Bills Drawn To Furnish Dollar Exchange

The fourth class of bankers' acceptances comprises bills drawn on member banks by banks and bankers in foreign countries, for the purpose of furnishing dollar exchange. These may be accepted by the former to an amount not in excess of fifty percentum of their capital and surplus, provided the maturity of such drafts is not more than three months, exclusive of days of grace.

Applications For Privilege Of Accepting Required To Be Filed With Federal Reserve Bank

Any member bank with an unimpaired capital equaling at least twenty percentum of its paid-up capital, desiring to accept up to one hundred percentum of its paid-up and unimpaired capital stock and surplus, as above described, is required to file an application with the Federal Reserve Board, through the Federal Reserve Bank of its district. The Federal Reserve Bank then reports the financial status of the applying bank to the Board and states whether the general financial conditions in the district are such as to make the granting of the application advisable, whereupon, the application is approved or rejected. The Federal Reserve Board has also provided that any applications which are approved may be rescinded by giving ninety days' notice to the member bank.

Limitations As To Amount Which Any One Member Bank May Accept

The fifty percentum limitation on drafts accepted for the purpose of furnishing dollar exchange is not to be included in the limits placed by the Act upon acceptances of a member bank of drafts and bills of exchange drawn against the shipment of goods or against warehouse receipts covering readily marketable staples.

Purchase By Member Bank Of Its Own Acceptances

Member banks which purchase their own acceptances before maturity are not required to include them in the aggregate of acceptances authorized by the Federal Reserve Act. It has been necessary in the past for banks, in order that the acceptance market might be developed, to buy many of their own acceptances. While it is undesirable in the opinion of the Federal Reserve Board for a bank to buy its own acceptances, it is essential that the credit of the accepting bank be protected through such purchases where the market conditions prevent absorption. The purchase by a bank of its own acceptances is equivalent to a loan or advance to the customer for whom the acceptance is made, and the liability of the customer is subject to the limitations placed on loans. The power of a member bank to accept drafts is entirely distinct from the power to discount acceptances of others.

Eligibility Of Bankers' Acceptances For Rediscount With The Federal Reserve Banks

The term "eligibility" applied to bank acceptances signifies what may be purchased or discounted by a Federal Reserve Bank. In order that it may be eligible, it must conform to all the requirements of the Federal Reserve Board.

Rediscount By Federal Reserve Banks Of Acceptances

Federal Reserve Banks may rediscount for any of their member banks, notes, drafts or bills of exchange, provided they have the following requisites: -

1. They must have a maturity at the time of discount or not more than ninety days, exclusive of days of grace.

2. Drafts drawn for agricultural purposes must have a maturity of not more than six months, exclusive of days of grace. Agricultural paper includes notes, drafts, bills of exchange or trade acceptances, drawn or issued for agricultural purposes, or based on the sale of live stock, and the proceeds of which have been used or may subsequently be used for agricultural purposes, including the breeding, raising, fattening, or marketing of live stock.

3. They must have arisen out of actual commercial transactions, namely, they must be instruments drawn for agricultural, industrial or commercial purposes, or the proceeds of which are to be used for such purposes.

4. They must not have been issued to carry on trading in stocks, bonds or other investment securities, except bonds and notes of the United States.

5. The aggregate of negotiable paper bearing the signature or indorsement of any one borrower, whether a person, firm, company, or corporation, rediscountable for any one member bank, must not exceed at any time ten percentum of the unimpaired capital and surplus of such bank. This restriction, however, does not apply to the discount of bills of exchange drawn in good faith against actually existing values.