Dear sir,
I know lc issued by non banks or corporate posses significant risks as there is no third party guarantee. If a bank issues a lc on its own behalf, does it retain the same risk?
Letter of credit issued by bank
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Letter of credit issued by bank
[quote="jim"]Dear sir,
I know lc issued by non banks or corporate posses significant risks as there is no third party guarantee. If a bank issues a lc on its own behalf, does it retain the same risk?[/quote
There are three tangible advantages to the bank insurance and handling of letters on its own behalf: namely that banks have the operational expertise to handle issuance and presentation under letters of credit in professional manner, that they have tradition of independence from the underlying transaction which is the basis of the commercial reputation of the letter of credit, and that in virtually all countries banks are specially regulated with a view toward protecting those who rely on their undertakings.
However, there is the risk of creditworthiness of the issuer and country risk. The consequences of insolvency is a matter whether the insolvency is that of a bank or non-bank issuer. In either case, the beneficiary assumes the risk of the creditworthiness of the issuer unless it is offset by obtaining confirmation or Credit issuance.
I know lc issued by non banks or corporate posses significant risks as there is no third party guarantee. If a bank issues a lc on its own behalf, does it retain the same risk?[/quote
There are three tangible advantages to the bank insurance and handling of letters on its own behalf: namely that banks have the operational expertise to handle issuance and presentation under letters of credit in professional manner, that they have tradition of independence from the underlying transaction which is the basis of the commercial reputation of the letter of credit, and that in virtually all countries banks are specially regulated with a view toward protecting those who rely on their undertakings.
However, there is the risk of creditworthiness of the issuer and country risk. The consequences of insolvency is a matter whether the insolvency is that of a bank or non-bank issuer. In either case, the beneficiary assumes the risk of the creditworthiness of the issuer unless it is offset by obtaining confirmation or Credit issuance.