BC - 168
BANKING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Banking Circular
Subject:  Charges by a Federal Reserve Bank Against a National Bank's
          Reserve Account Due to Default on Loan Made to a Nonmember
          Financial Institution

To:  Chief Executive Officers of all National Banks, Regional
     Administrators and Examining Personnel

This issuance concerns Reserve Account Charge Agreements ("Charge
Agreements") used by various Federal Reserve Banks ("Reserve Banks").
These agreements are used when a nonmember financial institution borrows
funds from a Reserve Bank and the transaction is processed through the
reserve account of a national bank with which the nonmember institution
has a correspondent relationship; Under the Charge Agreements used by
almost all the Reserve Banks, the lending Reserve Bank may charge the
national bank's reserve account if default occurs on the nonmember's loan
processed through the national bank's account. Under some of the Charge
Agreements, the charge is irrevocable, i.e., once the charge is made, the
Reserve Bank has used the national bank's reserve account funds to satisfy
the nonmember correspondent's defaulted loan. The national bank can seek
reimbursement only from that nonmember correspondent or from the
collateral pledged by that correspondent to the Reserve Bank. Under the
Charge Agreements used by other Reserve Banks, the charge is revocable
within a reasonable time. Therefore, if the national bank so requests
within a reasonable time, the Reserve Bank will cancel the charge against
the national bank's reserve account and proceed directly against the
nonmember institution for repayment of that institution's defaulted loan.
Under the Charge Agreement utilized by still other Reserve Banks, the
charge is revocable upon notice to the Reserve Bank within a stipulated
period (often 24 hours but as short as 1 hour). If the national bank fails
to give the Reserve Bank notice within the time stipulated, the charge
becomes irrevocable. This issuance establishes when national banks may
legally enter into the above described Charge Agreements and what
safeguards they must establish in order to conform to safe and sound
banking practice.

LEGALITY OF ENTERING INTO CHARGE AGREEMENTS

As stated in Interpretive Ruling 7.7010 (12 C.F.R. § 7.7010), a national
bank may not act as the guarantor of the debts of another absent a
substantial interest in the transaction involved or a segregated deposit
in an amount sufficient to cover the bank's total potential liability
under the guarantee. Maintenance of a correspondent relationship with a
financial institution is not such a "substantial interest." In normal
circumstances, a national bank will have neither such a substantial
interest nor such a segregated deposit when a loan from a Reserve Bank to
a nonmember financial institution is processed through the national bank's
account at the Reserve Bank. Thus, in normal circumstances, a national
bank is not permitted to enter into a Charge Agreement with a Reserve Bank
where such a Charge Agreement constitutes a guarantee of the Reserve
Bank's loan to the national bank's nonmember correspondent.

It is the position of the Comptroller's Office that an irrevocable Charge
Agreement constitutes a binding guarantee of the nonmember correspondent's
debt and generally cannot be entered into by a national bank. In contrast,
a revocable Charge Agreement is not a binding guarantee of the
correspondent's debt since a national bank entering into a revocable
Charge Agreement may, at its option, revoke the charge and thus avoid
liability for the debt of the nonmember correspondent. Because a revocable
Charge Agreement does not constitute a guarantee, it may be legally
entered into by a national bank regardless of whether that bank has a
substantial interest in the transaction involved or has received a
segregated deposit equal to its total liability under the agreement.

STANDARDS FOR SAFE AND SOUND BANKING PRACTICE

Each bank which enters into a revocable Charge Agreement must establish
written procedures which will ensure its ability to consider and effect
decisions and actions necessary upon such a charge in a prudent and timely
manner. The Comptroller's Office believes that, as a general rule, a
Charge Agreement that provides a period of less than 24 hours for
revocation of a charge will make the establishment of such procedures
extremely difficult, if not impossible. However, the Office will evaluate
each bank's compliance with safe and sound banking practice on an
individual basis. Thus, procedures developed for revocation periods under
24 hours will not automatically be found inadequate and procedures
developed for revocation periods of 24 hours or more will not
automatically be found adequate.

If a bank does not revoke a charge under a revocable Charge Agreement, it
has made a loan to its nonmember correspondent. Therefore, a decision to
not revoke a revocable charge must be made on prudent credit principles.
The resulting loan must comply with safe and sound banking practice and
all applicable legal provisions regarding such a loan.

Paul M. Homan
Senior Deputy Comptroller for Bank Supervision

Date:  April 9, 1982