Monday, January 18, 2010

Bank Loans to Stock Brokers.

"The making of bank loans to stock brokers is bottomed primarily on the confidence which the banker has in the broker as a person, and secondarily on the goodness of the securities offered. The modus operandi is substantially this: The broker, knowing from the clearing sheet of yesterday what payments he has to meet today, obtains from his bank in the morning authority to draw for this aggregate amount at an agreed rate of interest. As his checks come in during the day the bank certifies them and the banker sends to the broker the bank securities whose market value is greater by a certain margin than the amount borrowed.

"These loans are usually payable on call. As National Banks are forbidden by law to certify checks for a sum greater than the drawer of checks has on deposit, the practice in such cases is for the broker to execute a promissory note, which note the banker discounts, putting the proceeds to the credit of the broker, and attaching the security to it as it comes in during the day. While this method exposes the banker to some danger of loss in the interval between the certification of checks and the receipts of the securities, such losses seldom occur. There is an unwritten rule of the stock exchange that the bank must be protected at all hazards, both as a matter of personal honor and because the stock brokerage busines cannot be carried on otherwise."

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