Standby Letters of Credit: Efficient, Low-Cost, Payment Guarantees for Multiple Funding Needs

The Seattle Bank’s Standby Letters of Credit (LOCs) offer an efficient and low-cost way for members to provide the enhanced financial support needed to attract lucrative contractual agreements with third parties.

The Seattle Bank may issue a Standby LOC—or confirm a member-issued Standby LOC—to facilitate residential housing finance, support affordable housing and economic development initiatives, assist members with asset/liability management, or to provide members with liquidity or other funding.
Seattle Bank Standby LOCs have been used to:

  • Facilitate the purchase of (or commitment to purchase) mortgage loans
  • Collateralize public deposits and interest rate swaps
  • Support the issuance of commercial paper and medium-term notes
  • Support other transactions that promote affordable housing or economic development, including projects funded with advances from the Community. Investment Program (CIP) and Economic Development Fund (EDF).

The most common reason that the Seattle Bank issues Standby LOCs is to assist our members in attracting public deposits that exceed the level covered by FDIC insurance.  Standby LOCs function as a guaranty of payment, and they enable our members to leverage the Seattle Bank’s AAA debt rating to reduce credit risk to the beneficiary (their customer). Without the support provided by our Standby LOC, a member may need to more aggressively price their products to attract or retain deposits greater than those covered by FDIC insurance.

Terms can be structured to meet specific needs. Our Standby LOCs can be issued for up to 10 years for most commercial purposes—or up to 20 years when used to finance housing or to support an interest-rate swap. Our fees are competitive, and Seattle Bank Standby LOCs benefit our members by lowering their overall transaction costs. Members must pledge sufficient collateral to cover issued or confirmed Standby LOCs.

Special Considerations for Community Investment
Standby LOCs issued to support housing or economic development may be secured on a case-by-case basis with the following collateral:

  • Investment grade obligations of state and local governments
  • Secured or federally guaranteed loans to small businesses or securities representing interests in such loans
  • Second mortgage loans and commercial real estate loans

Members must provide documentation to validate that the Standby LOC is supporting an affordable housing or economic development initiative. Standby LOCs will not be issued in connection with tax-exempt revenue bonds used to finance non-housing-related economic development projects.

To find out how a Seattle Bank Letter of Credit can work for you, please contact your Seattle Bank relationship manager.