192. Bisk Of Exchange

Bearing further upon this question of commission, it is to be noted that it makes a great deal of difference whether the money is loaned out under an arrangement by which the banker takes the risk of exchange, or whether the borrower takes that risk - as fully explained in paragraph 178. In the case where the banker takes the risk of exchange he receives just so and so much from the borrower, 3, 4, 5 per cent as the case may be, and out of that has to come the difference between what he was able to realize from the sale of the ninety-day loan bills and what he has to pay for the "cover" ninety days later. Even if the exchange market has stood still in the meantime this difference in the two exchange rates is bound to be quite an item, and it reduces what he makes on the whole business to a pretty small percentage. But then the fact must not be lost sight of that he has never had to put up any capital at all and that anything he makes is clear profit. In case the loan has been made on the other basis, with the borrower taking the risk of exchange, the borrower pays the banker a fixed rate of commission - usually three-eighths of 1 per cent on ninety-day business. The banker makes that clear, for the borrower to whom he has lent, say, £10,000 of ninety-day bills, is obligated to return to him £10,000 of demand exchange at the end of ninety days. If the borrower can buy in this "cover" cheaply, by so much is the cost of the loan to him reduced. As for the banker, it makes no difference to him what the exchange market may do; he gets his three-eighths per cent commission (equal to 4 times 3/8 per cent = 1 1/2 per cent per year) and is out of the transaction.

193. Commissions On Loans

Large profits are at times made in loaning foreign money in the two ways described. The interest rate may seem small but the amounts involved in operations of this kind are enormous and even a small commission may mean a very large profit - in one month (October, 1902) one of the trust companies doing a foreign exchange business in New York cleared nearly $25,000 from commissions on sterling loans, excellent collateral being deposited and the borrower in every case taking the risk of exchange. Examination of the books of some of the big banking houses making a specialty of lending out foreign money here would probably show profits far in excess of the amount made by this trust company.

194. Profits Made From The Purchase Of Exchange

Buying foreign exchange for investment is still another source of profit to the foreign department. It sometimes happens, for instance, that for one reason or another discounts rise in Europe, driving down the rate of exchange for sixty and ninety day bills. When this takes place, if money is easy here, bankers are likely to buy large amounts of long exchange, not for the purpose of having it discounted and placed to their credit as usual, but for the purpose of actually holding it to maturity.