No mention was made in the foregoing statement of condition of the contingent liabilities of the foreign department. As was said, most foreign departments issue commercial letters of credit, both those of a sight and a time character. Most of them also issue travelers' letters of credit, both cash and guaranteed. Cash letters of credit are those which the customer has prepaid. Guaranteed letters are those guaranteed by some one, usually a third party. Travelers' checks are also usually dealt in by foreign departments, and it has been common for foreign departments to send foreign currency bills abroad for discount and credit. A common list of the contingent liabilities of a foreign department are, therefore:
Unused balance of sight letters of credit
Unused balance of acceptance credits
Unused balance of travelers' letters of credit (guaranteed)
Travelers' checks on hand
If a bank issues a confirmed or non-revocable sight commercial credit, it has undertaken to pay out funds usually against documents presented to it by some shipper in connection with a shipment of goods. Having obligated itself to pay, provided certain papers are tendered by the shipper, the bank has thus incurred a contingent liability. Obviously some one else has incurred a contingent liability to the bank in guaranteeing to take the documents up against payment. That is, of course, the bank's contingent asset, offsetting the liability. The amount of the contingent liability for the unused balance of confirmed sight letters of credit is measured by the total dollar value of the unexpired and unused portion of sight credits outstanding at a given moment.
These commercial credits are of a time character, that is the bank does not strictly pay out funds against documents representing goods in transit, but it accepts drafts for such documents, the drafts maturing after a certain period. That is the time element in the credit. For exactly the same reasons explained under sight credits the amount of acceptance credits issued and unused is a contingent liability of the bank. This relates to confirmed credits. So-called unconfirmed credits are those which are revocable at will by the issuing bank and are not therefore liabilities.
As in the case of travelers credits which have been issued by the bank and which it has obligated itself to pay drafts against, the bank is contingently liable to the extent of the credits issued. Each new credit issued increases the liability. All checks paid, by decreasing the amount of unused balance, decrease the contingent liability.