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 ? 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 ? 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 %
With Bank rate at 2½ % Customer pays 2½ to 3 %
With Bank rate at 3 % Customer pays 3 to 3½ %
With Bank rate at 3½ % Customer pays 3½ to 4 %
With Bank rate at 4 % Customer pays 4 to 4½ %
With Bank rate at 4½ % Customer pays 4½ to 5 %
With Bank rate at 5 % Customer pays 4½ to 5½ %
With Bank rate at 5½ % Customer pays 5 to 6 %
With Bank rate at 6 % Customer pays 5½ to 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.