LOANS AND ADVANCES IN LONDON
We are told that London banking is quite different to country banking,
but it is a difference of degree rather than of kind, and in London,
as in the provinces, the bank-manager has two rates--one for those
who, taking him at his word, do not attempt to bate him down, and a
second and lower rate for those persons who, knowing that he is of the
City, and scenting instinctively a servant of the company, who is in
possession of instructions, literally force his hand. A seller in a
free market where competition is vigorous generally has at least two
prices, though, of course, he only advertises one of them, and the
banks, which are not one whit in advance of the commercial ethics of
the times, base their rate upon expediency as well as upon the Bank of
England’s rate of discount. In stating so human and obvious a fact one
can only apologize for its intense triteness, and urge, in extenuation,
the blind, unreasoning faith of some people in the modern bank-manager.
Such faith may be beautiful, but, believe me, it is costly.
Mention has been made of the distinctions between country and
London banking, and one of these appears to be the adoption of the
“loan-account” system by the City banks, but “loan accounts” are not
by any means unknown in the provinces, though the opening of them is
exceptional. Moreover, though this system is greatly in evidence at the
head-offices of the joint-stock banks, the farther one moves away from
Lombard Street the less firmly is it established, and one finds in the
books of the London branch banks a medley of the two systems. That is
to say, some customers adopt the “loan-account,” and others pay a rate
upon their daily debtor balances, together with a commission on the
turn-over of their accounts.
When a “loan account” is opened by a customer, the banks do not charge
a commission upon his current account, but, as we shall see, neither
do they neglect to make amends for this omission. A customer, we will
suppose, when the Bank rate is at 3 per cent. obtains a loan of £20,000
from his banker at Bank rate. He draws a cheque for this sum, which the
banker debits to a “loan account” in his name, then places £20,000 to
the credit of his current or running account. Now the interest at the
rate of, say, 3 per cent. is calculated on the loan account, so if the
customer’s average credit balance for the half-year amounts to about
£4,000, then he has paid 3 per cent. per annum upon £4,000 which he has
never used. In other words, he has given his banker something like £60
for working his account during the half-year. Further, some London
banks charge a commission of ⅛ per cent. on the amount of the loan.
This they add each half-year to his interest, which, in the present
instance, would be debited in his current account pass-book thus: To
Interest, £325. By carefully checking his banker’s charges he will make
this discovery, and, of course, promptly demand that £25 be returned to
him.
It can now be seen that the London bank-manager is as eager to snatch
a commission as his country _confrère_, and, moreover, that he is not
without his opportunities, which, when the client is considered safe,
he seldom neglects. In other words, he does his duty like other honest
folk whose misfortune it is to be employees; and he does not specify
the ⅛ per cent. on £20,000 in the pass-book for the simple reason that
he knows it is safer disguised as interest.
The customer naturally does not see why he should pay a rate upon
£4,000 which he has not wanted, and which, in reality, the banker has
not lent, though he has created credit in his own books to that extent
by two simple entries on the debit and credit side of his ledgers.
Assuming that no commission was charged on the loan, £60 a half-year
seems a large sum to pay him for working an account, especially as
most of his rivals will bid against him for a well-secured loan. The
customer, therefore, should insist upon receiving the same rate upon
his daily creditor current-account balances as he is paying upon his
loan, and if he consider that his banker is entitled to a commission
for working his account, then he can arrange for a fair nominal
charge, but he may succeed in getting it worked free. Again, when his
current account is largely in credit, he can transfer a certain sum
therefrom to his loan account, and, by moving balances from the one to
the other, as occasion may arise, save himself an appreciable sum in
the shape of interest; but he may be too busy to adopt this course,
and it is evident that the first suggestion, which is better adapted
to his wants, will save him both time and money. Naturally the banker
will object, but the client will make it his business to endeavour
to overcome such opposition, which will be either strong or weak in
proportion to the nature of his cover and the desirability of retaining
his account.
