a
p a r t i c i p a t i o n and the senior b a n k r e v i e w the c r e d i t w o r t h i n e s s
3/
The use of the terms "senior bank" and "junior bank" has
no i m plications regarding p r i o r i t y of claims.
These terms
m e rely represent a shorthand method of i d e n t i f y i n g the
d e p o s i t o r y i nstitution that has c r e ated the a c c e p t a n c e and
conveyed the part i c i p a t i o n (senior bank) and the d e p o s i t o r y
insti tution that has received the p a r t i c i p a t i o n (junior bank).
-3-
of the junior bank.
Similarly, the Board prop o s e d that the
actual assets acquired be included for purp o s e s of assessing
capital adequacy.
48 F.R. 29001 (June 24, 1983).
c.
Discussion of c o m m e n t s .
The Board received
total of 29 comments.
Comments were received from 15
depository institutions, the A m e r i c a n Bankers Association, the
Bankers' A s s o c i a t i o n for Foreign Trade, and 12 Reserve Banks.
The commenters g e n e r a l l y supported the Board's overall approach
to the d e f i n i t i o n of participations.
Ten commenters opposed the requirement in the Board's
proposal that the agreement b e t ween the senior bank and the
account p a r t y indicate that the rights that the senior bank
acquires under the agreement are a s signable by the senior
bank.
These commenters b e lieved that this requirement would
interrupt the smooth flow of funds in the ac c e p t a n c e market in
view of the fact that agreements b e t w e e n the senior bank and
the account p a r t y often must be entered into rapi d l y and often
are not formalized beyond tested telexes, powers of attorney,
and simple letters.
Nine of these commenters stated that this
requirement was superfluous because, in the absence of a
p r o h ibition against assignment, the senior ba n k ' s rights would
be assignable under general princ i p l e s of commercial law.
Finally, five of these commenters also suggested that this
provision would restrict the use of participations, as those
account parties that prefer to deal o nly w ith the senior bank
would, upon being notified of the assignability, p r ohibit the
senior bank from p a r t i c ip a t i ng a cceptances and thus disrupt the
smooth functioning of the p a r t i c i p a t i on mechanism.
After considera t i on of the comments, the Board has
determined not to include in the final rule the p roposed
requirement that the agreement b e t w e e n the senior b ank and the
account p a r t y indicate that the senior bank's rights are
assignable.
The Board is not requiring the senior bank and the
account p a r t y s pecifical l y to agree that the senior bank's
rights are assignable bec ause the Board b e l i e v e s such rights to
be assignable in the absence of an explicit agreement.
In this
regard, given the nature of the agreements b e t w e e n the senior
bank and the account p a r t y and the speed with which these
agreements often are required to be formed, the prop o s e d
requirement for ass i g n a b i l i t y could h a v e a d i s r u p t i v e effect
upon the operations of the bankers' ac c e p t a n c e market.
Five commenters urged the Board not to p rohibit the
junior and senior bank from a g reeing among themselves that the
senior bank would be responsible for a d m i n i s t r a t io n and
enforcement of the entire o b ligation of the account party.
In
the absence of such an arrangement, these commenters argued
that account p a r t y defaults would likely result in multiple
enforcement actions.
Such m u ltiple actions, p o s s i b l y in
a
-4-
different forums, could result in s u b s t a n t i a l ly increased
litigation costs, inconsistent judgments, and a d m i n i s t r a t i v e
problems.
One of these commenters indicated that p e r m i t t i n g
each junior bank to pursue its own enforcement ac t i o n could
result in m i n o r i t y interests impairing d e l i c a t e workout
negotiations that were in the best interests of the majority.
Two of these commenters argued that junior banks should be able
to benefit from senior bank exp e r t i s e in re c o v e r i n g from a
d e f aulting account party.
The Board has deter m i n e d that, for the reasons set
forth b y the commenters, junior and senior banks may contract
among themselves as to which party(ies) will have the
respon s i b i l it y for admin i s t e r i ng the arrangement, enf o r c i n g
claims, or exercising remedies.
In this regard, the Board
believes that the parties should be aware of the risks inherent
in such arrangements, such as the p o s s i b i l i t y that the bank
with a d m i n i s t r a t io n or e n f o rcement r e s p o n s i b i l it y wou l d p r o m o t e
its own interests to the d e t r iment of the others.
