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4000 - Advisory Opinions
Bank Acceptance of Loan Guarantee From Foreign Affiliate Subject
to § 23A of Federal Reserve Act
FDIC--95--20
September 27, 1995
Gerald J. Gervino, Senior Attorney
Sheldon Reisman, Regional Counsel of our New York office has
requested that I review your opinion concerning ("Bank"). You had
provided this opinion to Mr. Nicholas J. Ketcha our Regional Director
in New York.
A letter to the Board of Directors of the Bank from our Regional
Director dated December 23, 1994 raised a question of an apparent
violation of Section 23A of the Federal Reserve Act,
12 U.S.C. 371c ("Section
23A"), with respect to loan guarantees accepted by the Bank from a
foreign affiliated bank. The letter indicated that the guarantees were
covered extensions of credit under Section 23A. They further aggregated
in excess of 10 percent of the bank's capital. Our Regional Director
also indicated that the guarantees must have been made on terms and
conditions that are consistent with safe and sound banking practices.
You have disputed that position in your opinion. Basically, you
indicate that the language of the Act and the changes to it made in
1982, deal with guarantees made by the bank, not guarantees in favor of
the bank. This is true. The idea of an affiliate of the bank providing
guarantees to the bank on behalf of third party borrowers is not one
that is ordinarily considered.
The Board of Governors of the Federal Reserve System considered this
question in 1934. They then concluded that an "accommodation"
indorsement of an affiliate of a bank does not constitute the
transaction a "loan or extension of credit" to the affiliate
within the meaning of Section 23A. It questioned the desirability of a
bank making a loan upon which it is deemed necessary to obtain the
accommodation indorsement of an affiliate, in some circumstances at
least, would appear to be questionable. Digest of 1934
Federal Reserve Bulletin 391, Published Interpretations of the Board of
Governors of the Federal Reserve System ¶ 4010.
The FDIC faced this problem with respect to affiliated bank standby
letters of credit prior to the 1982 amendments to Section 23A. In that
case, the affiliated foreign banks were securing loans to customers
with their standby letters of credit to their FDIC insured subsidiary
American banks. The American banks were extending credit to overseas
customers of its foreign affiliates with no documentation other than
the standby letter of credit from the affiliate foreign bank.
This practice, in effect, created a greater reliance upon the
creditworthiness of the foreign affiliated bank, since the bank was
receiving a direct obligation incurred for the purpose of inducing the
bank to make its loan. Where the bank merely accepts a security of the
affiliate as collateral provided by a borrower, the foreign bank
affiliate is not a party to the transaction, nor necessarily has any
knowledge or control over the pledge. Here, the foreign bank affiliate
is likely to be the moving party if any number of loans are so
guaranteed. The guarantee is in fact a more dangerous feature of the
transaction than the use of affiliate securities to collateralize the
loan, since the guarantee is in the exclusive control of the foreign
bank affiliate.
The 1934 Board of Governors opinion on accommodation endorsements,
whether valid today or not, is not in point, since it was meant to deal
with accommodation endorsements made for formal reasons. The Board of
Governors more contemporary expression has informally used as an
example, the accommodation endorsement made by a member bank
discounting paper received from a nonmember of the Federal Reserve
System. We cannot understand how an American bank, lending within its
expertise, should need the guarantee
{{2-29-96 p.4943}}of a foreign bank to make a loan.
Similarly, we do not understand why a foreign bank would be obligating
itself on a third party obligation, unless it receives consideration.
In our view, the facts that you have described in your memorandum
indicate that an extension of credit has been made to the foreign
affiliate bank. This extension of credit appears regulated by the
provisions of Section 23A(a) and (c) of the Federal Reserve Act.
If you have any further questions, please write or call me at (202)
898-3723. My Fax number is (202)
898-3715.
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