Has Brexit affected a Financial Organisations ability to facilitate Standby Letters of Credit?
Before going into the pros and cons of Brexit, what exactly is a Standby Letter of Credit? A Standby Letter of Credit or SBLC is a financial instrument, which are issued by banks on behalf of their clients.
The SBLC is a means of payment but can also be used in certain circumstances as a guarantee of a payment obligation, depending on its wording and construction. It is a common financial instrument that underpins international and national trade contracts. In respect to its uses, as payment means, it is a settlement of payment upon successful conclusion of a trade or shipment, or in its other use as a Guarantee of payment, it is the payment or claim as a last resort. The contract between a seller and a buyer is appended to the SBLC. It guarantees the seller payment if the buyer does not pay for goods received or can be used as a means of payment of the goods.
Brexit and its Impact on Standby Letters of Credit, (SBLC)
Brexit has had a negative impact on the issuing of SBLC’s. It is not so much a banks ability to issue a SBLC. Swiss banks remain unchanged whilst the newly positioned United Kingdom banks remain relatively healthy since their departure from the European Union.
It is the fall in imports that effects the number of SBLC’s issued by banks. As explained above the SBLC protects the seller from non-payment. For example, calling on information from our London Office, the United Kingdom’s imports from the European Union fell by 21.6% since them leaving the European Union. This fall is also affected by the corona virus, but the practicalities remain the same.
It is therefore safe to assume the number of SBLC’s issued will have fallen as well as most are linked of course to trade. There are fewer sellers in the European Union needing a SBLC. Therefore, the United Kingdom’s banks’ requests for SBLC’s are diminishing.
The Future for Standby Letters of Credit, SBLC
For example, prior to leaving the European Union, the United Kingdom has signed trade deals with non-EU countries, including ourselves here in Switzerland. The United Kingdom also signed a trade deal with Japan prior to leaving the European Union. The United Kingdom has applied to join the Asia-Pacific Free Trade Pact, CPTPP. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
The USA may consider joining the CPTPP as well. This will bring much closer trading ties between the USA and the United Kingdom. This will negate the need for a bilateral treaty with the USA.
In essence, the more international trade pinned to import and export of goods, the greater the demand for SBLC’s.
These potentially new trading agreements are good for SBLC’s. It indicates that our imports will increase. Therefore, some UK companies will be requesting their banks to issue SBLC’s in favour of the exporter.
Finally, the UK government has indicated that trade with the European Union will eventually get back to normal. It is assumed therefore that the number of SBLC’s issued will rise accordingly. Brexit has had a negative impact on the issue of SBLC’s. The UK banks are secure enough to fund the issues] of SBLC’s as and when needed