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Appeal of Violation of 12 U.S.C. § 161 (Fourth Quarter 2010)


A federal branch (the Branch) appealed the violation of 12 U.S.C. § 161 Reports to the Comptroller of the Currency cited in the most recent Report of Examination (ROE).


The basis of the bank's appeal stemmed from the decision by the Supervisory Office to discount the guarantee from the Head Office (HO) that the Branch would not sustain any loss in relation to three defaulted letters of credit (L/Cs).

In the second quarter of 2009, the Branch was notified by two customers of their inability to meet their debt obligations related to the L/Cs. The Branch honored the L/Cs during the third quarter of 2009. The HO provided an explicit guarantee to the Branch as assurance that it would not incur any losses. The Branch took steps to secure their position as a creditor to the two borrowers. The Branch obtained partial recovery from one borrower in the first quarter of 2010. No funds were obtained from the second borrower. The HO covered the losses to the Branch for both loans during the first quarter of 2010.


The ombudsman conducted a comprehensive review of the information submitted by the Branch as well as documentation supplied by the supervisory office. The ombudsman relied on 12 USC §161and guidance provided in the Comptroller's Handbook for Federal Branches and Agencies Supervision, Comptroller's Handbook for Review of Regulatory Reports, and the Comptroller's Handbook for Rating Credit Risk (Handbooks) in making the determination.

Using the standards and guidance provided in the Handbooks, the ombudsman determined the Supervisory Office appropriately applied the credit risk ratings and supported the violation of 12 USC § 161. Once the Branch became aware of their customers' financial distress, it was obligated to recognize the probability of default. This was also the decision point for the HO to determine its level of support in the event the L/Cs was presented for payment. Once the Branch honored the L/Cs, the HO level of support should have been enforced.

Without reasonable assurance that substantial repayment of the debt would occur within a relatively short period of time, the Branch could not support maintaining these credits on its books as valuable assets. The credits should be recognized as loss in the quarter in which they occurred. Accordingly, the call reports should be re-filed for the quarters ended September 30, 2009 and December 31, 2009 because the misstatement of total assets and total liabilities represented a significant error.