17. The bank's credit latitude.—It is of course necessary that a bank's investment in outside credit be such that the latter may readily be turned into cash whenever this becomes necessary. On that account, the majority of the investments in which a bank may engage are of a nature that yields a comparatively low rate of interest. For the purpose of being able at all times to discharge upon demand its obligations to de positors, the bank is compelled to regulate its credit operations by a consideration of the degree of con vertibility possessed by the credit instruments or se curities in which it deals.
Accordingly, certain kinds of credit security, per fectly good in themselves but lacking the element of ready convertibility, may for that reason be excluded altogether. Before the passage of the Federal Re serve Act, national banks could not lend money on the security of real estate,' and under the regulations of the Federal Reserve Board loans of this charac ter are very strictly guarded. On the other hand, certain classes of securities may be so readily market able that they do not come within the scrutiny of the bank's credit department. These are collateral se curities given for "call loans," their present value be ing determined by the condition of the market rather than by the standing of the borrower who deposits them.
18. "Business paper'' and "loans and discounts."— We thus arrive at a point where we see clearly what are the characteristics of that branch of credit called banking credit. Confusion is frequently caused by the fact that certain transactions undergo a change of name by reason of the different points of view from which they are regarded. For example, such credit
instruments as promissory notes and bills of exchange executed by business men are commonly designated "commercial paper" and under that name are dis counted by the bank. Upon the bank's records, how ever, such commercial paper appears under the name of "loans and discounts." In connection with "paper" of this form, certain other classifications are made by the bank. First, with regard to the security attaching to such paper, promissory notes are divided into "single-name" pa per and "double-name" paper, the former designating notes that have only the maker's indorsement, the lat ter representing notes that are made by one person to the order of another and indorsed by the latter. In the case of such double indorsement, since both indorsers are liable for the amount of the note, there is a double security for the bank.
A second classification takes into consideration the origin of the paper. In cases where such paper is the result of an actual business transaction, it is properly considered a "real" bill and rightly subject to discounting by the bank. If, on the other hand, it has no such origin it is termed "accommodation pa per" and is not usually considered a sound security for a loan.
The latter classification, however, is rather an arbi trary one, since a "fictitious" bill (accommodation pa per) —provided its maker is a person of known capi tal and standing—may rest upon what is to the bank a greater security than that which underlies what, by way of contrast, is designated a "real" bill.