If the
parties do wish to contract a m o n g themselves as to
a d m i n i s t r a t io n and enforcement, the Board e n courages that such
a rrangements clearly de l i neate the r e s p o n s i b i l it i e s of the
relevant parties.
With regard to the Board's prop o s e d req u i r e m e n t s
concerning credit reviews, two c o mmenters indicated that t hey
were unsure as to the mean i n g of the term "high credit
standards."
These commenters indicated that this term may
cause confusion to those parties subject to the regulation.
They suggested that the risks be reviewed in a c c o r d a n c e with
"prudent and sound banking p r actices" or "prudent bank i n g
practices."
One of these c o mmenters suggested that a junior
bank be permi t t e d to commit to p u r c h a s i n g all a c c e p t a n c e
part i c i p a t i on s offered by a senior bank on an o n g o i n g basis,
subject to p e r i o d i c review of the arran g e m e n t b y the junior
bank.
This commenter also suggested that blan k e t a g r e e m e n t s to
p urchase all p a r t icipat i on s from the senior bank be p e r m i t t e d
between a parent bank and its Edge a f filiates whe r e the credit
approval process for both o r g a n i z a t i o ns is h a n d l e d b y the
parent bank.
Another commenter argued that the junior bank
should be required to make an independent e v a l u a t i o n of each
account p a r t y and that b l a nket agreem e n t s p r o b a b l y do not
d i s p l a y the degree of scru t i n y of each a r r a n g e m e n t that the
phrase "participation" appears to contemplate.
Finally, one
commenter cautioned against a senior bank c o n c e n t r a t i n g
p a r t i c i p a t i on s in partic u l a r junior banks.
In view of the p o t e ntial confusion reg a r d i n g the term
"high credit standards," the Board has d e t e r m i n e d that the
junior and senior banks be required to assess their respe c t i v e
risks
in accordance with
"prudent and sound b a n k i n g
practices."
The examiners will in the normal course of the
examination process review the risk asses s m e n t p r o c e d u r e s
-5instituted by the banks.
The Board continues to believe that
the junior bank should review the creditworthiness of each
account p a r t y when the junior bank acquires a p a r t i c i p a t i on and
the senior bank should r e view on an ongoing basis the
creditworthiness of the junior bank.
Junior bank agreements to
p urchase from a senior bank all partici p a t i on s in BAs with
specified account parties subject to p eriodic review of each
specified account p a rty will be reviewed by examiners to assure
that the amounts are reasonable in relation to the two banks
and that p e r i o d i c reviews of each specified account p a r t y are
made and are up to date.
Junior bank agreements to rely
exclusively upon the credit judgment of the senior bank and
purch a s e on an ongoing basis from a senior bank all
partic ipations in BAs regardless of the identity of the account
p arty are not appropriate in view of the risks involved.
However, in those cases involving a p a r t i c i p a t i on b e t w e e n a
parent bank and its Edge affiliate where the credit review for
both entities is perfor m e d b y the parent bank, the Edge
C orporation should maintain d o c u m e n t a t i on indicating that it
concurs with the parent bank's analysis and that the acceptance
p a r t i c i p a t i on is appropriate for inclusion in the Edge
Corporation's portfolio.
Seven commenters stated that the amount of a BA
conveyed through a part i c i p a t i o n should be excluded from the
asset base of the senior bank for p urposes of a s s e ssing capital
adequacy.
Six of these commenters argued that such an
exclusion was n e cessary to avoid double counting of the asset.
Two of these commenters noted that such an exclusion would be
consistent with the treatment of loan participations.
One of
these commenters believe d exclusion to be a ppropriate b e c ause
the senior bank has transferred the risk of account p a r t y
default to the junior bank through the participation.
A fter c o n sidera t i on of the comments, the Board has
determined not to change its prop o s e d p o s i t i o n on this issue.
As dis cussed above, the junior bank incurs the risk of account
p arty default and the senior bank incurs the risk of junior
bank default.
