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FEDER L
RESERVE BO RD
W SHINGTON
X-3102
_,\pril 26, 192L
S U ~ J E C T : Authority of J a t i o n ~ l
Janks to
Guarantee
Letters
rear
Sir:
of Credit ru1i . ~ c c e p t u . n c c s , a Tld to
appoint
correspond
ent
bunks as
agent to
issue the same.
I t
recently
has been brought to the attention of the Fed-
eral
Reserve Board tbd.t
national
banks for some time have been
ac
customed
to guarantee let ters
of
credit issued a t
their
request
by cor
respondent banks in large
centers
on
benalf of the
national
bank s
customers.
For
i n s t ~ n c e , i t appears
that
where the custorrer of an in
terior na.tional dnk desires
to
obtain a le t ter of credit in connec
tion
with his foreign
business,
the national bank, instead of issuing
the le t ter
i t sel f will get one
of
i t s large ci ty
correspondents
to
issue a let ter for the .customer s
account,
which the national bank
guarantees,
that
is
the
r ~ t i o n a l
bank
agrees
that
in
the event the
customer
for
whose account the le t ter
is
issued
fails to
put the is-
suing bank
in
funds
to
rr.eet
the acceptdnces,
the
~ r n t e e i n g
bank
will do
so. The transaction does
not
always involve tne
issuance
of
a le t ter of credit,
for
the
correspondent
bank sometirr£s s i ~ l y ac
cepts a draft drawn upon i t
by
the ld.tional bank s customer, ani
tne
national bank, in a collateral agreement
with the correspondent
bank,
~ s u a r a n t e e s
the customer s
obligation
to
put
the
corresponient
bank
in funds to meet
the acceptance.
Under
the
la t ter
arrangement, the
national
bank s
l iabi l i ty
is
the same
as the
ul
ti;r.ate
l i abi l i ty which
drises out
of
guaranteeing a le t ter
of
credit, so that the two trans
actions will be considered as one and the same for the purposes of
this discussion.
I t
also appears that
some
national banks,
in
con
sidBrJ.tion of
a
fee or
cormrission, are a c c " ~ s t o m e d
to endorse acceptances
for the
accommodation
of their
customers
or
bi l l brokers. In
connec
tion w: th
such
pr.:tctices, the
question has
arisen as to
vwhether o
na
t ~ o n a l bank has
authority to
Uld ke such gua.rcmtees or accom" lodation
endorsements, or · ~ h e t h e r such acts are beyond the powers which nation
al
banl<:s lawfully may ex.erci s e.
Whether
or not
a ncitiona.l bank has
authority to
guarantee
a le t ter
of
crali or
to
endorse
cin
a c c e r - t ~ m c e
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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i
471
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involving t&J.s·
point, ani
in View
o:Z
;;:.e
i m p o r ~ e
o the
matters in
volved.
i t
seems
~ · 1 i : a a . b l e ~ o r tA8 ~ ~ i ·
to
s ta.te in some detail
i ts
views a.s
. to
tb.e letp.l MPec.ts of :;:...e situation.
· ·
@re
·is
:.10 e x . ; 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
~ t e e i n s
01
.
Mting a.s
surety
on
a letter ·
of cr.a.rlt. '. be National
Balk
A.et
. J ~ . u t : : o r i
zall n t i o n . : ~ ba,nks to
discount
and negotiate notes •
drafts and bil ls of eA::::....U;t:e,
ani to : .l...::ke .loans
on
personal
e ~ i t y
wAile
Section 13 of
t C . ~
:YtU6ral Reserve
Act more recently
bas confer
red 'Upon national ban::a
t=a e power to
a.oeept
drafts gl'QWing out of cer
tain S}feeified. t ~ a c t i o n s .
