Bankers' Acceptances and Trade Bills
A banker's acceptance is a short-term IOU created to finance a specific trade shipment, made safe to trade because a bank guarantees payment, turning an exporter's invoice into a security a money-market investor will hold.
An exporter shipping goods overseas often cannot wait months to be paid, but the importer cannot pay until the goods arrive. A banker's acceptance solves this: the importer's bank "accepts" a time draft — essentially promising to pay it on a set future date — which turns the exporter's claim into an obligation backed by a bank rather than by the importer alone.
A banker's acceptance is trade-finance paper that a bank has guaranteed, which lets the exporter sell the claim immediately to a money-market investor instead of waiting for the importer to pay, at a small discount for that immediacy.
Once accepted, the draft becomes a negotiable instrument the original holder (usually the exporter's bank) can sell at a discount to any money-market investor, who then simply collects the face value from the accepting bank on the maturity date. The bank's guarantee is what makes a stranger to the original trade willing to buy it.
Worked example. An exporter is owed $1 million in 90 days once the importer's bank accepts the draft. A money-market investor buys the accepted draft today for $985,000, a discount reflecting a roughly 6% annualized yield. In 90 days, the investor presents the draft to the accepting bank and receives the full $1 million, earning the $15,000 difference regardless of what happens between the original exporter and importer.
Bankers' acceptances were once a large money-market instrument but have shrunk considerably since the 1990s as letters of credit and other trade-finance tools took over much of their role.
Further reading
- Stigum's Money Market (7th ed., ch. on bankers' acceptances)