BANK. This article deals with the relation of the public to the banks. The other branches of the subject will be found under BANKING AND CREDIT; BANKS, HISTORY OF, etc. The public's relations with the banks take three main forms. Firstly, when the public is lender, and the bank the borrower; secondly, when the public is the borrower and the bank the lender; and thirdly, when the bank acts as the public's agent, or servant, in one of many capacities.
public's loans to the banks take two main forms: (I) money lodged on deposit account; (2) money lodged on current account.
The first point for the public to appreciate is that their "cash at the bank" is in reality their loans to the bank, and that the bulk of this money is re-lent to the public. This last point will be considered later, but meanwhile it may be pointed out that just as when a lender forces money on a borrower, the borrower need not accept the loan at all or need not take farthings or five-pound notes, so can the bank exercise a similar discretion. A manager who refuses to open an account, or a cashier who rejects farthings or who insists on the customer signing his name on a banknote, is within his legal rights.
A deposit account is subject to withdrawals at, as a rule, a week's notice, and the bank adjusts its own lending policy in accordance with this rule. Interest is payable at two points below bank rate in so far as London is concerned, and in general the bank must maintain a margin between its "borrowing" rates and its "lending" rates, as on this margin the bank has to live.
Very often, a manager will allow withdrawals to be made from deposit account at less than a week's notice (cases have occurred where money has been withdrawn from deposit on demand), but this is a concession.
A current account is always subject to withdrawals on demand, and in the vast majority of cases these withdrawals do not take the form of cash, but consist of transfers by cheque from one account to another. Cheques are defined and discussed elsewhere (see CHEQUE), but one or two matters concerning them will here be relevant.
a rule, four sets of people are concerned in the payment of every cheque—the drawer, the drawee's bank, the payer and the payee's bank. This is the simple and most common case. The cheque is first handed by the payee, together with a "paying-in" slip, to the cashier at his own bank. The paying-in slip is passed to the ledger-keeper and then to the pass-book clerk, who makes the necessary credit entry in the customer's account in the ledger and in his pass-book. The cheque itself is passed through ultimately to the bank's representatives at the clearing house. Here it is handed over to the representatives of the drawer's bank, who return with it and pass it to their own ledger keeper. He in his turn makes the debit entry in the drawer's ac count, and then sends the cheque to the pass-book clerk to be en tered in the drawer's pass-book and kept for return to the drawer.
Now the first and essential point is that this cheque is but one of thousands. A highly complex system of listing and sorting is necessary at the payee's bank to ensure that each cheque paid in finds its way to the bank on which it is drawn. In London, for example, cheques on other branches of the bank need one kind of segregation, cheques for the clearing house need another, for "walks" another, and for the Bank of England yet one more. The procedure here is to list together all cheques drawn on any one bank; thus bank A would make separate bundles of cheques drawn on bank B, bank C and so on. When all these cheques reach the clearing house, each bundle can go direct to the repre sentative of the bank concerned and it may be added here that it is at the clearing house that the inter-bank transfers of money take place. At the end of the clearing, each bank "owes" for all the cheques drawn on it, and is "owed" for all the cheques paid into it. A balance is struck of "owes" against "owed," and the bank's own account at the Bank of England debited or credited according as the final balance is minus or plus.
The customer can help materially towards the successful oper ation of the clearing system.
(I) The afternoon clearing occurs after banking hours. When agitating for an extension of banking hours, he will do well to remember that a bank has about two hours' work to do after it has closed its doors.
(2) Sorting takes place at top speed, and the sorter gets to know instinctively the "look" of each cheque. Hence the man who draws cheques on plain paper is a nuisance.
(3) Banks undertake definite responsibilities to meet any losses due to forgery, fraud, etc. In return, they are entitled to take various precautions. That is why endorsements to cheques must be meticulously correct, why alterations must be signed by the drawer and not initialled, and why the payee must conform to the rules, etc., of crossed cheques. The receiving cashier at the payee's bank is for . the purpose of that cheque the representative of his own bank, the drawer's bank and the drawer himself, and is serving the interests of all three.
(4) In England the customer should learn the meaning of the letters T, M and C in the bottom left-hand corner of every cheque. T means "town," i.e., cheques drawn on banks within a few minutes' walk of the clearing house in Lombard street. These are cleared in the town clearing, which takes place twice a day. M means "metropolitan," i.e., cheques drawn on banks within half-an-hour of the clearing house. These cheques are only cleared once a day. C means "country," i.e., cheques drawn on all banks outside the Metropolitan radius. The country clearing is held once a day, but it obviously takes a double post to transmit a country cheque to the drawer's bank and to receive the assurance that all is in order.
