Adapted from articles by W. H. Steiner, in Federal Reserve Bulletin, June, 1920; January, May, 1921.

(See text, pp. 182-84)

The methods which are followed in extending accommodation to banks differ in important particulars from those followed in extending accommodation to mercantile houses. With the latter, borrowing is assumed to be a natural and recurring operation. The general situation of the enterprise is considered, and on this basis a line of credit is extended. Borrowing by a bank, however, is usually not so regarded. Instead of viewing its transactions as a whole, and on this basis determining the line of accommodation, it is desired rather to go back to the general operations and to consider the specific transactions which occur. This is the case to the extent at least of having the paper representing these transactions as collateral, and analyzing these bills receivable to some extent. In consequence, no line of credit is generally fixed, but each individual case is considered on its merits, specific amounts being granted as needed. The line of credit is therefore employed only in a somewhat restricted sense. The position which is taken with respect to bank borrowing is well stated by one institution as follows: "We avoid as far as possible suggesting lines or limits as to the extent we would serve the borrower, simply indicating our disposition to fully meet their reasonable requirements in liberal proportion to balances maintained and with due regard to the amount of their capital investment and borrowing elsewhere, but frequently the borrowers suggest lines themselves which are agreed to if circumstances warrant, conditioned on everything continuing satisfactorily." Some institutions, however, make it a regular practice to fix lines for their bank as well as for their mercantile accounts, while some institutions fix lines only for those banks which are regularly in need of funds each year. The amount loaned is also limited in the case of national banks by Section 5202 of the revised statutes, covering indebtedness for loans or rediscounts, other than with the Federal Reserve banks, to the amount of unimpaired capital, and in many states there are provisions covering this matter.

The practice of institutions with respect to credit files on their bank accounts differs greatly. Some institutions keep a very elaborate file, whereas others rely much more largely upon the general acquaintance which the individual officers in charge have with the account. In a broad way the information which is considered is composed of the following: (1) statements of the institution; (2) experience of other institutions with the subject; (3) agency reports, which are, however, frequently not obtained; (4) reports of representatives; and (5) miscellaneous data such as newspaper clippings, special memoranda concerning the handling of the account, etc. New York banks in particular pay much attention to the experience which other institutions have had with the subject, and inquiry is usually made from a number of the latter's correspondents concerning the general standing of the bank in the community, its prospects, etc., the character, ability, and conservatism of its management, and the relations which the bank has had with the subject. Some of the Western and Southwestern institutions, which are in much closer contact with their borrowing accounts, do not make it a practice to communicate extensively with their correspondents, nor do they regularly employ representatives as in the case, for example, of New York banks.

Borrowing, in general, is of two classes - (1) for seasonal needs and (2) for extraordinary needs and special purposes. Banks generally insist that the borrower clean up its loans for a reasonable part of each year. The seasonal clean-up is, of course, pronounced in those sections of the country in which the crops bulk largest. In these sections the time of crop moving fixes the date of liquidation of the loans, and the maturities must be adjusted accordingly. Temporary accommodation will also be granted where unexpected or large withdrawals of deposits occur, or in the past in connection with government finance. In a few cases continuous borrowing is permitted where banks are located in large cities which lack sufficient banking capital to meet continuous borrowing demands. In granting accommodation, the lending bank considers prominently the profitableness of the account to it, as represented in particular by the balance which is kept with it.

Accommodation may be obtained in a variety of forms. Paper may be rediscounted or a loan may be made. This loan may be unsecured, or else secured by collateral consisting either of bills receivable or of securities. Loans may be made on demand or for a fixed maturity. Finally, the accommodation at times may be extended in a special form, such as through the use of the certificate of deposit, or by sale of securities or bills receivable with repurchase agreement.

The general practice is to extend loans rather than to grant rediscounts. There are relatively few unured loans. Collateral is desired for the assurance of safety which it gives. Banks on the whole differ in their preference with respect to the kind of collateral, some preferring bills receivable, while others prefer securities, but on the whole the collateral consists mostly of bills receivable. In the agricultural sections few securities are used. The use of collateral permits a margin which provides further protection to the lending bank. This varies very greatly with the individual case, the customary margin perhaps running, however, from 10 to 25 per cent.

Practice also differs with respect to the maturity of loans. Some institutions usually have demand loans, while others strongly prefer loans for fixed periods. This varies somewhat, according to the form of collateral employed, and loans on bills receivable are usually for fixed periods. A favorite maturity is 60 to 90 days. The collateral is generally held by the lending institution, although in the case of banks in distant parts of the country another institution may hold it under trust receipt. The collateral is generally returned shortly before maturity to the borrowing institution.

Borrowing against certificate of deposit is relatively rare, although in New England, on the Pacific coast, and in the Northwest it is still stated to be frequent. In some cases, also, officers or directors may arrange for accommodation on their own note, or else may indorse the borrower's paper in order to provide added strength. Purchase of securities or bills receivable under repurchase agreement is at times also found, and this may be done for special purposes, such as in connection with taxation. Most of the special forms of accommodation may be traced to a continuance of the prejudice which formerly existed against banks showing bills receivable or rediscounts in their published statements.