Documentary Acceptance, And Documentary Payment Bills

When drafts are deliverable only upon acceptance, the draft is known as a documentary acceptance bill; when deliverable only upon payment, the draft is called a documentary payment bill. The major portion of English international banking business is to take up documentary drafts, either for acceptance on a commission basis or for collection.

Clean And Secured Bills Of Exchange

Drafts known as clean bills, that is, those without documents attached, are issued usually against credit balances abroad. Such a bill, for example, is the bank's own draft drawn on any one of its foreign correspondents. Then there are so-called secured bills, drawn in connection with the sale of stocks and bonds, which may be shipped along- with the draft or forwarded under separate cover. The last method is adopted, however, only when the credit standing of the drawee, the purchaser and the securities is best known.

Finance Bills

Frequently interest rates are lower in Europe than they are in the United States, and our international bankers are quick to take advantage of the opportunity for profit, which may be gained by borrowing funds there to be loaned out here. Suppose the rate for money in New York is quoted at five per cent. In London at that time bills of exchange may be discounted at three per cent. Under such circumstances, the New York banker will draw a bill of exchange for so many pounds sterling, the maturity of which bill is, say, sixty or ninety days, upon his London correspondent who agrees to accept the bill upon presentation. This is known as a "finance bill." The New York banker is enabled to discount this bill drawn on his London correspondent, in New York. The purchaser of the bill in New York would invariably have it discounted in London. For the funds to reach London before maturity, the New York bank would have to remit to his London "accepting" correspondent, a demand draft in payment of the finance bill.

Finance bills are used by banks very frequently, and they make up a large amount of the commercial paper offered on the London market. They are a means of profit to the banks, which can secure money by the discount of such paper, loaning out the funds so acquired at a higher rate than that at which finance bills discount.

Commercial Letters Of Credit

Similar to the methods used, though more in the financing of American trade than that of England, is the "commercial letter of credit," which is an authorization to the shipper to draw on the bank, up to a stipulated amount, upon terms and conditions clearly expressed in such letter of credit, and which drafts so drawn the bank binds itself to either accept or to pay upon presentation. Here too, the bank is provided in advance with funds to take up the draft at maturity. For this service, the bank charges a round commission.

Advances On Consignments

English banks, as we have seen, make purchases of drafts or make partial or total advances. They also make advances on consignments of merchandise. Here, the signature of the drawer of the draft forms one part of the security and the goods form the other. The bank may turn over the goods to the firm, retaining a lien on such goods until the draft is paid, such lien being acknowledged in a "letter of hypothecation" given to the bank by the acceptors of the draft, stating that "such goods in the meantime, and the proceeds thereof, to be held by the firm in trust, on behalf of the bank, for the payment of said sum." Clauses as to insurance, sale, etc., are also continued in letters of hypothecation used in making advances on consignments.

The English banks, further, protect themselves from loss in the event the transaction results in unprofitableness to the parties concerned. A letter "of lien" or "of trust" provides that the firm "shall hold the said goods in trust on behalf of the bank, and have them duly stored, insured against fire, and remit the proceeds to the bank as and when sold. In such cases, when advancements on consignments are made by English banks, they may protect themselves in whatever way and by whatever means they think best, if this forms a part of the agreement with, and is acceptable by the firm.