Every day a certain number of "returns" or "unpaids" come to every bank through the clearing. These refer to cheques, which, when they reach the drawer's bank, are rejected, either because the drawer's account is overdrawn, or because of some irregularity in the cheque. As, for convenience's sake, the payee has originally been credited, he is now debited and the unpaid cheque returned to him for suitable action.
In the case of a country unpaid cheque, two days must clearly elapse before it is returned to the payee. During this time, the payee's bank reserves the right to refuse to let the payee draw against the proceeds of this cheque.
(5) Certain banks have special paying-in forms for country cheques. The use of these facilitates sorting.
(6) Every cheque costs the banks a certain amount of money for its clearance. The cost is the same whether the cheque is for one shilling or £I,000,000. The ideal customer is he who keeps a big balance and draws one cheque a year. A customer who draws a cheque every time he has a few odd shillings to pay is a nuisance. Also a customer who keeps only a small balance, may have to pay a charge to the bank to compensate it for the work done in clearing his cheques.
It may be added that whereas a bank will receive cash or cheques for the credit of an account without question or identifi cation, and at any of its branches, it obviously will not pay out cash unless it is satisfied that all is in order and unless the would be recipient can establish his identity and title.
Bills.—As regards discounts, the reader should read the article on BILL OF EXCHANGE, and his acquaintance with this article is assumed. In general, every branch of a bank is prepared to dis count approved bills for its customers, but certain rules and limi tations must be remembered.
(a) A bank only has a limited, though large, fund of money at its disposal, and has to meet many demands for accommodation. That is why head office has to ration branches and apportion fairly the funds available.
(b) The bank manager must know that his customer is of good repute and an "honest trader." (c) The bill must explain itself and represent genuine business. If Mr. Smith tries to discount a bill drawn on Mr. Jones at three months in respect of a sale of cotton shirts, and if Mr. Smith is a shirt manufacturer and Mr. Jones a draper, and if the bill states that it represents a sale of cotton shirts, then Mr. Smith will have no difficulty. On the other hand, if Mr. Smith and Mr. Jones are impecunious gentlemen of no apparent occupation and proceed to draw bills on each other, and then seek to discount them at their bankers, they will meet with no success. Certain reputable firms, especially those engaged in international trade and finance, do draw "finance bills" upon each other, and these the banks are prepared to discount, even though they represent no trading transaction, but are only a means of transferring funds from where there is a temporary surplus to where they can fill a deficit.
In short, when seeking to discount a bill, tell the manager the full facts of your position, and see that the bill is in order and self-explanatory. The rate at which a bank discounts naturally varies, both with the general course of money rates and also with the class of bill ; the rule being "the greater the risk, the higher the rate." The lowest rate is for bills endorsed by a bank, but "fine trade bills," or those bearing the names of sound, reputable traders, can be discounted at rates which are not much higher.
Overdrafts and Time Loans.—Time loans and overdrafts are best considered together. The essential point is that the money the bank is lending belongs to its customers and is repayable on demand. Hence any loan a bank makes must be a sound loan and must have a definite time limit to it. As a rule, a bank will not lend for more than six months. It will not lend money to finance new buildings, the installation of new machinery, or the purchase of other "fixed assets." The trader who needs money for such pur poses must issue shares or debentures to the public or borrow elsewhere. The most the bank will do is to make a temporary loan, pending a debenture issue or other permanent borrowing, and even here a prudent banker will assure himself that preparations for the debenture issue are in hand, and that the customer is definitely committed to making it.
A bank is always ready to lend money, to help a customer round a corner and to earn profits for itself, provided it is told the full facts of the customer's position. A trader should submit a balance sheet and profit and loss account, and bear in mind a banker's complaint that "Mr. Jones showed one profit and loss account to me when he wanted a loan, and another to the surveyor of in come tax over the road." He should further consult with his bank manager over the proposition he makes, and if the proposition has to go from the branch to head office, he should co-operate with the manager in "licking it into shape." Above all, he must make it clear that he intends to and can repay the loan at the end of the time limit fixed by the bank.
This is a suitable opportunity to differentiate between a definite loan and an overdraft. A loan for a definite amount and for a definite time is charged interest in full, whether or not the whole amount is immediately drawn upon ; though it is possible that the customer can negotiate for some relaxation of this rule. An over draft is only charged on the amount actually outstanding, even though an upper limit may have been arranged. Against this con cession, the bank has the right to ask for an overdraft to be paid off at once. It is hardly necessary to add that 2n account cannot, of right, be overdrawn without the previous consent of the bank. The rate of interest charged on loans and overdrafts depends on the going bank rate, being usually one point above bank rate and on general conditions of trade and industry and the money market.
