New York State Banking Department
To: Supervising Bank Examiner Straughn From: Assistant Counsel Sullivan Date:
December 14, 2009
Lending limit [---]
- If an extension of credit by a New York bank (the "Bank") is supported by a standby letter of credit, whether the obligation to the Bank on the letter of credit qualifies as collateral for the purpose of increasing the Bank's lending limit with respect to such extension of credit?
- Whether the Bank may renew an extension of credit if such extension exceeds the Bank's lending limit because of a contraction in such lending limit resulting from a decline in the Bank's capital stock, surplus fund and undivided profits ("CUPS")1?
- The obligation on the stand-by letter of credit does not qualify as collateral for such purpose.
- Unless the Bank is legally obligated to renew the extension of credit prior to the contraction in its lending limit, the Bank may not renew the extension except in a "workout" situation.
Section 103 of the Banking Law imposes lending limits on New York-chartered banks. Those limits generally restrict extensions of credit to one borrower to fifteen percent of a bank's CUPS, but allow such extensions up to twenty-five percent of CUPS if the additional ten percent is secured by collateral that can be adequately valued. Under Section 103.1(d)(2), such collateral must have "an ascertained market value or otherwise [have] a value as collateral as found in good faith by an officer of such bank or trust company" -i.e., an "ascertained market value" or "good faith value."In 1970, the Banking Department addressed the case where a New York bank had acted as a confirming bank with respect to a stand-by letter of credit, and therefore, the New York bank had a right to reimbursement from a Greek bank and its customer.2 The Department determined that this right to reimbursement did not qualify as collateral within the meaning of Section 103.1(d)(2). In 1981, the Banking Department considered a case where a New York bank had received a guarantee from a domestic bank3 and cited the 1970 determination with approval. The 1981 interpretation stated that in order to qualify as collateral, an item had to be both within the control of the bank and have an "ascertained market value" or "good faith value." The 1981 interpretation determined that the guarantee from the domestic bank met neither requirement. These interpretations support a similar conclusion with respect to the obligation to the Bank on the letter of credit.
In 1994, the Banking Department issued an interpretation that if a New York bank issued a legally binding commitment to make a loan that was within the lending limits applicable to the bank at the time of the commitment, the bank could fund the loan in accord with the commitment even if a diminution in the bank's capital caused the loan to exceed those limits at the time of funding.4 The clear implication of this interpretation is that the bank could not fund the loan if it were not legally obligated to do so.In the present case, the Bank may not renew a loan that exceeds its lending limit at the time of renewal unless the Bank was legally obligated to renew the loan prior to the decline in the Bank's lending limit. There is an exception in the case of distressed credits. The Banking Department has indicated that it would allow a New York bank to restructure those loans that are nonperforming - and probably those loans in imminent danger of becoming nonperforming - "without considering the applicable lending limit” provided that certain conditions were met.5
- In posing this question the Bank referred to shrinkage in the size of its assets. Under Section 103 of the Banking Law, however, the lending limit of a New York bank is determined as a function of the size of the Bank's CUPS and not of its assets.
- Memorandum from Associate Attorney Mark to Commercial Banks Division dated July 27, 1970.
- Memorandum from Associate Attorney Papir to Assistant Counsel Gelman dated March 27, 1981.
- Letter from Assistant Counsel Stacy M. Cooper to Lee Kielleren of Reliance Bank dated June 14, 1994.
- Memorandum from Assistant Counsel Barras to Examiner Lambert dated November 12, 1992. The conditions that were set forth in the memorandum are:
1. The loan must have been within the bank's lending limits when made.
2. New funds are not advanced in the restructure of the loan in the absence of special circumstances.
3. The original obligor on the loan is not released.
4. Security supporting the loan is not released unless loan is repaid to point where the remaining security is sufficient. In this regard,the substitution of security would be permitted if the substituted security were adequate.