Module: | MODULE A: INTERNATIONAL BANKING
Q78: Consider the following statements regarding the liabilities and roles of a Confirming Bank:
Statement 1: A confirming bank adds its independent and firm undertaking to honor or negotiate a complying presentation, in addition to the undertaking of the issuing bank.
Statement 2: If the issuing bank becomes insolvent and fails to reimburse the confirming bank, the confirming bank has the legal right of recourse to recover the funds directly from the beneficiary.
Statement 3: A confirming bank is unconditionally bound to extend its confirmation to any subsequent amendments issued by the issuing bank.
Statement 2: If the issuing bank becomes insolvent and fails to reimburse the confirming bank, the confirming bank has the legal right of recourse to recover the funds directly from the beneficiary.
Statement 3: A confirming bank is unconditionally bound to extend its confirmation to any subsequent amendments issued by the issuing bank.
✅ Correct Answer: A
The correct option is A. Only 1 is correct.
Concept Definition: A Confirmation is a definite undertaking of the confirming bank, added at the request or authorization of the issuing bank, to honor or negotiate a complying presentation of documents.
Structural Breakdown: It creates a secondary and independent layer of security.
The beneficiary looks primarily to the confirming bank, which is usually located in their own country, for payment.
This mitigates country risks and credit risks associated with the foreign issuing bank.
Historical/Related Context: Article 8 of the standard framework details the obligations of the confirming bank.
The confirming bank takes on the credit risk of the issuing bank and the political risk of the country where the issuing bank is located.
Causal Reasoning: Statement 1 accurately defines the role of the confirming bank.
Statement 2 is incorrect because the confirmation is provided without recourse to the beneficiary.
If the confirming bank pays against complying documents and the issuing bank defaults, the confirming bank must bear the financial loss.
It cannot claw back funds from the beneficiary.
Statement 3 is incorrect because Article 10 states that a confirming bank may choose to extend its confirmation to an amendment but is not obligated to do so.
Concept Definition: A Confirmation is a definite undertaking of the confirming bank, added at the request or authorization of the issuing bank, to honor or negotiate a complying presentation of documents.
Structural Breakdown: It creates a secondary and independent layer of security.
The beneficiary looks primarily to the confirming bank, which is usually located in their own country, for payment.
This mitigates country risks and credit risks associated with the foreign issuing bank.
Historical/Related Context: Article 8 of the standard framework details the obligations of the confirming bank.
The confirming bank takes on the credit risk of the issuing bank and the political risk of the country where the issuing bank is located.
Causal Reasoning: Statement 1 accurately defines the role of the confirming bank.
Statement 2 is incorrect because the confirmation is provided without recourse to the beneficiary.
If the confirming bank pays against complying documents and the issuing bank defaults, the confirming bank must bear the financial loss.
It cannot claw back funds from the beneficiary.
Statement 3 is incorrect because Article 10 states that a confirming bank may choose to extend its confirmation to an amendment but is not obligated to do so.