Bank Acceptancesbankacceptances00guarrich Bw

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BankAcceptances

Guaranty Trust Companyof New York140 Broadway

Fifth Avenue Branch London Office5th Ave. and 43d St. 33 Lombard St., E. C.


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Copyright, 1915by

Guaranty Trust Companyof Npw York


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ACCEPTANCESDefinition

In order to thoroughly understand themeaning ofan acceptance it is first necessaryto consider the definition of a hill of ex-cliange, because an acceptance is first a billof exchange before itbecomes an acceptance.A bill of exchange, therefore, is an un-

conditional order, in writing, addressed byone person to another, signed by the per-son giving it, requiring the person to whomit is addressed to pay on demand, or at afixed future time, to order or to bearer, asum certain in money.A bill ofexchange becomes an acceptance

when the drawee writes across the face ofit for example: Accepted, February 15,1915, payable May 15, 1915, John Doe."

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Two Kinds of AcceptancesThere are two kinds of acceptances

(1) Those made by private parties, suchas individuals, firms or corporations;(See page 2.)

(2) Those made by banks for their cus-tomers by means of which the credit ofthe bank is extended to the customer.(See page 4.)

Acceptances made by private parties areusually in connection with transactions forthe purchase of merchandise or for thefinancing thereof.

Bank AcceptancesA bank acceptance consists of the

extensionof the bank's credit to a customerby which the bank permits the use of itsown credit by its client for a consideration,such credit being either secured or un-secured, depending entirely upon the busi-ness character and financial responsibility


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of the applicant. A hank aceeptaiicemaiybe created as follows

A B & Co. in New York buy ofC D & Co. in Galveston a quantity ofmerchandise. In order to reimburseC D & Co. in a convenient manner,A B & Co. arrange with their bank toaccept on presentation the drafts of C D& Co., with documents for the mer-chandise attached. C D & Co. there-upon, under the terms of the sale, drawon the bank, which accepts the drafts,taking the documents. The draft thusbecomes a bank acceptance. Then en-sues a credit operation between the bankand A B & Co. as to what disposition isto be made of the documents and underwhat terms A B & Co. shall receive thedocuments from the bank, (it must beborne in mind that the bank is primarilyliable upon its acceptance and thesecurity for its acceptance is the mer-chandise for which it so acted.) Thisis usually easily adjusted. A B & Co.undertake by some means or other, toprovide the bank with funds prior to


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maturity of the draft in order that theacceptance for which the bank standsresponsible, at the request of A B & Co.,may be met.New York State Banking Law

Under the new Banking Law of theState of New York, passed in 1914, banksand trust companies that are under thesupervision of the State Banking Depart-ment are permitted to accept for paymentat a future date drafts drawn upon (them)by (their) customers and issue letters ofcredit authorizing the holders thereof todraw drafts upon (them) or (their) corre-spondents at sight or on time, not exceedingone year.'*By this provision all state banks and

trust companies in New York State aregiven the power to make both foreign anddomestic acceptances.

Federal Reserve ActThe Federal Reserve Act permits mem-

ber banks to accept bills involving the ex-portation or importation of goods, but doesnot permit the acceptance of bills coveringdomestic transactions 6


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Market for AcceptancesIt is obvious that prime bank acceptances,

backed as they are by well-known banks ortrust companies, and readily rediscountable,can find eager purchasers by virtue of theirhigh intrinsic security as the most liquidform of investment for banking institutions.Aside from cash in the vault nothing is sorapidly liquidated, especially in view of theexisting Federal Reserve system.

Acceptances are an important factor inEurope in the open discount market, andas soon as a market is provided in thiscountry they no doubt will become a mostpopular form of investment.With the object of assisting in the estab-

lishment of such a market, which as yet isonly slightly developed, the GuarantyTiiist Company of New York has been deal-ing in first-class paper of this charactersince the present New York State BankingLaw was passed.

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Advantages

There are certain distinct advantagesboth to banks and their customers to bederived from the creation of acceptances.These may be summarized as follows(1) Bank customers can ordinarily borrow

by this means more cheaply than bytheir straight note.

(2) The use of acceptances makes it pos-sible for bank^ and trust companies toproperly and conveniently financelegitimate business transactions oftheir customers without using any ofthe bank's funds or the use of anyadditional funds.

(3) Banks having surplus money whichcannot be readily employed at thetime can invest it in prime acceptances,which can either be held until matu-rity or sold in the open market, shouldsuch action be found necessary.

(4) Acceptances of well-known institutionswill more and more be sought asshort-term investments and will beespecially valuable for such a purpose,principally on account of their readymarketability.


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(5) Banks and trust companies can acceptfor a commission the paper issued bytheir best customers and sell it in theopen market, thus adding to theirbusiness another feature which can bea source of definite profit.

(d) The presence of the name of theaccepting bank makes prime to theextent of the credit of the acceptingbank the paper on which it appears.This at once eliminates the necessityand bother of checking the drawer orseveral endorsers upon paper, as theprimary responsibility rests with theaccepting bank. If this is in goodcredit all other names on the paper be-come proportionately of less interest.

(7) With the development of the use ofbank acceptances, the knowledge ofthe relations that the borrower haswith other institutions, which thecredit-extending banks will thus have,will create a condition of almostautomatic registration of paper ; thusmore than ever protecting the banksas well as the borrowers from the evilresults of the over-extension of credit.

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Table showing Attitude of the BankingLaws of the Various States inRelation to Acceptances

No PartialSpecific Power Power PowerState to Accept to Accept to Accept

Alabama *Arizona!Arkansas. ...... *California '^Colorado "^Connecticut . . . . '^Delaware ...... ^Florida '^Georgia *Idaho ^^Illinois, tIndiana '^Iowa. *Kansas *Kentucky '"^Louisianaf ..... T^Maine "^ , ^^ ,StateMaryland

| On?^^Massachusetts . ^Michigan '"^Minnesota.. - ^Mississippi! . ...Missouri *Montana ^^Nebraska ''^

tNo information received.tNo provision to accept mentioned In the law;considered to have this power under broad provisionto do general banking business.10


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Table showing Attitude of the BankingLaws of the Various States in

Relation to AcceptancesNo PartialSpecific Power Power Power

State to Accept to Accept to AcceptNevadafNew HampshireNew Jersey. .

.

New Mexico. . .New YorkNorth Carolina..North Dakota. .Ohio eOklahomaOregon *

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Pennsylvania . . -Rhode Island. . .South Carolina.South Dakota. .TennesseeTexasUtahVermontVirginia ^Washington ....West Virginia. . *Wisconsin *Wyoming *

tNo information received.11

Forelg-n< . Accept-( ances Only

f CommonI Law


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1UNIVERSITY OF CALIFORNIA LIBRARY

THIS BOOK IS DUE ON THE LAST DATESTAMPED BELOW

m-- - -'t Q.I916

ty Lz

APR 8 1921

m^i^ m\ 1 1 nnOCT 14 ,930

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Gaylord Bros.Makers

Syracuse, N. Y.PAT. JAN. 21, 1908

UNIVERSITY OF CALIFORNIA LIBRARY


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Bank Acceptancesbankacceptances00guarrich Bw

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