I t is
settled,
i l a w e v e ~ ,
tl:la.t a national
bank• s p o w ~ r to CU.scount negotiable paper
and
to
loan
money does not
car ry
wit .
i t
the
power
to
~ t e e or
act
as
surety upon, the obliga
tion
t ¬h&r, nor
is sucil
a. power
~ n c i d e n t a l to
tb4
b15ine&s of b a n k ~ ·
ing. Cor;paercia1 National l l ~ 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•.
In 3cwen v. : l e ~ s \ l t s , sw;ra;
p. 927, the. court scd1.
in
part:
11
I t
"'-7
be
a
tis. ted
in
general that no 'banking cor
poration tho
power
to become a
guarantor of tG&
obligation of
c:.nother, o::
to
lend.
i ts
credit to
i:J1¥
person or corporation,
unleas
i t s charter
or
govern-
ing
statute eJq)resaly
permite
i t .
~ r s •
i : . ~ l e ~ c •
~ ·
v.
&ttc}lers'
Drovers'
B a . n t ~
lb ' . 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
c o u t r ~ e t s
a. \d. to
exercise by i t s
board
of directors,
vr
.iuly
tl.Ut4:.brized officers or
agents.
subject
to law.
al l 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,
d r c ~ . f t s , bil ls
of exchange •
and other
·
evidences of
debt; by receiVing deposits; b7 buy Dg
and sel l ing exchange, coin, and bu.llion; b7 loaning
mone7 on
personal
security; and by
obtaining,
i s ~ n g .
circulating
notes
according to
the
pl'ovid
?US of this
t i t l e .
•
T :.ai
.e
is·
n these p r o v i s i 9 1 ~ no
~ ; , 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:, Ji oanking. I t
bas been luld
).n
S e q l i ~ v.
·Bank,
3
Ifugh a.
647;
Fed.
Cas.
:lo.
12542; l orton v.
Bank,
61 N H.
589;
n d ~
v.
Pirie,
a?
c.c.A. 171; 82 res. ?99."
SitJilarl7, a1
though.
the power
coilferred
1.-::pon
n«tlonal bank&
to aecept
drafts
c . . : . r r ~ e s
witb.
i t the
powe '
to hsue
lett9rt
of
cttedit
as
·
f
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.
r 472
-3
X-3102
ineidentdl tb :lreto, i t weald seem that sueh p ~ 1 e r s do t ~ o t
carry
With:
them
the
p o w ~ u · to.
gwrantee,
·
or
~ t a» surety · ~ o n acceptances ·or
letters
of cred.i
t
j
ssued
by
other
banka.
tn view
of
these
c o n s i d e r ~ t i o n Q . t h e
Federal Reserve Board
is
?f the
opmic,n t ~ t a. n a ~ i o n a l bank has
no
authori
to g.1arantee
or ~ . c t as
surety
upon Q le t te r of credit, o1· to etld,orse ar.
acceptance
for acr.omrto.i:.i.tion; that ~ h actt: are nl1(ra.
.vires;
a11d. tbclt
i f the
d i r e c ~ o r G
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 may
occur.
J{{Wf6vEsr,
While a national
bank cannot
gua.r.;Uttee
an
accept
ance
which
i t
does.
not own,
a
national bank may l)Ul"c.base an a.cceptC&DCe
c nd
im:Jiediately
re-sel l
it
with
i t s
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, ~ w r a ; Bank of. Va].dost9, v.
Ba.ird,
aul?ra. re appears to be no authority
o f
low, however, which per-
mi.
ts
a
national
bank to lend i ts creJi
t by
endorsing an
aec:epta.nce
whexe the transaction does not invovle an
a.et'u.al transfer
of
t i t l e
to fr·om
a
natiQna.l
bcmk.
