The Impact of Globalization on Bank Guarantees: Changing Role of Letter of Guarantee in Banking

Abstract

It is proved that traditional guarantees such as mortgaging or accessory guarantor could not reduce the risk in international trade and might put the business life in danger. In order to overcome such obstacles and secure the international transactions, bank guarantees have been designed and widely used. As a form of non-cash credit bank, a letter of guarantee ensures that the bank undertakes to meet losses arising—at the request of one of the parties—if the other party does not fulfill its requirement, debt in accordance with the contract or fails to perform as it should be. In the international level there have been several attempts to unify the rules on bank guarantees. The “United Nations (UN) Convention on Independent Guarantees and Standby Letters of Credit” was adopted and entered into force in 2000. Moreover, The International Chamber of Commerce accepted “Uniform Rules regarding the Guarantees at Request (URGR) Publish no.758/2010” which can be applied in the international trade as well. Four views have been developed on the legal nature of bank guarantees by the doctrine and court cases: “bail”, “guarantee”, “sui generis contract” and “mixed quality”.