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