Collateral.—Finally comes the question of collateral. In many cases a bank requires none. Loans to farmers are often unsecured, f or the bank manager knows all about the farm, and knows that the farmer cannot pack up his farm and quit. Loans to manufac turers and traders are often secured by a debenture or mortgage on the plant, and loans are permitted up to the limit of this de benture. The best collateral is sound, readily marketable stocks and shares. The usual procedure is for the borrower to transfer these to "the bank's nominees." The borrower continues to draw his dividends, but in case of need the bank can sell them over the borrower's head, handing him the difference between the net pro ceeds of the sale and the amount of his debt.
As the bank receives the proceeds of the sale on the next Stock Exchange settling day, it knows that if it has to realise the col lateral, it will have to wait for its money only a fortnight. A loan of this kind, therefore, is "liquid" from the bank's standpoint.
If the professional man needs temporary accommodation and does not wish to realise his securities, the above procedure is far and away the best. If he lodges securities whose current market value is £ Q00, and asks for an overdraft up to a limit of say £400, the bank is unlikely to object. He can then run his account up and down within that limit almost indefinitely. The bank knows it can always close down on him within a fortnight. The only danger point is a fall in the market value of the collateral. If this occurs, the bank will either reduce the limit of the overdraft, or else call for further security.
Branch Banks and Head Office.—Whether he is borrowing or depositing money, a customer will find it assists him greatly in his dealings with a branch bank, if he appreciates the branch's re lations with head office. Many lament the disappearance of the country banker, whose word was law in his own bank or small group of banks, and many complain that the modern branch man ager is circumscribed as to the accommodation he can grant. In these days of "big business," such laments are vain, and if the modern branch bank has lost the independence of its predecessor it has also lost its insecurity. To-day money banked at any one of 1,0oo branches is guaranteed by the resources of all the z ,000.
The modern big bank has "to lend to live," just the same as the small country bank. Out of the margin between its deposit rate and its loan rates it has to pay all its expenses and dividends. It is not true that a branch manager is discouraged from lending, but on the contrary he is judged by his superiors partly on his success in winning sound, profitable business for his branch. At the same time, the advance department at the head office has to ration out the money the bank has to lend, and it is for this reason that all applications for loans beyond a certain limit have to be referred by the branches to head office. Again, it is obvious that the ad vance department wants all applications to be reduced as far as possible to "a common form," as otherwise the task of discrimi nation would rapidly become an impossible one. It is as im portant for the customer to realise this as the branch manager, and this is why the customer is advised to co-operate with the branch manager in drawing up his application.
Banks' Services to Their Customers.—Space does not permit of more than the bare enumeration of the multitudinous services performed by a modern bank for its customer, many of them free of charge.
(r) The custody of stocks and shares and other valuables. This means more than bare safe-keeping. It includes the cutting and collection of coupons, the direct collection of dividends, and also a continuous watch on the drawing of bonds, the payment of cou pons in arrears, and other matters affecting vitally the interests of the customer. The bank will also buy and sell stocks and shares on behalf of the customer, though in many ways it is better for the customer to deal direct with a recognized broker.
It may be added that far the most convenient way of holding stock is in the form of bearer bonds permanently kept and ad ministered by the bank. The risk of loss is non-existent, and the convenience of handling is considerable.
(2) The financing of trade. A bank is prepared to undertake the collection and payment of bills of exchange for its customers, crediting or debiting them accordingly. In approved cases, it will accept or endorse bills on behalf of its customers and open credits for its customers under the usual conditions and terms. It will handle all documents and in general do all it can to assist its customers. Services such as these are, of course, subject to small charges, and the customer is advised to consult his own manager as to details, and as to what in his case the bank is pre pared to do.
(3) The bank will issue letters of credit or traveller's cheques to customers wishing to travel abroad. Full information can be obtained from any branch.
(4) The bank will buy or sell foreign exchange, spot or for ward, for its customers, under approved conditions.
(5) The bank will obtain passports for its customers, and also deal with their in-coming letters.
(6) The bank will act on behalf of its customers in income tax negotiations.
(7) The bank will make periodical payments, such as rent, sub scriptions, etc., on instructions from its customers.
(8) Finally, the bank will act as a trustee, and as an executor of a customer's will. (N. E. C.)