The margins required on these various classes of security vary with the lending bank. On loans secured by government bonds the usual margin is from 5 to ro per cent of the market value; on loans secured by municipals, rails, industrials, or good mixtures, it is zo or 25 per cent; and on loans secured by bills receivable it is more variable, ranging from 20 to ioo per cent. The margin required varies also with the standing of the correspondent; in the case of first-rate correspondents no margin at all may be required.
The lending bank must assure itself that these securities are in good order. In many cases the collateral pledged is already in the possession of the lending bank, being held for safe-keeping in its customers' securities department; and in such cases it is very easy to know that the stock is properly assigned or that the bonds are good. Some of the collateral which is sent may con sist of bank stocks, city or school district warrants, and these forms require careful scrutiny. Moreover, the loan value of these forms is difficult to determine. If the bank cannot fully satisfy itself that the collateral is perfectly good, it requires the borrower to substitute something else.
There are some banks in the stock yards district which operate cattle-loan companies in conjunction with their regular banking business. Such banks often offer for discount to other banks the cattle-loan company's bills payable secured by its customers' notes, which in turn are secured by cattle; or the cattle-loan company's bills receivable, secured by cattle and indorsed by the company, may be offered for discount. The buying bank, in loans of this character, receives either a chattel mortgage covering the cattle which secures the loan or the selling bank's trust receipt showing that the mortgage is being held for its account.
The collateral is generally held by the lending institution, but sometimes it is arranged that it be held, under trust receipt, by another institution in the vicinity of the borrower. This is more often the case when the borrower is far distant from the lender and it is desired to reduce the expense, inconvenience, and risk attending shipment of the collateral. It is also more com mon where the loan is for a very short time. Locating the
collateral near the borrower also makes the substitution much easier.
Examination and Substitution of Collateral for Loans to Banks When bills receivable are received as collateral, the credit department prepares a list of them, headed by the name of the bank and below it the names of the makers of the bills receivable, names of indorsers, if any, the amounts, and the due dates. The commercial agency ratings are placed after the respective makers and indorsers, and the credit files are searched for all information at hand regarding these to help determine the value of the col lateral. The receivables are examined carefully to see that they are in proper form, that the amounts in figures and in writing correspond and are not out of proportion to the ratings given the makers, that the datings are correct, that the notes mature within a reasonable time and are signed properly, that they are nego tiable, and that they are properly indorsed. If the paper is irregular in any way, if the bank's information is not entirely favorable, or if the bank has too many notes made by one person, the borrowing bank is asked to submit other collateral for that to which exception is taken.
In addition to the above list, the credit department also pre pares cards on which are recorded the names of the makers of the receivables, the date the collateral was received, from whom re ceived, the amount and the maturity. These cards are filed under the names of the makers, with their respective addresses; so that by referring to these cards it can be ascertained at a glance how much paper of a certain maker is entered as security.
The note and collateral having been passed upon favorably, a letter is written to the borrowing bank advising the decision of the bank in the matter of its loan. This letter acknowledges receipt of the borrowing bank's letter with note and collateral and informs the borrowing bank that it has been credited with the proceeds of its note. The letter, before mailing, is sent, together with the application letter, the application ticket, and the bank's credit folder, to the bank's officers to be finally passed upon by them and thus concentrate responsibility for loaning the bank's funds.