Introduction to Finance

trust receipt
.
 
Should the business fail, 
the bank would not be in the position of an ordinary creditor trying to establish its claim on 
the business assets. Rather, it could repossess, or take back, the goods and place them with 
another agent for sale since title had never been transferred to the customer. As the merchand-
ise is sold under a trust receipt arrangement, generally, the business must deposit the proceeds 
with the bank until the total amount of the acceptance is reached.
In summary, the banker’s acceptance and the commercial letter of credit involve four 
principal parties: the importer, the importer’s bank, the exporter, and the exporter’s bank. 
Each benefi ts to a substantial degree through this arrangement. The importer benefi ts by 
securing adequate credit. The importer’s bank benefi ts because it receives a fee for issuing 
the commercial letter of credit and for the other services provided in connection with it. The 
exporter benefi ts by being assured that payment will be made for the shipment of merchandise. 
Thus, a sale is made that might otherwise have been rejected because of lack of guaranteed 
payment. Finally, the exporter’s bank benefi ts if it discounts the acceptance, since it receives 
a high-grade credit instrument with a defi nite, short-term maturity. Acceptances held by com-
mercial banks provide a low, but certain, yield, and banks can liquidate them quickly if funds 
are needed for other purposes.
Banker’s Acceptance
The Board of Governors of the Federal Reserve System authorizes member banks to accept 
drafts that arise in the course of certain types of international transactions. These include the 
import and export of goods, the shipment of goods between foreign countries, and the storage 
of highly marketable staple goods in any foreign country. A 
banker’s acceptance
is a prom-
ise of future payment issued by a fi rm and guaranteed by a bank. The maturity of a banker’s 
acceptance arising out of international transactions may not exceed six months. This authority 
to engage in banker’s acceptance fi nancing is intended to encourage banks to participate in 
fi nancing international trade and to strengthen the U.S. dollar abroad.
Bankers’ acceptances are used to fi nance international transactions on a wide variety of 
items, including coff ee, wool, rubber, cocoa, metals and ores, crude oil, jute, and automobiles. 
Because of the growth of international trade in general and the increasing competition in 
foreign markets, banker’s acceptances have become increasingly important. Exporters have 
had to off er more liberal terms on their sales to compete eff ectively. The banker’s acceptance 
permits them to do so without undue risk.
The cost of fi nancing an international transaction with the banker’s acceptance involves 
not only the interest cost involved in the exporter’s discounting the acceptance but also the 
commission charge of the importer’s accepting bank. Foreign central banks and commercial 
banks regard banker’s acceptances as attractive short-term funds commitments. In recent