A bank's written promise to pay a third party if the bank's customer does not repay a debt or does not perform an obligation.
A standby letter of credit puts a bank’s credit behind a customer’s promise. The lending limit rule defines it as a letter of credit, or similar arrangement, that obligates the issuer to repay money borrowed by the account party, to pay the account party’s debt, or to pay on the account party’s default in performing an obligation. It differs from a commercial letter of credit, where the issuing bank expects the beneficiary to draw as the normal way of being paid.
A business usually needs one because someone else asks for it: a landlord in place of a cash deposit, a city for site improvements, a supplier, or a project owner.
The bank underwrites it like a loan, because it may have to pay. A standby counts toward a national bank’s lending limit for that customer. For capital, a financial standby converts at 100 percent of its amount, the same as a funded loan, and a performance standby, which backs a nonfinancial obligation such as a construction contract, converts at 50 percent. Expect a fee, collateral or a reduction in your line of credit by the amount issued.
How it shows up in the data here
Standby letters of credit are not a field on this site. Banks report them on the Call Report, but the files loaded here cover loans held, loans made and unused real estate commitments. A bank that issues a standby treats it as credit to you, so the estimated largest single loan on each bank page is the figure to check first. Find banks by that estimate on the search page.
Go further
- Find lenders by loan size: Banks whose estimated largest single loan is $5 million or more.
- Legal lending limit estimate: See how much room a capital figure gives one borrower.
- Legal lending limit estimate: The most a bank can lend to one borrower, from public capital figures. Always an estimate.
- The legal lending limit, explained: A bank may not lend more than a set share of its capital to one borrower. The rule explains why a large loan gets shared, and why a lender can say a request is too big for it.
- Business line of credit package checklist: A line of credit pays for the gap between spending money and collecting it. The lender wants to see that the gap is real, that it closes, and what it can take as collateral while it is open.
Related terms
- Unused commitment: The part of a legally binding promise to lend that the borrower has not drawn yet, such as the open amount on a line of credit or the unfunded balance of a construction loan.
- Legal lending limit: The most a bank may have outstanding to one borrower by law. For national banks it is 15 percent of capital and surplus, plus 10 percent more when the extra is fully secured by readily marketable collateral.
- Loans to one borrower: The total a bank counts against its lending limit for one borrower: loans, binding commitments and standby letters of credit, plus loans to related parties that the rules combine.
- Payment and performance bond: Two surety bonds on a construction contract: one backs payment of subcontractors and suppliers, the other backs completion of the work.
- Line of credit: A commitment from a lender to advance money up to a set limit, which a business can draw, repay and draw again as its cash needs rise and fall.
- Contingent liability: A debt a person or company would owe only if something happens, most often a guaranty of someone else's loan that the borrower then stops paying.
Sources
- 12 CFR 32.2, lending limit definitions, retrieved .
- 12 CFR 324.2, capital rule definitions, retrieved .
- 12 CFR 324.33, off-balance sheet exposures, retrieved .
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.