DEFINITION of 'Bank Letter Of Credit Policy'

An insurance policy that allows U.S. banks to confirm letters of credit issued by foreign financial institutions, facilitating the purchase of domestic exports. The policy was established by the Export-Import Bank of the United States and insures the domestic bank against the possible default of the foreign institution.

BREAKING DOWN 'Bank Letter Of Credit Policy'

Remember, banks take on additional risk when dealing in overseas transactions. Political risk, such as warfare or government intervention, can wipe out a borrower's ability to reimburse the bank. Furthermore, in smaller, less stable nations, foreign exchange risk can be very large. The policy protects banks against any inconvertibility arising from foreign exchange issues.

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RELATED FAQS
  1. When is it necessary to get a letter of credit?

    Capitalize on assets and negate risks by using a letter of credit. Letters of credit are often requested for buying, selling ... Read Answer >>
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    A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure ... Read Answer >>
  3. How do standby letters of credit help facilitate international trade?

    Find out how standby letters of credit can help facilitate international trade by providing an incentive for banks to vouch ... Read Answer >>
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    Learn what a standby letter of credit is and how it works, as well as how a standby letter of credit is typically used for ... Read Answer >>
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