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X-4730
:TXCERPTS FRH! T?Z E~.IDGURAL ADDR'ESS OV THE GOVERNOR OF IOWA,
EONORJGL:S
JCE~-
F. .AHMILL, TO TEE FORTY-SECOliD GENERAL ASSEMBLY,
DELIVERED .A:r DES MOEIJES, IOiVA, J.A.:TUARY 13tn, 1927 ·
BANKING
"Accordingly I recommend:
(a) That proposed subscribers to capital stock of State
banks ;nus t furnish a financial s taternent showing they arc worth
at least two times, over and above tneir exemptions, in unincumbered
property the a11ount of their stock subscriptions; the Banking Departmont to be required not only to investisate tho financial circumstances of subscribers to stock, but to determine whether or not
they are the character of men who have and tl\i 11 hold the respect
and confidence of the community as bankers. Subsequent statements
of financial conditions of s tock."IJ.olders to be furnished semi-annually
and filed with the Banlcing Commissioner.
(b) The stockholders should be required to deposit with
the "Banking Depart:nent securities defined by law to i:1sure the prom')t
and full J?ay:nent of any assess:r:ent vmich they may be called upon in
tbe future to pay.
This requirerr.ent should be made effective at
once on a.ny !ITEW banks or TRA1-TSFER of stock in old banks, stockholders in existing banks to receive not to exceed six ~er cent annual
dividends until this assessment liability is 'JUt u·? in ap"?roved
sccuri tics a.s aforesaid, which assessment liability requirement
might be mot either by the stockholder himself or by the bank
from its future earnings, acting in his behalf.
(c) Good baru~s should be made out of going banks rather
than of closed banks. Tho laws of some states and tr.e proposals
that have been submitted, proceed from the starting point which
has to do with closed banks. We should give our attention to
studying the situation as regards live, active institutions, and
those yet to bo formed giving, however, due regard to the liquidation requirements of closed banks.
(d) I reco~nend that the entire capital of a bru1k be paid
in before a bank can transact business; that the capital requirements
be raised to $25,000.00 for cities of 3,000 or less, $50,000.00
for cities of 6,000 or less, and $100,000.00 for cities having a
population over 6,000. Such capital must be paid in full before
the transaction of business, together with an additional subscription of 10 per cent to cover organization expenses, etc., which
it is unlikely immediate earnings of a new bank may meet. No
dividend should be declared until a surplus of 20 per cent has
been built up, and thereafter 20 per .cent of the net earnings
each year should be set aside until a 50 per cent surplus has been
created.
A requirement this drastic is not co..11mon in banking
statutes, and is for the )ur?ose of f}reventing distribution of
earnings as dividends until ~roper reserves have been set up to
~rotect against unforeseen contingencies.
Experience has shown
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ti:.at in times ,-;ast. so'nc ban1:es l:avc been too ···n·one in )ros,)E)rous
years to decla~e di videncls to the full carni:)f; cat)acity, ,:,i thout
regard to tl:e possibility of less 1ros·')erous periods, during which
losses might be in~~rred.
(e) Officers and particularly directors should give greatBr
at tent ion to tho business of the bank. Directors should be held
·?ersonally liable for u.ny losses resul tL1g from unlawful acts in the
management of the bank which they ::.iave in any sense ap)roved or
ratified. We should surround tlw O)erations of the State Banking
System with such safeguards and resolutions as will promote better
bar~ing, solely without regard to the conveniences ~~d likes or
dislikes of the bankers, as they are semi-public servants, but
not to so couch the terms of the law as will result in unnecessarily
hampering legitimate rrasiness transactions to the detriment of the
public interest. Iowa industry, agriculture and livestock pursuits
1nust function.
Iowa ca?ital must be conserved and Jnade· available
for the develo:~nt and operation of Iowa's resources. Remove the
present facilities of the State banking system, without a sufficient
substitute, and t!1ese industries, on mich so many depend, could
not continue.
