CHAPTER IV.

LOANS AND DISCOUNTS.

The assets of Canadian banks are unusually good for two reasons: First, because the law provides effective safeguards; second, because banking practice in Canada makes it very difficult to negotiate commercial paper of inferior quality.

The bank act gives almost a blanket privilege to a bank.a It may engage in all transactions appertaining "to the business of banking." But the sections of the act which contribute most to the quality of its assets are sections 88 and 89. These make it possible for a Canadian banker to become, as it were, a silent partner in an industry and at the same time to possess a first lien on all its liquid assets. A bank may loan money to wholesale dealers and shippers of produce of all kinds and possess a lien, not only upon the goods originally accepted as secured, but upon the goods which in the course of business are substituted therefor. These sections apply also to manufacturers, so that a bank may lend to a manufacturer

a The bank may open branches, agencies, and offices and may engage in and carry on business as a dealer in gold and silver coin and bullion, and it may deal in, discount, and lend money and make advances upon the security of, and may take as collateral security for any loan made by it, bills of exchange, promissory notes, and other negotiable securities, or the stock, bonds, debentures, and obligations of municipal and other corporations, whether secured by mortgage or otherwise, or Dominion, provincial, British, foreign, and other public securities, and it may engage in and carry on such business generally as appertains to the business of banking.

upon the security of his raw material and retain its lien upon the property through all the processes of manufacturing, having the same rights and powers with respect to the goods that it would possess if it had acquired the same by virtue of a warehouse receipt. On account of their importance sections 88 and 89 are printed below:

SEC. 88. The bank may lend money to any wholesale purchaser or shipper of or dealer in products of agriculture, the forest, quarry and mine, or the sea, lakes and rivers, or to any wholesale purchaser or shipper of or dealer in live stock or dead stock and the products thereof, upon the security of such products, or of such live stock or dead stock and the products thereof.

2. The bank may allow the goods, wares, and merchandise covered by such security to be removed and other goods, wares, and merchandise, such as mentioned in the last preceding subsection, to be substituted therefor, if the goods, wares, and merchandise so substituted are of substantially the same character, and of substantially the same value as, or of less value than, those for which they have been so substituted; and the goods, wares, and merchandise so substituted shall be covered by such security as if originally covered thereby.

3. The bank may lend money to any person engaged in business as a wholesale manufacturer of any goods, wares, and merchandise, upon the security of the goods, wares, and merchandise manufactured by him, or procured for such manufacture.

4. Any such security, as mentioned in the foregoing provisions of this section, may be given by the owner of said goods, wares, and merchandise, stock, or products.

5. The security may be taken in the form set forth in Schedule C to this act, or to the like effect.

6. The bank shall, by virtue of such security, acquire the same rights and powers in respect to the goods, wares, and merchandise, stock, or products covered thereby, as if it had acquired the same by virtue of a warehouse receipt. (53 V., c. 31, s. 74, 63–64 V., c. 26, s. 17.)

89. If goods, wares, and merchandise are manufactured or produced from the goods, wares, and merchandise, or any of them, included in or covered by any warehouse receipt, or included in or covered by any security given under the last preceding section, while so covered, the bank holding such warehouse receipt or security shall hold or continue to hold such goods, wares, and merchandise during the process and after the completion of such manufacture or production, with the same right and title, and for the same purposes and upon the same conditions, as it held or could have held the original goods, wares, and merchandise.

2. All advances made on the security of any bill of lading or warehouse receipt, or of any security given under the last preceding section, shall give to the bank making the advances a claim for the repayment of the advances on the goods, wares, and merchandise therein mentioned, or into which they have been converted, prior to and by preference over the claim of any unpaid vendor, provided that such preference shall not be given over the claim of any unpaid vender who had a lien upon the goods, wares, and merchandise at the time of the acquisition by the bank of such warehouse receipt, bill of lading, or security, unless the same was acquired without knowledge on the part of the bank of such lien.