As to the
practiee o ~ r n t e e i n g
let t•ns of
c ~ t
i t
18
~ n t e n d e d that
i f a.s
=:;t.ate:l
above,
a.
national
b..s:nl : he ::
no
d.Uthori t7
to guarantee or
act
as
J I U J ' ~ t , y ~ sace lettel"B• MAy national
ba nks
w ~ l l
be c ~ e l l e d
to
toreg< a business which is very d ~ ~ i r d . b l e
bo\h
from the
standpoint
o f
the banks
·tl.e111$tr.hes
a.nd fr'ltn
t . n t ~
s ~ n d p o i n t ·.
of
their
c u s t o m e r s ~
The
rcs,u
wil l
be,
1
t
i;;
r ~ 1 · ,
t.t.s.:l,
r.r.a"'
the cus•
tomer himself nuat necessarily
go
to a l.;.r-6e .:.i.
t
7 b ~ · l . ~ ' \ L J . ,
as
his
financia.l
standing perhaps
is not
generaj,ly
lri., v , ~ ~
:..:...
..
>
:-&\}.'leSt tor
credit in
many
instances lU l l be
r e t u s ~ d
and M "',;, . 4 .
1 ~ e
conpelled to
~ e e k other and
less
des1ra.ble
means for .financinf ::dt1
i ; ; ~ l n o s s ..
.
.
Realizing the p r ~ ? t i c a l force
of
these eonsiderdtions,
\be
Board
desire$
to suggest
an
alternative
method
of f i ~ ~ c i n g the
busi
neas
4eretofore
financed by means
of le t ters
of credit gucu-an1;eed by
the
national
bc.mks
cil t
wh0$e r e ~ e s t the le t ters
tae isS'Ued.
The
Boa:rd
is of
the oj>inion tba.t this
course, i f
adopted,
~ i l l enable a na,tiona.l
bank, wit4
only
sl ight modifications as to tho tnan."lor
: i
handling
the
\l)lsiness,
to
continue
to
carry
on
without
ent.er1.ng iQ.to
an
1ltrt
rl,.._s
transaction.
a.ke'
tbe
ca$e of' a
na.t
~ J ; - ~ a . J
bank in
an
i n t - i i f o r - c c ; t m ; m f ~ : · O S c.,"\tS.tomer
wishes
l i ~
¢bt. tt; te r of credit
which will be
sa
tl f a c t o r y
to his
foreign
.le:41; '-.
Th"
n.:s.tional bank,
il;;.vinY.
no
internati.on&l
st;anding,
or being vntncut any
d . ~ r l . m e n t
ca:pabie
of
handling foreign business, does not ··1ish to
i s s ~
the le t -
te r
i tself b u ~ is w i l l i ~ to extend i t s
credit to.
i t s CQntomer.
~ ~
tb»se circurostancef\,
i t
enters
into ~
e.rr.:tngetum"' w i t ~ : ~ ,
say. i t s
New York correspondent.
whereby the
ew
fork corre91Jondeut. agrees
f.
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473
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:C-3102
Sent o the interior bank tv issue a le t ter of c ~ d i t for
the
account of tne i n t e r i o r . b a n k ' ~ ~ q t o r o e r ,
the
letter tc be issued
in
the
natro
2f.
the
New
York
correspondent,
lmt
in
i s s t t i . ~
i t .
the New York correspondent is
acting, as a
matter
c£ fact,
a.s
·
a . ~ n t
for
an
undiaclo,eci prir..cipal, n a n : e ~ y , tb.e
interior
bank.
The
intel'io1· bClllk' s nan:e v.till
not
appear on tilz let,ter
o£
cre41t,
but i t s
1-;e'.t
Yo1'k• corrc.sj::ondent
ma,y look to
it. for reimburseu.ent
wier the colla1ieral
agancy agreement, n,pl; cond.it ionally
upon the
fo:Ulure '.)f. t·r a cut>to l'.&r
.O
put the isseing bank
in
funds
but
direct
ly and utlcond.i i o r . ~ l l s a.z.
the real
i&suer of the
letter.
