Discount House
What Is a Discount House?
In the financial world, a discount house is a firm that specializes in trading, discounting, and arranging bills of exchange or promissory notes. Its transactions are generally performed on a large scale with transactions that likewise incorporate government bonds and Treasury bills.
Otherwise called bill brokers, discount houses principally operated in the United Kingdom, playing a key job in the financial system there until the mid-1990s. By 2000, British discount houses largely failed to exist as separate financial institutions. They never again exist as separate financial institutions, however some actually stay in India and different nations.
Understanding a Discount House
Starting during the 1820s, discount houses once sat at the core of London's money market system. They served in effect as money lenders that participate in the buying and discounting of bills of exchange and other financial products, for example, money market securities, certain government bonds, and banker's acceptances (BA). By giving a ready market to short-term government-ensured securities and other money market instruments, and discounting short-term obligations for other financial institutions needing funds, they gave liquidity in the secondary money market.
A discount house specialized in discounting short-dated financial securities and acted as an intermediary between a lender and a borrower, arranging the purchase of different certificates of deposit (CDs), commercial paper, and other money market instruments referenced above at not exactly par value. Through these short-term securities, they borrowed funds from commercial banks at a rate below the market rate and loan these funds to borrowers at a marginally higher rate. The interest rate differential comprised a profit for the discount house.
Discount Banks and Financial System
The Bank of England (BoE) managed the discount houses to counteract shortages of everyday funds and credit in the interbank market. To manage the money supply in the economy, the Bank conducts open market operations which include extending or contract the volume of assets held with the Bank. It once did this solely by offering loans to discount houses through commercial paper or government-backed securities.
The discount houses utilized the loans to purchase money market securities from commercial banks, subsequently empowering these banks to meet their transitory requirements for loanable funds or for cash reserves. In this manner, the discount houses acted as intermediaries between the central bank and the commercial banking system in England. By expanding or decreasing the discount rate — the rate at which the central bank loans reserves to its banking system — the Bank of England have some control over the cost of borrowing and, in effect, the money supply.
A discount house didn't be guaranteed to need to borrow funds from the central bank first to give loans to commercial banks, notwithstanding. It additionally worked in the reverse scenario. Banks needing funds would sell commercial paper to the discount house, which took a small spread from the transaction. These bills would be sold to institutions with surplus cash, which gave the funds to be advanced. Thus, the Bank of England rediscounted the bills for the discount house and, in this way, kept a direct connection with the money market and the predominant interest rates in the economy.
Decline of the Discount House
Starting out of a casual network of bill brokers, who purchased bills of exchange and sold them to the Bank of England, the discount house system was officially set up in Britain after the financial crash of 1825. It remained practically unchanged for a considerable length of time. There were 12 discount houses, all based in the City (London's financial district), and they had a monopoly on daily dealings with the Bank of England in bills of exchange and, less significantly, in gilts (British government securities, like U.S. Treasury bills and bonds).
Electronic trading, the send off of derivatives markets, and the growth in the repo market started to give competition to discount houses' services in the mid 1980s. Be that as it may, their death toll was sounded during the 1990s, when the Bank of England started drastically restructuring the manner in which it set interest rates and regulated the money supply. In 1996, it ended the privileged position of the discount houses by opening up dealings in short-term money market instruments to a great many banks, building societies, and securities firms, based both in Britain and abroad.
By 2000, all British discount houses stopped their operations.
The last discount house to close was Gerrard and King in November 2000.
All england's international banks presently have major treasury departments, which trade government bonds and instruments on a dish European basis.
Special Considerations
In the United States, a discount house alludes to a large retail store that can offer consumer durables at below customary rundown prices, in light of its ability to purchase in bulk and utilize cost controlling practices.
Features
- Discount houses are financial institutions that act as money lenders, or act as intermediaries between commerical lenders and borrowers, trading in different short-term securities and instruments.
- By 2000, British discount houses largely stopped existing as separate financial institutions.
- Basically situated in the U.K., discount houses once gave a ready secondary market, subsequently guaranteeing liquidity in the British monetary system. The Bank of England frequently operated through discount houses to assist with managing the money supply, set interest rates, and stretch out credit to commercial banks.
