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okrAho-vn(4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 kiAtuiv't/f- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Ci9v26 cr6.61 G arta/Iva/1 ge".11 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Air DEPOSIT GUARANTY IN OKLA/MA Prepared by Clark jarburton, Chie: Bankirig and Business Section Division of Research and Ztatisticu Federal Deposit Insurance Corporation Division of Eesearch and atatistics FQderial Deposit Insurance Corporation March 1958 • TABLE OF CONTZNTS 1)&061T GUARANTY IN OKLAHOMA rtE Character of the guaranty ole*slation Admission of banks Deposits guaranteed Assessments Administration and cuctody of the fund Indebtelne;ss of guaranty fund Method of paying depositors and of liquidating failed banks Expenses of administration 10 Constitutionality of the duosit guaranty law Deaisions of the State courts Decision of the United States Supreme Court 11 12 13 Supervision and regulation of guaranteed banks Supervisory authority Lxamination of banks for admission to guaranty Supervisory powers of the Bank Commissioner Supervieory experience Statutory limitations on bank operations 16 16 Insufficiency and closing of the guaranty fund Inadequacy of the guaranty fund Suspension of payments from the fund Repeal of the deposit guaranty law 30 30 31 33 Number, deposits, and failures of participating banks Number and deposits of participating banks Concentration of bank deposits Weber and deposits of failed banks Comparison with failures in other States Causes of bank failures Procedures used in handling failed banks 34 34 34 36 42 Financial history of the guaranty fund Sources and adequacy of information Income, expenses, and indebtedness of the guaranty fund Insured deposits and losses in failed banks, by years Comparison of assessment receipts and losses in failed banks Settlement of the affairs of the guaranty fund 49 49 52 54 61 65 Appraisal of the Oklahoma deposit gusxanty system Enrden of assessments High failure rate Inadequate supervision 67 67 69 70 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 3 5 7 8 9 17 18 21 26 44 46 LIST OF TABUS 3s0 }44 1. 2. Supervisory powers of bank cormissioner„ and of state banking board, in Oklahol,ra Statutory limitations on bank operations in Oklahoma 27-29 3. Nigher of operating banks in Oklahoma participating and not participating LA the deposit guaranty systom, 1908-1922, by years 35 4. Deposits of operating banks in OUahoaa participating and not participating in the deposit guaranty system, 1908-1922, by yearn 36 lumber and deposits of state banks in Oklahoma, November 10, 1910, and Deceuber 290 1920 37 6. NUmber arid deposits of state banks in Oklahoaa closed because of financial difficulties, Ftbruary ill., 1908, to March 31, 1923, by years 3) 7. Size dietribution of failed banks in Oklahoma compared with average size distribution o.,:" operating state banks: period of aperation of deposit guaranty system 41 8. Annual bank failure rates in Oklahoma, 1908-1922, compared with rates in contiguous states and in the United States 43 9. Receipts, 1=penditures and unpaid obligations cf the Oklahoma depositors guaranty fund 1. 10. Rates and amounts of assessment, cash balance, and warrants outstanding, Oklahoma depositors guaranty fund, by years U. Insured deposits, and obligations to depositors of failed banks paid and unpaid, Oklahoma depositors guaranty fund, by years, 1908-1923 57 12. Percentage of deposits insured, and percentage of insured deposits paid by guaranty fund and recovered from liquidation of assets, bank failures under the Oklahoma deposit insurance system, by years 60 13. Annual assessuent receiets, liability for deposits in failed banks, and cumulative deficiency, Oklahoma depositors guaranty fund 62 14. Comparison of annual rates of assessment with rates required tc deposit obligations in failed banks, Oklahoma depositors guaranty fund, by years, 1908-1923 64 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DEINX3IT NTY IN OKL HOW The Oklahema law for the guaranty .f deposits was approved December 17, 1907, at the :irst session of the Legislature after adeission of Oklahoma into the Fnieral Unioe as is State. The Law becane effective rebruary i4, 1908, and continued in full operation for 13 years. In November 1921, when the liabilities of the fund exceeded its receipts and further borrowing on warrants became impracticable, the law became inoperative with respect to protection of depoeitors in closed banks, but the legal liability of the rued for such protection and the liability of the banks for payment of assessments continued until, the repeal of the law in 1923. The affair of the fund were not fully settled until 1934. Of the eight ntates Which eetablished deposit guaranty rods during the period, 1907-19/7, Oklahoma waz the first, and was regarded as a pioneer in the movement to provide eafety for bank deposits through application of the insurance principle. 4hen the Oklehoma law WWI enacted, forty years had elapsed since the State bank-obligation insurance systems of the nineteenth century had been in operation, and very little was known about their character or the success of their operations. CHARACTER OF THE GUARANTY Le4ISLATION When nelehoms became a tate in November 1907, incorporated banks operating in the former Oklahoma Territory, other than national banks, had been subject to evaeihstion and supervision by a Bank Commissioner, and private banks haki been prohibited for a decade. in the former Pullen Territory, comprising the western part of the stat, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis operated as private heLnke or with charters obtained under the general incorporation law of Arkansas, which had been extended to the Indian Territory by Act of Cnngreue. However, neither the private nor the incorporated banks were eeseined or supervised. In May 1908, about three months after the deposit guaranty legislation became effective, the banking laws of the State were codified, revised, and reenacted. A few minor changes in the deposit guaranty provisions were made at that time. Mere important revisions occurred in 1909, 1911, and lel3. Admission of banks. Participation in the deposit guaranty plan tow; made coapulsory for all banks operating under a State dharter. At the time the deposit guaranty law was enacted 464 banks, excluding national 0:auks, Atr,:: operating in Oklahoma. Of these,294 were located in the former Okiabalia Territory, and 190 in the former Indian Territory. Under a ruling of the attorney general the guaranty became effective immediately upon the levy of the first aseesament, watch vas required to be made within 60 days after passage of the law. The guaranty law in Oklahoma also provided that any national bank in the State might voluntarily come under the protection of the depositors' guaranty fund with the approval of the Bank Commissioner. The Attorney-General of the United etates in July 1908 ruled that national banks could not legally participate in a state system of deposit guaranty. Lin10 :pirii Annual Report of the Bank Commissioner, 1908, p. v, and O. Neal, The History and Developeent of :Aate Bank Supervision in Oklahoma (thesis in Rutgers University libren5). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Under the revised barking code of 1908 the deposit guaranty law was extended to trust companies. In 1911 trust cempaeies thereafter orgaeized were prohibited from dcing a banking busineses and the depouit guaranty law was amended to exclude from its provisions, after Septeiher 1 of that year, corporations doing a trust busineee. The latter Champ excluded only two institutions, holding about ons percent of the aggregate deposits previously covered by the guaranty. relingeished its trust compaey Charter Pnii One of thcst became a State bank, that; coming back under the guaranty system, about eighteen months later; the other consolidated with a reesereeet bank in 1914. In 1919 trust companies were authorized to establish savings departments, with a segregation of capital and with the deposit guaranty law applying to the savings department. Deposits plaxamteed. Deposit guaranty in Oklahoma orianally covered all deposits, the law providing that the State BarkinE Board *hould draw from the depositors' guaranty fund whatever amount, in addition to the cash which could be made immediately available in a failed bank, was neceseaey to meet the deposits of the bank. Under decisions of the State Banking Board, cashier's checks, certified checks, and drafts outstanding were not recognized as deposits. Application of the guaranty to secured deposit* was excluded by decisions of the State Supreme Court referring to moneys belonging to counties and to school funds deposited in banks which became insolvent. In oases where the assets of a failed bank were insufficient to pay