1. THE CREATION OF A BANKERS ACCEPTANCE Acceptances arise most often in connection with international trade: U. S. imports and exports and trade between foreign countries. 1 An American importer may request acceptance financing from its bank when, as is frequently the casein international trade, it does not have a close relationship with and cannot obtain financing from the exporter it is dealing with. Once the importer and bank have completed an acceptance agreement, in which the bank agrees to accept drafts for the importer and the importer agrees to repay any drafts the bank accepts, the importer draws a time draft on the bank.

The bank accepts The author, former assistant economist at the Federal Reserve Bank of Richmond, would like to thank Lawrence Aiken of the Federal Reserve Bank of New York, Walker Todd of the Federal Reserve Bank of Cleveland, and Tim Cook and John Walter of the Federal Reserve Bank of Richmond. The views expressed in this article are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System. 1 Although acceptances may be created by entities other than banks-such acceptances are referred to as "trade acceptances"-the term "acceptance" in this article will refer to bankers acceptances only. Federal Reserve Bank of Richmond Economic Quarterly Volume 79/1 Winter 1993 7576 Federal Reserve Bank of Richmond Economic Quarterly the draft and discounts it; that is, it gives the importer cash for the draft but gives it an amount less than the face value of the draft. The importer uses the proceeds to pay the exporter. The bank may hold the acceptance in its portfolio or it may sell, or rediscount, it in the secondary market.

In the former case, the bank is making a loan to the importer; in the latter case, it is in effect substituting its credit for that of the importer, enabling the im.