Evening star., 1921-06-05
ABe0F FINANCE,
BANK KACCEPTANGES
Story Of Relatively New
= Method of Granting Short
> Term Credit.
BY j. L. O'NEH.
Vice President of Guaranty Trust c,

There are marked dlnerenceS De-
tween trade acceptances and bankers
acceptances. The former is the re-
suit of a transaction between the
buyer and seller; the latter the re-
suit of the granting of credit by a
banker In the former case, it is
the buyer who accepts the draft: in
the latter it is the bank.
A bankers acceptance is defined by
the Federal Reserve Board as "a draft
or bill of exchange. whether payable
in the United States or abroad and
whether payable in dollars or some
other money. of which the acceptor is
a bank or trust company, or firm,
gagged generally in the business of
granting bankers acceptance credits"
In other words. bank acceptance
consists of the extension of the bank 8
credit to customer, wherein the
bank, for a consideration, permits the
customer to use it's credit This
credit may be either secured or un-
secured, depending upon the business,
character and financial responsibility
of the applicant.
According to an opinion of the counsel
of the Federal Reserve Board, when, a
member bank of the federal reserve sys-
tenn accepts a draft or bill OF exchange
drawn against it, it enters into con-
tract substantially similar to that OF
the maker of a note. so that while the
form of instrument differs. the legal eff
feet is the same. The use of a banks
acceptance, however, differs from the
use-of its promisSory note. When bank
accepts a draft or bill of exchange for
one of its customers. it merely lends its
credit responsibility to its customer in
order that he may procure the funds
elsewhere. The holder of a banks ac-
ceptance has the same legal rights
fha hav
promiSsory note.
How Created.
A bank acceptance may be created as
follows:
Richard Brown. in New York. buys of
John Doe. in Galveston. quantity OF
merchandise. In order to reimburse
John Doe in convenient manner,
Brown arrangeS with his bank in New
York to accept on presentation, the
drafts of John Doe with documents at
tached. Doe thereupon. under the terms
of the sale, draws on the bank, which
the documents. The drafts drawn by
Doe on the bank after they have been
accepted become bank acceptanceS.
Then ensues credit operation between
the bank and Richard Brown to deter
mine what disposition is to be made of
the documents and upon what terms
the bank will surrender them. This ad-
justment is easily made. The bank
when they fall due. Brown undertakes
to provide the bank with funds for that
purpose prior to the maturity OF the ac-
ceptance. (It must be borne in mind
that the bank is primarily liable upon
its acceptance and that. the security for
its acceptance is the merchandise which
is the basis for the transaction. The
bank also has the guarantee of the pur-
chaser of the merchandise
Commercial Credit Bill.
The foregoing case describes a docu-
mentary bill. Another form of accept
ance is created when the customer
draws his own draft directly on the
bank. and the bank accepts it for
payment at a future time. Such an
acceptance would be called a COM
mercial credit. bill and might be Sc
cured by warehouse receipts or other
collateral. eEt-siHlplG by the general
credit of the customer.
Bank acceptances offer certain dis
tinct advantages not only to mer-
chants. but also to the banks through
which they deal. =.
The specific advantages may be
summarized as follows:
The use of acceptance makes it pos
Slbie for trust companies and banks
to finance legitimate business trans
actions of their customers properly
and conveniently.
Banks having surplus money WhicA
cannot readily be employed at the
time may invest it in prime accept
ances which may either be held until
maturity or sold n the open market,
should such action be necessary.
Good ShOrt-FOrm Investments.
Because of their ready marketable
tty. acceptances of Well-known instit-
tut!onS will be sought more and more
as short-term investments and will
be especially valuable as such
AT thlS time. when We are striv-
ing further to develop our foreign
trade. the advantages of the accept
ance in foreign transactions are
worthy of especial consideration
Those who have desired to engage
IN foreign trade have experienced
much difficulty in their inability to
grant as good terms of credit as
have been accorded foreign buyers
by competitors abroad. 1t has been
the practice of many American ex-
porters, to require payment in cash
at New York against documents, and
the foreign trade of this country has
thus been handicapped. This diff
Guilty may be overcome by the use
OF bank acceptanceS. as the credit
required for the goods may be estab-
ilShed by drawing at sixty or ninety
Gays sight on New York accepting
bank or trust company. the accept
ance being discounted at the current
rate, or at an agreed fixed rate.
To Increase Its Use.
A measure which should further in
crease the use of acceptances in for
eign trade is the recent regulation of
the Federal Reserve Board making
six months bankers acceptances is
sued IN import and export transactions
eligible for open market purchase by
Federal Reserve banks. Such pur-
chases were formerly limited to
ninetyday bills.
Another advantage to the eSporte~
Is that he is Immediately reimbursed
for the value of his products or mer-
chandise and, instead of having his
capital tied up in credits. it is re-
leased for unemployment in new
business.
AcceptaIces based principally on the
commodities exported form a valuable
security. This was particularly evi-
denced in London at the outbreak OF
the war. when acceptances amount
circulation. The greater part of these
were subsequently liquidated by the
"self-1iQuidating" process; that is, by
the sale of the commodity which
formed the basis of the transaction
thus proving the soundness of the ac.
cepting business in general.
HiEh-Class Security.
The standing and credit of the &C.
cepting bank make the paper it ac.
cepts security of the highest class
The bank acceptance at once elimi.
mates the necessity and trouble OF
closely investigating the drawer OF
indorsers. as the primary RESPONSE.
bility rests with the accepting bank
If its credit is good. all other name.
on the, paper may be of secondary
Importance.
Bank aceeptances enhance the
credit and broaden the buying fielt