The Risks Explained
Issuing and Receiving Bank Guarantees:
Risk for the Issuer of a Bank Guarantee
The risks of issuing a Bank Guarantee are simple. If a condition is met and/or a demand for payment is made against your Bank Guarantee by the Beneficiary, then the Issuing Bank will settle the debt, in part or in full. If this happens the risk of the issuing party is that his pledge of assets made to the bank will be lost. The bank will take possession of pledged assets upon settlement of the Guarantee.
Settlement of Bank Guarantees can be made in part or in full. This means that a sum of money may be claimed under a Guarantee issued that is less than the amount of the Guarantee. In these circumstances, the issuer will only lose that amount of the pledged assets, plus a small bank charge. In the event that the full amount of the Guarantee is demanded, then all the pledged assets will be lost.
Risk for Receiving a Bank Guarantee
The risks of receiving a Bank Guarantee are zero. The Issuing Bank carries all of the risk. Save perhaps a few small bank charges, there is no risk of loss by receiving a Bank Guarantee.
Risk for Credit Lines Drawn Against Bank Guarantees Received
If you receive a Bank Guarantee and draw credit against it, the repayment of that credit or loan is secured by the Guarantee. It is not common practice for a bank to ask for additional security unless you exceed the face amount of the Guarantee.
However, it is not a common practice for a bank to lend credit that will certainly be defaulted leading to a claim on the Guarantee. The lending bank would want some kind of assurance that the credit can be repaid. Only as a last resort will the bank look to call the Guarantee. When making applications to credit line Guarantees, a repayment structure should always be included to demonstrate the ability to repay the credit without calling on the Guarantee.