What is a discount house?
In the world of finance, a discount house is a financial company that is engaged in discounting, trading and negotiating bills of exchange or promissory notes. They act as money lenders, or as intermediaries between commercial borrowers and lenders.
The discount house’s transactions are usually conducted on a large scale including Treasury bills and government bonds.
Discount houses, also known as bill brokers, played a significant role in Britain’s financial system until the mid-90s.
British discount houses stopped their activity by 2000. Although they do not exist as separate financial companies any longer, some of them still remain active in India and some other destinations.
Discount house meaning
The history of discount houses dates back to the 1820s, when they started functioning at the heart of the money market system in London. They provided a ready market for government-guaranteed securities and other instruments. They also provided discounted short-term obligations for other financial companies that were seeking funds, providing liquidity in the secondary money market.
In its essence, a discount house discounted short-term financial instruments and served as an intermediary between a borrower and a lender, helping to negotiate the purchase of different money market instruments (including certificates of deposit, commercial papers, etc) at less than par value.
Discount houses borrowed funds from commercial banks through short-term securities at a lower (below the market) rate and lent the received funds to borrowers at a higher price. The difference served as the discount house’s profit.
The Bank of England (BoE) worked with discount houses to regulate the money supply. It offered loans to discount houses through government-backed securities and commercial papers. In turn, the discount houses used these loans to buy money market securities from commercial banks, enabling them to fill their cash reserves or replenish loanable funds.
Therefore, discount houses are considered intermediaries between central and commercial banks. Decreasing or increasing the discount rate (the rate at which the central bank lends reserves) the BoE controlled the cost of borrowing, and in fact the money supply.
Historically, there were 12 discount houses in London, which cooperated with the Bank of England. In 1980, the development of electronic trading, derivatives market and repo market provided competition for discount houses. By 1996, the privileged position of discount houses ended when the Bank of England changed the way it regulated money supply and set interest rates by opening dealings in short-term money market instruments to different securities firms and banks.