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You value the business provided by your municipal
clients, but the required pledging of securities can be onerous
and costly. You need an alternative that is efficient and
flexible yet still provides your clients with the security
they demand. A letter of credit issued by the Federal Home
Loan Bank of Boston can provide you with security and convenience
along with the backing of an AAA-rated financial institution.
Because of our strong credit position, many
municipalities will accept a letter of credit issued by FHLB
Boston in lieu of pledging securities for municipal deposits.
This efficient, low-cost option allows you to retain securities
for liquidity and other purposes. We offer an easy application
process and flexible terms and conditions.
How Letters of Credit Work
To cover municipal deposits, the member would apply
for a letter of credit, issued by FHLB Boston. The member is
referred to as the applicant,
while the municipality is the beneficiary. A letter
of credit must have an expiry date and can only be cancelled
with the beneficiary’s consent. Typically, the letter
of credit will call for presentation of a statement by the
municipality certifying that the member has failed to meet
the terms of the agreement. Should the municipality submit
such a statement to FHLB Boston, the letter of credit guarantees
payment to the municipality as long as the statement meets
the terms of the letter of credit. FHLB Boston would honor
the obligation of the member bank to redeem deposits to the
municipality. At that time, an advance will be created against
the member’s
account.
Collateral and Capital Requirements
A letter of credit issued by FHLB Boston must be collateralized, but any form
of collateral that is acceptable for advances may be used, including 1-4 family
loans, which may already be pledged in your blanket pledge. There is also a
requirement to purchase stock, but only half the amount required for
advances.
Pricing
Prices range from nine to 25 basis points times the amount
of the letter of credit, depending on its size.
Learn More
For more information on using letters of credit to cover
your municipal deposits, please consult your relationship
manager at 888-595-8733.
In our Solutions newsletter,
see how some members are using LOCs to secure municipal deposits.
Our triple-A-rated letters
of credit are available in maturities of up to 10 years.
Please see our Products
Policy.
This statement does not purport to disclose
all of the risks and other material considerations associated
with letters of credit. Members should not
construe this disclosure statement as business, legal, tax,
or accounting advice from FHLB Boston. Members should consult
with their own business, legal, tax, and accounting advisers
with respect to letters of credit and should refrain
from using them unless they have fully
understood their terms and risks.
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