Your Buyer's Bank Confirmed the LC. Your Buyer's Bank Was the Problem.
Quote from chief_editor on June 2, 2026, 3:00 amA confirmed LC shifts payment risk to the confirming bank. When the confirming bank itself is the credit problem, the protection is circular.
Confirmation of a letter of credit by a second bank — typically a well-known bank in the seller's country or a global bank with a strong credit rating — is intended to eliminate the seller's exposure to the issuing bank's credit risk. If the issuing bank in the buyer's country fails or refuses to pay, the confirming bank pays instead. The seller has two independent payment undertakings. In normal circumstances, this provides meaningful protection.
The circular risk: what happens when the seller's own bank is the confirming bank, and the seller's own bank is the counterparty with a credit problem?
This scenario is less hypothetical than it appears. Sellers in markets where banking sector health is under pressure — where the domestic banking system has systemic credit issues — may find that the banks available to confirm their LCs are the same banks with elevated credit risk. A confirmed LC from a bank that is itself unstable does not provide the protection that confirmation is designed to give.
A more common version of this problem: the confirming bank is not the seller's domestic bank but is a regional bank operating in the seller's country that appears on the issuing bank's approved counterparty list. When the seller checks whether the LC is confirmed, the answer is yes. Whether the confirming bank's independent credit standing actually provides meaningful additional security depends on that bank's financial condition — which the seller may not have assessed.
Confirmation Value Equals Confirming Bank Credit Minus Issuing Bank Credit
The value of LC confirmation is the difference between the confirming bank's credit quality and the issuing bank's credit quality. If both banks have the same credit profile — both are well-rated, solvent, operating normally — the confirmation provides redundancy rather than a meaningful credit upgrade. If the issuing bank is a solid regional bank and the confirming bank is a stronger global bank, the confirmation provides a real credit upgrade for the seller.
If both the issuing bank and the confirming bank are in the same fragile banking system — both exposed to the same systemic risks, both subject to the same sovereign or currency constraints — the confirmation may provide a legal redundancy without providing a meaningful economic upgrade. When the issuing bank faces stress, the confirming bank in the same system likely faces related stress.
This analysis is not commonly performed by sellers who focus on whether the LC is confirmed rather than on the credit quality of the confirming bank relative to the issuing bank. The check — is the LC confirmed? — is binary. The underlying question — does the confirmation actually reduce my payment risk? — requires a credit assessment that sellers rarely conduct.
Industry estimates for the credit quality of confirming banks used in commodity LC transactions vary significantly by commodity corridor. On established routes — Asian buyers with European confirming banks — the confirmation provides a genuine credit upgrade. On emerging market corridors — where the issuing and confirming banks are both in the same developing financial system — the upgrade may be minimal.
The Sovereign Risk Dimension
Beyond bank credit risk, confirmed LCs are subject to sovereign risk: the risk that the government of the issuing bank's country imposes transfer controls, currency restrictions, or payment moratoria that prevent the issuing bank from paying even if it has the financial capacity to do so. Confirmation is supposed to address this: the confirming bank is in a different jurisdiction and can pay even if the issuing country's government restricts outflows.
But if the confirming bank is also subject to restrictions — either because it is in the same jurisdiction or because the confirming bank's correspondent banking network is affected by the same sovereign restrictions — the protection breaks down. A confirmed LC with a confirming bank that cannot access the payment system needed to make the payment is legally but not practically different from an unconfirmed LC.
Sellers who deal regularly with buyers in jurisdictions where sovereign payment risk is material should work with their trade finance banks to understand which confirming bank arrangements actually transfer sovereign risk offshore, and which ones provide only the appearance of doing so.
A confirmed LC shifts payment risk to the confirming bank. When the confirming bank itself is the credit problem, the protection is circular.
Confirmation of a letter of credit by a second bank — typically a well-known bank in the seller's country or a global bank with a strong credit rating — is intended to eliminate the seller's exposure to the issuing bank's credit risk. If the issuing bank in the buyer's country fails or refuses to pay, the confirming bank pays instead. The seller has two independent payment undertakings. In normal circumstances, this provides meaningful protection.
The circular risk: what happens when the seller's own bank is the confirming bank, and the seller's own bank is the counterparty with a credit problem?
This scenario is less hypothetical than it appears. Sellers in markets where banking sector health is under pressure — where the domestic banking system has systemic credit issues — may find that the banks available to confirm their LCs are the same banks with elevated credit risk. A confirmed LC from a bank that is itself unstable does not provide the protection that confirmation is designed to give.
A more common version of this problem: the confirming bank is not the seller's domestic bank but is a regional bank operating in the seller's country that appears on the issuing bank's approved counterparty list. When the seller checks whether the LC is confirmed, the answer is yes. Whether the confirming bank's independent credit standing actually provides meaningful additional security depends on that bank's financial condition — which the seller may not have assessed.
Confirmation Value Equals Confirming Bank Credit Minus Issuing Bank Credit
The value of LC confirmation is the difference between the confirming bank's credit quality and the issuing bank's credit quality. If both banks have the same credit profile — both are well-rated, solvent, operating normally — the confirmation provides redundancy rather than a meaningful credit upgrade. If the issuing bank is a solid regional bank and the confirming bank is a stronger global bank, the confirmation provides a real credit upgrade for the seller.
If both the issuing bank and the confirming bank are in the same fragile banking system — both exposed to the same systemic risks, both subject to the same sovereign or currency constraints — the confirmation may provide a legal redundancy without providing a meaningful economic upgrade. When the issuing bank faces stress, the confirming bank in the same system likely faces related stress.
This analysis is not commonly performed by sellers who focus on whether the LC is confirmed rather than on the credit quality of the confirming bank relative to the issuing bank. The check — is the LC confirmed? — is binary. The underlying question — does the confirmation actually reduce my payment risk? — requires a credit assessment that sellers rarely conduct.
Industry estimates for the credit quality of confirming banks used in commodity LC transactions vary significantly by commodity corridor. On established routes — Asian buyers with European confirming banks — the confirmation provides a genuine credit upgrade. On emerging market corridors — where the issuing and confirming banks are both in the same developing financial system — the upgrade may be minimal.
The Sovereign Risk Dimension
Beyond bank credit risk, confirmed LCs are subject to sovereign risk: the risk that the government of the issuing bank's country imposes transfer controls, currency restrictions, or payment moratoria that prevent the issuing bank from paying even if it has the financial capacity to do so. Confirmation is supposed to address this: the confirming bank is in a different jurisdiction and can pay even if the issuing country's government restricts outflows.
But if the confirming bank is also subject to restrictions — either because it is in the same jurisdiction or because the confirming bank's correspondent banking network is affected by the same sovereign restrictions — the protection breaks down. A confirmed LC with a confirming bank that cannot access the payment system needed to make the payment is legally but not practically different from an unconfirmed LC.
Sellers who deal regularly with buyers in jurisdictions where sovereign payment risk is material should work with their trade finance banks to understand which confirming bank arrangements actually transfer sovereign risk offshore, and which ones provide only the appearance of doing so.