(f) Tl1at the ratio of ca?ital to deposits is also sufficient to provide a reasonable margin of safety to depositors.
After making a survey of the conditions surrounding some
failed bamcs, it is my opinion t~at one of the local causes of bank
failures is the fact that officers of the bank have been interested
in side ventures and r.ta ve ei t!:,er borrowed or loa~ed funds of the
bank in cases where they were directly or indirectly financially
interested. This ?ractice bas occurred in many instances with the
r::ana3ini:o officer of the institution. The first thougl1t is to restrict the O'?erations of the w.a.nagi:ng officer of a banking insti'tution to the business of the institution w~ich he represents. Restraint to this extent m~ be unconstitutional. We should, there~
fore, reach tJ.1is situation by restricti.--yg the loans 1 the advances
that ID80' be :nade by e. ba:1king institution in such cases, and it
should be :nade unla·wful for a bank in this State to loan to a
director 1 officer, or em:_:>loyee thereof 1 or for a director. officer
or err;ployee thereof to borrow from the bank any of its funds,
except subject to the following limitations:
1. The indebtedness of an officer, other tnan a
director or an employee, shall not exceed five per
cent of the paid-up capital stock and surplus of the
corporation.
2. No such loan sr~ll be made without first being
approved by a majority of the board of directors at
a meeting in the minutes of which such approval shall
be recorded in detail. Every such loan shall be acted
upon in the absence of the applicant.
3· The combined indebtedness of directors, officers and
employees shall not exceed forty l~r cent of the paid-up
capital stock and surplus of the cor,.,oration.
4. No officer who is actively engaged in the management
of any bank, or any employee, shall BORROW any amount
whatever from or discount any note or other commercial
-paper with the bank by whom etn;Jloyed, except uoon good
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co llatere1l, or other :J.."n?lo security or endorsement;
and no such lo&::J. or C.:.iscount shall 'oe 7":Ja.de until after
it lias been a•?91' ovod by a majority of the directors or
a committee of the board of directors DUthorized to act.
5· No offica 7,ho is actively enc&ged in the management of any bank, or any employee, Sr..ALL ILAKE -~'"Y LO.A..11J
for the bank by ·;rhom ornployed in w.:_ich said officer or
employee is personally or fina:1cially interested, di:;:ectly or indirectly, for his own account, for himself,
or as the partner or agel1 t of othars, except upon good
collateral, or other a~plc security or endorsement, and
no such loan shall be made until after such perso~1al
interest shall l~ve been disclosed to the board of directors and that fact sl1o<m by the min •. tes of the meeting of the board of directors, and t:w lo<.:..c'l approve.-1. by
a majority of said ~oard of directors.
It should also be provided thut if the directors of any
bank permit any of the directors, officers or em:;>loyees tl~reof
to borrow its funds, or disco~nt notes on commercial pa?er, in
violation of the foregoing reconrnendation or in an excessive
amount, or in a dishonest manner, or in a ma~~er incurring great
risk or loss to such bank, any director ~rrho l?artici?ated in or
assented to the same should be liable nersonally for all dfu~age
which the bank or its shareholders ~~w sustain by reason of
such loan.
The bank failures in the state he.ve brought forth the
question of a co:n"9Ulsory guarantee of banlc d.e:~osi ts. I know of
no model baDk guaranty law. Only eight st~tes out of the
Union have ever attempted such a law. Ho state has ·9assed
such 8..'1 Act si nee 1917. All such laws were ?Ut to the test
when t~e general 9eriod of deflation set in in 1920. Since
that time the failure of at least half a dozen or more of them
has been c:1la-ni tous. W':12- tever the cost of thoroughly co:1T9etent
a~d efficient ba:;::lk: exe.mina ticns, it is a proper charge against
banks. Whatever laws are devised to make sure that banks are
give:1. kis sort of supervision, they will have economic justification. Adequate examination and control encourage good banking and discourQge bad banking. Bank guaranty laws work contrariwise.