Tht
bencf .oi-.lry
vf
tbe le t ter
end.
the holdera of the aeeeptancas drawn
tile1•euuJ.er
Will look co and rely on the credit o
the;
N'elv
York
bank,
for i t s
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 ~ J k ,
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
b a n k ~
i n s t ~ ~
o f g u a r ~ t e e i n g the
let ter o credit,
will·exeaute
a separate contract a p p ~ ~ r t t i n g i ts York correspondent
i ts
agent, and t4greein; W l ~ " · : : . a i t1or.ally to r e i m ~ e the a.ger"t
as
such .
~ o r
any moneys
pai i
cr.:.t.
oz:,
i
desired,
to P\lt the agent in ·
funds meet
tl:e a . c c e , t : * . ~ a n c e s
as
t4ey
rr.ature. 1t would seetQ tbat
this proee: l.u·e will
1»'3
t the practical
requl
reJMnts
o ~ e
si tua.
tion and at tbo s.tattkl titr.e avoid i LW nec,ssit,- o arty contract of
guarantee.
· . After ca.ref·ul consi.deration.; tbe 'Bo t.td c o r u s i d ~ r s - ~ ·
·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·::.
,r
y pO\ten.
A national bank
unquestionably
m y legitimately flt::.nce ih cus-
. tomer• s business 'by issuing a
le t tar
Qf
credit
ih
i t s own name.
I '
a.
national ba nlt
m y issue
a le t ter
it(el.f , w o - . . ~ 1
Mt-'m that·
a. national' bank'ma.y isaue a le t ter throngb. ~ 1 a . g e n ~ . pro.Viled
that· tile national
bank
has autbor1\y to a.proint
.::\n
·:a.gEll .t tor
that
Ptcr.Posa. I t
i s tit"J.e
that
i it
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
na t iow bank cannot ap:roint
an
agent at a rlace other
than
i t s
place of busineu to t\Ccept drafts n
t l k ~
of his ;trincipal
ba.r.k and
to p4l.T such cU-ofts
as
they l m : \ . t t n · ~ .
« 'his r o l i n ~
was
based on the C\)nstruction
of Section
5190 of
the
i i ~ · . r ~ ted Statutes
whlch
provides
in
p :a.rt:
..
"Tile usual D-J.liliness <Jf
each
n t ~ : c : ~ J .
ban'b.n.g
~ s o c i a t 1 o n aQ..ul
be
t r r - . n s a c t t ~ d :: t : . J ofzice
or bar.king ·bou.ze loca.te.i
iu
tn, =lace ~ p a c i f i e d
in i t s o r g a n i ~ a . t i o n
eerti
t icate. :
T h ~ Comptroller sdid tha.t the d.CCsptance
ea.ttd {i&.yaent
ot
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·'
-5-
dra.fte is x:.at o the usw.J. business of a n.a.Uor.a.l bank within the
meaning
of
Ut .'.t s ~ c t i o n ,
cand therefora
ruled ~ n e r a l l y ~ b e t such.
busiuess ma.y be transacted
only
a t the na.tional bank's principal
office or b a n l d n ~ house
anJ.
not in d.JlOther
place
through
an
agent.
r 474
Tf e .Eoi'ri is of the opinion,
however. tnat the provisi9ns
of
Section 5190
. -> n·'>t
n e ~ e s s a r i l y prevent ru.tiollal bar:k from
appointing a n o ~ h a r ~ . w . k o ' banl.ml'
as
i ts .J.gent
to issua
&.
let ter
of
cre:J.it in tho
. . - ~ . o : : t 6 . \ ~ . I t
it?
well
recogr..ized tbJ.t, wb:Lle a
ru.tion..i:l
bank
rr.a.y
::lot t l · a r . ~ a . e t
any
part of i te "us·,lt l busin,sa" at
ano.the:: plt\'}e tb.T
U i L .
an
a ~ t
'neverthelsss,
t
nny. appoint an ,
&gent
t r
specific
p u r p ~ t e a
or to transact
porticular
) ind$
of
busi
r.ess.· t : n < i ~ r tne:oe
c.irc'U1L6tances
• i t
wonlci
seem
th::lft ~
national
bank, for
t.be ptU'ptJse ·of financing i t s eustomer
1
15 businsss 1n
the
manner
herein
GllgSested,. may appoint
a.
