The Research On Risks And Measures Of Letter Of Credit Of Commercial Banks In China

The letter of credit is an international settlements tool which guarantees for bank credit. According to research, there has been a prototype of the credit in the Roman period. But it was widely used in international trade settlements until nearly100years. Especially in the sixties and seventies of the20th century, Letters of credit occupied the dominance of the international settlements, that more than85%international settlements were completed by Letters. Although later declined, the letter of credit still accounts for a large proportion in developing countries’foreign trade.Added bank credit in the Letter of credit can reduce the risk of long-distance between partners or not familiar with each other and conducive to fulfill trade contracts smoothly. But reducing risk dose not equal to eliminating risk. The credit is not a foolproof idealized tool. On the contrary, banks provide credit guarantee for the partners, meanwhile they also face many risks. The subject of this article is studied on commercial banks. Through a lot of literature, empirical analysis by combination between theory and the classic cases, discuss the major risks faced by the commercial banks in the credit settlements and its causes and propose corresponding preventive measures.The thesis is divided into six parts. The first part of the preface introduces the background and significance of the research and the present researching situation of Letter of Credit, as well as literatures from domestic and foreign scholars. The second part discusses the origin, concept, and features of Letter of Credit, and a simple analysis of the business processes under Credit. The third part introduces the definition of risk in the Credit, and then combined with the characteristics of the credit system describing the two root reasons of the risk in Letter of Credit business:bank credit and principles of independent abstraction. The fourth part combines with relevant case studies to pay attention to the major risks of Letters of Credit such as fraud, document risk, operational risk, market risk, credit risk, political and legal risks which faced by banks, one by one, and corresponding preventive measures.The risk of fraud part proposes specific measures to guard against fraud for Documentary Credits, through several common means of documentary credit fraud and its characteristics; Discussions of document risk focuses on the point of the principal risks of the ocean bill of lading and measures, combined with cases to point out the details of dealing with the dispute over the letter of credit which banks should be grasped; Part of the operational risk, makes a brief description of the risks mainly caused by the bank’s defective internal risk control, the unclear duty settlements, frequent movement of persons, meanwhile, proposing measures to improve the internal system construction, the quality of staff and operational capacity; In the part of market risk, the writer discusses risks due to fluctuations in the price of export goods which will be impacted by factors such as the changes of interest rate and exchange rate. And also he asks the commercial banks should focus on the trend of the global economy, macroeconomic policies and activities of concern the trade of both sides to against market risks; Part in credit risk, the writer divides the credit risk from different unethical main parts, and discussing manifestations and precautions mainly from import and export enterprises credit risk and the BIS; The political and legal risk part suggests that banks in the credit business should pay attention to the risks caused by the changes of factors such as political, economic and social stability of the country between trading parties and also should be aware of their legal jurisdiction to avoid risks due to problems of the application of law. The fifth part compared the improvements of UCP600which applied from the beginning of2007with UCP500. and the positive and negative impact from these improvements in risk prevention and control of banks. Part VI summarizes and raises again the bank’s risk management is not to eliminate risk. but try to avoid or reduce the loss caused by risks, and pointing out that the bank should take precautions. It is necessary to master the sufficient credit investigation and trade background of trading parties and other banks before in order to avoid risks in the first place; Ensuring serious and independent single-trial principles of orders, according to international practice, put into effect the reasons behind the discrepancy, to control risks in the controllable range; Banks should learn to actively respond after a dispute has arisen, to avoid or reduce the occurrence of loss rationally, favorably and sparingly, in order to control the bank’s risk at the lowest level through this before-during-after management model.