I am inclined to the belief that the soundest and most
effective safeguard to bank deposits is a mutual exrunination system similar to the one devised by the C~·,icago Clearing House Association. This system bas been in effect in Chicago for a number
of years and has been acce?ted by the banks tl1ereof, a.'1d while
there have been occasional failures, no depositor of a member
bank has ever lost a dollar since the ex~uination system was
established.
I believe it is feasible to divide the State into
districts and to organize the ban..l<:s b each district into a
mu.tual examination association, which ca.."l. make use of the clearing house s;ys tem effectively. Once institute such an organization and the strong banks would get in for the possible advantage that it would offer. Then competition would force other
banks to become strong enough to warrant membership.
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The bankers and the baru~ te)ositors of each State should
m&ke sure tv~t the benl~ exaninations department is efficiently
managed and a"'lply provided with men and. moDey. As the banks
t11emselves pay all the costs of the de;Jartr:ent, the :public cannot
object to tbis. In my judg~ent if they would do tuis, they would
set up the soundest and most effective L1.strument of safeguarding
de;osits yet devised.
Our own Banking Deq.:,rtinent needs more men a..'l'ld money to
hire still more com96tent ;nen. Tbe head af the department should
be ·able to earn and he should be paid as much as the president of
a good sized bank. Under such condi tio!ls 11ve should have no epidemic
of baru~ failures and no demand for a guaranty la~. Iowa should
ado:,>t a banking uo licy tha. t is sound, that will maJre each banker
stand for a policy tba.t 'l\ri. 11 :;>rotect his own bank and the de·9ositors
therein.
Let us an:,>ly ourselves to devE:lo"J a.c>J.d encourage better
bankers, more careful exaninatio!l of banks and require banking
laws to be more rigidly e11fo1·ced. Tl1e res~onsibili ty of the9oor banker and the fraudulent b::mker snould not be charged to
the honest and efficient :)~:n-~er or the -)l]_blic in general.
Let us be fair and re:no:nber again tbat the economic
conditions tt:roug}-_ ·nhich we :1ave been ~nssing have been unprecedented. Borrowers, whether b·J.siness, ,)rofessional men or farmers
re·:Jresentii.lg in normal ti:nes smie of our financially strongest
and best citizens, have, due to existing conditions become financially embarrassed or "gone oroi:e. 11 Credit l1.as -,;een extended to
them legitimately and in good faith. Tl:..ese borrowers have been
unable to pay their notes or interest. The stockholders of banks
throughout the State have been making up those losses so far as
they could and in a vast number of inst&nces have themselves
GIVEN THEIR ALL in the effort to make up those losses caused by
legitimate borrowers, in order that their b~~cing institution
might survive and their depositors be 9rotected.
Prager experience, proper final1Cial ability, proper
busi~ess integrity on the part of the banker, 11as, does now, and
always will safeguard the depositors' funds.
The essential
t?1ing, the paramount necessity, is that legislative action should
en.'lance rather than nullify tl~.E: necessity tor .sue~~~ as all of the
ba..Jking experiences of the co.:mtry in all thes'e years have
der."onstra.ted the sou.-.dness of this contention and the futility
and the d~'l'lger of banking sedatives.
Affirmative let;islative st?ecifications co·1cerning invest:nent of a ban.."k' s funds are dangerous 1md offer an opportunity
for unsound banking, viliile broad gener~l restrictions as to investment of any and all of the fu.'lds of the ba..Jk, ·?rovide .?,
feasible and necessary protection to deoositors.
Wi t:1. ti1ese i:ldiSi?ensc:>..ole qnali ties our fi -:1a.11cial institutions should <~.nd will attain adegu::-,te strength and be best able
to serve the fundsmental interests of the comvr..onweal th. 11
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