A US lawyer has warned that regulations expected to be introduced by Washington will require US companies to meet a higher burden of proof than big banks in litigation and that L/C risks will be transferred from banks to companies.

California-based attorney Jeremy Weinstein says that under the regulations, letters of credit (L/Cs) issued by US branches of EU banks are subject to "arbitrary EU bail-in haircuts".

Difficult questions

A bail-in is the rescuing of a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings while a haircut is the difference between the market value of an asset used as loan collateral and the amount of the loan.

In a letter to the Financial Times, Weinstein says regulations such as those proposed raise several questions for US companies. "How does a credit manager price the risk of not being allowed to close out hedges when a bank defaults. How does one assess risks from entities so unpredictably resolved?" he asks.

Risk transfer

Risks have been increased and transferred from banks to companies Weinstein says and concludes that, "the uncertainties of ad hoc outcomes and impaired legal rights create serious risks for companies."

A comment posted online about Weinstein's letter says to its writer, "your point about L/Cs is especially worrying. But thanks to you, I shall ensure my firm requires a suitable standby L/C when we take an L/C issued by an EU bank."

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.