banking principles and practice volume 4 domestic banking— earning assets

Ttiis book is DUE on last date stamped below SOUTHERN BRANCH UNIVERSITY OF CALIFORNIA LIBRARY LOS ANGELES. CALIF. Banking principles and practice By RAY B. WESTERFIELD, Ph.D. Assistant Professor of Political Economy, Yale University; Secretary-Treasurer, American Economic Association IN FIVE VOLUMES VOLUME IV DOMESTIC BANKING— EARNING ASSETS NEW YORK THE RONALD PRESS COMPANY 1921 Copyright, 192 1, by The Ronald Press Company All Rights Reserved HG CONTENTS VOLUME IV—DOMESTIC BANKING— EARNING ASSETS Chapter Page XLII The Discount Department 813 General Functions and Organization of the Discount De- partment The Nature of Discounting The Nature and Care of Discounted Paper Rediscounting of Bills Receivable Guaranties in Lieu of Indorsement Responsibility of Directors for Approval of Discounts Routine of Department's Work Advances and Rediscounts with the Federal Reserve Bank Records in the Discount Department XLIII The Loan Department — Loans to Stock Brokers . 828 General Functions of the Loan Department Internal Organization Classification of Loans of Banks in the United States Classification of Collateral Loans Stock Brokers' Loans Method of Placing Loans Collateral for Loans The Loan Agreement Day Loans and Overcertification Day Loan Agreement Margins on Stock Brokers' Loans Requirements as to Collateral Requirements as to Margins Collateral Substitutions on Stock Brokers' Loans Rates of Interest on Stock Brokers' Loans Method of Determining Call Loan Renewal Rate Dangers of System of Rate Determination Factors Influencing Call Money Quotations Method of Determining Time Loan Interest Rates Daily vs. Fortnightly Clearings Relation of the Call Loan Rate and the Commercial Paper Rate of Interest The Collection and Computation of Interest XLIV The Loan Department — Other Loans Merchandise Loans and Commodity Paper Legal Protection of Merchandise Loans 863 IV CONTENTS Chapter Page Risks of Loans on Staple Commodities Substitutions of Collateral on Merchandise Loans Loans on Bills of Lading The Rediscount of Commodity' Paper Handling the Collateral of Rediscount Paper Loans to Banks Collateral and Margins of Bank Loans Examination and Substitution of Collateral for Loans to Banks Handling Applications for Loans Ratio of Loans and Balances— Forms of Loans Time Limit, Renewal, and Cancellation of Loans Records of the Loan Department Overdrafts — Disadvantages of Practice Prevalence of and Remedies for Overdrafts XLV The Law of Loans and Discounts and of Negotiable Instruments Distinction Between Pledge, Mortgage, and Lien Relation of Pledgor and Pledgee What May Be Pledged Creation and Establishment of a Pledge Rights of Pledgor and Pledgee The Keeping of the Pledge Redemption, Termination, and Sale Warehouse Receipts — Uniform Warehouse Receipts Act Classes of Receipts Liability of Warehouseman Satisfaction of Warehouseman'? Lien Negotiation and Transfer of Warehouse Receipts The United States Warehouse Act 887 XLVI The Law of Loans and Discounts and of Negotiable Instruments (Continued) 913 Bills of Lading —Terms of Issuance Classes of Bills of Lading Liability of Carrier Negotiation or Transfer of Bills of Lading Buyer and Seller's Title to Goods Fraudulent Use or Negotiation of Bills Statutory Limitations on Loans and Discounts 1. Loans on Bank's Capital Stock 2. Loans of Bank Examiners 3. Loans to Officers and Directors 4. Limits of Borrower's Liabilities to Bank Determination of Borrower's Liability Loans on Real Estate Security Investments in Real Estate and Mortgages Usury Laws CONTENTS Chapter Page XLVII The Credit Department 935 General Functions of the Credit Department Need for Credit Department Effect of Federal Reserve System on Credit Department Summary of Departmental Work Internal Organization of the Credit Department Passing upon Loans and Discounts To Whom Credit Information Is Furnished Credit Files Sources of Credit Information 1. Interviews with Borrowers Utility of Financial Statements 2. Mercantile Agencies — Organization Services of Mercantile Agency 3. Interchange of Credit Experience 4. Credit Exchange Bureaus 5. Other Sources of Information XLVIII The Financial Statement as a Source of Credit Information 956 The Nature of a Financial Statement Classification of Assets and Liabilities Ratio of Current Assets to Current Liabilities The Analysis of Current Assets The Analysis of Current Liabilities The Analysis of Fixed Assets The Analysis of Fixed Liabilities Ancillary Items XLIX Commercial Paper and the Discount Market . 