In case the application is for an advance of funds, the cashier of the borrowing bank executes a collateral note in favor of the federal reserve bank, pledging notes, drafts, bills of exchange, or bankers' acceptances, or bonds or notes of the United States, as described in the schedule included in the application for the loan. The list form is similar to that required from applicants for redis counts and requires the same description of the pledged items. If securities of the United States are to be pledged, a different form is used. By the terms of the note the federal reserve bank is given the right to require such additional security as it may deem proper, and, in case of default in providing the additional security or in case of non-payment of the note, is also given the right to sell the collateral in whole or part.
The paper eligible for collateral for such loans, or for redis count with the federal reserve banks, is defined by the Federal Reserve Board, and the same rules of eligibility apply for each of these uses. To facilitate the flotation and banking operations connected with the Liberty Loans, the federal reserve banks, for advances not exceeding fifteen days, established preferential rates of discount "for notes, drafts, or bills of exchange issued or drawn for the purpose of buying or carrying bonds, notes or certificates of indebtedness of the United States, and secured thereby, having a maturity at time of discount of not more than oo days"; and "for one-day promissory notes of member banks required in connection with transactions involving the fiscal operations of the Government, secured by eligible paper or bonds, notes or certifi cates of indebtedness of the United States." It has also been the policy of the federal reserve banks to grant preferential rates to acceptances.
Proper notations must be made on the bank's books against all paper so hypothecated with the federal reserve bank, and from time to time early maturing notes must be withdrawn and approved substitutions deposited. The credit man of the federal reserve bank may pass unfavorably upon certain of the paper tendered for discount or collateral and may insist upon other paper or upon further credit information about the objectionable paper, in which case other paper or additional information must be provided by the discount clerk. Paper pledged with the federal reserve bank is returned to the pledging bank when substitutions are provided. Paper discounted by the federal reserve bank is sent for collection somewhat in advance of maturity to the bank where payable.
Records in the Discount Department There are various books used in the discount department, some of which are very essential and are found in this department in every bank; others may be peculiar to a bank and be kept primarily because of its peculiar organization or because of the character or methods of its business. Some of the more common
books are the route book, the yield book, the liability ledgers, the discount ticklers, the offering book, the maturity books, and the bills receivable book.
I. The Route Book. At the opening of business each day the clerks enter in the route book from the discount tickler the notes due that day and payable within the bank's city collection limits, and indicate the place of payment on each item. The total amount of this book is deducted from the total of the discount tickler page, and the balance must prove against the figures of the country collection department, which is collecting the other notes. After this proof is made, these items are sent out for collection by messengers; as each messenger reports on his items they are checked off on his route sheet.
2. The Yield Book. This book shows the exact amount of the bills discounted under the various rates and the amount each is earning daily, and also the average rate. For purpose of illus tration, suppose the bank had under discount bills running at the following rates: making in all $50,000,00o earning $6,916.67 a day, at an average rate of 4.98 per cent; and suppose at the close of business the fol lowing changes have occurred: making a net increase of $28,00o for the day, with an increase in earnings of $3.89. In summary: total amount of bills discounted $50,028,000, earning per day $6,920.56, or at the average rate 4.98 per cent.
3. The Liability Ledgers. These contain alphabetical lists of borrowers, one or more ledgers for individual customers and one or more for bank customers. By means of these books the bank is able to tell what are the liabilities of its customers to the bank as discounters or borrowers and as indorsers for others. A man may not be a heavy borrower himself, but he may have indorsed for others to such an extent as seriously to impair his credit. Borrowers are generally given a line of credit based upon what their accounts with the bank and their general credit would seem to warrant. To keep the run of this line of credit is one of the particular uses of the liability ledger, for it is contrary to the National Banking Act for a bank to loan to any individual or firm upon his or their own name more than a certain per cent of the capital and surplus. In a large and active bank it is im possible to keep track of these loans without the use of the liability ledger. All items are entered as follows: date when the loan was made; rate; maker; indorsers, if any; amount; and maturity.