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4000 - Advisory Opinions


Guarantee of Loans to Nonbanking Affiliates by Affiliated Banks Within a Bank Holding Company

FDIC-86-1

January 2, 1986

Carey E. DeMoss, Senior Regional Attorney

This is in response to your December 11, 1985 inquiry wherein you ask whether guarantees from three affiliated banks within a bank holding company would be valid guarantees in the following outlined situation.

A bank has been requested to lend funds to an operation center owned by a bank holding company. The debt would be secured by guarantees from the banks within that holding company. The holding company wants the operation center to borrow the money directly with the lending institution guarantees on the debt of the operation center coming directly from the three affiliated banks.

Section 332.1(d) of the FDIC's rules and regulations [12 C.F.R. § 332.1(d)] generally prohibits insured nonmember banks from guaranteeing or acting as a surety on the obligations of third parties. There are, however, several exceptions to that general rule. The official footnote to the regulation states that the limitations of section 332.1(d) do not apply to "acceptances, endorsements, or letters of credit made or issued in the usual course of banking business". Other exceptions to section 332.1(d) have also been recognized. It appears from prior opinions of the Legal Division that the FDIC has essentially adopted the exceptions promulgated by the Comptroller of the Currency in Interpretive Ruling 7010 (12 C.F.R. § 7.7010) which provides in applicable part:

"A national bank may . . . bind itself as a surety to indemnify another, or otherwise become a guarantor, if it as a substantial interest in the performance of the transaction involved or has a segregated deposit sufficient in amount to cover the bank's total potential liability."

In addition to the exception contained in the footnote to section 332.1(d), therefore, guarantees of insured nonmember banks will not violate that regulation where: (1) the bank has a segregated deposit sufficient in amount to cover the potential liability of the guarantee, or (2) the bank has a substantial interest in the performance of the transaction involved. The first exception is substantially similar to the exception provided in section 337.2(c)(2) pertaining to standby letters of credit. With regard to the second exception, the term "substantial interest" has never been specifically defined. As a matter of practice, however, the "substantial interest" exception to section 332.1 has traditionally been limited to situations where the bank has a direct and economic interest or stake in the transaction regarding a third party. For example, a trustee bank has a direct economic interest in guaranteeing the performance of a co-trustee.

In the present case, it would appear that the "substantial interest" exception to section 332.1(d) would apply. The loan in question would be for the operation center which performs various banking services for the three affiliated banks and 87% of which is owned by the bank holding company. The debt would be secured by guarantees from the three affiliated banks within that holding company. The source of funds for repayment of the loan would, in all probability, stem from the bank holding company. In view of this, it would follow that the three affiliated banks would have a "substantial interest" in the loan made to the operation center. Accordingly, the banks' guarantees in the present outlined situation would not violate section 332.1(d) of the FDIC's rules and regulations.

Notwithstanding the opinion expressed herein, I highly recommend that you consult the legal counsel regarding the particulars of this described transaction.


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