969 The Cash Discount System and Single- Name Paper Two-Name Paper The Trade Acceptance—Nature of The Acceptance Compared with Commercial Draft Relative Value of Two-Name and Single-Name Paper Basis of Security of Commercial Paper The Open Account and the Discount Market Open-Market Borrowing Factors of Development of Open-Market Borrowing Kinds of Open-Market Paper The Note-Broker — Commission Rates Purchases Through Brokers — Risks and Guaranties Advantages of Borrowing Through Note- Brokers Effect of Open-Borrowing on Banks Objections to Open-Market Borrowing Volume of Open-Market Borrowing The Registration of Paper Sold in Open Market The Assignment, Hypothecation, and Guaranty of Accounts Receivable Borrowing from Commission House VI CONTENTS • Chapter Page Simultaneous Borrowing from Different Sources The Trade Acceptance and the American Acceptance Council Advantages of Trade Acceptance to Buyer Advantages of Acceptance to Seller Advantages of Acceptance to Banking System L Commercial Paper and the Discount Market (Con- tinued) 996 Bank Acceptances Origin of the Bank Acceptance Development of Use in the United States Difference Between the Bank Acceptance and Other Com- mercial Paper Factors Which Influence Granting of Acceptance Credits Limitations to Acceptance Credits Acceptance Provision? of Federal Reserve Act Use of Domestic Bank Acceptances Illustrated Functions and Purposes of Bank Acceptances EligibiHty of Bank Acceptances for Rediscount Forward Transactions in Acceptances Factors Requisite for Creation of Discount Market Acceptance Dealers Advantages of Discount Market to Banking System Rediscounts with the Federal Reserve Banks Need for Standardization of Discount Paper Rediscount of Promissory Notes and Agricultural Paper Open-Market Purchases LI The Bond Department 102 1 General Functions and Organization of the Bond Depart- ment Bank Investments in Securities Powers of Commercial Banks with Respect to Securities Powers of National Banks with Respect to Securities Powers of State Banks with Respect to Securities Transactions in Bonds — Stock Exchange Procedure Execution of Orders The Accounting, Recording, and Custody of Bonds Bought The Bond Ledger The Bond Earnings Book Other Books of the Bond Department Syndicates, Participations, and the Distribution of Original Issues LII Operations of the Bank as Transfer Agent, Regis- trar, Fiscal Agent, Trustee, and Savings Institution 1040 Functions of a Transfer Agent and Registrar The Registration of Corporate Stocks CONTENTS vii Procedure and Functions of Registrar The Transfer and Registration of Bonds The Payment of Registered Interest Transfer Agent for Corporate Stocks The Stock Books and Transfer of Certificates Procedure in Transfer of Certificates Transfers in Fiduciary Capacities The Delivery of the New Certificates The Stock Ledgers Taxation of Transfers Proxies Subscriptions to Capital Stock Compensation of Transfer Agent The Nature of a Paying or Fiscal Agency Method of HandHng the Coupons The Trust Department —Legal Requirements Development of a Trust Department The Savings Department FORMS AND ILLUSTRATIONS Figure Page 33. Loan Envelope for Securities (face) 838 34. Substitution Ticket ! . . 850 35. Graph Showing the Usual Seasonal Changes in Money Rates, Based on New York Quotations 860 vui Banking Principles and Practice VOLUME IV DOMESTIC BANKING— EARNING ASSETS VOL. IV — I [...]