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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

-2-

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 &noth&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

-4-

: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

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'.

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