Risks And Measures Of The Letter Of Credit In Bank

Letter of Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. With the development of international trade, because Letter of Credit can help both sides in business transactions solve the credit problem, it has become a major form of trade settlement. The banks also get earnings through this trade, which can be described as a win-win Business. However, For the disadvantage of the credit settlement itself (like complicated or high cost), as economic development, access to 90 years, the usage of Letter of Credit began to decline, according to statistics, the proportion of U.S. and European companies to use letters of credit has been reduced to 10 to 20%. It’s usage in Asia-Pacific countries also declined annually. But in developing countries, because of the unfamiliar with the credit situation of both sides in the transactions, they preferred to trust the bank credit. Credit settlement became The most common method of settlement in import and export trade of developing countries. At present, the use of letter of credit as high as 80 to 90% in China’s international trade.However, due to the changing international political and economic situation, as well as the moral crisis in commercial transactions, letter of credit also brought bank no small risk. Like the financial crisis triggered by subprime mortgage crisis in 2008, a large number of companies have collapsed because of it’s influence, a series of high reputation company including Lehman Brothers, Bear Stearns, Merrill Lynch, GM which had high ratings went bankrupt, and even some Countries and some U.S. states and cities also declared bankrupt, banks will inevitably have to face bankruptcy caused by uncollectible amount under the credit problems. Faced with such a complicated international economic situation, how to control risk in the credit settlement, became the top priority of banks.This paper is divided into four parts. The first part describes the writing background and purpose; and the second part introduces the risk of letter of credit settlement from three aspects, including the customers, banks, and the market. The third part focuses on the risk of suspension of payment of the credit. In conclusion, PartⅣon the basis of the first three parts made a number of relevant policy recommendations.