... The volume of work for the department as a whole, and for the different divisions of the department, fluctuates widely during the day A slump on the exchange not only suddenly and DOMESTIC BANKING EARNING ASSETS 830 immensely increases the volume ularly affects the margin clerk demanded, but of loans On partic- the other hand, an upward swing of exchange prices, while increasing the volume of loans volume. .. time loans or on depositors' demand loans The rates on the demand loans are raised and lowered as the money market fluctuates, and the borrower is notified in each instance The department also keeps a record of the average rates on time and loans, tors' demand loans, bank meetings reports of all demand daily, monthly, and yearly day and prepares for the direcloans made and remaining unpaid loans, brokers'... acceptances; and where payable sent for collection about ten days before maturity, and a receipt DOMESTIC BANKING EARNING ASSETS 826 for all such items is given by the country collection department When paid in advance, lar due date to made is at once transferred from that upon which it is paid and a columns of the discount in the proper discount ledger a note Similar action is its regu- memorandum ticklers and. .. not with the expectation of receiving payment at once 4 Demand 5 Brokers' Special Loans Loans, or strictly Street Loans The bank may also act as agent for many loaning in the metropolitan market any excess of its customers, money they have DOMESTIC BANKING EARNING ASSETS 8 34 In such cases the bank generally handles the funds as if they its own and informs the customers that it will give the were same... however, the notes themselves are used as vouchers, are charged against the several accounts, and are returned at the end of the month in the ordinary course of business DOMESTIC BANKING EARNING ASSETS 822 Advances and Rediscounts with the Federal Reserve Bank The function of preparing: (i) discounts for rediscount and the federal reserve bank, with discounts or other collateral for (2) pledge with the... provided sent for clerk where payable DOMESTIC BANKING EARNING ASSETS 8 24 Records in the Discount Department There are various books used in the discount department, some of which in every are very essential bank; others primarily because of may in this department peculiar organization or because of the its character or methods of and are found be peculiar to a bank and be kept its Some of business books... rates and the amount each is earning daily, and also the average rate For purpose of illustration, suppose the bank had under discount bills running at the following rates $ 6,000,000 at 6 % yield per day $1,000.00 14, 000,000 " 5>2 12,000,000 " 5 8,000,000 " 4^ 10,000,000 " 4 making " " " " 2,138.89 " " 1,666.67 " " " " 1,000.00 " " I, III II in all $50,000,000 earning $6,916.67 a day, at rate of 4. 98... day; and for this reason the clerks are freely shifted from one of the above groups to another, according to the pressure of work The Nature The of Discounting principle of advance Such bank discount is the collection of interest in interest is not yet earned 813 In the case of a loan DOMESTIC BANKING EARNING ASSETS 8 14 the borrower makes his note out with interest at an agreed rate from date, and. .. annum, and in an institution which has constantly outstanding may amount The following table shows the difference in per cent of return per annum between lending money for a year on simple interest and advancing funds by discount of onea large amount on bills discounted this extra income to a considerable figure year paper By Interest THE DISCOUNT DEPARTMENT 6 815 DOMESTIC BANKING EARNING ASSETS 8l6... which certain important privi- would not otherwise enjoy DOMESTIC BANKING EARNING ASSETS 8l8 3 This method entails much rediscounting and there work than does the added advan- less clerical is, therefore, tage of time saved and possibility of error minimized Since there a reluctance to rediscount on the part both of is the country selling banks and of the buying reserve city banks, loan operations between . FIVE VOLUMES VOLUME IV DOMESTIC BANKING EARNING ASSETS NEW YORK THE RONALD PRESS COMPANY 1921 Copyright, 192 1, by The Ronald Press Company All Rights Reserved HG CONTENTS VOLUME IV DOMESTIC BANKING EARNING ASSETS Chapter Page XLII. a Trust Department The Savings Department FORMS AND ILLUSTRATIONS Figure Page 33. Loan Envelope for Securities (face) 838 34. Substitution Ticket ! . . 850 35. Graph Showing the Usual Seasonal Changes in Money Rates, Based on New York Quotations 860 vui Banking Principles and Practice VOLUME IV DOMESTIC BANKING EARNING ASSETS VOL. IV — I