Federal bank regulators have rejected a novel loan structure devised by NationsBank Corp. to skirt capital requirements.
The Federal Reserve Board and the Office of the Comptroller of the Currency ruled that a $450 million backup line for Fina Oil and Chemical Co. represents a long-term loan commitment for which banks must set aside capital.
NationsBank argued unsuccessfully that the deal should be treated as a short-term commitment, exempt from capital requirements.
As a result of the Fina ruling, participating banks will have to set aside capital and Fina itself will have to pay higher fees.
The impact of the ruling goes beyond the Fina credit Regulators were also sending a warning shot to other banks, said Robert Bostrom, general counsel at National Westminster Bancorp.
"It's fair to say that Fina is an example of regulatory concern" that banks may be getting too aggressive in their interpretation of risk-based capital guidelines established under the international Basel accord, Mr. Bostrom added.
Under the guidelines, banks are not required to allocate capital against loan commitments that mature in a year or less.
Though the capital rules give banks an incentive to make short-term commitments, bank customers often want the liquidity insurance that comes with multiyear commitments.
In the case of the Fina credit, which was syndicated earlier this year, NationsBank provided the Houston-based company with a 360-day backup facility that included an irrevocable offer to convert the credit into a multiyear facility.
Question of Commitment
NationsBank and its law firm, Bracewell & Patterson, argued that the irrevocable offer did not constitute a commitment.
Regulators viewed the irrevocable offer as a "commitment to make a commitment," according to Roger Pugh, assistant director of banking supervision and regulation at the Fed.
As such, it was viewed as a commitment from the start, requiring capital.
Regulators informed NationsBank of the decision by phone late last week.
"We felt like [the Fina credit] was consistent with a number of other structures in the market," said Thomas Bunn, head of loan syndications at NationsBank, in Charlotte, N.C. He declined to elaborate.
NationsBank spent about a year working on the loan structure, dubbed "ELF", for extendable liquidity financing.
The Fina deal represented the first market trial for the new structure.
Though it was successfully syndicated, some banks turned the Fina deal down because of fears that it might run afoul of bank regulators -- fears that turned out to be prescient.