Standby Letters Of Credit Research Articles

Bank Guarantee: Significance and Regulation Issues of the solvet et repete Principle

Bank Guarantee: Significance and Regulation Issues of the solvet et repete Principle

A Study on the Defence of Refusal for the Payment of Issuing Bank under Standby Letter of Credit and Documentary Credit

A Study on the Defence of Refusal for the Payment of Issuing Bank under Standby Letter of Credit and Documentary Credit

Regulating Financial Guarantors: Abstraction Bias As a Cause of Excessive Risk-taking

To improve financial regulation, scholars have engaged in extensive research over the past decade to try to understand why systemically important financial institutions engage in excessive risk-taking. None of that research fully explains, however, the unusually excessive risk-taking by financial guarantors such as bond insurers, protection sellers under credit-default-swap (CDS) derivatives, credit enhancers in securitization transactions, and even issuers of standby letters of credit. With tens of trillions of dollars of financial guarantees outstanding, the potential for failure is massive. This Article argues that financial guarantor risk-taking is influenced by a fundamental anomaly in perceiving risk. Financial guarantors commit to pay out capital only if certain future contingencies occur, in contrast to banks and other financial institutions that pay out capital—for example, by making a loan—at the outset of a project. As a result, financial guarantors are subject to a previously unrecognized cognitive bias, which the author calls “abstraction bias,” that causes them to underestimate the risk on their guarantees. The Article provides empirical evidence that supports the existence of abstraction bias and its influence on financial guarantors. The Article also examines how an understanding of abstraction bias can improve the regulation of financial guarantor risk-taking.

CONTRACT OF KAFĀLAH (GUARANTEE) IN ISLAMIC FINANCE: EXTENDING THE FRONTIERS OF ISLAMIC LAW

In the traditional application of kafālah (guarantee) agreementunder the Islamic law, the kāfil (guarantor) is not expected to makeprofit from offering to guarantee. However, in the contemporaryIslamic financing, a huge volume of national and transnationaltransactions are built around kafālah in form of bank guarantee,standby letter of credit and shipping guarantee. The Islamicfinancial institutions have thus redesigned the traditional conceptto take advantage of the robust return, like their conventionalcounterparts, accruable from kafālah transactions. This raisesfundamental question of possible infraction of the Shariah orcontrivance of legal device (hiyal) to permit the impermissible.This paper therefore, conducts a study of the traditional conceptof kafālah with a view to examining the possible contrivancein and/or infraction of Shariah in the process of its redesignand application. The goal is to screen the product for Shariahcompliance and the methodology adopted is qualitative. Itconcludes that rather being a contrivance of Islamic traditionalprecept the practice is an ingenious extension of the frontiers ofIslamic law to the contemporary needs.

Remedies to Fraud in Documentary Letters of Credit: A Comparative Perspective / Opravné Opatrenia Pri Podvodoch S Dokumentárnymi Akreditívami: Komparatívna Perspektíva

Abstract Article 4 of the Unified Customs and Practices of Documentary Letters of Credit establishes the notion of autonomy principle by separating credit from underlying contract between account party and beneficiary. Article 5 by recognizing the autonomy principle confirms that effectuate the payment under credit, banks only deal with documents and not with goods. As a result, while documentary letters of credit are meant to facilitate the process of international trade, their sole dependency on compliance of presented documents to bank by beneficiary to actualize the payment will increase the risk of fraud and forgery in the course of their operation. Interestingly, UCP (currently UCP600) takes a silent status regarding the problem of fraud in international LC operation and leaves the ground open for national laws to provide remedies to affected parties by fraudulent beneficiary. National Laws have different approaches to the problem of fraud in general and fraud in international LC operation in particular which makes the access of affected parties to possible remedies complicated and difficult. Current paper tries to find answer to the questions of (i) what available remedies are provided to affected parties in international LC fraud by different legal systems? (ii) And what are conditions for benefiting from such remedies under different legal systems? In achieving its objective, paper will be divided in two main parts to study remedies provided by intentional legal frameworks as well as the ones offered by national laws. Part one will study the position of UCP and UNCITRAL Convention on Independent Guarantees and Standby Letters of Credit (UNCITRAL Convention) and remedies, which they provide to LC fraud in international trade. Part two in contrary will study available remedies to LC fraud and condition for access them under English and American legal system.