HOW THE LAW PROTECTS THE BANKS.

The law puts the banks in a position to be of great service to the business interests of Canada and at the same time protects their advances. If a bank lends money to a wholesaler or to a manufacturer it practically becomes owner of all the goods in his establishment. Yet the borrower is in no wise embarrassed, for he has the same right to buy and sell that he would have if he were under no obligation to the bank. If at any time, however, he adopts a policy of which the bank disapproves, or if the course of his business indicates that something is wrong, his bank may take immediate possession of his stock of goods. On account of the importance of this class of advances the law sets forth in detail the form of note or contract which the borrower must sign, as follows:

SCHEDULE C.

In consideration of an advance of by the

dollars made

Bank of A. B., for which the said bank holds the following bills or notes (describe the bills or notes, if any) [or, in consideration of the discounting of the following bills or notes by the bank for A. B. (describe the bills or notes)], the goods, wares, and merchandise mentioned below are hereby assigned to the bill said bank as security for the payment on or before the

the rate of

day of

of the said advance, together with interest thereon at per centum per annum from the -day of (or, of the said bills or notes, or renewals thereof, or substitutions therefor, and interest thereon, or as the case may be).

This security is given under the provisions of section eighty-eight of the bank act, and is subject to the provisions of the said act.

The said goods, wares, and merchandise are now owned by and are now in the possession of

and are free from any mortgage, lien, or charge thereon (or as the case may be), and are the following (description of goods assigned).

Dated, etc.

(N. B. The bills or notes and the goods, etc., may be set out in schedules annexed.)

A bank's lien upon property accepted as security for a loan, or covered by a bailee or warehouse receipt or a bill of lading, is superior to that of any vendor unless the vendor's claim was known to the bank when it accepted the goods or documents as security. If a debt is not paid when due the goods put up as security may be sold by the bank at public auction within ten or thirty days after notice has been sent by mail to the pledger. The bank, however, can not acquire this hold on the property of a borrower unless the security is given at the time the loan is negotiated. A bill of lading or warehouse receipt acquired by a bank as supplementary security for a loan gives it no special rights or powers.

BANKS SILENT PARTNERS IN INDUSTRY.

These provisions of the law contribute greatly to the strength of the assets of Canadian banks. A large part of their so-called commercial paper is secured practically by title to goods in warehouses, factories, and wholesale stores. Such security is more saleable than stocks and bonds, and paper having such security back of it is therefore better banking paper than notes secured by stockmarket collateral. So far as would seem possible the Canadian bank act makes merchandise of all kinds a sort of collateral security for bank advances. It assumes that

if a bank advances capital for the conduct of a business it should have a claim upon all the assets of the business and upon all goods as they come and go in the course of trade. No matter how a merchant's stock may change in character, it all belongs to his bank in case he fails to take up his paper or meet his engagements. In the same way a manufacturer's stock of goods, the raw material and the finished products, no matter how they change from day to day and month to month, will become the property of his bank if he fails to pay his note. The law practically makes every bank a silent partner in many wholesale and manufacturing businesses and gives it many rights which no ordinary silent partner can acquire. It has the effect naturally of making bankers keep a close eye upon business conditions as well as upon the affairs of their individual borrowers. Canadian bankers are interested in the lumber market, in the prices of metals, in changes in the tariff, and in the acquisition of foreign markets for Canadian manufactures and products, even as the Wall street banker is interested in the prices of stocks and bonds. He is in a sense the owner of merchandise of all kinds, and both trade and financial news have equal significance to him.

The law contains a number of other important provisions. A bank, for example, must not make a loan secured by the pledge of shares of its own capital stock. If it makes loans to any directors or officers of the bank, the amount of such loan must be reported each month to the government. No general manager or other employee of the bank can vote at a meeting of the stockholders. The bank must not pay dividends in excess of 8 per cent unless it has a rest or surplus equal to 30 per cent of its