An opinion from the U.S Supreme Court stating that letters of credit, when acquired for cash, are the equivalent of a deposit liability. A legal historical example of a clean standby letter of credit, the text of which is clean of any requirements of documentation of nonperformance or default for the beneficiary to obtain payment. A discussion of the role of the International Chamber of Commerce in encouraging more equitable practices in the area of standby letters of credit. A discussion of case law and legal writing showing that pertaining law has developed away from domestic concepts and structures, and that it is a fallacy to think in terms of a comprehensive body of domestic law on LOC and especially in terms of diversity of national laws. The issuance of standby LOC involves the separation of many of the services associated with lending, such as credit risk evaluation and underwriting, from funding.
Banks argue that they are in the risk management business - whether on or off the balance sheet.
An important difference between a standby LOC and conventional financing with uninsured depositors is that a standby LOC beneficiary retains the loan in the event of bank failure as opposed to having to stand in line with the FDIC and other creditors to recover the remaining assets of the bank. The greatest motivation for off-balance sheet banking is the opportunity cost of funding assets with reservable deposits without a binding capital constraint. This enables a bank to receive an underwriting fee that can bolster current profits without tieing up capital. A bank may not be asked to issue a guarantee unless it is perceived by the market to be strong. The return on this arrangement is likely to be greater than that of a deposit while still maintaining insurance against loss.