Information > This page

The mechanics of bank SLCS and guarantees 
(Source: Unknown Economist / Accountant of a Major US Corporation under direction of its Board of Directors)

The driving force behind the financial instruments under discussion in this paper is the U.S. government through its monetary agency, the Federal Reserve Board. The U.S. dollar is the basis of the world's liquidity system since all other currencies base their exchange rate on it. Quite simply this means that the U.S. is the world's central banker. As the world's central banker, the U.S. has an enormous responsibility to maintain stability in the world's monetary system. As well, the U.S. as the most powerful nation has accepted the role as the champion and promoter of democracy in all of its endeavors. While the U.S. has many tools to do this, one in particular is relevant for the purposes of this discussion.

The Federal Reserve Board (Fed) uses two financial instruments to control and utilize the amount of U.S. dollars in circulation internationally: Standby Letters of Credit (SLC) and Bank Guarantees (BG).

The Fed's domestic tools to control credit creation are interest rate policy, open market operations, reserve ratio policy and moral persuasion. In the domestic context, these tools are not always as effective as the Fed would like them to be. Part of the reason for the less than perfect effectiveness is due to the substantial stock of U.S. dollars in foreign jurisdictions. Several of the Fed's domestic tools cannot be used by it in other countries. For examples, the Fed cannot change foreign reserve ratios.

Furthermore, a significant amount of credit creation occurs in U.S. dollars in foreign countries, particularly in the Eurodollar market. The Fed cannot control the credit creation in foreign markets through its .........

More information is provided in the Member Area

Recommended further reading:
ICC endorsement of the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit 
Letters of Credit (LC, ILC & Pay Order) 
Documentary and Standby letters of Credit 
Standby Letter of Credit and Builders Letter of Credit by the New York State Banking Department 
Letters of Credit by Michael Rowe