One of the advantages of standby credit letters is that they generate fee income without using up scarce bank funds.

Question

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Standby letters of credit generate fee income for banks because they are a commitment by the bank to pay, only if the bank's client defaults on an agreement. They do not usually involve the immediate use of bank funds, as they are a form of contingent liability rather than a direct loan.

One of the Advantages of Standby Credit Letters Is That