the general depositors, the court ruled that deposits of public funds were not entitled to protection by the depositors https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis guaranty :und, since the statute provided a specific *Totem for the protection of such deposits. The court also ruled that neither the owners of such deposits nor a surety company which had paid such a deposit WM3 entitled te Share in the assets of the institution until guaranty fund had bez.,:n repaid in full, because the law geve the State priority in such distribution on behalf of the guaranty fund. In 1913 the law wee amended to exclude from protection by the fund deposits otherwise secured, and deposits on -which a greater rate of interest was paid than was authorized by the Blink Commissioner. Two years later, another amendment provided that surety companies paying a deposit of public funds for which they were liable in a failed busk ewe entitled to a pry rata Share with the depositors' guaranty fund in the proceeds of the assets of such failed banks. T416 amendment, however, was declared void by the 3/ State :Apreme Court. These decisions did not reduce the protection afforded school or other public fuude, but prevented surety companies from recouping, out of the guaranty fund or the assets or a closed bank, any paxt of their losses in Okleheee backs so long as the suaranty fund afforded protection to unsecured depositors but wael'ot fully repaid from the proceeds or liquidation of the assets of the banks. y Columbia Bank & Trust Co. v. United States Fidelity and Guaranty Co. (1912, 33 Oki. 535, 126 Pao. 556; Lovett et al., v. Lankford et al.(1914), 47 Oki. 12, 145 Pace 767; and United States Fidelity& Guaranty Co. v. State et al. (1917), 67 Oki. 14, 168 P34. 234, .11 State ex rel. Short, Atty. 'eeek. v. Johnson et al. (1923) 90 Okl. 21, 215 Pac. 945. The ground on each this decision was made vas a technicality, namely, that the preference right of the depositors' guaranty fund against the assets of a railed bank had been impaired, and that this was not expressed in the title of the amendatory act. After the guaranty fund, in November 19224 ceased to per depositors, a Federal court decided that a surety compaey that had paid secured deposits in an Oklehoma bank that failed vas entitled te share in tee distribution of assete of the bank ratably with unsecured depositors, on the ground that with no payment from the guaranty Auld, nor issuance of warrants on the fund, to the depositors the State had no preferred claim against the failed bank. Strain et al. v. United States Fidelity & Guaranty Co. Circuit Court of Appeals Eighth Circuit (1923), 292 F. 694, affirmed by the United etates Supremo Court, 264 u.s. 570, 68 L. ad. 854. Howeverl , the State Supreme Court, in a later cease, ruled that the unsecured depositors in a failed bank retained, until repeal of the law, a gegimula kf : rthrairv the Ilf6Tution of assets of the bank. State https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 44‘) e NEN. Aosesumente. The original deposit guaxanty law in Oklahoma provided for an Initial assessment of percent of average daily deposits, excluding State funds properly secured, during the preceding year. In the 1906 revision of the law, deposits of the United States were also excluded. Annual ussesaments at the same rate were to be made on the growth of deposits. If the fund became depleted, it became the duty of the State Banking Beard to levy a seecial aeuesament sufficient to restore the fund to 1 percent of average daily deposits. /n 1909, about a year after the initial assessment wae levi, the assessment previsieeL were revised. The nee law provided for the aecumulation of a fund amounting to percent of average daily deposit', by an initial payment of 1 percent of average daily deposits, with a credit for the assessment previously paid, and sUbsequent annual payments of one-twentieth of 1 percent of average daily deposits. Lech bank wee also required, once a year, to make such additional payment as was necessary to adjust its total payments into the fund in proportion to any growth in its deposits. Special assessments for restoration of the fund when reduced by payments to depositors or closed banks were limited to 2 percent in any calendar year. All assessments were computed on the bacis of average daily deposits during a period of a year, the deduction for United States and State funds being eliminated. Further cLanges in assessments were made in 413, following two years in which the total assessments averaged over 1 percent of deposits per year. The regular annual assessment ems raised te cne-fifth of 1 per- cent of average daily deposits, excluding uecured deposits, and the maximum rund to be accumulated was reduced to 2 percent of deposits. Assess- ments for restoration of the fund, when reduced below 2 percent of average .41 No prevision was made for refund if the deposits of a bank decreased. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis daily deposits, yere limited to one-fifth of 1 percent in any year. Also, special assessnents not exceeding one-fifth of 1 percent each year were expressly authorizedetering the following three years and forbidden tharlafter. These provisions remained in force luring the subsequent duration of the fund. The 1913 amendment to the guaranty law also provided for the posting with the State eeeiong Board, by each bank, of State or local government obligmtions approved by the Board in an amount not less than 1 percent of average daily deposits, with a minimum of $500, as zacurity for the payment of its liabilities to the fund. A problem of collecting the assessment arose from the eoureri. sion of State banks to naticnal hanks. Under a state Supreme Court decision in 1915 a bank subject to the law of 1909 which had become a national bank was liable for the full 5 percent asieseeeet, payable in accordance with the instalment payments imposed by that law. The court held that the State bank, though it had ceased to exist as a State corporation, did not thereby escape liabilities incurred by it during its continuance as a State bank, and that the effect of surrendering its charter and organizing as a national bank was neither to mature nor A/ However, this dedischarge the deferred payments of the assessment. cision wan myereed four years later, when the Court decided that the bank was liable onle for such payments as matured or 'were payable while 2/ it WAX doing businees as El State bank. 2.1 State ex rel. West-TWET-Gen. v. Farmers' National Bank of Cushing (1315) 47 Oki. 667, 150 Pan. 212. Y. / Citizens National Bank of Broken Arrow v. State ex rel. ireeling, Atty. Gen. (1919) 76 Oki. 94, 184 Pee. 63. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -1Basks organised subsequent to the enactment of the deposit guaraaty law, emanates those formed by reorgeeization or coneolidatien of Meeks subject to the law, were required to pay into the fund at the time of opening for business 3 percent of the amount of their capital etock. Until 1913 this payeent wee; a credit fend, subject to adjustment at the end of one year to the rate oe average daily deposits levied on other banks. Adoinistration and custody of the fund. Supervision and management of the depositore' guaranty rued in Oklahoma were placed in the State Banking Board, composed of the Governor, Lieutenant Governor, the President of the Board of Aericulture, State Treaeurer, and State Auditor. This Board was eepuwered to adopt all suitable rules and regulations not inconsistent with law for the management and edeinistration of the fund. In 1911 the compeeition of the State Bnekine Board was altered to consist of the Governor and two other members appointed by the Governor, with the approval of the Senate, to be remunerated on a per diem plus expenses baais. The Bank Coumiscioner was made ex officio secretary of the State laakiag Board. Two years later the composition of the State Bankieg Board was again Changed. After that date the Board was composed of the Bank Cum- eissioaer as ex officio chairman and three members appointed by the Governor with the aperovel of the Senate. The eommissioner was selected by the Governor from a panel of three persons, and the other members from a panel of nine eersoes, recommended by the executive council of the State Bankers Association, an association consisting of a repreeeetative selected by the board of directors of each bank. After two years' ex- perience with this method of appointment, the recommendation of persons for Commissioner be the State Bankers easociation was dropped, and the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -13- Commissioner ems appointed by the Governor. The original lee contained no prevision regerdiee of the guaranty fund, but in 1909 provision WKS ee made for the investment of T5 percent of the Guaranty fund in