Evaluation On The Risks Of Letter Of Credit In Commercial Bank

As a conditional payment instrument used by banks internationally, settlement method of L/C saves the importer and exporter out of credit crisis, boosts mutual trust between each other and helps guarantee the seller's acquirement of payment and the buyer's getting the commodities. Accordingly this kind of bank business develops very quickly since its introduction. Based on the statistics from the International Chamber, more than 70% of international trade is settled by L/C, which is far above remittance and collection. L/C has become the most widely used main payment means.With the progressing of economic integration and finance globalization, L/C business gets fast development in our commercial banks as well owing to the upgrading of competition. Especially after China's entry into WTO, many foreign banks take part in the competition of this field first. To avoid the potential risk of shrinking of the market share and accomplish the challenging task from the superior, our commercial banks normally better the revenue by means of scale extension. As to the bank, L/C business bears the characteristics of both high revenue and risks. On the one hand the bank can earn commission fees while providing service of L/C issuing, negotiation, confirming and amendment for involvers in the international trade, on the other hand the bank may suffer credit risk, nation risk, currency risk, price risk and operational risk as well as other risks when dealing with such business. Thus how to evaluate those risks and control them at a certain low level has always been the concern of banks.Based on lots of references both home and abroad, the author finds that study on L/C crisis mainly concentrates on two aspects: much qualitative analysis was done on country risk, credit risk borne by the bank and the customer etc. regarding L/C business while quantitative analysis is relatively scarce. Empirical studies were carried on by commercial banks. International Chamber publishing such as URC522, URR525, 535 and 565 is quoted and documents with the emphasis on L/C clauses analysis and operation in practice are made to instruct the bank to avoid and control L/C crisis. On the whole, a set of feasible L/C risk evaluation system is still to be established and systemic, scientific and comprehensive quantitative analysis is to be done in this field.With references to studies on L/C business risk evaluation and neural network theory, this article does some research work on L/C business risk classification and...