Standby Letters of Credit And Other Bank Guaranties: Revisited

1 04 2019

 By Timothy D. Naegele[1]

The United States has experienced periods of boom and bust since its rich history began.  Such is the basic nature of economic cycles, and of our capitalist system that governs global economic activity.  Like the laws of gravity, certainties exist in economics too.  What goes up, comes down—sometimes with a resounding thud.

When crises arise, as they will, public policymakers in America and other countries must be prepared to deal with them in a responsible and effective manner, and have tools at their disposal to do so.  One area of economic activity that few Americans know about, much less comprehend, involves the staggering amounts and extensive uses of guaranties—issued globally by banks, other financial institutions, businesses, governmental agencies[2], and individuals themselves.

According to the latest figures published by the Fed, the aggregate amount of “Financial standby letters of credit and foreign office guarantees” in the fourth quarter of 2018 stood at more than a half-trillion dollars—$566.8 billion, to be exact—which seems exceptionally low.[3]  My newest law review article deals with standby letters of credit and other bank guaranties, and with their counterparts in other areas of domestic and international commerce.[4]

The article builds on an earlier discussion of such issues, before the U.S. Senate more than 40 years ago.[5]  Since then, crises have come and gone; and the issue today is what public policymakers have learned in the interim about how to anticipate and address them.  As I have written:

Guaranties have been used in commercial transactions for centuries, in various contexts and in various parts of the world.  Banks have not been alone in their willingness to engage in such undertakings, and have sought new methods of characterizing guaranty transactions in recent years, in an effort to circumvent legal bars as to these practices.

. . .

A guaranty is a promise by one party to answer for the payment of some debt, or the performance of some obligation, in case of the default of another party, who is in the first instance liable for such payment or performance.  A standby letter of credit is merely one form of a guaranty which has been subject to increased usage by banks in this country during recent years.  There are a variety of reasons why the use of standby letters of credit has increased.  The primary reason from a legal standpoint is that our courts have held that national banks are not permitted to guarantee the obligations of another party.

The national banks involved have been imaginative enough, in responding to this situation, to fashion an instrument which they contend is not an illegal guaranty but is akin to a traditional letter of credit, as a means of avoiding any legal or regulatory constraints. . . .

[T]he standby letter of credit is a means by which a bank permits its customer to make use of the bank’s credit standing and goodwill in the customer’s business.  . . .  [T]he bank is in effect “selling off” its credit to others. . . .

. . .

Quite obviously, instead of “lending” its credit[] in certain transactions, the bank itself could provide funds directly to its customer.  At the time the customer seeks such funds, however, the bank may not . . . wish to lend such monies.

. . .

[T]he use of such instruments abroad has been sanctioned owing to the fact that the laws of several countries authorize banking institutions chartered thereunder to engage in such undertakings.  Accordingly, it has been determined that American banks would be at a severe competitive disadvantage if their foreign counterparts were permitted to guarantee certain transactions, while American banks competing for the same business were prohibited from doing so.  It is questionable, however, whether there has ever been a conscious assessment of the risks which attend foreign transactions of this nature vis-a-vis the benefits derived therefrom.

. . .

Banks are special institutions subject to rules designed to assure their soundness for the benefit of depositors and to maintain public confidence in the banking system.  The potential bank liability on a standby letter of credit, and consequent risk of loss to the depositors and shareholders of the bank, is just as real as if the transaction had been a typical lending transaction by the bank.

. . .

It is appropriate to focus on the use of guaranties in the standby letter of credit context because banks are reluctant to disclose fully or describe the various types of guaranty transactions, and because it presents a useful illustration of a high risk situation once one is able to cut through the complexities of the transactions involved.

. . .

A fee of from one-quarter of one percent to one percent, or as much as $1 million on a $100 million standby letter of credit financing, is collected by the bank for its services; and the bank is not required to commit any funds of its own, unless a default occurs.[6]

No one should deny the opportunity for U.S. banks and other financial institutions to make a profit and serve their customers, as long as they act responsibly and legally, and their solvency and stability are not put at risk.  However, aggregating more than a half-trillion dollars today on the part of American banks and other financial institutions alone, standby letters of credit and other bank guaranties present enormous potential risks to the U.S. and global economies.


Capitol and flag


© 2019, Timothy D. Naegele

[1]  Timothy D. Naegele was counsel to the United States Senate’s Committee on Banking, Housing, and Urban Affairs, and chief of staff to Presidential Medal of Freedom and Congressional Gold Medal recipient and former U.S. Senator Edward W. Brooke (R-Mass). He and his firm, Timothy D. Naegele & Associates, specialize in Banking and Financial Institutions Law, Internet Law, Litigation and other matters (see and Timothy D. Naegele Resume). He has an undergraduate degree in economics from the University of California, Los Angeles (UCLA), as well as two law degrees from the School of Law (Boalt Hall), University of California, Berkeley, and from Georgetown University. He served as a Captain in the U.S. Army, assigned to the Defense Intelligence Agency at the Pentagon, where he received the Joint Service Commendation Medal (see, e.g., Mr. Naegele is an Independent politically; and he is listed in Who’s Who in America, Who’s Who in American Law, and Who’s Who in Finance and Business. He has written extensively over the years (see, e.g.,, and can be contacted directly at

[2]  For example, in a lawsuit where a judgment of more than $4 million was rendered against a bank, the bank’s federal regulator was permitted to issue a letter of credit (or guaranty) on behalf of the bank, which allowed it to appeal the verdict.

