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Bankers Acceptance
Source:  Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)

As defined by the board of governors of the Federal Reserve System in its Regulation A (advances and discounts by Federal Reserve Banks), “a draft or bill or exchange, whether payable in the United States or abroad and whether payable in dollars or some other money, accepted by a bank or trust company or a firm, person, company or corporation engaged generally in the business of granting bankers’ acceptance credits.”  A bank acceptance, therefore, is the acceptance obligation of a bank or trust company engaged also in banking; bankers (the apostrophe is usually dropped) acceptance is a broader term including those of other acceptor firms in the business, referred to as discount houses.  Bill dealers buy and sell bankers acceptances, which are referred to as bankers bills, or simply bills.

Federal Reserve Promotion of Bankers Acceptances.  

The Federal Reserve System has been closely connected with development of bankers acceptances as an important sector of the U.S. money market.  The Federal Reserve banks became, beginning in 1916, substantial purchasers and holders of bankers acceptances, posting fixed rates above or below the market, as monetary policy called for, at which the banks stood ready to buy bills.  Until 1955 it was the passive policy of the system to buy and never sell, so that while the purchases were technically open market operations, actually Federal Reserve buying of bills resembled more the discounting function, since it was not at the initiative of the Federal Reserve banks.  Since 1955, however, bill buying by the Fed has been at its initiative, so that such operations have become full-blown open market operations, including repurchase agreements if appropriate with bill dealers.  The Federal Reserve banks adjust their holdings of bills by simply not replacing those paid at maturity.  

Regulation B of the board of governors of the Federal Reserve System governs open market operations in bills by Federal Reserve banks.  This regulation prescribes the following:

 

1.    Any bankers acceptance or bill of exchange which is eligible for discount is eligible for purchase by Federal Reserve banks in the open market, with or without the endorsement of a member bank if:  it has been accepted by the drawee prior to purchase; or it is accompanied or secured by shipping documents or by warehouse, terminal, or other similar receipts conveying security title; or it bears a satisfactory bank endorsement.

2.    A bankers acceptance growing out of a transaction involving the importation or exportation of goods may be purchased if it has a maturity not in excess of six months, exclusive of days of grace, provided that it conforms in other respects to the eligibility requirements.

3.    A bankers acceptance growing out of a transaction involving the storage within the U.S. of goods actually under contract for sale and not yet delivered or paid for may be purchased.  On such paper, however, the acceptor must be secured by the pledge of such goods; and the acceptance must conform in other respects to the eligibility requirements. Unless endorsed by a member, a bill of exchange is not eligible purchase until a satisfactory statement has been furnished of the financial condition of one or more of the parties thereto.  Similarly, unless accepted or endorsed by a member bank, a bankers acceptance is not eligible for purchase until the acceptor has furnished a satisfactory statement of its financial condition in form approved by the Federal Reserve Bank, and has agreed in writing with a Federal Reserve bank to inform it upon request concerning the transaction underlying the acceptance.

Member Bank Discounting of Bills.  

Any member bank may discount at its Federal Reserve bank bankers acceptances which have the following features of eligibility for discount under Regulation A: 1.    Endorsed by a member bank.

2.    Growing out of transactions involving the importation or exportation of goods, the shipment of goods within the U.S. , or storage of readily marketable staples.  In the case of an acceptance growing out of the storage of readily marketable staples, the bill must be secured at the time of acceptance by a warehouse, terminal, or other similar receipt conveying security title to such staples.  Such receipt shall be issued by a party independent of the customer or issued by a grain elevator or warehouse company duly bonded, licensed, and regularly inspected by state or federal authorities with whom all receipts for such staples and all transfers thereof are registered and without whose consent no staples may be withdrawn.  Moreover, the acceptor must remain secured throughout the life of the acceptance.  If the goods are withdrawn from storage before maturity of the acceptance or retirement of the credit, a trust receipt or other similar document covering the goods may be substituted in lieu of the original document, provided that such substitution is conditioned upon a reasonably prompt liquidation of the credit.  To this end, it should be required, when the original document is released, either that the proceeds of the goods will be applied within a specified time toward a liquidation of the acceptance credit or that a new document, similar to the original one, will be re-substituted within a specified time.

3.    Drawn by a bank or banker in a foreign country, or dependency or insular possession of the United States , for the purpose of furnishing dollar exchange.