Altho u g h the senior b ank's ultimate risk may be
less than its risk prior to c o n v e y a n c e of the participation,
and may be less than the risk of the junior bank, the senior
bank does incur the risk that b o t h the account p a r t y and the
junior bank will default. The Board beli e v e s that including the
risks incurred b y the senior bank in a s s e ssing the senior
bank's capital and the risks incurred b y the junior bank in
assessing the junior bank's capital is not "double counting"
but rather a p p r opriate r e c o gnition of the risks involved.
One commenter suggested that the Board defer the
effective date of its final rule one year to allow banks
sufficient time to revise e x i s t i n g B A forms and to permit
outstanding BA p a r t i c i p a t i o n a g r e e e m e n t s to mature.
Another
-6commenter stated that the final rule should not a p p l y to
p a r t i c i p a t i on s entered into b e fore the e f f e c t i v e d ate of the
final rule or to renewals of such p a r t i c i p a t i on s .
A third
commenter indicated that the Board m a y w i s h to c onsider
"grandfathering" partic i p a t i on ag r e e m e n t s e n t e r e d into be f o r e
the effe c t i v e date of the final rule.
The Board has d e t e r m i n e d to d e l a y the e f f e c t i v e date
of the rule for six months.
The Board b e l i e v e s that six months
should p r o v i d e institutions sufficient time to p r e p a r e for the
minimum requirements, p a r t i c u l a r l y in v iew of the fact that the
prop o s e d requirement that the senior b a n k and the ac c o u n t p a r t y
agree that the senior bank's rights are a s s i g n a b l e ha s not b een
adopted.
A six month d e l a y will result in c u r r e n t l y
o u t s tanding individual p a r t i c i p a t i on s not b e i n g a f f e c t e d by
this rule b e c ause of the m a x i m u m six mon t h m a t u r i t y of e l igible
BAs.
The Board determined that the six mon t h d e l a y e d ef f e c t i v e
date was p r e ferable to g r a n d f a t h e r i n g e x i s t i n g p a r t i c i p a t i o n s
because the g randfather in g a p p r o a c h wou l d r e q u i r e e x a m i n a t i o n
of each individual p a r t i c i p a t i o n to d e t e r m i n e w h e t h e r it was
affected b y this rule.
Accordingly, the rule will a p p l y to all
p a r t i c i p a t i on s in BAs created or r e n e w e d on or a f ter the
effective date of the rule.
One commenter indicated that a number of b a n k s h a v e
deleted p a r t i c i p a t e d p o rtions of BAs that t h e y h a v e created
from their b ooks of accounts.
In this regard, the Report of
Condition and Income c u r r e n t l y prov i d e s that all a c c e p t a n c e s
created by a bank are to be reflected on that b a n k ' s b a l a n c e
sheet whether or not they are subject to p a r t i c i p a t i o n
agreements.
The impact of this rule on small e n t i t i e s h a s b e e n
considered in accordan c e with section 604 of the R e g u l a t o r y
F l e x i b i l i t y Act (Pub. L. 96-354; 5 U.S.C. § 604).
The Board's
rule will p r o vide small member b a n k s that are c o v e r e d b y the
BESA limitations with increased f l e x i b i l i t y w i t h regard to the
usage of eligible BAs.
No new r e c o r d k e e p i n g or r e p o r t i n g
requirements will be imposed as a result of this action.
List of Subjects in 12 C F R Part 250
Federal Reserve System.
Pursuant to its a u t h o r i t y under
of section 13 of the Federal Reserve Act
Board of G o vernors has amended, e f f e c t i v e
Part 2 5 0 — Miscel l a n e o us
Interpretations—
section 250.165 to read as follows:
the s e v e n t h p a r a g r a p h
(12 U.S.C. § 372), the
June 10, 1984, 12 CFR
by adding
a new
- 7 -
SECTION 250.165 — BANKERS' ACCEPTANCES:
OF PART I C I P A T I ON S
DEFINITION
(a)
(1)
Section 207 of the Bank Export Services
(Title II of Pub. L. 97-290) ("BESA") raised the limits on the
aggregate amount of eligible bankers' acceptances ("BAs") that
m a y be created by a member bank from 50 percent (or 100 per
cent with the permission of the Board) of its paid up and
unimpaired capital stock and surplus ("capital") to 150 percent
(or 200 percent with the p e r m i s s i o n of the Board) of its
capital.
