4000 - Advisory Opinions
"Special Interest" Exception to Part 332 Prohibition on Bank Guarantees
September 19, 1984
This is in reply to your letter of August 20, 1984, concerning whether a certain proposed transaction would be violative of Part 332 of the FDIC's regulations (12 C.F.R. Part 332 (1984)) if undertaken by Illinois state banks insured by FDIC. The following opinion applies only to insured state nonmember banks (not members of the Federal Reserve System) regulated by FDIC.
As described in your letter, the banks propose to sell to a third party purchaser all or part of their respective municipal bond portfolios. Before the purchaser will purchase the bonds, however, each bank must: (1) agree to repurchase the bonds from the purchaser at a specified later date; (2) to obtain a letter of credit against which the purchaser might draw to obtain payment of the repurchase price should the bank fail to repay the price when called to do so; and (3) deposit with an escrow agent on behalf of both the bank and the letter of credit issuer United States Government securities or certificates of deposit.
As you may know, Part 332 prohibits FDIC-insured, nonmember banks from guaranteeing the obligations of others. The enumerated exceptions to this prohibition are acceptances, endorsements, and letters of credit made or issued in the usual course of the banking business. Over the years, the FDIC has also generally recognized an exception when the guarantor bank disposes of its own paper and/or has a "substantial interest" in the underlying transaction. These exceptions to the general rule against bank guaranties are the same as those found in the Interpretative Rulings of the Office of the Comptroller of the Currency in 12 C.F.R. §§ 7.7000 and 7.7010 (1984), which are applicable to national banks. The first applies when the bank guarantees notes and other obligations sold by the bank for its own account. The second type of guaranty is permitted when the bank has a substantial interest in the performance of the appertaining transaction.
After reviewing the proposed transaction described above, it is our opinion that a guaranty afforded by the bank to the trust and the holders of interests therein would not be violative of Part 332. This is so because the bank would be guaranteeing obligations sold for its own account, and because the bank would have a substantial interest in the overall transaction. Please note, however, that this opinion is limited to the particulars of the above-described business arrangement. The bank would not be permitted, for example, to purchase securities for the purpose of selling them to a mutual fund and guaranteeing payment of the securities to the purchasers of shares in the fund. This, of course, is in contrast to the foregoing situation, where the bank is selling securities originally purchased for its own investment purposes and held for a certain period of time. Also, this opinion does not address any issues such as the bank's power to enter into the escrow arrangement, which may arise relative to the proposed transaction under the applicable laws and regulations of Illinois.
I hope this is adequately responsive to you inquiry.