Article by Paul R. Verkuil
Five years ago I wrote an article that discussed a then recent phenomonon in bank lending practices, the use of the letter of credit as a device to ensure the obligation to pay money. The essential thesis of the article was that these "standby" letters of credit posed new risks and were premised upon different banking assumptions than the traditional letter of credit used to facilitate the sale and transfer of goods. It was suggested that the unregulated use of these standbys could lead to an unprecedented series of bank failures. The prescription offered was a legislative reform package that would distinguish standbys from traditional letters of credit and subject them to more exacting regulatory control. In the intervening years, activity on banking and regulatory fronts has confirmed the seriousness of the earlier predictions. In particular, the failure of the United States National Bank (USNB) in San Diego brought to light the serious deficiencies in regulation of standbys. This followup comment will focus upon the judicial and legislative developments that have occurred in the last five years, including the events surrounding the demise of USNB. Emphasis will be placed on an analysis of a regulatory reform bill that recently passed the United States Senate.
About the Author
Paul R. Verkuil. Dean and Professor of Law, Tulane Law School. The author appeared as an expert witness (called by the FDIC) in First Empire Bank v. FDIC, No. 74-468-N (S.D. Cal. 1977), modified, 572 F.2d 1361 (9th Cir. 1978), and testified at the hearings on S. 2347, a bill to regulate standby letters of credit. The case and the bill are discussed herein. See notes 13, 22 infra.
Citation
53 Tul. L. Rev. 314 (1979)