State warrants or such other securities as vere specified for Otate funds. Two years later, after a large eart of the fund kept in cash had been tied up by the failure of the bank in which it vas deposited, the law vas amended to provide for the redeposit of the entire fund in the respective bank, according to the amounts of their assezeuente, the banks ieeuing to the Bank Commissioner certificates of deposit bearing 4 percent intereat. In 1913 the law was again amended to provide for the payment of the aseessment in the form of cauhier - s checks to be held by the State Banking Board until it was necessary to collect them. Such cashiers checks were to bear no interest. The requirement of deposit of securities as surety for the payment of assessments, adopted at this time, has been mtntionti above. Indebtedneu3 of guaranty fund. The original law contained no provision against the contingency that the assessments collected might be inadequate to pay all of the deposits in closed banks, other than the provision for such additional assessueats as eight be needed. in 1909, when a maximum was placed upon the special azsessmente which could be levied in any one roux, the State Beeeteg Board was authorized, in the event that the assessments were in to meet the Olsten of depositors in tailed banks, to issue certificates of indebtedness bearing 6 percent interest to the depositors. Such certificates were to be cone secutively numbered and to be paid by the tate Banking Board as soon as possible in the order in which they had beee /sated. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The foweeeing provisicns were in effect until 1913, when they were replaced hy a methed of borrowing dealeeed to provide immediate cash with which the guaranty fund could pay the depositors of failed hanks. The Otate Banking Board was authorized to issue "Depositors" Guaranty Fund lilaresets of the State of Oklahoma, tearieg 6 percent letereat, which could be disposed of, at not less than par value, in ouch manner az the Board saw fit to facilitate the liquidation of failed banks. These werrants were given a first lien upon future receipts of the guaranty Puma from assessments or from the proceeds of liquidation of failed banks, and were to be retired in order of issue. The warrants ware made nontaxable; and were authorized as investments of trust funds reel of sinking funds of the State and local governments, and as collateral required to be deposited for the security of public funds. Any trust caapany, building tied loan association, or insurance company was authorized to purehaee the warrants to the extent of it capital and surplue. In 1915 the investment of a bank in such warrants vas limited to itu surplus and 10 percent of its capital etock. When pale of the warrants becaue difficult, the practice was followed of exchanging them, with the permission of the iedividual banks, for other collateral posted by the banks as security for tie paymeat of assessments. The collateral was then sold and the proceede used by the guaranty funet in meeting its obligetions. Methol_21:pmlEg.depositors and of liquidating failed hanks. Depositors in a Itiled bank were to be paid by the State Banking Board in cash when the Bank Commissioner took possession of the bank. From 1909 to 1913, as has bee indicated, the Board issued certificates of indebted- ness to the depozitors if the amount in the fund was insufficient. After 1913, the Board was authorized to sell warraeta and use the proceeds therefrom to make immediate payment to the depositors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The State vas give a first liee, for the benefit of the depositore' gmaraety tea, upou the seeets of any failed beek, inc1udthg the personal liabilitiee of stockholdere, officers, arecters or other persons to the bane. In 1909 ae aweadmeet to the law provided that the iunde realizod by the Bank Couwiesioeer from the assets of a eelled balit Should first be eepiied to the eepeneee of liquidatiee, than to peyment to the depositors' guarauty fund of all money paid by.. that fund to depositors of the beak coecereed, then to the refuudlng a aey emergeecy assessments levied upon the guaranteed boas. The liqpidatien of failed beaks was pleeed in the hands of the Beek Commissioner. In practice, with the approval of the State Bankleg Board, meet of the ielled banks were liquidated through sale of their assets to another bank or to a eewly orgenieed successor. in suah eaues a eaymeet was made fri-hki the guaranty ruaa hurfLAent to enable assumption of the depositeper the total liabilities, of the elased beak.. In=Ay ceeeu, the guarauty fund seemed au additional contingent liability if the assets take ever ehoald yield upon colleetien less than their cetimated value. :,..4ilis.neeec administratioa. Ue4er the el-lei/pal law expeuees iecurred hy the State Banking Board be administerieg the depoeitors' guaranty fund sere paid from the deposit guaranty feed. In the 1908 revision of the ism theee exeensee, and the Beek Commissioner's salary and other expenses of his ifice Igere paid from the proeeedti of feet; epon the banks for each SIMMiAllitiOft eade. However, in 1909 the 6alaric4 of the Ceemissioner and or his assistants, and in 1913 the expenses or the State Banking Board the meebers of which served eithout compensatioe„ wereemade payable from the general revenue fund of the Ante. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In 1917 all expenses of the Banking Departnent became payable from the geueral revenue fund, with all fees and other Charges collected by the Commissioner to be paid into the general revenue runie COWTITUTIOWIZIT OF TIN OSIT =RUT! LA4 Bankers objected to the deposit guaranty law in Oklahoma, ee . a test of the constitutioeality of the law was nude by the Fable State Bank. This bank asked the district court of Logan County for an injunction restraining the levy of the first assesseent by the State Bahking Board. The Noble State Bank contended that the guaranty law was in can:lict with several sections of the Constitution of the State of oeinhoma, for the follewing reaeons: 1. That the law deprived the bank of this enjoyment of the gains of itu oun industry for the benefit of depositors of other banks in which the plaintiff had no interest. 2. That the law deprived the bank of its property without due process of law. 3. That the law violated the contract between the bank and the State of Oklahoma, evidenced by its charter, patent, and certificate of authority. 4. That the property of the bank was taken for private use without compensation and against the consent of the bank. 5. That, if it be held that the property was taken for public use, than it was taken without compenaation and not in accordance with the form prescribee. 6. That the law embraced more than one subject. 11 it vas claiMea that the 7Li; violated the following sectiome of te 1 8V: E4,Agi.2i;(0)st:a.7 7111;t!,5i3i7leue!.'t,Agt.i6, nenttgenii 9, Art. 10; () sec. 14, Art. 10; and (10) Sec. 1, Art. 14. Sec. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12- 7. Agit, if the law be construed as levyinz a tax, this tax was assessed upon an arbitrary eazie wetheut regard to t: fair cash value of the property assessed. 8. That, if the law be construed as levying a tax, this tax exceeded the enxieum permitted. 9. That, if the Ifia be construed as levying & tax, this tax vas levied for private purpose rather than public use. 10. That the deposit guaranty law did not provide for the teetion of individual stockholders in the bank. The Male State Bank also contended that the depositors' guaranty fund law violated the Constitution of the United States: (1) by impairing the obligation of the contract between the bank and the atate of Oklahoma as evidenced by its articles of incorporation, patent, and certificate of authority; and (2) by depriving the bank of its property without due process of the law, denying to it equal protection of the law. Decisions of the State courts. The district court of Logan County refused to grant the injunction resented by the Wale state Bank. The bank &Nestled the case to the Oklahoma agrams Court, which upheld the decision of the lower court. The Otate 4uprwe Court, in a lengthy opinieeks asintairied the point of view illustrated by the following quotation: y Xais fogiimpiciEst iBe Law violated the following sections of the Constitution of the United States: (1) Sec. 10, Art. 1; (2) Fourteenth ilmendnant. Supreme Court of CilrIahccap Noble State Bank v. Haskell et al., ieptember Ii, 1908, 22 Okl* 48, 97 Poe. 590. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -13Banks are chartered by the state, not with the paramount view of ambito the stockholders to mike investments and derive profits therefrom, but to it a public neceasity. The stockholders, havingande investments theredle should be protected, but private interest meet *Ivey& be aSherdivated by the state, in the reasonable exercise of its police power, to the public eelfare or good,. 