4.    Having a maturity at the time of discount of not more than 90 days’ sight, exclusive of days of grace.  Acceptances drawn for agricultural purposes and secured at the time of acceptance by agricultural purposes and secured at the time of acceptance by warehouse receipts or other such documents conveying or securing title covering readily marketable staples may be discounted with a maturity at the time of discount of not more than six months’ sight, exclusive of days of grace.  Nevertheless, no acceptance discounted by a Federal Reserve bank should have a maturity in excess of the usual or customary period of credit required to finance the underlying transaction or of the period reasonably necessary to finance such transaction.  No acceptance growing out of the storage of readily marketable staples should have a maturity in excess of the time ordinarily necessary to effect a reasonably prompt sale, shipment, or distribution into the process of manufacture or consumption.

Acceptance for any one customer in excess of 10% of the capital and surplus of the accepting bank must remain actually secured throughout the life of the acceptance.  In the case of acceptances of member banks, this security must consist of shipping documents, warehouse receipts, or other such documents, or some other actual security growing out of the same transaction as the acceptance, such as documentary drafts, trade acceptances, terminal receipts, or trust receipts which have been issued under such circumstances and which cover goods of such a character as to ensure at all times a continuance of an effective and lawful lien in favor of the accepting bank.  Other trust receipts are not considered such actual security if they permit the customer to have access to or control over the goods.

Acceptance Powers of Banks.  

Authority of a member bank to accept drafts or bills of exchange drawn upon it is based on the Federal Reserve Act, particularly the seventh and twelfth paragraphs of Section 13 of the Act, and Regulation C of the FEDERAL RESERVE BOARD REGULATIONS, which governs member bank acceptance of commercial drafts or bills and acceptance of drafts or bills to furnish dollar exchange.

Any member bank may accept drafts or bills of exchange (commercial drafts or bills) drawn upon it which grow out of any of the following transactions:

1.    The shipment of goods between the U.S. and any foreign country, or between the U.S. and any of its dependencies or insular possessions and foreign countries, or between foreign countries.  A member bank accepting any commercial drafts or bills growing out of such transactions will be expected to obtain before acceptance and retain in its files satisfactory evidence, documentary or otherwise, showing the nature of the transactions underlying the credit extended.

2.    The shipment of goods within the U.S., provided shipping documents conveying or securing title are attached or are in the physical possession of the accepting bank or its agent at the time of acceptance.

3.    The storage in the U.S. or in any foreign country of readily marketable staples, provided that the draft or bill of exchange is secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering such readily marketable staples.  A readily marketable staple means an article of commerce, agriculture, or industry used as to make it subject to constant dealings in ready markets with such definitely ascertainable and the staple itself easy to realize upon by sale at any time.  In connection with member bank discounting at the Fed of such bills, the Federal Reserve banks may neither discount nor purchase bills arising out of the storage of readily marketable staples unless the acceptor remains secured throughout the life of the bill.

No member banks shall accept any commercial draft or bill unless at the date of its acceptance such draft or bill has not more than six months to run, exclusive of days of grace.

Limitations on acceptance by member banks of commercial drafts or bills are as follows: 1.    Acceptance for one person.  No member bank shall accept commercial drafts or bills, whether in a foreign or domestic transaction, for any one person, company, firm, or corporation in an amount equal at any time in the aggregate to more than 10% of its paid-up and unimpaired capital stock and surplus, unless the bank be and remain secured as to the amount in excess of such 10% limitation, either by attached documents or by some other actual security growing out of the same transaction as the acceptance.  A trust receipt which permits the customer to have access to or control over the goods will not be considered actual security within the meaning of this limitation.

2.    Limitation on aggregate amount.  No member bank shall accept commercial drafts or bills in an amount equal at any time in the aggregate to more than 50% of its paid-up and unimpaired capital stock and surplus (except that, with the permission of the board of governors of the Federal Reserve System, as provided in the following paragraph 3, any such member bank may accept such drafts or bills in an amount not exceeding at any time in the aggregate 100% of its paid-up and unimpaired capital stock and surplus; but in no event may the aggregate amount of such acceptances growing out of domestic transactions exceed 50% of such capital and surplus).  Commercial drafts or bills accepted by another bank, domestic or foreign, at the request of a member bank which agrees to put such other bank in funds to meet such acceptances at maturity shall be considered as part of the acceptance liabilities of the member bank requesting such acceptances as well as of such other bank if it is a member bank

3.    Authority to accept up to 100%.  Any member bank desiring authority to accept commercial drafts or bills up to 100% shall file with the board of governors, through the Federal Reserve bank of its district, an application for permission to exercise such authority.  Such application need not be made in any particular form, but shall show the present and anticipated need of the applicant bank for the authority requested.  The board of governors may at any time rescind such authority granted by it after not less than 90 days’ notice in writing to the bank affected.

