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TeachMeFinance.com - explain Standby Letter of Credit standby letter of credit -- a guaranty issued by a Federal Home Loan Bank on behalf of a member thrift institution wishing to enter into an interest rate swap agreement on its own. If the member institution defaults on its swap contract, the standby letter of credit obligates the District Bank either to pay a stated amount to the counterparty or to assume the swap obligation of the member institution. another definition... Standby Letter of Credit -- A letter of credit which a bank issues on behalf of its customer to serve as a guarantee to the beneficiary of the letter of credit that the bank's customer will perform a specified contract with the beneficiary. If the customer defaults, the beneficiary may draw funds against the letter of credit as penalties or as payments, whichever the terms of the credit provide. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.