Q.on:estic or foJ"eign bank
or banlan:· u i ta a g e n ~
to issue in
tiJB a.g9nt •s· own nama
a.
loatter
of
credit
and
t.o
a c c e ~ t
du.tts drawn
thereunier,
providei t iat
the
authority con erred
is s p . c i f i c a ~ l y
limited to
tm
pa.rt:i\ ul:t.r trans•
a . c t i ~ n involved and thbt a
d e f i n i t ~
li.Drlta.tiot•
is
iJI Posad. 'l4pcll tbe
aJDO .mt of each
le t ter
of
credit . ·
In c a J ~ e t 'lrJ l v \ ~ r t . e suggested should ·be adopted. the
a ~ n t
'" bank \Vbic.h issues t h ~ ·lQ,t.er and
whiCh
is p r i ~ l l t : U ' i l f an.i un\}on
ditionaJ.ly l i a b l ~ uJ?on t t . ~ t e.cc&ptanees made thero\U1d6r
nuet
include
the l ia.bilit .t
crt.
suc.h
.acc<:ptancea.
as and
w h . ~ n
i." &CUt'reli,
among i t s
. · general a c c e p t u . n c ~ l iabi l i t iee su'bje¢t
·co
tha 1:.m1 tati:::ns on tll
acceptance
power ;t:rescri:X::l by
la.wr
..1T.:l.. i l l · . ~ ~ . . , c h
~ ~ ~
l . Y ~ t : # r ~ o r
bank i s by
bwothesis the raal
~ c e p t o t
atiJ.
iQ.
::t:,;:t .j '
r::.
\\nOon-.
~ tionally l iable
to the .::.gont b¢1k.
for
any
i O O l ~ v t ; : ~ : 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 a c ~ t a n c e s , the
principal
v l . l u ~ . l to m..11t
include. ·the
amount
of th.l aocept.ances, as and
wher.
I ' L ~ d , ita
genet:c.\1 ~ e p t a n c e l iabi l i t ies subject to the limitatior.s of law.
I t
shoulti be relreJilbered tll t
tb&
foregoins
merely
re-.
presents tha·
B9ard•t
o p i n i o ~
aa to
the legality. o
the
proposed
plan.
ni
as to
the requirement$ w h i ~ h ~ be c ~ l 1 e d
w i t ~
i f
national
banks see
f i t to adopt
the
plan
In the last
ar.alyais",
.the
question
whether a.
nation&l
~ legally may
aPfoint
a corre$
.Pondent as i t s a g ~ u t in
particular
t.-ansaet.ions to
i s s ~
a le t ter
of credi t and to ; c ~ ~ t
drafts d r ~ therewtler, • .:.n..:
w':.t ther in
other
reapecti?
a
l·:atiof4t1
benk
legally
may
t " " ~ : ~ . . . t C t
t.oo
·business
in the m:mner a u g ~ e s t e ~ . is a. qnestion ' fer t ~ ..laten:.i.n.::.ticn of
.the
courts. I t r.eei:;JS udvis,\ble. JlOWSV'er, for t.o 'l bo-.ll.r.i r o
set forth
i t s views with rega.t'd to
the
matter
'tlllder diSC\ lSI ion i•'l order that
i t s J)Odticr. ma7 be c l e a . t ~ ~ Y u n d e r ~ t o o d .
7/17/2019 frsbog_mim_v14_0470.pdf
http://slidepdf.com/reader/full/frsbogmimv140470pdf 6/6
'.
t
. . This let ter hai.
been submitted
.to
the Co Iptroiler of the
(};ll'rencr
an.i
r
conc'JIS
in
the
views
expressed,
herein.
V"r1
t:ruly y u r s ~
V l c e G o v e r n o r .
75
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