Regulators consider standby letters of credit to be the riskiest of all contingent claims offered by banks because

Question

Quizplus · Accepted Answer

Regulators consider standby letters of credit to be the riskiest of all contingent claims offered by banks because they are usually unsecured, meaning there is no collateral backing the guarantee. Additionally, a standby letter of credit guarantees performance even in the event of a default, which exposes the bank to credit risk. Although interest rate risk may be a factor, it is not the primary reason why regulators consider standby letters of credit to be so risky.

Regulators Consider Standby Letters of Credit to Be the Riskiest