Legal Definitions - negotiating bank

Definition: A financial institution that discounts or purchases drafts drawn under a letter of credit issued by another bank.

Example: Company A wants to buy goods from Company B in another country. Company B requires payment through a letter of credit issued by a bank. Company A's bank, the negotiating bank, agrees to pay Company B for the goods and then collects the payment from Company A.

Explanation: In this example, the negotiating bank acts as an intermediary between the buyer and the seller. It provides a guarantee of payment to the seller and assumes the risk of non-payment from the buyer. The negotiating bank also charges a fee for its services.