4th the view that the depositor, as well as the stockholder, apd, the geeerat public with an incidental interest therein, mey be preheated, banking is regulated, and limitations, restraints, and requirements are imposed. The leposition of double liability upon the stockholderej the regiment of reserve fends; stipulations as to what capital stock cannot be investel inj prescribed qualification* of the direetore-eall these having been tried, in the euegeent of the Legislature the further restriction that active officers should not borrow from the bank without incurring pains and penalties was deemed salutary. /n addition to further and more comp1eto4 protect the depoettors, the deYoatoral MWOremhy feed is created, the Legislature acting pursuant to the mandatory declaration of the Cometitution sian of Court. The Noble tate Beak ems dissatisfied with the decision of the Oklahoma Supreme Court and appealed to the United etates Supreme Court. Ihile the cane wee modem, similar cases came before the United States Supreme Court regardimg deposit guaranty laws in Nebraska and Kansas, on appeals from decisions of the Circuit Courts of the United States for the Districts of BebraskaaM011106, respectively. The /kited States Supreme Court heard the argumeuts regarding the three cases at its fall term in 1e10. On January 3, 1911, the Court rendered its decision on the Oklahoma case, which was also applied to the NebraeWe and Kansas cases. The principal point in the caeca considered by the United States Supreme Court vas the contention that the deposit guaranty laws took the private property of one bank for the private use of another bank without ceepensation. The opinion of the court, by Justice https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis admitted 1T-Noble State Bank v. Haskell, (1911) 219 U.S. 104, 55 L. ee. ele. that this eleht be the ewe, but pointed out that such transfers of property are constitutional if there is sufficient purpose and necessitY. In the first place it is establithed ay•series of eases that am ulterior public advantaae may justify a cemparstively lasismitionmt taking of private property for last, in its immediate purpose, IS s private use... And in the next, it would ONO that there maybe other cases beside the everyday one of taxation, in Aids the there of each party in the benefit or a scheme of mutual prote-tion is sufficient compemsation for the correlative burden that it is compelled to assume... At least, if we have a case within the reasonable exercise of the police power az above explained, no more need be said. 2./ The opinion them disemesed the application of police power to the gmeranty of bank deposits as follaest It may be said in a general amy that the police power extends to all the pu La needs. /tmy be put forth in aid of what is ay usage, or held by the prevailing morality or strong sad peepemderant opinion to be greatly and immediately necessary to the ptialic welfare. Awns matters of that sort probably few would doubt that both usage end preponderant opinion give their sanction to smiOreing the primary conditions of successful commerce. One at those conditions at the preset time is the possibility of payment by checks drawn against bank deposits, to such an extent do checks replace currency in daily bueiness. If then the legislature of the etate thinks that the public welfare relutree the measure rmewor consideration, analogy and principle are in favor of Winner to enact it. Avon the primary object of the required assesement is not a private benefit as it was in the COAQS above cited of a ditch for irrigation or a railway to a mine, but it is to make the currency of cheeks secure, and by the same stroke to make safe the almost compulsory resort of depositors to banks as the only available amens for keeping money on hand. Tbe priority of claim given to depoeitors in incidental to the Same object, and is justified in the same may. The power to compel, beforehand, coeoyeration, and thus, it is bolievecio to lake a failure unlikely and a general panic almost tapaasible„ met be reeopized, if government is to do its proper work, unless we can may that the mews have no ressomable relation to the end... So far is that from being the case that the device it a familiar one. It was adopted by same states the better part of a century ago, and seems newt to hsve been qucatiomed until now./ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .cii7p, 35 L. Zd. 116. *, pp. 116-17. -15- The conclusion of the court was stated in the summary of it opinion as followo: The levy arld collection, under a State statute, from every bank existing under the State leen, of an assessment based Ippon average daily deposits, for the purpose of creating a depositors' guaranty fUnd to secure the full repayment of deposits in ease any such bank becomes insolvent, is ie, Valid exercise of the police power, and cannot be regarded as depriving a solvent bank of its liberty or property without due process of law... The police power of &State extendm to the regmlation of the banking business, aud even to its prohibiticn, oscept on such conditions as the State say prescribe. y This decision is notable not only beeaueo it affirmed the constitutionality of the deposit guaranty legislation, but also because of tne grounds on which that affirmation was made. The decision is based on the gruund that safety of payments made by check is one of the primary conditions of successful commerce, that the police power covers any regulations meceseary to make the currency of Checks secure, and to =eke safe the money kept on hand by depositors in the fora of bank deposits. The decision thus rests on the idea that the purpoec of thc; 104,101fttiot is the pzetectios of circulating medium. The prOblom of the constitutionality of a deposit guaranty or insurance plan deeigned primarily to protect the invested saving& of isdividuals was not considered by the upreas Court in this case. The Court neither asserted nor implied that asseuoncute upon one bank for the purpose of protecting interest-bearing deposits, or other deposits not subject to check, are, or are net, constitutional, except as such protection may be incidental to the protection of deposits which are part of the circulating medium. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis rbid., pp. 112-13. -16ATERVISION AND REGULATION OF GUARALTekD BANKS Supervisory authority. Under the original deposit guaranty law and the revised banking code of May 1908, the Etate Banking Board was given no duties other than administration of the deposit guaranty law. The Bank Commissioner was charged with the following dutieo: certification of compliance with the law by peraons organizing slew banks and authorization of such banks to open for bueineas, examination of all tate-ehartered banks and trust companies and Oi national banks if they should apply for the benefits of deposit guaranty, reporting of violations of law to enforcement authorities, haleiling of banks closed because of insolvency or for violations of law, and other duties, ouch as Obtaining reports of conditiou, associated with bank supervision. In 1913, the State Banking Board was required to approve, in its discretion, the opening of any new bank, and to see that each operating bank was examined at least twice each year. Under the 1908 law the Bank Commissioner 40A; appointed by the Governor, with the advice sad consent of the 6enate, fur a term of four years. The Bank Commissioner must have had, prior to appointment, at least three years' practical experience as a banker, but at the time of appointment could not be an officer or employee or any bank or any person interested as an owner or stockholder of a bank. In 1913, When the Bank Commissioner was made ex officio chairean ef the State Banking Board and the appointment was required to be made frcm a panel of three persons named by the State Bankers Association, the practical banking experience required of the person appointed was raised to fire years. The Last of these provisions was retained When, two years later, the requireeeet of selection from a panel wae dropped. