4000 - Advisory Opinions
Letter of Credit Issued to Insurance Company Not in Violation of Part 332
July 16, 1983
Robert E. Feldman, Attorney
This memorandum responds to your concerns about the subject letter of credit (attached). You have raised the question whether the letter of credit violates section 332.1 of the FDIC's regulations (12 C.F.R. § 332.1) because it was issued to an insurance company, and because it appears that the bank is assuming all of the insurance obligations of the insurance company. Additionally, you have pointed out that the account party has no monetary obligation to anyone. Rather, the obligation of the account party is essentially a fiduciary obligation to insure that grain is not lost, stolen, turned over to the wrong party, or burned. You have questioned whether the use of the term "obligation" in clause 3 of section 337.2(a) of the FDIC's regulations (12 C.F.R. § 337.2) requires a monetary obligation on the part of the account party.
After discussing this matter with Assistant General Counsel Roger A. Hood and Attorney Lawrence Bates in Washington, I have concluded that this letter of credit is not a violation of section 332.1. The term "obligation" should not be equated with a monetary obligation alone. Thus, even though this letter of credit smacks of a bank performing the obligation of an insurer, it is permissible simply because it fits within the groundwork of section 337.2. As you are probably aware, section 337.2 has effectively gutted the restrictions set forth in section 332.1, and it is unclear what a bank may be prevented from doing under the provisions of section 337.2.
As you recall, I pointed out to you earlier the effect of section 337.11. This section says simply that, although section 337.2 permits the issuance of standby letters of credit, the same credit analysis that applies to loans must also be applied to the issuance of standby letters of credit. Therefore, any action that you deem advisable to take against the subject bank because of the issuance of this letter of credit should be based on the same safety and soundness criteria that you would apply to a loan given under the same circumstances.
In situations where an account ostensibly owned by parties who are not all natural persons is labeled a "joint account" but fails to meet the criteria of section 330.9, the true ownership interest of each co-owner should be added to any other deposits held by the respective owner or owners at the bank and be insured with the other account(s) to an aggregate of $100,000 per depositor.