Bank Endorsement – Definition

Cite this article as:"Bank Endorsement – Definition," in The Business Professor, updated February 24, 2020, last accessed October 21, 2020, https://thebusinessprofessor.com/lesson/bank-endorsement-definition/.

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Bank Endorsement Definition

A bank endorsement is a bank’s authorization on a negotiable instrument created by its customer to an unknown or third party. This endorsement stipulates that the bank will stand by the obligations of the negotiable instrument as created by the customer. Examples of negotiable instruments covered by bank endorsement include check, banknotes (dollar bills or pound notes), promissory notes, demand drafts, certificates of deposits and bills of exchange.

A Little More on What is a Bank Endorsement

A bank endorsement is an assurance to a counterparty or the receiver of a negotiable instrument that a bank will ensure that the obligations are fulfilled. Bank endorsements are commonly used in international trade where a party authorizes payment to another party that is unknown. The bank that gives an endorsement in this type of transaction acts as a middleman, giving an assurance that the creator of the negotiable instrument will fulfill the necessary obligation.

Generally, financial institutions give endorsement to negotiable instruments when there is an assurance that the specified funds will be disbursed. There are two types of bank endorsements, they are banker’s acceptance and time draft. A banker’s acceptance is provided by a bank when there is a certainty that it has the capacity to provide the specified funds.

Bank Endorsements: Examples With Bankers Acceptances and Time Drafts

Bank endorsement often accompanies negotiable instruments such as banknotes (pound notes or dollar bills), cheques, demand drafts, certificates of deposits, bills of exchange and promissory notes. Negotiable instruments are promises of payments created by a bank’s customer to a third party. When customers create these instruments, they must be backed by the underlying bank, this shows that the payment promised will be redeemed in due time.

There are two types of bank endorsements, these are a banker’s acceptance and a time draft. A banker’s acceptance offers an assurance to the receiver of a negotiable instrument that the bank will facilitate payment. It is a reliable endorsement that often accompanies short-term negotiable instruments.

A time draft, on the other hand, is used when negotiable instruments are used between foreign countries. A time draft is likened to a foreign cheque whose payment is guaranteed by the issuing bank. For instance, if an exporter is issued a time draft in exchange for the delivered goods, the issuing bank gives an assurance that the specified amount will be paid at a specific time. This is to say that the receiver of a time draft will not receive payment until the maturity of the negotiable instrument.

Time drafts are sometimes called usance drafts, just like bankers acceptances, they are used for short-term instruments.

Reference for “Bank Endorsement”

https://www.investopedia.com/terms/b/bank-endorsement.asp

https://investinganswers.com/financial-dictionary/businesses…/bank-endorsement-614…

https://financial-dictionary.thefreedictionary.com/Bank+Endorsement

www.businessdictionary.com/definition/bank-endorsement.html

https://thelawdictionary.org/bank-endorsement/

Academic research on “Bank Endorsement”

Commercal Paper, Bank Deposits and Collections, and Commercial Electronic Fund Transfers, Miller, F. H., Ballen, R. G., & Scott, H. S. (1983). Commercal Paper, Bank Deposits and Collections, and Commercial Electronic Fund Transfers. Bus. Law.39, 1333.

The endorsement effects of corporate venture capital in the creation of public companies, Ginsberg, A., Hasan, I., & Tucci, C. L. (2005). The endorsement effects of corporate venture capital in the creation of public companies (No. CSI-WORKING-2005-004). Empirical research on the certification role of venture capital investment in initial public offerings (IPOs) tends to ignore how variant attributes and contexts might affect the benefits of affiliation received by a young firm undergoing an IPO. In this paper we argue that because corporate venture capital (CVC) and independent venture capital (IVC) investors possess different types of expertise and investment orientations, they provide different confidence-building signals to investors of newly public firms. Analysis of 1830 initial public offerings during 1990-1999 showed that CVC investment sends a different signal of quality than IVC investment, as reflected in the extent to which the offer price is lower than the market price at the end of the first day of trading than it would be with IVC investment alone. This effect is particularly pronounced when the corporate investor is a bank, or in the same industry as the IPO, and when equity markets are hot. We also found that this effect decreases at an escalating rate when the corporate investor’s portfolio becomes larger. Our results confirm the premise that corporations, banks and independent venture capitalists play different endorsement roles in the creation of public companies, and that the value of CVC endorsements depends on key attributes of the CVC and the type of market uncertainty that dominates IPO investors’ concerns.

The impact of bank ownership of underwriters on the underpricing of initial public offerings, Ursel, N. D., & Ljucovic, P. (1998). The impact of bank ownership of underwriters on the underpricing of initial public offerings. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l’Administration15(1), 17-27. This study examines the underpricing of Canadian initial public offerings (IPOs) since July 1, 1987, when banks entered the underwriting business. The level of underpricing found (3.64%‐3.95%) is much lower than that found by other studies. Bank ownership of an issue’s underwriter is found to be significantly related to lower underpricing. However, this appears to be due to the fact that banks acquire high prestige underwriters and not due to bank ownership per se.

Endorsement and Negotiation of Government Warrants, Iverson, P. E. (1962). Endorsement and Negotiation of Government Warrants. Utah L. Rev.8, 28.

Simple certified e-check with a partial PKI solution, Hsin, W. J., & Harn, L. (2005, March). Simple certified e-check with a partial PKI solution. In Proceedings of the 43rd annual Southeast regional conference-Volume 2 (pp. 185-190). ACM. In this paper, we propose a simple certified e-check scheme. It is simple because no full PKI setup is needed by the e-check users. Additionally, it provides privacy and flexibility that are not in the current certified e-check scheme. Furthermore, it can be easily implemented on top of the existing Internet banking systems without additional cost. With this simple solution, we hope that the e-check will gain wide acceptance among the general population.

A Non-Negotiable Crossing, Baxter, I. F. (1982). A Non-Negotiable Crossing. Can. Bus. LJ7, 141.

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