In trade finance, the issuing bank is the bank that issues a letter of credit, usually at the request of its customer, the applicant (normally the importer), in favour of the beneficiary (normally the exporter). By issuing the credit, the bank gives the beneficiary its own irrevocable undertaking to pay, or to accept and pay a draft, when documents that comply with the credit's terms are presented.
The role is defined in the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600), which describes the issuing bank as the bank that issues a credit at the request of an applicant or on its own behalf. It sits at the centre of the transaction: it deals with the applicant on one side, and with advising, nominated, confirming and reimbursing banks on the other. In card payments the same words mean something different, the bank that issues payment cards to consumers; that sense is covered at issuing bank.
Issuing bank in plain terms
An overseas seller may not trust a buyer it has never met, but it will trust a large bank. So the buyer goes to its own bank and says: "Please promise this seller that you will pay, as long as the seller proves it has shipped the goods." The bank agrees, because it knows the buyer and has arranged to be repaid by it.
That bank is the issuing bank. Its promise turns a risky sale into one the seller is willing to make. The bank does not look at the goods; it only checks the papers the seller sends, such as the invoice and the shipping document. If the papers are right, it must pay, even if the buyer has since changed its mind or run into trouble.
The issuing bank's undertaking
Under UCP 600 a credit is irrevocable even if it does not say so, and Article 7 sets out the issuing bank's obligation to honour a complying presentation. Whether the credit is a sight letter of credit or a usance letter of credit, the undertaking applies directly if the credit is available with the issuing bank, and also if a nominated bank does not pay as it was authorised to. The issuing bank also undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation.
The undertaking is independent of the sale contract and of the applicant's relationship with the bank. The issuing bank cannot refuse payment because the applicant has not paid it, has gone bankrupt or disputes the quality of the goods. It can only refuse if the documents do not comply or, in narrow cases under national law, for fraud. The issuing bank is bound from the moment it issues the credit, and it cannot amend or cancel it without the beneficiary's agreement; changes are made through a documentary credit amendment.
Examining documents
Banks deal with documents, not goods. Under Article 14, the issuing bank must examine a presentation on the basis of the documents alone and decide within a maximum of five banking days after presentation whether they appear on their face to comply. It applies UCP 600 together with international standard banking practice, set out by the ICC in ISBP 821. Typical checks cover the commercial invoice, the bill of lading, insurance documents, dates, amounts, and conditions such as partial shipment or transshipment.
If the documents do not comply, the bank may ask the applicant whether it will waive the discrepancies. If it refuses, Article 16 requires a single notice to the presenter stating every discrepancy and what the bank is doing with the documents. A bank that fails to follow this procedure loses the right to say the documents did not comply.
Relationship with the applicant
For the issuing bank, a letter of credit is a contingent credit exposure on its customer. Before issuing, it approves a facility, takes cash margin or collateral, and has the applicant sign an application and reimbursement agreement. After paying, it debits the applicant, or lends to it, perhaps under a trust receipt so that the importer can sell the goods while the bank keeps an interest in them. If the applicant cannot reimburse, the bank bears the loss, which is why banks treat LCs as a form of credit risk and why prudential rules apply a credit conversion factor to them.
Under the Basel framework, short-term self-liquidating trade letters of credit arising from the movement of goods attract a lower credit conversion factor than other off-balance-sheet commitments, reflecting that the shipped goods are some protection. Issuing banks also screen parties, vessels and goods for sanctions and trade-based money laundering before they issue and again before they pay.
Relationships with other banks
The issuing bank usually sends the credit to the beneficiary through an advising bank in the exporter's country, commonly a correspondent bank, using SWIFT messages. It may ask that bank to add confirmation, which creates a second, separate undertaking; it may nominate that bank to pay or negotiate; and it may appoint a reimbursing bank, issuing a reimbursement authorization under the ICC's URR 725 rules, sometimes backed by a reimbursement undertaking. The same bank may also issue a standby letter of credit, which is normally governed by ISP98 and works as a guarantee of performance or payment rather than as a payment method.