Characteristics of Bank Guarantees
Some important characteristics of Bank Guarantees should be noted:
- Bank Guarantees are written specifically for a purpose; where an account holder will instruct his bank to issue a guarantee to another bank on behalf of their account holder.
- The bank will hold adequate assets of the account holder as security for the Bank Guarantee.
- Bank Guarantees cannot be transferred to third parties unknown to the banks.
- They cannot be bought or sold.
- They do not carry CUSIP or ISIN numbers and are not tradable securities.
- They are issued for a specific time period.
- Upon Expiry, Bank Guarantees are terminated, they are not traded.
- A Bank Guarantee has no end value and does not accumulate any investment element or maturity value.
- They should not be considered as ‘investment notes’.
- They should not be ‘touted’ on the open market as the issue of a Bank Guarantee is between closed parties (the Issuer and Beneficiary only).
- Banks do not issue them to raise money and should not be confused with Medium Term Notes (MTNs).
- The strength of a Bank Guarantee is limited to the financial standing (and rating) of the Issuing Bank.