The Nature and Care of Discounted Paper The paper held by the discount department is, with respect to its ownership, of several classes: 1. The notes and acceptances discounted by the bank and now the property of the bank.
2. Bills receivable which have been pledged by banks and other borrowers as security for loans, and which are kept in the department because it has better facilities for caring for them than has the loan department.
3. Time items, the property of customers, which have been deposited or left with the bank for collection and credit to the customers' accounts, when due; in many banks these are held by the note teller, who attends to their collection.
The greater part of the paper held by American banks consists of unsecured and single-name forms. The growth of acceptances has increased the proportion of two-name paper in recent years. Since the great bulk of credit is extended on unsecured loans, it is evident that a close watch must be kept on the credit of all those borrowing on their own unsecured notes or by discounting the unsecured notes of others. Changing conditions must be duly considered, and credit information must be constantly sought and carefully analyzed. This is a function of the credit depart ment.
One of the most exacting duties of the discount clerk is the care of bills receivable pledged with the bank as collateral by bank correspondents. Loans by a reserve city bank to a correspondent bank are made on an unsecured or collateral note, or else by rediscounting commercial paper. The usual way is for the correspondent to give its collateral note and pledge a large number of bills receivable of small denominations. The volume of this business is rapidly declining, for correspondent banks which are members of the federal reserve system are relatively ceasing to borrow from reserve city banks, and instead are borrowing or rediscounting with their federal reserve banks. It is reasonable to assume that this tendency will continue as country banks accustom themselves to business operations with their federal reserve banks.
Each bank's receivables are kept by the discount department in a separate envelope, which is ruled to show the amount and maturity of the loans, the amount of collateral received and returned, with the dates, and the balance of collateral on hand.
In this way can be told at a glance to what extent any correspond ent is indebted to the bank and whether a proper margin is being maintained. The receivables are kept arranged in the order of their due dates, and all are entered on cards arranged chrono logically showing just what notes fall due on any particular date.
Rediscounting of Bills Receivable When the borrowing by a correspondent is done by re discounting bills receivable taken from the correspondent's portfolio, these notes are usually payable at the office of the send ing bank and of course bear that bank's indorsement. They are accepted with the understanding generally that they are to be forwarded to the borrowing bank for collection and are to be charged to the bank's account on the day of maturity. A peculiar sentiment has pervaded the American banking and busi ness world against rediscounting; country banks have hesitated to sell their discounts lest their customers interpret it as due to financial weakness. Frequently when they do rediscount they take precautions to keep their customers from knowing that their paper has been rediscounted; one way of doing this is to in dorse their bills rediscounted with pencil and request the buying bank not to place its stamp or collection number upon them. All such requests are carefully complied with by the reserve city bank. A small slip of paper is attached to each one of these notes, and the collection number is stamped upon the slip; in this way the items may be readily identified, and at the same time the notes are not mutilated as the slips can be easily detached. Another arrangement to the same end is to buy the paper with an agreement to resell it again to the seller if specified conditions are met.
The practice of rediscounting has not been encouraged by the reserve city banks. It is much more satisfactory, from their point of view, to lend on the bank's own collateral note, for several reasons: i. A margin of collateral is required, and this adds to the safety of the loan.