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -17- Examination of banks for admission to guaranty. The first task of the State Banking Board and the Bank Commissioner after enactment of the deposit guaranty law was to examine all banks in the State, other than national banks, before the deposit guaranty law should toveomc. effective. The Commissioner did not have sufficient examiners to make these examinations, particularly in view of the fact that the banks in the former Indian Territory had not previously been examined. A speciae force of 31 examiners selected from among bankers in the State was employed and 513 examinations were made within a period of six weeks. The Bank Commissioner, in his report for 1908, stated that those banks whose condition or past record did not justify a continuation of business were ordered to discontinue receiving deposits and to liquidate, and that they did so. According to a report prepared by a later Commissioner, 24 banks Dmiled to meet the otandards required for continuance in business and admission to guaranty, and were forced to liquidate during the first year of the fund's operation, and 30 banks ift:re reorganized under new charters to meet the requirements. However, the Commissioner also stated: On account of the unfavorable financial situation at this time it was extremely difficult in maey instances to aeet every requirement immediately. If the bank vas solvent and showed a disposition to comply with the law as promptly aa possible the department endeavored to be fair and give them an opportunity... While a largo number of banks were technically not in harmony with every provision of the banking laws their general condition was such that the department did not feel justified in closing them and upon their promise to correct the objectionable features of their business they were allowed to continue in operation. pi g Linwood 0. Heal, The History and Dovelopmgdnt of tate Bank Supervision in Oklahoma, (1942), pp. 64 and 65. y First Annual Report of the Bank Commissioner, 1908, pp. viii-ix. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -18.. The Bank Commissioner in office four ymrs later held a less optimistic view of the condition of the banks admitted to the guaranty system. The only near fatal mistake made in our Guaranty Law wao that after its passage, the immediate taking in under the guaranty system of all banks without first the most careful and rigid examination of tanks, men and methods. They should have been tried out under the most thorough test and the incompetent and dishonest should have been eliminated from our financial institutions, and none but the strongest and best men permitted to engage in banking. 1/ Thomas Bruce ebb, who made a detailed study of the Olcliahr,,a situatien after the guaranty law had been in operation, commented in similar fashion on the Commisaioner'a statement in the 1.908 report: But this deacription of the condition of the banks was far too roseate. It is now well known that a goodly nuaher of banks, especially on the Indian Territory side, wore positively insolvent. 3/ Supervisory Rovers of the Bank Coemissioner. The superviaory pewers given the Bank Commissioner related chiefly to fereetnAtions, the eapital position of the banks, and conditions under which a bank could be closed. The Comrissioner also had some powers relating to the opening of new banks and to the quality of back management. Part of the Commissioner's powers, particularly with respect to the handling of closeA banks and after 1)13 the opening of new banks, were shared with or exercised under the control of the State Awaking Board. The powers of the Commissioner and of the Board are summarized in Table 1. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis g Thirniennial Report a the Bank Commissioner, 1912. T. Brute Robb, The Guaranty of Bank Deposits, v. 41. -19- Table 1, SUPMVISOFY PO4ERS OF BANK COMMI23TONER, AND OF STATi: BANKING BOARD, IN OKLAHOMA Item Openieg of new banks Examinations and rEp2rts of condition: Frequency of examinatione Powers Commissioner to approve incorporators and to Laems certificate of authority to transact 4 banktag 'business after epecified requirements for incorporation have been filed, capital stock paid-up, and barik examined. .:C} In 1913, amended to give full discretionary over to Commissioner and Bankieg Board to approve is of certificate to eogmge in the bankimg business. At least tviee a year and whenever dee advisable by Commissioner. ..4/ Scope of examinations A full and careful examination. Reports of condition Commissioner to prescribe feet sod set at least four tines a year, te regeire additional reports whenever deemed neeeeehri to obtain full and complete knowlefts of bank's cit. Bank management: Removal of undesirable aosets or diecontinuance of undesirable practices No specific previsien. Impairment or deficieecy of capital Commissioner to require Lepairment of capital below legal minimum to be made good within 6o days; in 1909, amended to 30 dews, and to require increased capital and surplus if below minimum ratio to deposits. 4/ Removal of bank officers, directors, or employees Commissioner nay order removal by Board of Directors of any officer lent& upon exaelnation to be dishonest, reckloes, or incompetent. Taking possession or closing a bank https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Commissioner authorized to take possession and liquidate a bank: If found insolvent, by court or Commissiouerlo examination, with following conditions defined as insolvency: when cash market vele of assets insufficient to meet liabilities; when unable to pay creditors in usual and customary manner; when legal reserve not made good as required by law. • Table 1. APERVISORY PO4ERS OF BAIMCCONNISSICNa, AND OF STATE BANK= BOARD, rs mum - continued It Aeking possession or closings bank !.ontinued Handling of closed banks: Return to owner* Liquidation assets or caeital stock Powers If officers refuse to submit bank to exaaination or be examined under oath. If officers or directors violate any provision of the act. If afbeirs placed by benk under control of Commissioner. Commissioner may authorize reopening of bank if solvency restored by stockholders and any indebtednese to Guaranty Fund repaid. Unless returned to owner°, closed beak to liquidated by Commissioner. Commissioner may sell assets won order of District Court or judge theroof. 1g As of May 26, 1906, sitk subasetant amendments during the period of operation e deposit guaranty siyatam. For the most part the act of May 26, 1908, was a codification of the previous banking statutes, including the territorial baaking law and the deposit guaranty law enacted DeeeMber 17, 1907. The requirement that the incorporators be approved by the Bank Commissioner was inserted by the Act of May 26, 1908. In 1)21, examinations by Federal Reserve System of State banks members of e Federal Reserve System to be acceptable, at the discretion of State banking authorities, in lieu of State examinations. 4/ See Table 2 for minimum capital stock, and after 1909 maximum ratio of deposit:, to capital and surplus. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -21- SeperviseEy experience. During the early years of the deposit guaranty system supervision of state banks in Oklahoma Witii eaueleepeed the small size of the examiniug staff and frequent changes of personnel. ketch of the first three Dank Commiusloners held the office less, or only a little more, than a year. Lists of examiners in the second and third biennial reports of the Commiasioncr Show may one or two names appearing in the preceding report. However, after 1911 there was more stability, with one person holding the Commissioner's office for eight years. The improvement in the vallty of supervision MSS described by T. Bruce Robb as follows: The reconstruction of the state banking department has produced most salutory results. It will be recalled that the state baaking board ie nov appointed by the governor from a list nominated ny the state bankais themselves. This has coppletely divorced the board Iron politics. Mr. J. E6 Lankford, who served as haeh eammissioner from 1911 to 1919, orgmnised a most efficient bank supervision. This department is Indefatigable in ferreting out inoompetent and reckless banking. 