Once only used to define the underlying World Bank guarantee for a syndicated loan (see below), Bank Guarantee has now become a catch-all phrase for any instrument in which a bank stands in for it's creditworthy customer.
In it's true definition, a Bank Guarantee is an The World Bank (The Bank) issues to guarantee loans made by other banks to The Bank's creditworthy customer, and this is how it works:
ABC company has agreed to work with Outer Slobovia to build a dam and irrigation system in the country's hinterlands. Neither ABC nor Outer Slobovia has the money for the project, and the amount required is too much for any one bank to lend.
Therefore, independently or as a joint venture, ABC and Outer Slobovia approach The World Bank asking that they guarantee the loan amount for the project so they can seek financing for several banks, i.e. syndicate the loan.
ABC and Outer Slobovia must complete a loan application as with request for funding. This type of loan application is so complex that most applicants hire a specialized firm to do the job.
The application covers every aspect of the project such as insurances, environmental surveys and impact reports, yearly projected costs, projected return, credit history, and so on and so forth. The Bank then takes several months to review the application.
If and when The Bank feels that the project is loan-worthy and that ABC and Outer Slobovia have or will have the ability to pay back the loan, The Bank arranges with a group of other banks to lend the money, and guarantees to each of these banks that it will pay back the loan in the event of a default by ABC, Outer Slobovia, or both. That is a Bank Guarantee, and it is made out to a specific customer for a specific project.
Other banks, such as Chase Manhattan, Credit Suisse, Bank of America, and Deutsche Bank also guarantee loans in the same manner.
Other than for the above description, "Bank Guarantee" is loosely used to signify any one of several financial instruments used in trade finance. These include LETTERS OF CREDIT in their various roles, DEMAND GUARANTEES, and PERFORMANCE BONDS.
Financial con artists persuade their marks that there is a wonderful, secret opportunity available in trading so-calledPRIME BANK GUARANTEES, or PBG's.
They use the term as if it were a stand-alone financial instrument that can be obtained in quantity like stocks and bonds, and attach all sorts of quick wealth accumulation to the myth.
One finds the use of Bank Guarantee, BG, and PBG in HIGH-YIELD INVESTMENT PROGRAM scams, in which the investor is told many a tale about leveraging anywhere from $10,000 to $10,000,000 to purchase hundreds of millions or even billions of dollars worth of guarantees on day one, then selling them on day two for huge profits.
The truth of the matter is that the buying and selling of trade finance instruments is a highly specialized field, relegated only to experienced FORFAITERS and the forfaiting department of international banks. Forfaiting requires an intimate working knowledge of international politics, law, and economy.
As for selling a Bank Guarantee for profit, as you can see in the Truth above, that wouldn't really be very practical.
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