Definition Of Bank Acceptance

A banker's acceptance is defined by the Federal Reserve Board as "a bill of exchange of which the acceptor is a bank or trust company, or a firm, person, company, or corporation engaged in the business of granting banker's acceptance credits."

Trade And Bank Acceptances Distinguished

The trade acceptance arises from a transaction between the buyer and the seller. The bank acceptance is the result of the granting of credit by a bank or banker. The trade acceptance is accepted by the buyer. The bank acceptance is accepted by the bank as the agent of the buyer.

Bank Acceptances, How Created

In the same manner in which the individual or the firm can command credit, so is the bank capable of extending its credit to its customers, where, for a consideration, it permits its customers to use its credit, which may be either secured or unsecured, depending upon the business character and the financial responsibility of the applicant. Bank acceptances herein referred to arise out of commercial transactions.

Distinction Between A Bank's Acceptance And A Bank's Note

When a member bank of the Federal Reserve System accepts a draft or bill of exchange drawn against it, it enters into a contract substantially similar to that of the maker of a note, so that, while the form of the instrument differs, the legal effect is the same. The use of a bank's acceptance, however, differs from the use of its promissory note. When a bank accepts a draft or bill of exchange for one of its customers, it merely lends its credit responsibility to that customer in order that he may procure the funds elsewhere. The holder of a bank's acceptance has the same legal rights against the bank as the holder of its promissory note.

Credit Standing Of Bank Acceptances Based Upon Bank's Credit

The degree to which the credit value of bankers' acceptances is measured is by the standing and credit of the accepting bank. The financial standing of banks is generally better known than that of individuals, firms, corporations or others, eliminating to a great extent the necessity and inconvenience of investigating the standing of the drawer or the indorsers. The holder of a bank acceptance knows that the accepting bank is entirely responsible. The holder knows also that if the credit of the bank is good, he need have no fear of poor security, as the bank is primarily liable.

Acceptances By Member Banks Of The Federal Reserve System

Under the provisions of the Federal Reserve Act, member banks are permitted to accept drafts which have not more than six months to run, exclusive of days of grace, arising out of one of the following ways: -

1. They must have originated from a transaction involving the importation or exportation of goods.

2. They must have arisen from a transaction involving the domestic shipment of goods, and must have had shipping documents attached at the time of acceptance securing or conveying title to the goods.

3. They must have been secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title to readily marketable staples.

Member banks may accept bills of the classes above designated up to fifty percentum of their capital and surplus. Where permission is obtained from the Federal Reserve Board, such member banks may accept paper of the class above mentioned up to one hundred percentum of their capital and surplus. Acceptances arising from domestic transactions may not exceed fifty percentum of the capital and surplus of the bank. The bank is prohibited also from accepting for any one person, firm, company or corporation, drafts aggregating more than ten percentum of the capital and surplus of the member bank. But, where drafts above referred to, carry with them the documents or other security, the latter limitation does not apply.