Section 207 also pr o h i b i t s a member bank from
creating eligible BAs for any one p erson in the aggregate in
excess of 10 percent of the institution's capital.
Eligible
BAs growing out of domestic transactions are not to exceed 50
percent of the aggregate of all eligible acceptances authorized
for a member bank.
This section of the B ESA applies the same
limits applicable to member banks to U. S. bran c h e s and
agencies of foreign banks that are subject to reserve
requirements under section 7 of the International Banking Act
of 1978 (12 U.S.C. 3105).!/
(2)
This section of the B ESA also provides that any
p o r tion of an eligible BA created b y a covered bank ("senior
bank") that is conveyed through a "participation agreement" to
another covered bank ("junior bank") shall not be included in
the calculation of the senior b a nk's bankers' a c ceptance limits
established by section 207 of B E S A . 2/
However, the amount of
the p a r t i c i p a t i o n i_s to be included in the BA limits applicable
to the junior bank.
The language of the statute does not
define what constitutes a p a r t i c i p a t i on agreement for purposes
of the a p p l i c a b i l i ty of the B ESA limitations.
However, the
statute does authorize the Board to further define any of the
terms used in section 207 of the B E S A (12 U.S.C. § 372(g)).
The Board is clarifying the term p a r t i c i p a t i on for purposes of
the BA limitations of the BESA.
(b)
The legislative h i s t o r y of section 207 of the
BESA indicates that Congress intended that the junior bank be
obligated to the senior bank in the event that the account
p arty defaults on its o b l i g a t i o n to pay, but that the junior
bank need not also be obligated to p a y the h older of the
a c c eptance at the time the B A is p r e s e n t e d for payment.
H. Rep. No. 97-629, 97th Cong., 2nd Sess. 15 (1982); 128
i/
The institutions subject to the BA limitations
will h e r e i n a f t e r be referred to as "covered b a n k s . M
of
B ESA
2/
The use of the terms "senior bank" and "junior bank" has
no implications regarding p r i o r i t y of claims.
These terms
m e r e l y represent a shorthand method of identifying the
d e p o s i t o r y institution that has created the accep t a n c e and
conveyed the partic i p a t i on (senior bank) and the depos i t o ry
institution that has received the p a r t i c i p a t i on (junior bank).
Act
-8C o n g . R e c . H 4647 (daily ed. J u l y 27, 1982) (remarks by Rep.
B a r n a r d ); and 128 C o n g . R e c . H 8462 (daily e d . O c t o b e r 1, 1982)
(remarks by Rep. Barnard).
The legislative h i s t o r y also
indicates that Congress intended that eligible BAs in which
p a r t i c i p a t i on s had been c o nveyed not be required to indicate
the name(s) (or interest(s)) of the junior bank(s) on the
acceptance in order for the BA to be excluded from the BESA
limitations applicable to the senior bank.
128 C o n g . R e c . S
12237 (daily ed. September 24, 1982) (remarks of Sena t o r s Heinz
and Garn); and 128 C o n g . R e c . H 4647 (daily e d . J u l y 27, 1982)
(remarks of Rep. Barnard).
(c)(1)
In view o* Congr e s s i o n al intent w ith regard to
what constitutes a partici}. tion in an eligible BA, the Board
has determined that, for purp o s e s of the B ESA limits, a
p a r t i c i p a t i on must
satisfy
the
following
two m i n i m u m
requirements:
1.
A wri t t e n a g r e ement entered into
b e t w e e n the junior and senior bank under
which the junior bank acquires the senior
bank's claim against the account p a r t y to
the
extent
of
the
amount
of
the
p a r t i c i p a t i on that is e n f o r c e a b l e in the
event that the account p a r t y fails to
p e r f o r m in accordance with the terms of the
acceptance; and
2.
The agreement b e t w e e n the junior
and senior bank p r o v i d e s that the senior
bank obtains a claim against the junior bank
to the extent of the amount of the
p a r t i c i p a t i on that is e n f o r c e a b l e in the
event the account p a r t y fails to p e r f o r m in
a c c ordance with the terms of the acceptance.
(2)
Consistent with C o n g r e s s i o n al intent, the m i n i m u m
requirements do not require the junior bank to be o b l i g a t e d to
pay the holder of the ac c e p t a n c e at the time the BA is
prese n t e d for payment.