1,1 The problem of supervision duriue the early years of the guarante system vas also teade very difficult by an extremely rapid growth in the number of beaks. t a call date two weeks after the law became effective 47O State banks were in operation. During the next two years approximately two hundred banks commenced operations under State charters, about half of which had formerly operated under national charters. During the latter part of 1910 the Commissioner, who had taken office on June 1, attempted to use his power to refuse certificates of authorization to open for business if conditions in the various communities did not justify additiomaa https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1/ RokETThe Guaranty of Bans Deposits, p. 105. -22- banks, but found that under the law and a decision of the State Supreme Court he was required to issue the certificates when the incorporators had copplied with the specific requirements of the law. He recommended that the Commissioner and State Banking Board be given power to regulai:,. the number of banks organized in any town or city, and that no person permitted to engage in the banking business without a license from the Board granted only after a thorough investigation of the character and ability of the applicant. In 1913, the law was amended to reneire the approval of the Commissioner and of the State Banking Board before issuance of a charter for the organization of a beak. No specifications were given in the law for the guidance of the Board in exercieinG its discretion in passing on applications, but the Bank Commissioner, in his report for 1914, laid down the following principles: no charter is issued unless Under the present system positive proof be furnished that the bollking facilities of the community are not adequate to the public needs. There duet be convincing evidence at hand that the enterprise will, be an assured success. Those applying for a charter amst be men in every way worthy of confidence and the proposed.cdrieers must be of the highest honesty and integrity, having ample banking experience. .2./ . The efforts of the Commissioner, and the change in the law, succesafally checked the high rate of formation of new banks, for the largest number of State banks reporting at any call date was 6)5 in January 1911. Second Biennial Repori—Frthe Bank Commissioner, 1)10, pp. xii-xiii. X Fourth Biennial Report of the Bank Commissioner, January I, 1915, p. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -23The rank Commissioner's powers to close a bank for insolvency violation of law were ample. Except under the circumetance of a general decline in value and businees depression, these powers, rigorously used, wre adequate to result in the closing of most banks that were badly managed or in poor condition before their condition became sufficiently acute to involve the guaranty fund in serious loss. However, closing of a bank is a drastic actioe that may have a severe impact on the community, und in practice bank supervisory authorities find it difficult to take such action in the early stages of the deterioration of a bank'a condition. In =shwa, action to close insolvent boas was also delayed becauee of wallow in making large enough assessments to enable payment of dtpositere by the guaranty fund. Toward the end of 1912, Bank Comuissioner Lankford reported to the Governor: iiithin the first few zonthe of my administration the fact was disclosed that the department had aany insolvent banks on hand; some of ehich it MS4 imperative to take charge of and liquidate at once; others 'Should have beau liquidated soon thereafter, but as our Guaranty Law provides that all depositors Shall be paid at owe, in full, there being no funds on hand, and our banks as a whole being unable to stand additional excessive and heavy assessments, the Department vas prevented from hamling them in the proper mmmmer at the ttme.2./ The powers of the Bank Commissional to take action in the mac of incompetent or improper managameot of a bank, without closing it, also appoar to have been reasonably adequate, particularly after 1913, when amendmente to tne law provided penalties for various types of illegal acto of bank ()Metals and employees. These penalties, together with the Commisoloner's power to remove from office any bank official whoa he fuu.-_ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis br Third Biennial Report of the Bank Commissioner, Dec. 1912, pi, v. -24to be dishonest, reckless, or incompetent, made it possible to raise the standard of bank management throughout the 3tate. At the beginning of 1915, Commissioner Lankford reported that he had displaced over 125 incompetent and unscrupulous warner officers of be' e. However, he also reported that of 27 prosecutions of bank officers for violation of the criminal statutes, only seven convictions had been secured, in part because of insufficient legal assietanee. The quality and adequacy of bank examinations appear also to have been hampered by the limitation of available funds and salaries permitted. The annual cost of the Bank Commissioner's office, including expenses of the ..;tate . Banking Board, during the time the law was in effect, was approximately 450,000 to 470,000, or about 00 to 4140 per partidipating bank. From 1913 to the repeal of the deposit guaranty law in 1923 the salary of the Bank Commissioner was fixed by law at $4,0ool and those of his 12 specifically authorized assistants at $2,000 each. Of these assistants, one was designated sy law as Assistant Bank Commissioner, and one as building and .can auditor. The remaining ten 1.4 constituted the bank examining force. since the number of operating Fourth Biennial Report of the Bank Commissioner, Jan. 1915, P. viii-ix. 3/ From 1909 to 19160 When part of the expenses of the Commiseioner's offices vas net from the proceeds of examination fees, appropriations for the Banking Degartmeut ranged from 07,000 to 00,000; from 1917 to l922p.mben the ememination fees were paid into the general revenue fund, the sovelfriatieme for the Department ranged from $64,000 to $71,000. for In January 1919, the Commiasioner recomaamiedac;MTICAr of $2,500, with an annual increase of 000 for five years. :Sixth Aiennial Report of the Bank Commiseioner, p. 4. 1/ The reports of the Bank Commicsioner state that in 1912 the Department had one special and eight regular examiners; in 1914 ten examiners. In somu of the later years the appropriation bill provided for only eight examiners. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I/ -25State banks was about six hundred, and two emanations per year were required, each examiner eas apparently required to make about 120 bank examinations per year, too large a nweber to permit as thorough examinetions as would have beeu desirable. Bank Ceeelssioner Lankford unsuccessfully urged that employees of the Banking Departeeelt be given civil service etatus. In his last biennial report he stated: Six years ago, and at each successive meeting of the Legislature thereafter, this office has in the strongest possible terms recommended that this Department be placed under civil a Banking Department is male destroyed service rule, ter and when once under a cloud it is difficult to regain confidence in the public mind. The validity of this observation ware borne out by sdasequent event. After 1919, the quality of bank supervision in Oelahoma deteriorated. No further reports of the Bank Commissioner were published, except for one at the end of 1920 containing statements of the individual banks but no text. The Bank Commissioner at that time was indicted a year later for accepting a bribe from a bank in bad condition, and after leaving the State for two years, wee convicted. A few years later the author of a thesis on the guaranty of bank deposits at the Uavereity of Oklahoma coamented as follows on this Commissioner's handling of his office: II The Peteral Deposit Insurance Corporation in 1941 had two examiners and two assistant examiners in Oklahoma to make IMO eimmilistion per year of approximately 160 banks, or an average of 40 eimmimmilloms per year per member of the examining force. Comparison of the ammiatmg task in 1941 with that during the period of operation of the guaranty Arid dim uot appear to be invalidated by differences in the size distributim at the banks examined. From 1916 to the repeal of the guaranty law, the MIMI, proportion of banks in the size groups shows $500,000 of deposits was merle the Dame as the proportion in those grow of beeeks examined in 1941 by the Corporation. 3/ Thornton Cooke, 'The Collapse of Bane-Deposit Guaranty in Oklahoma and Its rosition in Other 6tates,",eparterly Journal of 1019116010 XXXVIII (November 1923). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -26Nal-administration of the banking department of no state in the Union has been more odious or harsd'ul than that by Fred Dennis of Oklihama. Other appointees to the Bank Commissioner's office, up to the time of repeal of the deposit guaranty law, occupied the position only a snort time, and were unable to restore the office to its former effectiveness. One feature of the Oklahoma banking code may be mentioned here because of its potentialities for reducing the risk to and losses upon the deposit guaranty fund, though its use does not appear to have had such an effect in practice. This was the statutory prohibition, after 1909, on the receipt of deposits, excluding deposits of other banks, in excess of ten times paid-up capital and surplus. If the reports of a bank indicated deposits in excess of this ratio, it became the duty of the Commissioner to require the bank to increase its capital or surplus or to cease to receive deposits. This provision of law could have been made a valuable weapon in maintaining the banks in a sound condition and in preventing unwise bank expansion, had the ratio been computed on the capital and surplus an appraised by bank examiners instead of being coeputed on capital and surplus as stated in the reports of the banks, and had the examining force been sufficiently large and competent to provide good appraisal. The law opecified that action was to be taken on the basis e ehe reports outwitted by the banks, such reports to be in the form require:1 by the Commissioner; but did not specify that the Commissioner could require the banks, in submitting reporte of assets and liabilities for this purpose, to adjust valuations in accordance with examiners, appraisals. Statutory limitations oil bank operations. The principal statutory limitations on banking operations, under the 1908 law and the amendments adopted While deposit guaranty was in force, are summarized in Table 2. 