Investigating the Policy of International Trading Companies of Iran in Using Letters of Credit

<p>Letters of credit play a crucial role in international trade. In this study, we investigate the most preferable characteristics of letters of credit for the international trading companies in Iran. We seek to investigate which kind of guarantee (commercial L/C or standby L/C) they prefer to secure the performance of their client's obligations. Studied companies were 20 international trading companies in Tehran, from which 50 experts were participated in our survey study. For measuring the participants and their policy in using letters of credit, a questionnaire in Persian was designed. For analyzing data we used statistical tests (One-sample t-test). Data showed that <em>being</em><em> a guarantee</em>, <em>integration</em>, <em>documentary conditions</em>, and <em>secondary payment mechanism </em>are four important reasons for international trading companies in Iran to use letters of credit in their contracts. Statistical results showed that “being a guaranteed credit” is the most important factor with a mean of 3.660 ± 1.135.Also, we found significant relationship between these four factors and the L/C usage policy (p <0.01, and p< 0.05). We concluded that they mostly prefer standby letters of credit for securing their transactions.</p>

The Domestic Standby Letter of Credit Desk Book for Business Professionals, Bankers and Lawyers

The following preface and chapter describe an effort to convince readers (business people, bankers, and lawyers) that the standby letter of credit is a handy, flexible, commercial device that can support virtually any business activity and often without a battery of lawyers or letter of credit “experts.” The law of standby letters of credit is unique but not exotic. Any educated professional can understand it and can use the standby to enhance the value of an unperformed promise.

Credit enhancement factors for the financing of independent power producer (IPP) projects in Asia

Public and private parties give a number of guarantees and commitments in the form of credit enhancement for successful investment and implementation of independent power producer (IPP) projects in Asia. A research is thus conducted to find the suitable credit enhancement factors for these projects. From 27 out of 28 credit enhancement factors that were validated by IPP professionals, factor analysis revealed five factor groupings which are — (1) shareholders' credit enhancement, (2) host government's credit enhancement, (3) multi-lateral development banks (MDBs), export credit agencies (ECAs) and other parties' credit enhancement, (4) capital structure mechanism, and (5) commercial bank's credit enhancement. From these critical credit enhancement groupings, it is further noticed that contingency equity support, standby credit guarantee, subordinated debt mechanism, financing with political risk insurance from MDBs and ECAs, escrow account, and standby letter of credit are of great importance for financing decision of IPP projects in Asia.

Bank Demand Guarantee and Standby Letter of Credit as collaterals in International Trading Operations

Bank demand guarantees have become an established part of international trade. This financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships. The instruments are designed to reduce the risk taken by each party. In this sense bank demand guarantees are similar to standby letters of credit. Similarities and differences among them are the subject of this paper.

Standard for Examination of Documents and Liability of Issuing Bank in Standby Letter of Credit

Standard for Examination of Documents and Liability of Issuing Bank in Standby Letter of Credit

Enforcement of Arbitration Agreement in the Dispute of Standby Letter of Credit

Enforcement of Arbitration Agreement in the Dispute of Standby Letter of Credit

Guaranteeing the guarantee law in Pakistan: the UNCITRAL Convention and the guarantee laws of Pakistan, the UK and the USA

This article intends to provide a comparative analysis of the UNCITRAL Convention on Independent Guarantees and Standby Letter of Credit and the relevant laws of three jurisdictions, i.e. UK, USA and Pakistan with a view to explain their similarities and differences. The objectives are indeed not to yield any innovative ideas but to shed light on the Pakistani law as compared to the international standards set forth by the UNCITRAL Convention and adherence to these standards by laws of advanced jurisdictions like UK and USA. After a brief description of standby letters of credit and independent guarantee, we shall introduce the UNCITRAL Convention, followed by a comparative analysis. In our conclusion we shall endeavour to justify the need for Pakistan to accede to the Convention or bring legislation to conform to international standards in the field of guarantee law.

A Study on Governing law and Fraud of the United Nations Convention on Independent Guarantees and Standby Letters of Credit

A Study on Governing law and Fraud of the United Nations Convention on Independent Guarantees and Standby Letters of Credit

The Evolution of Credit Card Structures

Since the first true credit card securitization in 1986, credit card structures have evolved from a mortgage pass-through structure, tweaked to accommodate revolving credit card balances, to a multi-asset-pool structure. The interest-only period and the rapid-amortization period are two structural elements that continue to serve as the core of revolving asset structures. A standby letter of credit and reimbursement agreement, used for credit enhancement, was replaced by a loan agreement along with a cash collateral account, then a collateral investment amount, and then a collateral interest. New accounting rules, allowing issuers to treat debt securities as a sale of receivables backing those securities, facilitated issuance of notes to capital markets investors worldwide and facilitated the ?delinking? of securities providing credit enhancement from any particular securities being enhanced. Now credit card issuers are dealing with new challenges including: 1) a proposed amendment the SFAS 140 that could call into question traditional structural features essential to achieving a highly rated transaction and the reissuance of securities common with commercial paper programs; and 2) new disclosure rules for asset-backed securities (ABS) proposed by the SEC that could exclude securities issued by a trust that is backed by differ

