208.24—Letters of credit and acceptances.
(a) Standby letters of credit.
For the purpose of this section, standby letters of credit include every letter of credit (or similar arrangement however named or designated) that represents an obligation to the beneficiary on the part of the issuer:
(3)
To make payment on account of any default by the party procuring the issuance of the letter of credit in the performance of an obligation. 6
Code of Federal Regulations
Footnote(s): 6 A standby letter of credit does not include: (1) Commercial letters of credit and similar instruments, where the issuing bank expects the beneficiary to draw upon the issuer, and which do not guaranty payment of a money obligation; or (2) a guaranty or similar obligation issued by a foreign branch in accordance with and subject to the limitations of 12 CFR part 211 (Regulation K).
(b) Ineligible acceptance.
An ineligible acceptance is a time draft accepted by a bank, which does not meet the requirements for discount with a Federal Reserve Bank.
(c) Bank's lending limits.
Standby letters of credit and ineligible acceptances count toward member banks' lending limits imposed by state law.
(d) Exceptions.
A standby letter of credit or ineligible acceptance is not subject to the restrictions set forth in paragraph (c) of this section if prior to or at the time of issuance of the credit:
(1)
The issuing bank is paid an amount equal to the bank's maximum liability under the standby letter of credit; or
(2)
The party procuring the issuance of a letter of credit or ineligible acceptance has set aside sufficient funds in a segregated, clearly earmarked deposit account to cover the bank's maximum liability under the standby letter of credit or ineligible acceptance.