Similarly, the m i n i m u m r e q u i r e m e n t s do
not require the name(s) or interest(s) of the junior bank(s) to
appear on the face of the acceptance.
(3)
An eligible BA that is conv e y e d t h r o u g h a
p a r t i c i p a t i o n that does not s a t i s f y these m i n i m u m r e q u i r e m e n t s
would continue to be included in the BA limits a p p l i c a b l e to
the senior bank.
Further, an e l i g i b l e BA conv e y e d to a covered
bank through a par t i c i p a t i o n that p r o v i d e d for a d d i t i o n a l
rights and obligations among the p a r t i e s would be e x c l u d e d from
the B E S A limitations of the senior bank p r o v i d e d the m i n i m u m
requirements were satisfied.
-9(4)
A p a r t i c i p a t i o n structured p u r s u a n t to
m i n imum requirements would be as follows:
U pon the conveyance
of the participation, the senior b ank retains its entire
obli g a t i o n to p a y the hold e r of the BA at maturity.
The senior
bank h a s a claim against the junior bank to the extent of the
amount of the p a r t i c i p a t i o n that is e n f o r c e a b l e in the event
the account p a r t y fails to p e r f o r m in a c c o r d a n c e with the terms
of the acceptance.
Similarly,
the junior bank has a
c o r r e s p o n d i ng claim against the account p a r t y to the extent of
the amount of the p a r t i c i p a t i o n that is e n f o r c e a b l e in the
event the account p a r t y fails to p e r f o r m in ac c o r d a n c e w i t h the
terms of the acceptance.
(d)(1)
The Board is not
the account p a r t y specifi c a l l y to
rights are a s s ignable beca u s e the
be assi g n a b l e even in the absence
requiring the senior bank and
agree that the senior bank's
Board beli e v e s such rights to
of an explicit agreement.
(2)
The junior and senior ban k s m a y contract among
themselves as to which party(ies) h a v e the r e s p o n s i b i l i t y for
admini s t e r i ng the arrangement, e n f orcing claims, or exercising
remedies.
(e)
The Board recognizes that both the junior bank's
claim on the account p a r t y and the senior ba n k ' s claim on the
junior bank involve risk.
Therefore, it is essential that
these risks be assessed b y the ban k s involved in accord a n c e
with p r u d e n t and sound ba n k i n g practices.
The examiners will
in the normal course of the exam i n a t i o n process review the risk
assessment proce d u r e s instituted by the banks.
The junior bank
should review the creditwo r t h in e s s of each account p a r t y when
the junior bank acquires a p a r t i c i p a t i o n and the senior bank
should review on an ongoing basis the cr e d i t w o r t h in e s s of the
junior bank.
Junior bank agreement to r ely e x c l u s i v e l y upon
the credit judgment of the senior b ank and p u r c h a s e on an
ongoing basis from the senior b ank all p a r t i c i p a t i on s in BAs
regardless of the identity of the account p a r t y is not
appropriate in view of the risks involved.
However, in those
cases involving a p a r t i c i p a t i o n b e t w e e n a pa r e n t bank and its
Edge affiliate where the credit re v i e w for b o t h entities is
performed b y the parent bank, the Edge C o r p o r a t i o n should
m a i n t a i n docu m e n t a t i on indicating that it c o n curs w ith the
p a rent bank's analysis and that the accep t a n c e p a r t i c i p a t i o n is
a p p r opriate for inclusion in the Edge Corpo r a t i o n 's portfolio.
(f)
Similarly, the Board h a s d e t e r m i n e d that it is
a ppropriate to include the risks incurred b y the senior bank in
assessing the senior bank's capital and the risks incurred by
the junior bank in assessing the junior bank's capital.
these
-10(g)
In view of this c l a r i f i c a t i on of the
relating to p articipat i on s in BAs, the Board encour a g e s the
private sector to dev e l o p s t andardized forms for BAs and
partic i p a t i on s therein that clearly d e l ineate the rights and
r e s p o n sibilities of the relevant parties.
By order of the Board of Governors,
(signed) William W. Wiles
W i l l i a m W. Wiles
Secretary of the Board
December 2 , 1983.
issues
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