Evidence of predictability in the cross-section of bank stock returns

In this paper, we examine the predictability of the cross-section of bank stock returns by taking advantage of the unique set of industry characteristics that prevail in the financial services sector. We examine predictability in the cross-section of bank stock returns using information contained in individual bank fundamental variables such as income from derivative usage, previous loan commitments, loan-loss reserves, earnings, and leverage. We find that variables related to non-interest income, loan-loss reserves, earnings, leverage, and standby letters of credit are all univariately important in forecasting the cross-section of bank stock returns. Surprisingly, neither book-to-market nor firm size is important in our sample. We examine whether this cross-sectional predictability is due to increased risk, or another explanation, such as investor under or overreaction. Our results suggest that this predictability is not due to increased risk, but rather is consistent with investor underreaction to changes in banks’ fundamental variables. Furthermore, out-of-sample testing demonstrates this underreaction appears to be exploitable using simple cross-sectional trading strategies.

Legal management of machinery failures: Legal instruments securing performance and safety

Safety engineering aims at reducing the incidence of failure. In order to limit the loss in cases of failure, purchasers of plant equipment and machinery seek to protect themselves in various ways. The level of legal protection available varies considerably. An assessment is made of the value of various types of legal protection usually found in international plant equipment and machinery contracting. In particular, the following are reviewed. (i) Comfort letters are assurances issued by the contractor or its parent company. The legal value of letters of comfort is very limited and in many cases enforceability is non-existent. (ii) Warranties are either legal warranties available under the national law applicable to the contract and as such subject to legal prerequisites or formalities sometimes not fully contemplated by the parties, or express stipulations of the parties and as such are subject to the enforceability and construction of the terms chosen. (iii) Ondemand guarantees provide a high degree of comfort as collateral for securing warranties. The unfair calling of on-demand guarantees, and any disparity in the legal evaluation of on-demand guarantees under different legal systems are areas of major concern. The rules published by the International Chamber of Commerce (ICC) and the Convention drafted by UNCITRAL are discussed. (iv) Stand-by letters of credit in documentary form provide a high degree of security to both the contractor and the buyer. The documents to be tendered under stand-by letters of credit are capable of providing reliable legal evidence in cases of failure. Documentary letters of credit are subject to the ICC Uniform Customs and Practices for Documentary Credits (UCP 500). They enjoy worldwide reputation and secure informity in their application. (v) Sureties in the USA are reliable and effective devices that industry has developed over the years. A surety company guarantees the timely and conforming completion of construction and plant contracts. The underwriting company supervises the progress of the contract and steps in or replaces the contractor in cases of failure. Unfortunately, the activities of the surety companies traditionally is restricted to the USA, and some time will pass before a surety industry will develop in other parts of the world. Recommendations are made on how to manage the risk of failure from a legal point of view. The use of effective forms of legal protection is an indispensable aspect of safety engineering and high wire risk management.

The underinvestment hypothesis and off-balance sheet direct credit substitutes

Prior tests of the underinvestment hypothesis, as an explanation of why banks use off-balance sheet direct credit substitutes, are deficient in econometric technique and in their use of U.S. data which is likely to be strongly distorted by regulation. In contrast we test the hypothesis on Australian data which is relatively free of the regulatory distortions affecting prior studies and examine two types of off-balance sheet direct credit substitutes, namely standby letters of credit and bill endorsements. The empirical results lend support to the underinvestment hypothesis.

United Nations: UN Convention on Independent Guarantees and Stand-by Letters of Credit

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Third-Party Certification in New Issues of Corporate Tax-Exempt Bonds: Standby Letter of Credit and Bond Rating Interaction

This paper expands the commercial bank certification literature by examining the role of banks as issuers of standby letters of credit in the corporate tax-exempt debt market. While considerable evidence for such a role is observed in the equity markets, little has been done to focus on the debt markets. The certification influence of the bank is confirmed as the market reacts positively to not only the employment of the letter of credit but also the quality of the bank providing this form of credit enhancement. The results also substantiate the role of the rating agency as the principle means by which the bank certification effect is transmitted to the market.

Standby letters of credit and bank capital: Evidence of market discipline

Market discipline, if it exists and is important, should link bank decisions together and have an impact on the way decisions are made. The relationship between the issuance of standby letters of credit and primary capital is modeled in the context of market discipline and then estimated. The hypothesis that market discipline causes a joint relationship between bank capital and standby letter of credit decisions for banks that are active participants in the standby market or that rely heavily on purchased funds is tested and cannot be rejected.