Loans to Banks An important class of borrowers from reserve city banks is their correspondents. It is not customary for the lending bank to extend lines of credit to its correspondents, but each applica tion is treated on its merit and specific amounts arc loaned as needed. Many banks do, however, extend lines of credit to other banks. In general, the lending bank stands ready to supply the reasonable requirements of the correspondent, but only in propor tion to the average balance carried and with due regard to the applicant's assets and borrowings elsewhere and within the limitations set by law. Larger loans would be granted to an applicant offering paper eligible for rediscount than to one offering ineligible paper.
Some reserve city banks have a formal rule that a minimum balance of 20 or 25 per cent of the borrowings must be carried with the lending bank; some fix a minimum amount for the balance, say, $2,500 or $3,00o for a bank with capital and sur plus of $25,000. Exceptions are made to these rules on occasion, but chronic borrowers are favored less with exceptions than occa sional borrowers. These balances make the account more profit able and also guide the lending bank as to the character of the management of the correspondent, for small balances with fre quent overdrafts indicate that the correspondent is working with too small liquid assets.
Quite complete credit files are assembled by the reserve city banks to guide them in making loans to banks. The credit data are procured from representatives of the borrowing bank, from other correspondents, from the state superintendent and state bank examiner, from statements of the bank, from agency re ports, and from personal visits by the field representatives of the reserve city bank.
Much of the borrowing is seasonal, particularly by correspond ents in agricultural districts. The occasions are the planting, the harvesting, and the carrying of the grain or produce in ware house or in transit. The maturities of the loans synchronize with the ends of these periods. Many reserve city banks insist upon a seasonal clean-up of the loan for a reasonable part of the year. Some of the loans, however, are for extraordinary needs and special purposes, for instance, the sudden and large with drawal of government deposits or some change in the market situation.
The table on page 873 gives the distribution of loans by nation al banks to other banking institutions as among reserve cities, federal reserve districts, state and national banks, and forms of loans.
These figures, covering the three chief forms of interbank borrowing, include the great majority of such loans, but some bankers have always been reluctant explicitly to report interbank loans where non-committal ways were open. The general pre judice against bank borrowing which has existed until recently, the objection raised by customers to having their notes sent from the bank where they were originally negotiated, the tendency of business men to hesitate to depend for accommodation upon a bank which itself had to borrow, and the legal limitations which, with certain exceptions, restricted the bank's debts and liabil ities to an amount not exceeding its capital stock, have caused some bankers to conceal as many of their borrowings as possible. The Comptroller of the Currency has pitted his wits against these bankers in unearthing the concealed loans, but has found it impracticable to prevent violations of the law. Some of the methods of concealing interbank borrowings are: r. To put them in with such items as "other liabilities," "notes or securities sold with agreement to repurchase," or "bills receivable rediscounted for the bank's benefit without recourse on the bank but with indorsement or guaranty of an officer or director of the bank." 2. To use the personal credit of some of the officers or directors of the borrowing bank.
3. To arrange a nominal sale to the directors or officers of some of the bank's bills receivable, indorsed without recourse, and let them rediscount or pledge this paper for a loan from another bank.' Collateral and Margins of Bank Loans The borrowing may be done by rediscounting or by loans on promissory notes. The loans are either unsecured or collateraled by bills receivable or securities. Some are demand loans, others time loans. Some borrowing is done by the use of certificates of deposit. The method of selling securities with an agreement to repurchase is also common. The proportion of loans secured by discounts to those secured by bonds varies among the borrowing banks, depending upon the volume and character of business done and upon the part of the country where the bank is located. The collateral is most frequently bills receivable. Occasionally borrowing is done on the personal note of the directors or officer, or else their personal indorsement is put on the note of the bank.