Bank Guarantees – Explained
The Bank Guarantee market is a global business. Whether it is a direct or indirect Bank Guarantee, as explained below, is utilised throughout the world’s financial centres as security for non-performance on an obligation by the beneficiary of the Bank Guarantee. The model for transferring a Bank Guarantee is remarkably unsophisticated where the Issuing Bank is instructed by their client, (The Applicant or Provider), to transfer a Bank Guarantee via the swift system, to another bank, (The Receiving Bank), favouring their client, (The Beneficiary).
For those companies endeavouring to utilise a Bank Guarantee, it is important to understand the difference between a Documentary letter of Credit (DLC), a Standby Letter of Credit (SBLC), and a Bank Guarantee (BG). A Bank Guarantee is a SECURITY for a payment, whilst a Standby Letter of Credit and a Documentary Letter of Credit are a MEANS of payment.
Bank Guarantees issued from different country’s or jurisdictions can only be governed by the laws of the country where the issuing bank is domiciled. Therefore, from a legal standpoint, it is important that each Bank Guarantee is studied separately.
Issuing Bank Guarantees is commonplace in the financial markets of today. Whether it is a Direct Bank Guarantee where the Issuing Bank transfers a Bank Guarantee direct to another bank or an Indirect Bank Guarantee where the issuing bank instructs their correspondent bank to issue a Bank Guarantee on their behalf. Bank Guarantees have become an indispensable part of business transactions. Therefore, it is germane at this juncture to understand the differences between a Bank Guarantee and a Surety Bond or Performance Guarantee. Fundamentally, a Surety Bond or Performance Guarantee is comparable to a form of insurance and as such will not pay unless certain pre advised criteria have been fulfilled, whereas a Bank Guarantee is payable on Demand.
The Collateral Transfer Facility utilises Demand Bank Guarantees as a unique way for companies looking to raise credit lines, loans or arrange for capital injections, referred to as Credit Facility Guarantees. The Demand Bank Guarantees make use of strict verbiage and are governed by ICC Uniform Rules for Demand Guarantees (URGD 760), and are payable on FIRST DEMAND.