lectre 13 Standby Letter of Credit.pptVIP

2007-06-12 Zhang Ailing Lecture Note 13 Standby Letter of Credit Structure Background Definition Comparisons with Commercial Documentary Credit Characteristics Types Procedures Specimen Game Rules Background (1/3) Originated in the 1800s, the United States In 1864, the National Bank Act of the United States prescribed that banks be forbidden from undertaking obligations under guarantees and that only insurance and bonding companies be allowed to issue guarantees. Background (2/3) In order to compete with foreign banks, the U. S. banks developed a new form of letter of credit, “if the borrower failed to repay the money borrowed, the issuing bank would pay the beneficiary on behalf of the borrower, and if the borrower repaid the money at maturity, the credit would be of no effect.” Such a letter of credit was in a “standby” state and hence called “a standby letter of credit.” Background (3/3) Rapidly developed in the early 1950s by American and Japanese banks in order to overcome the law in their countries which forbids banks from issuing guarantees. Till the end of 1998, the outstanding value of Standby L/C is as much as SEVEN times of the value of Commercial Documentary L/C. Definition (1) “A Documentary Credit or similar arrangement, however named or described, which represents an obligation to the Beneficiary on the part of the Issuing Bank to： i）repay money borrowed by the Applicant, or advanced to or for the account of the Applicant; ii） make payment on account of any indebtedness undertaken by the Applicant; or iii） make payment on account of any default by the Applicant in the performance of an obligation”. (the Banking Regulatory Commission of the U. S. Federal Reserve, 1977) Definition (2) Standby Letter of Credit is a bank guarantee that “stands by” in the event that a buyer does not meet his obligation for payment. In the practice of international trade, it is generally used to support an Open Account Transaction or Docume