Question

Regarding the type of liability for the bank, how do a Letter of Credit (L

Q: Answer-Regarding the type of liability for the bank, how do a Letter of Credit (LC) and a Bank Guarantee (B...

The LC creates a Primary liability for the Bank does not wait for default to happen, whereas a Bank Guarantee creates a Contingent liability dependent on the happening of an event like non-payment by the applicant.

C and a Bank Guarantee (B
G differ?

A For an LC, the bank's liability is contingent on the applicant's default; for a BG, the liability is primary.

B For an LC, the bank's liability is primary and does not wait for a default; for a BG, the liability is contingent on the non-payment/default by the applicant.

C Both instruments impose a strictly contingent liability that only triggers after 90 days.

D Neither instrument carries any liability for the bank; the risk lies entirely with the trader.

E For an LC, the liability is secondary to the insurance provider, whereas for a BG, the bank acts as a co-borrower.

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