This section is from the "Practical Banking" book, by Albert S. Bolles.
In some States, though the rule is not uniform, the law requires that for a collateral to be good security when delivered to the bank, stock must be actually transferred on the books of the company which first issued the same.
Another form of loan is that made on the security of business paper. Thus, a merchant having a number of small notes of his country customers, brings to the bank $15,000 or $ 20,000 of such paper, and asks, on the pledge of it, for a loan of $10,000, giving his own note at thirty, sixty or ninety days. This custom is more common in Western cities than in New York. It is among the safest of business transactions, if ordinary care and discrimination are observed, for if the principal should fail, his estate will pay something, and the division of the remainder among several parties, with a considerable surplus beyond the amount, leaves the risk of loss very small.
Such are the several ways of loaning the resources of a bank. It may be added, however, that fewer losses occur in loaning to regular dealers than in buying paper. Banks, of course, know more about their dealers than about other persons not keeping accounts with them.
If a single director objects to a note offered for discount or purchase, the board generally will refuse to make the loan. If an objection should be based simply on prejudice, the board probably would not respect it. But if a director should say, "I have a pretty good reason for not buying that paper," his opinion would be conclusive. Directors are chosen partly for the information which it is supposed they will throw on the condition of business, and especially on that in which they are engaged. It is supposed that a director knows more about the condition of persons engaged in the same business as himself, than the other directors, whose occupations are different. This is why their opinions have so much weight. Nevertheless, bank directors are not always disinterested in the performance of their trust. Not long since we heard the following story. A bank director, who was also a member of the Produce Exchange in a large city, attended a meeting of the directors of the bank. Several persons, who also were members of the Produce Exchange, had presented notes for discount, accompanied with collateral securities, principally warehouse receipts for grain. When these offerings were read, one after the other, the director in question objected, maintaining that they were not as safe as they ought to be. When the entire list of offerings had been exhausted, a large balance remained unemployed. The director just mentioned said if no better use could be made of it, he would take it though at a rate which was not very remunerative. His offer was accepted. Immediately he went to the persons who had applied for loans to his bank and loaned to them on the securities which they had offered. Of course he was not the typical bank director. Generally, directors are men of well-known integrity, and though too often neglectful in attending meetings, they freely give their best experience to the bank when they do attend.
Some directors attend meetings with regularity, and take a deep interest in the affairs of their bank. They seek to enlarge its sphere and to increase its gains. There are other directors whose presence is a surprise. A third class appear irregularly, and sometimes are troublesome in their endeavor to learn concerning all the business done at the meetings when they were not present. They are usually retained in spite of their ways for one reason or another. If they attended regularly, most of their questions would be unnecessary. Time would be saved, and the temper of their associates would not be tried. In a large board of twelve or fifteen directors it is hardly possible to have unanimity on all occasions, and yet each director may fill his valuable niche in the institution. Each one, whether pleasant or disagreeable, whether regular in his attendance or otherwise, may through his wealth, or business relations, or knowledge, serve a useful purpose. At all events, they are usually selected with care, and changes do not frequently occur.
It has been said by a banker whose experience is worth heeding that it is one of the duties of the president to protect a dealer when he is unjustly assailed. To do this is also for the advantage of the bank. Beside the general results of the fair treatment of credit, there is this particular result, that the best class of customers which a bank can have consists of those whom it has nurtured from moderate to larger success, and whose experience has been all along linked in agreeable intercourse with its officers and directors. These are not easily seduced to open accounts with other banks; but they are faithful to their old friends and they introduce other dealers.
The New York City banks do not discount paper that runs for a longer period than four months. This is the general rule. It is not always observed; but a man's credit would be unusually good, or ample collateral security would be required, were a loan granted for a longer period. Some banks will take only first-class double name paper, that is, paper having the name of an endorser beside the maker, and would prefer to buy such paper, at four and a-half or five per cent., to buying other paper just as good, perhaps, at six per cent, interest. In any event, a risk is taken, and with the utmost precaution in making loans losses are not wholly avoided.
One of the functions of a good bank manager is to ascertain, in every possible way, the financial condition of his customers. Every well-conducted bank has a book in which everything of importance pertaining to the credit, ability and character of their customers is noted. Papers are diligently read and reports scanned, inquiries are made of persons who are supposed to know about others; all kinds of business are investigated with care; occasionally a considerable sum is paid to an individual for making a special investigation into the affairs of a customer. Very often these investigations and inquiries must be made with great tact and secrecy. If a customer were to find out that he were under a telescopic investigation, he might be offended, withdraw his account, and vengefully exert himself to injure the bank. On the other hand, no faithful bank manager should be negligent of his duties in this regard. No opportunity for inquiry should be neglected. The most successful bank managers are those who are most diligent in conducting these investigations, and in watching all these complicated movements of trade.