Final answer:
Banks act as intermediaries in import/export transactions involving a letter of credit, by guaranteeing payment to the exporter once the shipment documents meet the terms of the L/C. The role of banks here is to reduce risk and facilitate international trade, not to set international trade regulations.
Step-by-step explanation:
The role of banks in import/export transactions involving a letter of credit (L/C) is quite specific and does not include setting international trade regulations. Instead, banks act as intermediaries between the buyer and the seller in these transactions. They issue L/Cs that guarantee payment to the seller upon fulfillment of the terms and conditions specified in the credit. When a seller presents the required documents proving that goods have been shipped as per the agreement, the bank pays on behalf of the buyer. This process mitigates the risk for both parties involved in international trade by ensuring the seller receives payment if they comply with the L/C terms, and the buyer receives assurance that goods have been shipped before making payment.
In the case of exchange rate fluctuations, central banks play a crucial role in stabilizing the banking system and controlling the money supply to prevent widespread bank bankruptcies that can lead to a recession. Although commercial banks and central banks work synergistically within the financial system, their functions in relation to L/Cs and international trade are distinct from those of regulatory bodies that set trade regulations.