Authority to Accept Drafts or Bills to Furnish Dollar Exchange.  
 Any member bank, after obtaining the permission of the board of banks or bankers in foreign countries, dependencies, or insular possessions of the U.S. for the purpose of furnishing dollar exchange (dollar exchange drafts or bills) as required by the usages of trade in the respective countries, dependencies, or insular possessions, subject to the conditions set forth herein.  Any member bank desiring to obtain such permission shall file with the board of governors through the Federal Reserve bank of its district an application for such permission.  Such application need not be in any particular form but shall show the present and anticipated need for the authority requested.  The board of governors may at any time rescind any permission granted by it after not less than 90 days’ notice in writing to the bank affected.

Any such foreign country, dependency, or insular possession of the U.S. must be one of those specified in a list published by the board of governors for these purposes, with respect to which the board of governors has found that the usages of trade are such as to justify banks or bankers therein to draw on member banks for the purpose of furnishing dollar exchange.  Any member bank desiring to place itself in position to accept drafts or bills of exchange from a country, dependency, or insular possession not specified in such list may request the board of governors through the Federal Reserve bank of its district to add such country, dependency, or insular possession to the list, upon a showing that the furnishing of dollar exchange is required by the usages of trade therein.  The board of governors may at any time, after 90 days’ published notice, remove from such list the name of any country, dependency, or insular possession contained thereon.

Any such dollar exchange draft or bill must be drawn and accepted in good faith for the purpose of furnishing dollar exchange as required by the usages of trade in the country, dependency, or insular possession in which the draft or bill is drawn.  Drafts or bills drawn merely because dollar exchange is at a premium in the place where drawn or for any speculative purpose, or drafts or bills commonly referred to as finance bills (bills not drawn primarily to furnish dollar exchange) will not be deemed to meet these requirements.

The aggregate of drafts or bills accepted by a member bank for any one foreign bank or banker shall not exceed an amount which the member bank would expect such foreign bank or banker to liquidate, within the terms of the agreements under which the drafts or bills were accepted, through the proceeds of export documentary bills or from other sources reasonably available to such foreign bank or banker arising in the normal course of trade.

A member bank shall not accept any dollar exchange draft or bill unless at the date of its acceptance it has not more than three months to run, exclusive of days of grace.

Limitations are as follows:

1.    Acceptances for one bank or banker.  A member bank shall not accept dollar exchange drafts or bills for any one bank or banker in an amount exceeding in the aggregate 10% of the paid-up and unimpaired capital and surplus of the accepting bank, unless it be and remain secured as to the amount in excess of such 10% limitation by documents conveying or securing title or by some other adequate security.

2.    Aggregate amount.  A member bank shall not accept dollar exchange drafts or bills in an amount exceeding at any one time change drafts or bills in an amount exceeding at any one time in the aggregate of 50% of its paid-up and unimpaired capital and surplus.  This limitation is separate and distinct from and not included in the limitations prescribed above with respect to acceptances of commercial drafts or bills.  Dollar exchange drafts or bills accepted by another bank, whether domestic or foreign, at the request of a member bank which agrees to put such other bank in funds to meet such acceptances at maturity shall be considered as part of the acceptance liabilities of the member bank requesting such acceptances as well as of such other bank, if a member bank, within the meaning of these limitations.

Summary.  Since the close of World War II, the volume of bankers acceptances outstanding has expanded substantially to new peaks, totaling over $7.9 billion at the close of 1971, compared with $154 million at the close of 1945 and $1,732 million at the close of 1929.  Expansion in recent years became pronounced beginning in the late 1950s, reflecting the expansion in world trade, reestablishment of currency convertibility, and increased use of dollar arrangements in international trade.  Prime bankers acceptances are those of highly regarded banks and bankers active in acceptance financing. Yields (discount basis) vary with money rates and may range 50 to 100 basis points higher than those on Treasury bills of similar maturity.  Six dealers, all in New York City

, maintain markets in maturity.  For investors other than commercial banks, savings banks, insurance companies, and varied types of non-financial corporations, bankers acceptances compete with other money market instruments of deposit as to suitable denominations, convenience of maturities, adequacy of supply, and marketability.  The Federal Reserve System, as indicated supra, has been especially interested in development of the market for bankers acceptances, as evidenced by active open market operations therein, repurchase agreements with nonblank dealers since 1955, and establishment by the New York Federal Reserve Bank of a separate acceptance department in January, 1964.

BIBLIOGRAPHY

JENSEN F.H. and PARKINS, M. “Recent Developments in the Bankers Acceptance Market.”  Federal Reserve Bulletin.  January, 1986.
STIGUM, M. The Money Market.  Dow Jones-Irwin Inc., Homewood , IL , 1983.  

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