The Indianapolis journal. [volume] (Indianapolis [Ind.]) 1867-1904, 1903-03-22
WHAT "ovERCERTIFICATIoN" is.

Literary Bulletin.

Literary Bulletin.
Every now and then. especially at the
time OF some bank failure in Wall street.
great deal Is heard about the "overcertin-
cation" of checks, a term which to the av-
erage reader is wholly unintelligible. Ii mas
remained for Serene s. Pratt. in his new
book, 1.-The Work of Wall Street, 10 Iur-
nish a clear and concise statement OF what
this means
Decentralization forms an immediate con-
nection between the bank and the stock
brokers. A broker, for instance, has bought
stock for which, on delivery, he must pay
$4,000. But before he can get any loans
from the banks on this stock he must have
the stock In his possession so as 10 pc aDie
TO use ii as collateral for the loans. Before
he can get possession of il he must pay for
it. His balance in the bank may not be
more than $4,000. What Is he TO do? Right
here enters the new alliance between the
banks and the brokers. 1t goes by the
name of certihcation. The broker draws a
check for $4,000 in payment for the stock.
The check is sent to the bank where the
broker keeps his account for certification.
The cashier or paying teller indorseS the
check across its face. thus certifying that
not only the signature Is correct, but that
the bank will pay the amount of the check
upon presentation and identification, or
when II comes TO it through the operations
a balance of only $4,000, yet here is the
bank certifying to his check for $4,000,
and this is what is called "overcertifca-
of credits on which the transactions of
Wall street stand.
OvercertifcatioI. is, In fact, temporary
loan. There are number of Wall-street
banks-not all-that do a regular business
of certifying brokers' checks, but the larger
proportion of this is done by trust COM
panies. The broker enters into a definite
arrangement with a bank whereby he
agrees to keep daily cash balance Of say,
$4,000, and in return the bank agrees to
certify his checks up to. say, $,OOoOoo. This.
on its face, seems startling. especially as
the national banking law prohibits national
banks from certifying checks for which
there is not money of an equal amount on
deposit. The law, however, is practically a
dead letter. Moreover the practice of over
certification as conducted for the convent
ence of stock brokers is by means as
dangerous as Ii seems.
While the immediate cause of the Seventh
National Bank failure in 1901 was overcerti-
fication, the real causes were deeper seated,
and as matter of fact there has been no
other serious trouble caused by certifica-
tons for brokers in twenty years. The
violation of the law is in most cases more
technical than actual, for broker is
obliged to make deposits at the bank as
quickly he receives checks for payment
of certificates delivered, without waiting
until nearly o'clock and then making one
deposit for the day. Deposits and certifiSa-
tons are therefore going on simultaneously.
The rational banks are gradually with
drawing from this business. and the state
banks and trust companies are taking their
place. They are, however adopting another
and freedom from flegality. They are
making morning loans to brokers of an
amount that will cover their probable GER
LITIGATION for the day, based on the sfngle
named paper" of the broker, that is to say
his individual, unindorsed note, and the
broker has to his credit deposit at the
bank sufficient for the days business, while
technical generalization Is avoided.