necessaryonlytoprovideforthepaymentofthedifference.
Relation of the Call Loan Rate andthe Commercial Paper Rate
ofInterest
Thecallandtimeratesforbrokers'loans aredependent upon
thesupplyofand demandforsuchfunds. Thesupplyconsists of the loanable funds seeking temporary investment, as held by banks andbankersinside andoutside New YorkCity, including foreignbanks andagenciesofforeignbanks,and byfirms, indivi- duals, and corporations. The contributors to the supply vary withtheseasonandwith theattractivenessofother opportunities forinvestment,eitherlocallyor inothermarkets. Itisthe policy ofmost bankstoprovidefor theircommercialclientsfirstandto investonlythe excess in call loans and commercialpaper. The demandforcallloanfundsvarieswith theactivity of the market;
low rates in turn promote speculative activity. The demand
isoftenverysudden andnecessitous,and tocallforth andassure a call loan fund sufficient to finance the securities market it is
recognized that the limitation of the rate to the legal rate for commercial transactionsisanintolerablerestriction.
Thefederalreserveprovidesasourceoffundsformembers by
rediscounts, but the rediscount facilities are specifically denied topaper used in speculativeactivities on the stock andproduce exchanges. Therefore, to assurethemselvesofaliquidsecondary reserve, member banks areinchned to invest their surplus fund in rediscountable comjnercial paper rather than in call loans.
Interior banks tend to send less of their excess funds to Wall
Street, butinvestitin commercialpaper. Butuntil alargedis- countmarketdevelopswhichabsorbs the loan fund,callloanson stockexchangecollateral willcontinuetobeanimportantfeature of our banking system. Moreover, the prevalence of high demandrenewalrateswilldivertfundsfromthecommercial paper market to the stock market, for some banks and some other
86o DOMESTIC BANKING— EARNING ASSETS
lenders will take advantage of the higherrates. This diversion restricts the commercial paper market and will in time force a higher rate on commercial paper. The two markets thereby reactone upontheother. Thecommercial paperrateisaffected
by many factors which only indirectly affect the call loan rate.
The commercial paper rate, as well as its seasonality, is much more steady. These facts are shown in the following graph (Figure 35)
Index
THE LOAN DEPARTMENT— STOCK BROKERS 86l
The interestbills arecommonly computed by one setof men andchecked by anotherset, andare thenenteredin theinterest book. The use of interest tablesis discouraged inmanyof the larger banks, as figuring by head and hand, using, say, the old United States bank rate system, together with the 6 per cent method, has proved more speedy and accurate than the use of tables. To illustrate: the principle that the interest for 6 days at 6percenton$100,000equals$100 (answerarrived atbypoint- ingoffthree placestotheleft)can bevariedtoalmostanyrequire- ment, whereonly onerate has been madeduring thelife ofthe loan. But where a loan hasrun, say, fora month with several changes in ratesduring that time, the easiest rule to follow in suchcases is to
—
Multiply thenumberofdays bythedifferent rates.
Multiply the sum of these amounts by the multiple or fraction of $1,000 which the principal is (this can usuallybedonemerelybypointingoff to rightorleft).
Divide by 6 twice; thus the interest for a loan of
$100,000, running for a month, at thefollowing rates, would be computed
:
3-
6days at6%
"
5
" 3
" 2^
$ 36 30 18 6 22 12.50
31 6) 124.50X100
6) 2075
$345-83
The customisto figureona 31-daymonth anda360-day year basis,sothat thebankgets31/360ofa year'sinterestonamonth's loan, instead of 31/365, netting it a slight profit on all loans whereinterestis chargedfor theactualnumber of days elapsed.
The interest on time loans, not discounted loans, is figured at 30 days tothemonth.
In addition to the collection of interest on its own loans, the loan department is also responsible for the collection of interest on loans held for out-of-town banks. These loans are included with its own loans on the interest bills sent out, and,
whenpaid, theinterestisapportionedamongthedifferent banks towhichit isdue. Thecorrespondentusually gets thesamerate as the bank itself, and the loan is given the same care as to margin, collateral, and ratesas itsown, and thewholeserviceis
gratuitous.
CHAPTER XLIV