DEFINITION of Bank Endorsement

A bank endorsement is an endorsement by a bank for a negotiable instrument, such as a banker's acceptance or time draft. This assures any counterparty that the bank will stand behind the obligations of the creator of the instrument.

BREAKING DOWN Bank Endorsement

Bank endorsements are common in international trade, wherein the business parties are typically unknown to one another. Banks stand in the middle by assuring good funds to the recipient. A bank endorsement, in the case of a banker's acceptance, for example, is the equivalent of a guarantee. A banking institution will generally not provide a banker’s acceptance without a reasonable likelihood that it would be able to provide the funds as specified.

Bank Endorsements: Examples With Bankers Acceptances and Time Drafts

As noted above, bank endorsements often accompany specific negotiable instruments. Negotiable instruments, including bills of exchange, promissory notes, drafts and certificates of deposit, represent payment promises to a specified person (the assignee). Checks are common forms of negotiable instruments.

Bankers acceptances are similar to T-Bills in that they are short-term debt instruments. Yet while T-bills are associated with the U.S. government, a company issues bankers acceptances, which a commercial bank then guarantees. Due to the perceived safety of bankers acceptances, these instruments commonly facilitate international institutions’ completing transactions; at times, bankers acceptances can eliminate the need to extend credit.

For example, an American wine importing business may issue a banker’s acceptance with a date beyond when the South African wine cases are expected to be delivered. This allows the South African exporting business to have a payment instrument in hand prior to finalizing a shipment, which can help smooth any obstacles within such an international deal, including any disparate regulations, language barriers, and/or variances in infrastructure.

Money market funds often include both T-bills and bankers acceptances. Bankers acceptances are traded at a discount from face value on the secondary market.

A time draft is a foreign check, guaranteed by an issuing bank. However, a time draft is not payable in full until a specified amount of time after the receiving party accepts it. As with bankers acceptances, time drafts are associated with short-term credit, on which companies can rely for the financing of goods in international trade. Time drafts allow the buyer a delay in payment after accepting a shipment of exported goods. Time drafts become trade acceptances after a buyer accepts.

A twist on the time draft is that an exporter may hold this acceptance until maturity (at which point she or he will be paid in full), or the option exists to sell the instrument prior to maturity at a discount and obtain earlier access to the funds. “Tenor” and "usance” are terms used between acceptance and maturity. For this reason, time drafts are also called "usance drafts."