2,21 George Marion Crisp, The Cue/silty of Bank Deposits, thesis for M. A. aegree at University of Oklehoma, 1926, p. 55. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 2. STATUTORY LIMITATIONS ON BANK OPERATION3 IN OSIANCW Item Responsibility" of officers )directors, and stockholders: i:xamfilation . of bank Provisions of law Directors to mike thorough examination twice a year of books, records, funds and securities, to be recorded in detail and copy forwarded to bank commissioner and each stockholder. Losses resulting from violations of law Officers, directors, and any other per.. participating in a violation of law liable for all damages incurred as a result of such violation. Liability of stockholders Additionally liable for amount of stoc.„ owned. Bonding of active officers and employees Board of Directors to require cashier and any officers handling funds to give good and sufficient bond to be held by Banking Board. Limitations on loans and investments Loans to bank examiners No provision. Loans to officers and employees Uther direct or indirect loans to activc managing officers forbidden. Loans to directors No specific provision. LOIS= to stockholders Total indebtedness of stockholders to 50 percent of paid-up capital. Maximum to single borrowers (not to apply to bills of exchange or discounts collateralled by warehouse receipts under specified conditions) Limited to 20 percent of paid-up capital. Maximum secured by real estate 20 percent of the aggregate loans of the bank, on real estate secured by first mortgages running not longer than one year. Secured by own capital stock (applicable also to purchase of own stock) Prohibited unless necessary to prevent loss on debt previously contracted and to be disposol of within six mouths of acquisition. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 2. STATUTORY LIMITATIONS ON BANK OPLRATIONO IN OKLAHOMA - continued Item Limitations on ownership of real estate and stooks Maximum in tanking house and equipment Provisions of Law One-third of paid-up capital. Time limit on real estate acquired by collection of debt Five years and to be disposed of within thirty days thereafter. Other real estate Prohibited. Bank stocks Prohibited, except stock in Federoki. bank, unless acquired to prevent loedebt. Other corporate stoCks Prohibited. Limitations relating to dekosits Maximum aggregate deposits May be fixed by Commiasioner in proportion to paid-up capital and surplus. In 1909, amended to ten times paid-up capital and surplus, excluding deposits of other banks. Maximus rat: of interest payable on deposits To be fixed at discretion of Commissioner. Receipt of deposit when insolvent or in failing circumstances Prohibited. Required reserves Total required Until 1915, 20 percent of entire deposits ir areas with population under 2,500, and 25 percent in areas with population over 2,500, or if bank a reserve depository; in 1915 amended to 15 percent and 20 percent, respectively. .2 . / In actual oath in bank One-third. Character of balance Balances to be held in solvent banks selected from time to time by Commissioner. Limitations on borrowing Maxima mount Maxima value of assets pledgeable as security https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 50 percent of paid-up capital for temporary deficiencies; Commissioner to prohibit borrowing for =lending. 1/ Mot specified (may pledge assets). -2)- Tablo 2. STATUTORY LIMITATIONS ON BANK OFSRATIONS IN OKLAHOMA - eontinued Item Limitation on zseialt of dividends Sax-nixes to be carried to surplus prior to dividends Provieions of law 1/10 of net profits until surplus 50 percent of paid-up agpital. dhen losses equal or exceed undivided profits Forbidden. dhen reserve is Pmpoired Forbidden. 'vthen insolvent or capital impaired Forbidden. IvAximum Amount determined by directors to be expedient after deducting losses and bad debts. Minimum capital stock New banks 4/ Other banks Graduated by population of city er town: 20,000 or more population - 4100,000 6,000 to 20,000 population - 50,000 1,500 to 6,000 population 25,000 500 to 1,500 population 15,000 500 or less population 10,000 :Jee limitation on deposite (above). 1./ As of May 26, 1908, with sebsequent amendments during the period of operation of the deposit guaranty gystam. For the most part the act of May 261 190O, wae a codification of the previous banking statutes, including the territorial banking law and the deposit guaranty law enacted December 17, 1907. 2/ Savings banks not transacting general banking business required to keep 10 percent of deposits in man and 10 percent invested in federal, state, county or municipal bonds. After 1921, tate banks members of Federal Reserve System to comply with reserve requirements of Federal Reserve. 1/ After 1921, State banks members of Federal Reserve System not subject to limitations on borrowing. ig Until 1909, ranged from $10,000 in places with population of less than 2,500 To 425,000 in places with more than 10,000. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -30INJUFFICI3NCY AND CLOSING OF THE GUARANTY FUND IasiINHEy of the guaranty fund. In 3eptember 1909, less than twenty months after the deposit guaranty Ism went into operation, the largest bank participating in the eystem failed, with liabilities tar larger than the accumulated fund. The crisis in the fund's affairs resulting from this failure was met by using the pewer to issue certificates of indebtedness, an emergency an on the participating banks, and unusual methods of handling the affairs of the closed bank. For nearly a decade the fund was continuouely in debt. The limitation an assessmente after 1913, and particularly the prohibitioe of special assessments after 1916, drastically curtailed the possibility of rapid retirement of obligations issued to make payments to depositors of failed banks. During most of this period of indebtedness, the aajor part of the fund's debt wms owned by the participating banks, with much of it deposited with the State Banking Board as security for payeent of future assessments. This procedure had become possible under the pro- visions of the 1)13 law regardiug issue of "Depositors Guaranty Fund earrants, and assured a ready market for the warranta. There were, however, diverse attitudes towards the warraeta. In January 1916 the Treasurer of the State Banking Board referred to the warrants as "the only 6 per cent investment / know of in the state that you can buy at par that is absolutely good. But a banker commented on them ae follows, y The Banking Board was able to delay or adjust payments to COLIC depositors with large accounts eho were closely associated with the eanagewent of the bank. The closing of this bank and the handling of its affairs arc described in Robb, The Guaranty of Bank Dcposits, pp. 43-57. -Aith the money collected from the assets of failed banks being applied on the outstanding secured earrants, and with the state banks gradually taking up more warrants with cash in lieu of depositing security with the Banking Board, it will not be long before all the warrant indebtedness of the Guaranty Fend will be held by the state banks themselves." Editorial in The State Banker, official organ of the Oklahoma state Bankers Association, aenpnar J415,pp. 16-17. 1/ The etae Banker, January 1916, p. 22. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis after asking whether the item of Securities with the State Banking _eard", carried as an asset, is such or a liability: I venture the assertion that should an eeeeiner find in my ease a note that had the appearance of being as slow as he knowe securities with the State Saakias 'card are bound to be, he would require me to charge it off thaaga I sight be able to prove to hta that it would be paid years beftre my Guarantee Warrants...ft should we carry these ,arrantu and pay ourselves interest on them when we must pay the interest ourselves to ourselves? Is it to fool ourselves or to fool the people? 