See Timothy D. Naegele, The Bank Holding Company Act’s Anti-Tying Provision: Almost 50 Years Later—Part I, 135 BANKING L. J. 315, 336-338 (June 2018) (Naegele 2018, Part I) [Timothy D. Naegele-Part I] (discussing Lucken et al. v. Heritage Bank National Association et al., U.S. District Court for the Northern District of Iowa, Case # 5:16-cv-04005, PACER Docket Sheet entry 197, paragraphs 6-8 (“Pursuant to Federal Rule of Civil Procedure 62(d), if an appeal is taken, the appellant may obtain a stay by supersedeas bond.  . . . Defendants have obtained . . . a Letter of Credit in favor of Plaintiffs for an aggregate amount not to exceed $5,000,000.00, available through Federal Home Loan Bank of Des Moines, Des Moines, Iowa.  . . . In addition, Plaintiffs and Defendants have executed an agreement setting forth the events of default which would trigger calling upon the letter of credit”)) [PACER Docket Sheet entry 197]; see also (“The Bank Holding Company Act’s Anti-Tying Provision: Almost 50 Years Later”)

[3]  See off-balance-sheet-items

[4]  See Timothy D. Naegele Standby Letters of Credit

[5]  See Timothy D. Naegele, Standby Letters of Credit And Other Bank Guaranties, Compendium Of Major Issues In Bank Regulation, Committee On Banking, Housing And Urban Affairs, United States Senate 621 (May 1975) [Naegele-Standby Letters of Credit And Other Bank Guaranties].

This Senate submission and its attachments constitute a useful starting point for the discussion of this subject, and they will be referred to throughout this article.  The author respectfully suggests that it might be useful for the reader to review them.

[6]  See id. at 626-629, 633, 634, 635.



8 responses

1 04 2019
H. Craig Bradley


How are we possibly going to pay for today’s spending by our government in California? Borrow and spend. Who secures our credit? Of course, we the property owners do, as our properties are collateral for Gov. Newsome’s expanding social spending ( Medical for all ). What happens when the heavy hitters ( high income producers ) leave California? In short, trouble.

1 04 2019
Timothy D. Naegele

Thank you, Craig, for your comments.

Yes, California governmentally is bizarre. This has been true for a very long time, with no positive end in sight.

The rest of the nation recognizes this, and has little or no empathy.

3 04 2019
H. Craig Bradley


Needless to say, high overall tax rates ALWAYS result in low rates of economic growth anywhere in the world. So, its not only about the overall size of government, its also the level of taxation just as much. “The People” seem to have been so brainwashed (public schools ?) they can no longer recognize this simple correlation. You can bet the Liberal elites and their cronies sure do.

Sadly, its the same pattern of recognition currently exists in most other states, as well. The whole country will follow California down the Marxist Road in about 10 more years, just as soon as President Trump finishes his two terms in office. AOC and Medicare for All ?

In the future, collectivism with a vengeance is coming eventually to America. Capital will flee to Asia when it does, deflating all the asset classes that were inflated by capital flight (flows) from other countries, principally Europe and China. The dollar will weaken at that time, and we will then have our twin goals of high inflation and high interest rates. Stagflation is a com’in to town.

3 04 2019
Timothy D. Naegele

Thank you too, Craig.

What you posit is a recipe for disaster once President Trump leaves office, unless his successor is like minded and equally conservative.

I do not disagree. Indeed, i believe that if Hillary Clinton had been elected, we would have been heading for a repeat of the “Great Recession” of 2008, or far worse.

3 04 2019
3 04 2019
Timothy D. Naegele

Thank you, Craig. Student debt is the government’s largest asset, yet the Left and universities seek forgiveness.

The universities have ratcheted up their costs, with the expectation that they will be bailed out, which is irresponsible if not insane.

Bricks-and-mortar universities may become dinosaurs as more higher education shifts online. Again, the universities will want/demand bailouts, which must be denied.

They pushed the student loans to increase their coffers, and fund their Leftist-tenured professors; and they saddled their students with oppressive student debt in the process.

As I have written before, such educational institutions are dinosaurs, just like newspapers.

See, e.g., (“Are Colleges Dinosaurs?“) and (“Grad-School Loan Binge Increases Debt Worries”) and (“Newspapers Are Dead, Not Dying“)

3 04 2019
H. Craig Bradley


Mike has been preaching ( “Dirty Jobs” Cable series) on hundreds of thousands of high paying, (skilled) blue collar jobs going unfilled for lack of qualified applicants. Companies pay good wages for skilled help with a few years of experience behind them. College no longer qualifies.

We are not adapting to economic changes as a nation. Today, the best pay goes where its needed and a college degree is not where to find such employment for the majority of college students anymore. Been that way for at least 15 years now, yet we can’t seem to change our national priorities. We are simply addicted to debt, be it student debt, auto loan debt, housing debt, credit card debt, or national debt. All the same: digging our (national) great big hole.

Time to Get Smart, not “educated” :

3 04 2019
Timothy D. Naegele

I agree, Craig; and I agree with Mike Rowe—with whom I have agreed for a long time.

As I have written—which of course is the much bigger and overriding issue:

[T]his is war. It is multi-faceted and multi-dimensional, and not simply a culture war; and it must be treated as such.

See (“The Treasonous Left’s Attempt To Destroy Our Electoral College”)

The latest, as you know, are the scumbag Jerry Nadler’s efforts to subpoena the entire Mueller report; and attack and destroy the Trump presidency nonstop.

See, e.g., (“House Judiciary Panel Approves Subpoenas for Mueller Report”) and (“House panel authorizes subpoena for Mueller report as Trump backs away from calls for public release”)

Nadler and Maxine Waters, Elizabeth “pocahontas” Warren and countless others are among the many reasons why lots of us left the Democratic Party, and will never go back.

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