Letters of credit (L/Cs) are being used as one component in mechanisms introduced to maintain liquidity in the US financial and commercial sectors in the wake of last month's terrorist attacks on New York and Washington.

The economic fallout from the September 11 atrocities has already made an impact on US consumer confidence and card issuers have reported higher delinquency rates amongst credit card users.

Such indicators have however prompted federal bank and thrift regulators to introduce measures to prevent the US economy falling into a full-blown recession. These measures are partly responsible for enabling banks to sustain or even increase the levels of support and lending provided to companies affected by late or non-payment from customers as a result of the attacks.

Private and public efforts

According to US treasury secretary, Paul O'Neill, it is "thanks to careful planning and preparation for potential disaster, and swift action by both the private and public sectors, that the US' financial system is operating with only temporary disruption."

Agencies including the Federal Reserve Board, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration (NCUA) have issued guidance to the institutions they supervise, encouraging them to work with customers that can demonstrate a need for support as a direct or indirect result of the attacks. Additional support for these customers includes easing credit terms, waiving late payment fees, extending loan terms and restructuring debt obligations.

Federal support

For its part, the financial sector has pumped billions of extra dollars into the market to maintain liquidity and has reportedly made significant use of standby L/Cs in doing so, thereby putting pressure on banks' balance sheets.

Regulators have however been supportive of these circumstances. The Federal Reserve has extended record credit levels to banks while the federal banking agencies have issued notice to all banks that they recognise the need at this time for eroded capital ratios.

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