We next come to the rate a borrower should pay upon a well-secured loan
or advance, and here, again, we may touch upon a distinction between
London and country banking. A banker, like any other dealer, adapts
his business to his surroundings, but in a great city like London he
is practically compelled to specialize more or less, and but little
money is lent in the City upon mortgage, whereas overdrafts are granted
freely in the country against the deeds of house property. Of course
there are exceptions; and certain well-known firms, whose credit is
beyond question, may not even be asked for any security when they
borrow at certain times of the year, but they soon would be if the
loan began to assume a permanent character; for though a banker may be
willing to advance to an influential and reputable firm without cover
just at those seasons when demand upon it is heaviest, he assumes that
such assistance will only be required temporarily, and would instantly
become nervous should it appear from his books that the firm was slower
than usual in reducing the loan, whilst immediately he perceived that a
certain amount of it threatened to take the form of a permanent advance
he would ask for security.
The City banks are too busy to give much attention to the wants of the
small man of business, and, broadly speaking, they require marketable
securities before they will grant a loan or advance. The suburban
manager, however, who is only on the edge of this struggling mass of
humanity, views the smaller applicant with a kindlier eye, because the
large borrower seldom approaches him, so in the suburbs one can borrow
on mortgage just as one can in the country. Indeed, suburban banking
approximates very closely to country banking, the one noticeable
distinction being the deposit rate. The West-end banker, again, has
his peculiarities, and it by no means follows that the rules and
regulations of a bank’s head-office in the City are in complete harmony
with those of one of its branches within a quarter of an hour’s walk of
the seat of government. It is, therefore, impossible to define London
banking, because London is vast, and the system eminently elastic and
adaptable.
The following table will give one a fair idea of what rate should be
paid upon a loan or advance, fully covered by securities which can be
sold on the Stock Exchange practically at any moment:--
With Bank rate at 2 % Customer pays 2½ to 3 %
” ” 2½ ” ” 2½ ” 3 ”
” ” 3 ” ” 3 ” 3½ ”
” ” 3½ ” ” 3½ ” 4 ”
” ” 4 ” ” 4 ” 4½ ”
” ” 4½ ” ” 4½ ” 5 ”
” ” 5 ” ” 4½ ” 5½ ”
” ” 5½ ” ” 5 ” 6 ”
” ” 6 ” ” 5½ ” 6 ”
It must be distinctly understood that this table will only serve the
purpose of a guide to what the rate ought to be, and that the customer
can, if his credit be good, by bringing pressure to bear upon his
banker, very probably make a closer bargain with him. For instance,
with the Bank rate at 4½, a person whose securities and credit are
beyond question might obtain a loan at ½ below Bank rate. He may
further arrange that his rate shall be ½ per cent. below Bank rate,
with a minimum to the banker of 3 or 3½. That is to say, his rate will
never be less than 3 or 3½, and when the Bank rate is above 3½, then he
pays ½ below it.
On the other hand, the customer who accepts the rate mentioned by the
manager without question fares badly, for no dealer quotes his minimum
rate first. He reserves that, as is usual in the highest financial
circles, until last, and he finds it difficult to look pleased when it
is forced from him, because his directors, if he quoted it too often,
may come to the conclusion that his hand is losing its cunning. The
client will have to do more than ask in order that he receive: he must
use argument that is convincing. Knowing that certain bank-managers
are running about the City in search of desirable accounts, just as
are bill-brokers for first-class paper, he not unnaturally comes
to the conclusion that he can find a cheaper market elsewhere, so,
having exhausted the gentler modes of suasion, the client finally and
reluctantly threatens to apply elsewhere, or reveals the fact that he
has already done so, and with what result, when the manager, if he
think him in earnest, quotes his very lowest rate, and asks him not
to mention it outside. Where the loan is a small one, however, the
directors will not trouble themselves greatly as to whether it either
goes or remains.
The much-vaunted 1 per cent. above Bank rate is, of course, only paid
by the small man, whose securities are not of the better class, and
by the customer who has not studied the market. Some London banks, we
know, charge a rate on the daily balances and a commission, but this is
the ordinary country practice, so, in order to avoid reiteration, it
has been thought desirable to discuss the method in the next chapter.