§ 13.12. Standby letters of credit.
(a) Definition. As used in this section, the term ‘‘standby letter of credit’’ means a letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuing institution to repay money borrowed by or advanced to or for the account of the account party, or to make payment on account of an indebtedness undertaken by the account party, or to make payment on account of a default (including a statement of default) by the account party in the performance of an obligation. The term does not include commercial letters of credit and similar instruments where the issuing institution expects the beneficiary to draw upon the institution, which do not guaranty payment of a money obligation of the account party and which do not provide that payment is occasioned by default on the part of the account party.
(b) Restriction. A standby letter of credit issued by an institution shall be combined with other standby letters of credit and loans for purposes of applying the legal limitations on loans of the institution under section 306 of the act (7 P. S. § 306). Where the standby letter of credit is subject to a nonrecourse participation agreement with other institutions or banks, this section applies to the issuing institution and each other participant which is an institution in the same manner as in the case of a participated loan.
(c) Exceptions. Standby letters of credit shall be subject to subsection (b) except where one of the following conditions exist:
(1) Prior to or at the time of issuance, the issuing institution is paid an amount equal to the institution’s maximum liability under the letter of credit.
(2) Prior to or at the time of issuance, the issuing institution has set aside sufficient funds in a segregated deposit account, clearly earmarked for that purpose, to cover the institution’s maximum liability under the standby letter of credit.
(d) Disclosure. Each institution shall maintain adequate control and subsidiary records of its standby letters of credit comparable to the records maintained in connection with the institution’s direct loans, so that the institution’s potential liability thereunder and the institution’s compliance with this section may be readily determined. In addition, standby letters of credit shall be adequately reflected on the institution’s published financial statements.
Source The provisions of this § 13.12 adopted October 24, 1975, effective October 25, 1975, 5 Pa.B. 2841.
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