Under the National Bank Act a loan evidenced by an unsecured obligation, whether promissory note or bill of exchange, cannot exceed 10 per cent of a bank's paid-up and unimpaired capital and surplus. This fundamental limitation was continued in the Federal Reserve Act, which, however, added certain exceptions. In addition to the unsecured loan, a customer can also receive another loan amounting to 15 per cent of the bank's capital and surplus, provided the note is secured by bills of lading and other shipping documents, warehouse receipts, or other instruments conveying or securing title to readily marketable, nonperishable staples having an actual market value of 115 per cent of the face amount of the note. Thus a bank with a capital and surplus of $100,000 may grant to a customer one loan of $10,000 based on his promissory note. Assuming that he has shipped a consignment of cotton worth $17,250, he may then present the bill of lading, insurance policy, and other shipping documents as collateral to the bank and receive another loan of $15,000 on this second promissory note.

During the recent war another exception was made to the 10-per-cent limitation of the National Bank Act. In order to encourage the sale of Liberty Bonds, Victory Notes, and certificates of indebtedness, these could be used as a means of obtaining additional accommodation from banks. Regardless of any other loans which the customer may have already received, he could obtain additional credit amounting to 10 per cent of the bank's capital and surplus, if his note were secured by not less than a like amount of government war obligations. Thus the bank mentioned above, with a capital and surplus of $100,000, could have loaned to one customer the maximum sum of $35,000 on the following three notes: (1) $10,000 on a straight unsecured obligation, (2) $15,000 collateraled by shipping documents or warehouse receipts, (3) $10,000 secured by a like face amount of government war obligations.

Certain types of loans are free from any restriction. No limit is imposed by law upon loans which a bank grants to a customer on his promissory note if it is secured by government war obligations whose face value is at least 105 per cent of the amount of the note. This suspension of the 10-per-cent limitation was regarded as a necessary measure in financing the war, but this privilege expired on December 31, 1921.

The exceptions so far discussed have been applied to loans evidenced by the promissory notes of the bank's customers. All limitations are also waived on "bills of exchange drawn in good faith against actually existing values." These instruments are defined by the rulings of the Federal Reserve Board as drafts secured by a complete set of shipping documents which convey a clear title to goods already shipped or in process of shipment. Such bills of exchange also include bankers' acceptances eligible for rediscount under Section 13 of the Federal Reserve Act. The bank is also unrestricted in extending credit to a borrower if it discounts commercial paper which he has received from his customers in the course of his business and actually owns. Thus promissory notes or bills of exchange which evidence debts due from other persons may be offered by the borrower and discounted by the bank.

The absence of any limitations on the three types of loans described above has been justified on the ground that the lending bank is given adequate protection. This protection depends upon the following factors:

(1) amount of the margin or excess value of collateral,

(2) the value of the business transaction on which the obligation is based, (3) the credit standing of two parties - maker in the case of a note, acceptor in the case of a draft, and indorser of both instruments.