We may now consider the bank acceptance, which is considered a still higher form of commercial paper. Ordinarily, the credit of the bank is considered to be higher than that of the commercial firm, which, as an item of safety, is more preferred by the bankers of this country and by the Federal Reserve Banks for purposes of investment and in commercial paper dealings. It may arise in the following manner:

The seller, instead of drawing a trade acceptance on the buyer, has the buyer make arrangements with his bank whereby the seller may draw upon the buyer's bank instead of upon the buyer himself. This ordinarily gives rise to a bank acceptance, generally regarded as a credit instrument of the highest sort.

The discount and rediscount of commercial paper, principally the trade and bank acceptance, tends to establish equilibrium in reserves according to the needs of each district. By the counterflow of bank reserves from the cheaper market to the dearer ones, an equilibrium in discount rates is as well maintained.