Dated, New York, the day of , .
(Signed)It is to be noted that this agreement is very sweeping in the security it provides for the bank; that it contains no mention of any specific loan or maximum amount of loan, or of rates or terms, but is wholly ancillary to other loan contracts; and that it is a continuing contract.
Day Loans and Overcertification In this connection a statement of the nature of "clearance loans," or "day loans," is fitting. Until within the last decade the custom of the Street was for a bank to agree to certify checks to the amount, say, of $i,000,000 for a broker who would carry with it an average cash balance of, say, $ioo,000. Certification meant that the bank assumed the obligation to pay the check on presentation over the counter or through the clearing house, the implication being that the broker had at least $1,000,000 balance at the bank, out of which it would set aside funds to the amount of the face value of the checks certified. But the practice was one of overcertification, for the balances were much less than the certifications signified. Overcertification was forbidden by the National Bank Act, but its one-time almost universal practice in Wall Street shows that this feature of the act was a dead letter. The Comptrollers of the Currency opposed overcertification, and the banks gradually adopted a system of "day loans" in order to meet the requirements of the law. In the morning the broker estimates his probable needs for certification that day, and on the basis of his single-name unsecured note borrows enough to pro vide him with sufficient credit at the bank to cover what checks he expects to present for certification during the day. Plainly, while this loan system obviates technical overcertification, it has exactly the same practical result, for the banks still make the same extensions of credit on the same scant security.
Some of the Wall Street banks have taken a more conservative attitude toward "clearance," or day loans, by demanding col lateral to secure them. The adoption of this rule naturally caused a rapid decline in the number of brokers' accounts and in the amount of their balances with conservative banks, and diverted such accounts to less conservative institutions.
Day Loan Agreement For the clearance loan, with the security deposited, the broker is required to sign some such form letter as follows: New York, N. Y., (date) The Bank of New York, New York City.
• Dear Sirs: For the purpose of securing to you the payment of any and all clear ance loans which you may hereafter make to us, we deliver to you here with and pledge with you the following securities: (listed)You are to hold the above securities as security for the payment of any and all clearance loans which you may hereafter make ts) us, and to de liver them to us, upon demand, at any time after all outstanding clearance loans have been paid.
It is understood that every such clearance loan is to be repaid at or before 3 o'clock P. m. of the day when it is made; and that, in default of such payment, you may sell, at public or private sale, without notice to us, any or all the above securities, at such time or times as you may deem advisable, and apply the proceeds to the payment of any unpaid clearance loans and any and all other indebtedness or liability from us to you at such time or times existing.
It is also understood that other securities may, with your consent, be substituted, from time to time, for any of the above securities, and that any such substituted securities shall be upon the same terms as the securi ties above mentioned.
Yours very truly, (broker)And the bank acknowledges receipt of the securities by the following letter: Dear Sirs: We have received your letter of this date and the securities mentioned therein, which we agree to hold upon the terms therein stated.
Yours very truly, The Bank of New York Then, whenever the broker wishes the bank to certify to an amount greater than he has on balance, he presents a day loan note, which reads: New York, (date) On demand, for value received promise to pay to the Bank of New York, or order, dollars, hereby agreeing that said Bank shall have a lien upon all property of the undersigned now or hereafter in its possession or under its control, as security for any indebted ness of the undersigned now existing or hereafter contracted, with the right at any time to demand additional security, and with the right, upon default in payment, to sell, without advertisement or notice to the under signed, any or all of the securities or property so held, at public or private sale, or to otherwise dispose of the same in the discretion of any of the officers of said Bank, applying the proceeds upon the said indebtedness, together with interest and expenses, legal or otherwise, the undersigned to be liable for any deficiency.