Advantages of Acceptance to Banking System The discounting bank and the banking system as awhole find the following advantages among others in the use of trade acceptances: i. Trade acceptances are more liquid and easy to handle than accounts receivable. The paper is eligible for rediscount at the federal reserve banks and at discount houses and in the open market generally. It constitutes an excellent secondary reserve for the member banks. It is strictly commercial and self-liquidat ing. The federal reserve banks allow preferential rates for it. Discount companies are being organized to specialize in certain kinds of acceptances; they may come to offer still better rates than the federal reserve banks.
2. Banks will be free from the obligation to renew loans; borrowers frequently request their banks to renew or extend the time of their notes, and the banks are not free to refuse lest they lose an account. The trade acceptance is based on a specific commercial transaction that liquidates it. The banker can dis count them freely and, when near his limit, can rediscount; the paper is then in the hands of third parties who have not the rela tions of buyer and seller and are therefore in an independent position as to granting renewal or extension of time.
3. Banks are restrained by statute and by business expediency from loaning to any one person more than a certain per cent of their capital and surplus. They often find therefore that they are not able to handle business offered to them by some of their best customers. These restrictions are not imposed upon banks in the discount of trade acceptances.
4. Trade acceptances facilitate the work of the credit man of the bank. Their collection is almost always made through banks. This puts the banks in a position to know how the acceptors meet their obligations, what sort of customers their depositors have and who they are, etc.
5. Trade acceptances will probably increase the amount of business of banks, for more of the common business transactions will pass through their hands, such as collections, discounts, re discounts, commercial advice, etc.
6. Any development of the discount market tends to free the bank from dependence upon the stock exchange and frees the commercial market and capital from the financial market and capital. This is one of the ideals of the federal reserve system.
The introduction of trade acceptances is not free from danger of abuse. It is highly desirable that they should maintain their high quality. They should be limited to actual current commer cial transactions. They should not be renewed, except rarely, many of their virtues hanging upon strict observance of maturi ties. If the present custom of a trade is short-term credits, trade acceptances should not be introduced to extend the terms; nor should they be used only with slow-pay customers, as such prac tice would quickly lead to discrimination against acceptances in the discount market. The use of acceptances does not mean that the credit departments of banks or sellers can be less careful and vigilant in credit extensions. Nor may the paying teller or other bank officers scrutinize the paper less carefully for forgeries and fictitious issues.