The Federal Reserve Act permits member banks to accept bills or drafts drawn upon them when aris ing out of certain kinds of transactions, under restric tions which are explained in a later chapter. These acceptances may be rediscounted at the Federal Re serve banks. New York State has passed a law permitting state banking corporations to make ac ceptances on domestic as well as on foreign bills. The authorization of rediscounts and acceptances is a not able step forward for American banking.
14. Loan on warehouse receipts.—After stocks and bonds, the next great class of property which may be used for collateral is merchandise and materials repre senting the investment of that form of capital which it is the legitimate function of banks to provide. If the calculations of the owner are not amiss, this prop erty will be prepared for the market and sold within the near future. Accordingly, it embodies the best quality of collateral security in that it will be liqui dated naturally and thus provide funds with which to repay the debt.
Certain difficulties present themselves, however. Merchandise and materials cannot be delivered to the bank in the same manner as stocks and bonds. If they are left in the possession of the borrower, they may disappear, or substitution may be made, or they may deteriorate thru neglect. These risks can be avoided only by placing the goods in the possession of a third party, who acts as trustee for all concerned and who is required by law to conform to certain rules which make fraud and loss impossible. The trustee issues a certificate, called a warehouse receipt, which contains a description of the property deposited. This receipt forms a legitimate collateral for bank loans.
Loans on warehouse receipts have increased to a marked degree in recent years. The growth is ac counted for largely by the standardization of various kinds of merchandise used for the purpose, by the de velopment of warehouse insurance, and by the passage of uniform laws by several states. At first, such loans were looked upon as a species of pawnbroking, but most banks now look upon them with favor. Some banks still prefer not to accept receipts for ware house goods as collateral at all. Instead, they require a transfer to themselves on the books of the ware house, taking a non-negotiable receipt therefor.
15. Loans on open book bankers lend funds to business men on the security of the open book accounts of their customers or on instalment contracts which are assigned to the bank as collateral.
This business is strongly discountenanced by the more conservative bankers, who class banks engaging in it with pawnbrokers. They say that under the present conditions of banking competition any business man can borrow all the bank funds to which he is entitled on his general credit, and that those merchants who can get funds only by assigning and hypothecating their book accounts are undeserving of any bank credit at all. A description of the methods of obtaining and granting such loans is found in the chapter enti tled Divisions of Credits in the Modern Business Text on "Credit and the Credit Man." 16. Loans on insurance banker is of ten requested to make a loan on the security of a life insurance policy. If the policy has a cash surrender
value it is a safe loan so far as the security goes, but it may be a hard one on which to realize. Such loans have usually a sufficient amount of sentiment con nected with them to induce the banker to make the loan. In most cases, the policy is accepted by the banker more as a moral than an actual security. George Rae in his book "The Country Banker" says regarding life insurance policies as collateral security: "But the inability to pay a sum owing to a bank has not ordinarily a fatal effect on the life of the debtor; it is frequently quite 'the reverse." If the loan is made at all, the bank should make sure that premiums on the policy are paid promptly.
17. Loans on is a rare thing to find loans on chattels among a bank's assets. The writer knows of a loan which was secured by a pledge of wedding silver. The silver lay in the bank's vaults for years, and while there was enough of it to secure the loan, it is doubtful whether the entire lot could have been sold for one-quarter of its original value. Loans on horses, wagons, and similar equipment are sometimes made, but the cases are so rare that they hardly need to be described at length. Chattels are not valuable as bank collateral.
Chattel mortgages are frequently recorded by those who dispose of goods sold on the instalment plan. A reference to the local official record will indicate the character of selling of this type that is being prac tised in any community. It will also be of much in terest to the business man. The recording of a chat tel mortgage is always a signal to creditors. Dealers are accustomed to watch, the record of assignments closely. Careful bank officers, doing local business, watch these official records just as closely as the busi ness men do. This is the chief reason for referring to a record of chattels.
18. Specialization in are begin ning to specialize in a few kinds of loans. They be come accustomed to certain types of transactions, get to be expert in handling them and find their greatest profits there because they build up special facilities for carrying them on. Other classes of business drift away or, at least, are not sought. A national bank located in the lower end of New York City had most of its customers in two lines of business. A few years ago nearly all the houses in one line began to move up-town. The bank, not being permitted by its Fed eral charter to establish branches and not wishing to move away from its other line of customers, was forced to send out messengers to collect deposits and to offer all kinds of inducements to hold its old business.
It is unwise for a bank to carry specialization too far, whether it be in certain maturities, classes of loans or lines of business. In any event, a bank should not lend too great a proportion of its funds to one person or to a single industry. In the words of an old pro verb, it should not carry all its eggs in one basket.
The National Banking Act limits specialization somewhat by requiring that the amount which a na tional bank can loan to one person or firm shall not exceed ten per cent of its paid-up capital and surplus or 30 per cent of its subscribed capital.