EB 92-5
BANKING ISSUANCES
Comptroller of the Currency
Administrator of National Banks
Type:  Examining Bulletin
Subject:  California Registered Warrants


TO: Department and Division Heads and All Examining Personnel.

The State of California has begun issuing registered warrants to cover a
funding gap that exists pending the legislature's approval of a budget for
the state's current fiscal year, which began July 1, 1992. This bulletin
alerts examiners to safety and soundness considerations and provides
further guidance as to the reporting treatment of registered warrants and
certain other issues discussed in the "Interagency Position On California
Registered Warrants," dated June 30, 1992.

Registered warrants drawn against unexhausted appropriations and otherwise
issued in accordance with California law are extensions of credit to the
state that constitute state general obligations as defined in the
regulations of the Office of the Comptroller of the Currency (OCC). The
term general obligation, defined in 12 CFR 1.3(g), means "an obligation
supported by the full faith and credit of an obligor possessing general
powers of taxation, including property taxation." 12 CFR 1 provides that
banks may purchase state general obligation securities for their own
account without limitation, subject to prudent banking judgment.

As a matter of prudence, banks should consider obtaining appropriate legal
opinions that any registered warrants purchased represent valid and
enforceable general obligations of the state. Banks should determine for
this purpose the extent to which they should rely on opinions of the
California Attorney General, counsel retained by other banks, or their own
counsel, depending upon their particular situations.

Although the OCC has long recognized that certain obligations may be
treated either as loans or securities depending upon the circumstances,
the OCC and the other bank regulatory agencies recognize that interagency
consistency is desirable whenever possible. Accordingly, assuming that
banks have satisfied themselves that the warrants represent valid state
general obligations, for regulatory reporting purposes, banks should
account for them as "General obligations" on Schedule RC-B, under the
category "Securities issued by states and political subdivisions in the
U.S."

Although the warrants are not rated, and are subordinate to the state's
general obligation bonds, the existence of general obligation debt ratings
on the state simplifies credit evaluation. Examiners should review the
warrants in accordance with Banking Circular 127, which defines
sub-investment quality securities as those rated below "Ba" and "BB"
(Moody's and Standard & Poor's, respectively). California's current
ratings are "Aa" by Moody's (following a downgrade on July 6) and "A+" by
Standard & Poor's (following a downgrade on July 15). Further credit
downgrades are possible if the budget problem is not resolved shortly.

In the event of a prolonged budget stalemate, examiners should pay
particular attention to potential liquidity and credit concentration
ramifications. Examiners should urge banks to adopt procedures to protect
against the purchase of unauthorized or fictitious warrants. This may
include close consultation with appropriate state officials.

Because the timing of payments on the warrants is uncertain, national
banks should have plans to address any undesired reduction in asset
liquidity which might occur due to accumulation of the warrants. Banks
should also have systems in place that accurately measure all accumulated
credit exposure to the State of California, including other California
state general obligation holdings. Banks should consider preparing
appropriate disclosure statements clarifying customer rights and
liabilities with respect to the warrants (e.g., distribution of accrued
interest income, hold policies, late returns, etc.).

Examiners may direct legal questions to Laura Plaze, Legal Advisory
Services Division (202-874-5330), and supervisory questions to Kurt
Wilhelm, Chief National Bank Examiner's Office (202-874-5070).


 


Donald G. Coonley Chief National Bank Examiner

Date:  August 10, 1992