Bank Guarantee risk
Key Facts
Bank guarantee risk.
The risk with a Bank Guarantee sits with the Beneficiary of the Guarantee.
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Any company can apply to their bank to issue a Bank Guarantee on their behalf. The bank will look for 100% security before issuing a Bank Guarantee and this can take the form of cash or assets, or if the client is credit worthy, the Bank Guarantee can be issued on margin.
The usual application forms will have to be filled out, giving details of currency, amount, and expiry date, the name of the Beneficiary, together with the reasons for applying for a Bank Guarantee, and if for a project the requisite business plan must be supplied.
If the Issuing Bank agrees to issue a Bank Guarantee the mechanics of transferring the Bank Guarantee to the Beneficiaries account is straightforward. Utilising the swift system, (“Society for Worldwide Interbank Financial Telecommunications”), the bank will transfer the Bank Guarantee to the Beneficiary’s bank, using the dedicated message code for transferring Bank Guarantees, Swift MT 760. In some instances.
The Issuing Bank will send a pre advice to the Receiving Bank, using the Swift Message Code MT 799 informing them to expect a Bank Guarantee in favour of their client.
For more details on Swift, please go to our Swift page.
Risks for the Receiving Bank
There is no risk to the Receiving Bank. If the bank is lending against a Bank Guarantee, it will be a Demand Bank Guarantee, and as such is callable on First Demand, thus the banks position is secure. Otherwise, they are just acting as an electronic depository or safe keeper of the Bank Guarantee for which they will charge a fee, and they may even demand that their client, the Beneficiary, keeps a minimum balance on the account if they are borrowing from a third party monetiser.
Risks for the Issuing Bank
There are no risks for the Issuing Bank, as in the event of a claim the Issuing Bank will have obtained adequate security from their client, the Provider.
Risks for Lenders Credit Lining a Bank Guarantee
A Bank or third-party lender, when offering a credit line, (See Credit Lining Bank Guarantees), to the Beneficiary of a Demand Bank Guarantee, will lend in the full knowledge that they are totally secured by the Bank Guarantee.
There is no particular risk to the lender, but even though they are fully secured, they will not offer a credit line or loan to the Beneficiary if they feel the underlying transaction is not strong enough to fulfil the obligation of repayment. In this event, the Bank Guarantee would have to be called, and lenders tend not to offer loans or credit lines if they are of the opinion that a claim will be made against the Bank Guarantee.
Risks for the Beneficiary of the Bank Guarantee
The risk with a Bank Guarantee sits with the Beneficiary of the Guarantee. This is because the Guarantee will be secured singularly or in a combination by Assets, Shares, or Cash owned by the Beneficiary.
If you have any further questions on this or any other subject related to bank guarantees, then you can search our frequently asked questions where you will hopefully find the answer you are looking for. Alternatively, you can ask us a question and we will answer it for you.