TeachMeFinance.com - explain Standby Letter of Credit
standby letter of credit -- a guaranty issued by a Federal Home Loan Bank on behalf of a member thrift institution wishing to enter into an interest rate swap agreement on its own. If the member institution defaults on its swap contract, the standby letter of credit obligates the District Bank either to pay a stated amount to the counterparty or to assume the swap obligation of the member institution.
Standby Letter of Credit -- A letter of credit which a bank issues on behalf of its customer to serve as a guarantee to the beneficiary of the letter of credit that the bank's customer will perform a specified contract with the beneficiary. If the customer defaults, the beneficiary may draw funds against the letter of credit as penalties or as payments, whichever the terms of the credit provide.
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