Discount Market The

Discount Market The

Discount Market, the London discount market consists of twelve major discount houses and a dozen or so similar small institutions. Its business consists of dealings in bills of exchange, nowadays mostly Treasury bills; but in recent years there has been an increasing business in short-term Government bonds. In effect the market lends to the Government by buying Treasury bills and Government bonds. About half of the funds of the market are borrowed from London clearing banks, and most of the remainder comes from the commercial banks and overseas banks.

Traditionally the clearing banks do not buy bills themselves, partly because the banks (to remain liquid) prefer bills with less than two months to the date when they mature, partly because the discount houses group bills into parcels maturing at the same time. Other financial institutions compete with the discount houses for the weekly 'tender' of bills.

When a bill broker buys a three-month bill he does not borrow for the same terms, but finances the bill by borrowing from day to day. His profit lies in the very narrow margin between his lending and borrowing rates of interest. If these loans are 'called in' simultaneously by all banks, the discount houses may find it difficult to finance their bills, and they may have to borrow from the Bank of England, which will traditionally always help the market at a price (see Bank Rate). In these circumstances the market is said to be 'in the Bank'.

The discount market is a feature of the financial system peculiar to Britain; other countries have short-term money markets, but only Britain has institutions which specialize entirely in such dealings. From time to time the need for them has been questioned. In particular, the 'syndicated bid' which the discount houses make for the weekly Treasury bill tender is criticized by some economists and others as a restrictive practice. Some observers also consider the Treasury bill system unnecessary and would confine Government short-term borrowing to ways and means advances from the Bank of England. The monetary authorities, however, seem to consider that the discount market plays a useful role in providing a smooth and flexible market in bills and short-term bonds.

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