Lending and Investment Practices of Commercial Banks

Abstract

The investment and lending practices and policies of the commercial banking system change relatively slowly. Standards and practices which have proved successful in making loans to finance the production of goods and services or in investing funds in governmental and corporate securities continue to be utilized. Frequent modifications of lending practices are not needed since the financing needs of business and industry change slowly. Some change is, however, discernible. Some successful lending practices have been adapted to meet the new financing needs of industry and commerce. In some cases, new techniques of lending have been devised in order to extend credit to finance new types of business. The terms and conditions under which certain types of loans can be made have been altered by federal or state legislation. Recently, the laws have been modified to permit banks to invest in entirely new types of securities, e.g., World Bank Securities. Moreover, the existence of a large public debt has changed markedly the investment policies of the commercial banking system. Changing tax policy has also influenced trends in investment practices. For the purpose of analyzing the contemporary trends in the lending and investment practices of commercial banks, the end of World War II can be taken as a convenient date from which to start. It would, however, be incorrect to imply that the policies and practices discussed in the following pages are new, that is, developed and employed for the first time since the end of the war. These lending and investing practices are discussed because they are being employed by more and more commercial banks. It should be emphasized that they supplement the older and better known methods; they have not replaced them. The lending and investment practices and policies of the commercial banking system have been influenced by the postwar monetary and fiscal policies followed by the Treasury Department and the Federal Reserve System. It is, therefore, impossible to discuss contemporary trends in lending and investment policies without referring to the policies followed by the central banking system and the Federal Government. It is equally impossible to discuss these policies at length since they are beyond the scope of this paper.1