What is a Letter of Credit?
A letter of credit (L/C) is a credit instrument, issued by a financial institution, guaranteeing payment on behalf of its customer to a beneficiary, normally to a third party but sometimes to the institution’s customer, for a stated period of time and when certain conditions are met. An FHLBNY L/C substitutes the issuing institution’s (FHLBNY member-lender’s) credit for the credit of the FHLBNY.
The FHLBNY's L/C process:
The FHLBNY issues two types of L/Cs: Irrevocable Standby or Irrevocable Direct Pay.
Irrevocable Standby L/C:
Provides that the FHLBNY pay out to the beneficiary in the event of a member's default or failure to perform under a contract or other agreement between parties.
Irrevocable Direct Pay L/C:
Permits the beneficiary to look directly to the FHLBNY for payment of a member’s obligation. It cannot be cancelled before a specific date without the agreement of all parties involved.