The department's opinion was requested as to whether a bank, which was to issue a letter of credit, could for purposes of computing lending limits under section 103(1) of the Banking Law, exclude those portions of its obligation under such letter of credit for which it held irrevocable participation agreements from other banking institutions. The letters of credit which were the subject of the inquiry were used to back up commercial paper issued by corporate borrowers.

The department noted that the primary purpose of the lending limits requirement is to prevent undue exposure to the credit risk of any one borrower, and that such exposure is effectively reduced by irrevocable participation agreements.

Accordingly, the department concluded that the lending limits need only apply to that part of a letter of credit commitment retained by the “lead” bank or trust company provided (i) the participation agreements with other banks are irrevocable and entered into at the same time as, or prior to, the issuance of the letter of credit, and (ii) all participating banks are also irrevocably committed to continue their participation in any “roll-over” of the letter of credit that the lead bank is obligated to undertake.

DATED: October 2, 1972