Banks and Their Customers / A practical guide for all who keep banking accounts from the customers' point of view

by Henry Warren

Discounted Bills.

The city-article of every morning paper contains a list of market discounts from which one can see at what rates the bill-brokers and discount-houses are taking the various classes of bills. Bank-bills would be paper either accepted or indorsed by the banks; and fine trade-bills or best trade-bills would be the acceptances of those firms whose credit is so good that the question of their paper not being paid at maturity is practically never considered. As the credit of the banks ranks highest it follows that bank-bills can be discounted at the finest rates. Again, less risk is run on a three months’ bill than upon one for four or six months. In other words, the position of an acceptor is less liable to change in three months than in six, therefore short bills are in greater favour; consequently, the rate upon a six months’ bill, other considerations being equal, will be higher than that upon one which has three months to run, though the difference, of course, will only be a fractional one.

The bill-brokers, we know, obtain most of the bank and the fine bills, but they are also dependent upon Lombard Street for the greater part of their resources; and as a bank, which owes huge sums on demand, likes to keep its assets as liquid as possible, it follows that bankers take short bills from the brokers in preference to those which are drawn for long terms, for the simple reason that should they think the outlook uncertain and deem it prudent to strengthen their reserves, the shorter bills will run off the more quickly, thereby providing them with additional cash. A three months’ bill, therefore, from a banker’s standpoint, is considered more desirable than one at six months’ date.

When trade is active and loanable capital dear market rates of discount will naturally be high, and the Bank rate, speaking broadly, is generally in touch with the market rate for three months’ bank-bills. Conversely, when trade is dull and the prices of commodities are falling, fewer bills will be on offer; but the fund with which they are discounted will be proportionately greater, consequently the market rates of discount will be low, as, also, will be the Bank rate. It must be remembered, however, that the Bank of England discounts bills for its own customers below its published rate—when its minimum is temporarily above the market rate; for were it not to adopt this course its customers would naturally discount their bills with the brokers.

As the bill-brokers are middlemen between Lombard Street and those merchants who have bills to sell it follows that the market rate of discount is always below the bankers’ rates, and that, therefore, holders of the better-class paper take it to the brokers, but this peculiarity has been mentioned in Chapter VI. It may, however, be added that the remittance of the best country bills to the London bill-brokers is a comparatively new movement, which the banks do not regard with favour. Competition between the brokers being keen, it is questionable whether the finest rates are quoted in the papers, for the merchants who have bills for sale will, of course, not neglect to higgle with the brokers, who, like the bankers themselves, certainly would not advertise their lowest rates.

The large discount-houses and brokers possess considerable capital, though it would look extremely small when contrasted with the short-loan fund, and they deposit certain approved securities with the banks against the money at call advanced to them; but the small bill-brokers are little better than runners for the banks with whom they re-discount their bills almost as soon as they are in their cases, and their capital would consist principally of a silk-hat and a bill-case. Certain brokers on the Stock Exchange, it may be added, stand in much the same relation to Lombard Street. Besides borrowing from the banks the bill-brokers also accept deposits from the public, basing their rate upon the Bank rate, and allowing a slightly higher rate than the London bankers.

The market for bills is a special market, into which the banks pour their surplus funds, so customers will be careful not to confuse the price of a bill with the price of a loan, though, of course, there is a close connexion between the two; for when loanable capital is dear discount rates too are high, and when the former is cheap the latter are low. The London customer, who discounts fine bills with his banker, will naturally take care that he does not pay a higher rate than the bill-brokers would charge him, and when he discounts second-rate trade-bills he will remember that competition is very keen, and that if his credit be good he can generally induce the manager to quote a fine rate.

Coming to provincial banking, we have seen that the large merchants and manufacturers remit some of their best trade-bills to London; but in the great cities, where the banks are numerous, the competition for good paper is considerable; and as the customer usually keeps his current account at the bank with which he discounts his bills, he can generally, if his account be worth retaining and his credit good, get his paper discounted at Bank rate, or even slightly under when the market rate is below it.

In the small country towns, however, the banks’ rates are higher, but then, of course, the paper they discount there is not of the same class; and a capitalist, be he a money-lender or a banker, raises his rate in proportion to the risk he runs, the one thinking a bill so doubtful that 100 per cent. will just tempt him to risk his principal, and the other drawing the line at about 7 per cent.

A, for instance, has an acceptance of C’s for £100, dated the 1st January and drawn for one month, so the bill, allowing the usual three days’ grace, will be due upon the 4th February. A takes this bill on the 5th January, to his banker, by whom it is discounted. From the 5th January exclusive, to the 4th February, inclusive, there are thirty days; and assuming that the discount rate be 5 per cent. per annum, and the rate of commission upon the amount of the bill ⅛ per cent., we get the following:—

	100 × 5 × 30	=	8s.	2d.
	100 × 365
⅛ per cent. upon £100		=	2s.	6d.
			10s.	8d.

A, therefore, has paid about 6½ per cent. per annum for the accommodation. The country banks, when they charge 5 per cent. per annum interest and ¼ per cent. commission upon short bills, obtain something like 8 per cent. per annum upon their capital; but, needless to say, the persons who pay these rates are either out of touch with the market or else their credit is so bad that they are glad to discount their bills with a banker upon almost any terms. And then, again, there is not much paper of this description under discount with the provincial banks.

Country customers, whose credit is above suspicion, make very close bargains when they take good trade-bills to the banks to be discounted, and seldom pay any commission upon the amount of the bill, though, of course, the manager will attempt to exact it if he think that his man will pay without protest. As previously stated the customer almost invariably discounts his bills with the banker with whom he keeps his current account, and he generally pays the same rate on his paper as he does upon his overdraft. Competition for desirable accounts being keen, it follows that a client who discounts largely can always bring pressure to bear upon the manager, should he consider that his rates are excessive and altogether out of touch with the market rates.