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

by Henry Warren

Again, a man can mortgage his property, but, as a rule, he prefers to obtain a “limit” on it from his banker, more especially if he intend gradually paying off the advance, as, should he borrow £500 on mortgage, he will have to pay a rate on that sum, but when he obtains a “limit” of £500, and his account is only £250 on the wrong side, he pays on the smaller amount only. As a rule, a solicitor acts as middleman between a mortgager and mortgagee; and the borrower might remember that solicitors, when advancing their clients’ money, or, indeed, when they act in any capacity, are quite as human as bank-managers, and that it is always advisable to higgle with them over the rate, which, of course, should be based on the value of loanable capital at the time. The deed usually stipulates for six months’ notice on either side.

A customer who is desirous of obtaining an advance upon property which already has a first mortgage upon it, will not find the banks either sympathetic or eager to assist him; though if his banker be “in” with him he will, of course, accept any additional security which is likely to lessen his risk or minimize his loss. In the usual course of his business second mortgages and equities of redemption are not thought desirable, and then, again, the law does not give a second mortgagee all the protection it might.

The current-account customer, who calls upon the bank-manager with the object of obtaining an overdraft against property, will generally be asked if his life is assured, and if he reply in the negative, he may be requested to assure to the extent of the “limit” the bank is ready to grant him, and to deposit the policy as collateral security with the deeds. Many men of small means assure their lives, and a banker, provided the office be a good one, will generally advance up to the surrender-value of the policy. This he ascertains by applying to the assurance company, which tells him at what figure they will commute it. The rates charged upon this class of security are high.

Where the customer’s overdraft is only partially secured, he must make the best terms he can for himself; and, as there is practically no competition for such an account, he will probably have to pay from 5 to 6 per cent. per annum interest and from ⅛ to ¼ per cent. on his turn-over. These are the maximum rates, which, no doubt, he will attempt to reduce, though with what success must remain problematical. The person who obtains an overdraft without security must, as a rule, give thanks, and pay up with a light heart, for should he apply elsewhere he would be received with open-mouthed astonishment. A good name in the banking world implies that its owner is worth some few thousands of pounds; and though, in the moral sense, its value is considered beyond price, directors, while appreciating it in the abstract, regret their inability to safely ensconce it within their safes, and therefore, as practical men, their powerlessness to advance against it unless backed by collateral securities.

Lastly, a few words may be said anent personal security. If you have a wealthy friend who is willing to sign a promissory note with you, or to guarantee your banker against loss up to a certain sum, an overdraft can soon be arranged; but such a request puts friendship to the severest test, and it may be extremely difficult to find your friend at home should he as much as suspect the reason of your visit.

We can see that competition is centred around the safe business, and that though those persons who possess tangible securities can make very close bargains, the less desirable is the cover from a banker’s point of view, other considerations being equal, the higher are the rates the customer will probably be asked to pay. The man who possesses the right class of securities should, therefore, take them to the cheapest market, and the owners of the less marketable varieties might remember that from 4½ to 5 per cent. per annum on the overdraft and ⅛ per cent. commission on the turn-over are very full rates, which may often be considerably reduced when the customer, whose credit is good, does a large and profitable business.

The only remaining subject for discussion is the relation that exists between the bank-manager and his directors, who confine his power to very narrow limits. The city-manager, for instance, at the head-office of a London joint-stock bank, might be empowered to grant loans to the extent of from £2,000 to £3,000 without first obtaining the consent of the board. Any application in excess of his “discretionary power,” as it is called, would have to be submitted to the directors, two or three of whom, during certain hours, are always in attendance each day, in order to deal with those requests for large loans where an immediate decision is essential, while a full board would probably sit twice a week. The board, of course, would be asked to confirm the decisions of the “daily” committee, and from time to time the loans granted by the city-manager would be subjected to criticism by that body.

At the metropolitan, suburban and country branches the “discretionary power” of the agent or manager would be based upon the amount of business transacted at the branch. In a small town of from 20,000 to 30,000 inhabitants a manager might have power to grant, when necessary, loans to the extent of £350 and under, without first obtaining the sanction of the board. All applications for advances in excess of his power would have to be immediately submitted to the head-office, accompanied by a letter, describing the nature of the security offered, and stating the desirability of obtaining or keeping, as the case may be, the account. This report, in every probability, would be addressed to the “advance department,” where it would be criticized by the officials before going into the board-room. Many questions would be asked with reference to the working of the applicant’s account, his annual turn-over, and so on. If he came to them from a rival bank then they would want to see his pass-book, and, were he already a customer, the manager would send a list of his daily balances and comment upon his means, habits, etc. Having satisfied themselves upon these points, the chief of the advance department reports to the general manager, who submits the application to the board. The process, it will be seen, is cumbersome and necessarily slow, for it often takes the machine as many days to give a decision as it does a private banker minutes.

The manager, evidently, has very little real power under this system, and, practically, the branches are managed from the head-office, the agent being a kind of clerk-in-charge, who reports to, and announces the decision of, his directors. Indeed, the rules and regulations are framed for this very purpose, and the banks make it part of their policy to effectually hold their managers in check, and to so arrange the work of an office that but little is left to their decision, while it is the duty of the accountant to instantly report any irregularity to the general managers. The average bank-manager, it must be remembered, has had neither a business nor a financial training, and it would therefore be extremely risky to give him a large field in which to make experiments. Of the two evils the boards of the banking companies choose by far the lesser, and, by allowing him a small “power,” they tether him like a donkey to a stake, thereby limiting his grass to the length of his rope.

In a large manufacturing city a manager’s discretionary power would not exceed £1,000 to £1,500, and in the smaller cities it would range from £500 to £1,000, while in the provincial towns it would be from £300 to £500, according to population. Each month the manager, as a rule, has to send to the head-office a report upon all accounts that are over his power, together with a separate one relating to bills discounted, and at least twice a year he must submit a long return of every overdrawn account on the books of the branch certified by the accountant and himself. The head-office, in short, watches him as a cat does a mouse, and criticizes those advances he himself is allowed to make severely should they not meet with the approval of those in authority.