4e may fool ourselves but be assured that we cannot fool the people. A./ This question of the worth of the warrants soon began to appear theoretical. The increased yield of the regular assessments for the guaranty fund and the reduced frequency of failures during the inflationary 1;eriod of World War I made it possible to retire all outstanding warrants by the middle of 1919. For a year thereafter the guaranty fund was out of debt. suspension of payments from the fund. In the latter part of 1920 and in 1.921 came the nationwide wave of bank failures accompanying the deflationary policies of that period. The impact of the deflation on banks in Oklehor-e wau doubtless accentuated by the laxity of bank supervision after 1919, but the major factor in the situation was the co2.le2 in values, particularly in farm products. Further, the guaranty system, with assessments limited to one-fifth of 1 percent per year, was much less capable of meting an adverse situation than it had been at its beginning. But for a year the obligations of the fund to the depositors of failed banks were net through issuance of warrants, which, as in Sue earlier period, were mostly sold to the participating banks and deposited with the j. L. Pryor, TOisaranty Fund iarrants,. The State Banker, January 1916, p. 42. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 'Peeking Board in lieu of other collateral az security for payment of future assessments. /n this purled the We:bus to this procedure appears to have come as maeh from the State Banking Beard as from the participating banka, and by the latter part of 1921 only about one- tenth of the participatiag banks hid securitieu other than euarsety Auld 1 2 warrants deposited With, the State Beekieg Beerd. By that time there was no other cash market for the warrants. They could legelly be issued to the depeeitorz of banks that closed, but the depositors would have little hope of eventual payment. This reuulted fram the fact that the earliest lamed outstaadin rrante„ with latereet at 6 percent per year, hadprierity of Dement free the guaranty feed, both from the proceeds of future assessments On participating banks, and from the proceeds of liquidation of failed banks. Recoveries from the assets of additional banks that might fail would therefore be used to pay obligations arising from earlier failures. It was estimated that the interest on outeteading warrants would abeorb a large share of the azeessment receipts, aaa retirement of the outstanding warrants from the remainder of the receipts would take twenty years. Oa the first or hurvemb*r 1921, the second largeet bank then participating in the auaranty system failed. Two weeks later, at a meetiag of the State Banking Board, the Board discussed the condition of the banks and of the guaranty fund, and talked with the State Governor about them. From eviaence presented at the litigation regarding disposition of the remaining assets of the fund after repeal of the law. Thornton Cooke, "The Galleys* of Bank-Deposit Guaranty in Co"" and Its Position in Other Statos,"loe. cit. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -33At this informal mooting with the Governor, the further issuance of warrants to depositors in failed banks was thoroughly discussed, and each member of the Board was asked what his attitude would be toward ceklling on tha State Banks of Oklahoma for additional eecuritiec, said securities being necessary before the issuing of warrants could be made practical as outlined by the opinion of Judge Zwick of the Attorney-Genaralia office. aich mewber of the Board expressed himself se being unwilling to call on the State Banks for additional security at this time, knowing their strained condition, and knowing that to enforce oame would can the closing of numerous other banks. This was followed, at a subsequent meeting of the State Awaking Beard, by a resolution that the moneys and funds on hand &well be used in the liquidation of contracts now in effect, and that they will not make any contracts or promises that are contingent on the future collections of the assets of the Guaranty Fund until .aid funds are available for distribution. Repeal of the deposit juaranty law. ith numerous additional failures in 1922, and a Sharp contraction of depoeits in participating banks and therefore in the income from assessments, there was no hope of restoring the system to solvency without aid from the State. A bill to issue bonds to meet the deficit in the guaranty fund was debated and defeated in the 3tate Legislature at its session in early 1923. A bill Which repealed all assessments and the provisions for issuing certificates and warrants, without releasing banks and their officers from obligations already incurred, wee thereupon passed and became effective on March 31 of that year. The repeal of the law 46ts followed by liti- gation regarding the distribution of the azaets remaining in the Guaranty Fund, which delayed settleeent of the affairs of the fund until 1934. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis aate Banking Board, meeting of Nov. 16, 1921. if Minutes of thi7Banking Board, meeting of Jan. 9, 1922. State the of Minutes V -314NUMIER, De:POSITS, AND FAILURZS OF PARTICIPATING BANKS Nunberaed dvpsits of paeticiyating banks. The number of banks operating in CloildiPma which participated, and the mumber which were not eligible to participate, in the deposit guaranty system each year, are given in Table 3. The participating Weeks include all State banks and, during the years 1906-1910, trust compauies. The nonparticipating banks include national banks and, after 3eptember 1911, trust companies operating under State law. During the first two years of deposit guaranty the proportion ee banks in the Aate operating under the guaranty system rose rapidly, due primarily to the conversion of national tanks to Ante banks. After the third year the proportion operating under the Guaranty syetem declined, primarily as the result of conversions of State to national banss. The deposits of the participating banks and nonparticipating banks, for each year, are given in Table 4. During the first two yeare of deposit guaranty the proportion of all bank deposits in the State which were held by the participating banks rose rapidly. After 1910, however, the proportion held by banks in the guaranty system declined. The deposits of participating banks given in Table 4 exceed the amount of deposits covered by guaranty, because certified and cashier's checks, public funds, andorter 1913,other secured dopoeits • were excluded froe guaranty. Concentration of bank deposits. Table e shows the amounts of •leposits held on November 10, 1910, and December 29# 1920, by State banks in Oklahoma grouped according to their 3. sits. In 1910, U. percent of the deposits, and in 1)20, 15 percent, were concentrated in the ten largest banks. The largest bank in 1910 held 2.2 percent, while the largest bank in 1920 held 2.7 percent, of the deposits of all State banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e -35Table 3. NUMBER OF OPMATING BANKS IN OKIAHOMk PARTICIPATING AND NOT PARTICIPATING. IN THE Di203IT GUARANTY OYST:A, 1908-1922, BY YEARS ----___, All bans Participating operating in deposit guaranty 2/ in Oklahoma Date 1/ Feb. 1908 7 End of year 1908 470 Not participating in deposit guaranty 4/ Percentage participating 312 60.1 834 546 288 65.5 1910 887 924 668 695 219 229 75.3 75.2 1911 1912 914 923 631 615 283 308 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 913 913 903 885 901 936 944 977 936 910 582 563 557 547 566 582 599 622 556 463 331 350 346 338 335 355 345 355 382 447 1909 69.0 66.6 63.7 61.7 61.7 61.8 62.8 62.1 63.5 63.7 59.3 50.9 of year data are for call dates on or nearest to -bccii&Y-II. The call dates for state and national banks are not identical in several years. End 3/ Includes all banks and trust companies operating under state law, except 2 trust companies in 1911, 2 in 1912* and 1 in 1913. After 1911 trust companies were excluded from deposit guaranty, but none is reported as engmod in banking operations after 1913. Figures for 1908-1920 from biennial rzporta of the Bank Commissioner) figures for 1921 and 1922 from Federal Rene:rye Bulletin, November 1937, p. 1117. Reports of the Bank Commissioner werc net publfsled subsequent to 1920. 11 Includes national banks operating in Oklahoma, and also 2 trust companies in 1911, 2 in 1912* and 1 in 1913* operating under State law but excluded from deposit guaranty. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 36. Table 4. DEPOSITS OF OPXRATING BANKS IN OKLAHOMA PAXTICIPAT/BG AND NOT PARTICIPATING XX THE Di2O3IT GUARANI SYSTA 1908-1922, BY 'MHZ (Amounts in thousands) Ds.te V Feb. 1908 nd of year 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 All banks operating in Oklahokia Banks participating in deposit guaranty 2/ 03,2188 U6,720 75,238 105,815 121,012 106,698 122,802 135,233 129,301 158,153 265,349 381,935 j8,998 513,071 434,364 359,691 392,990 31,617 54,769 61,309 44,004 45,876 46,131 44,n3 48,460 64,799 137,392 120,660 190,900 160,673 112,579 75,027 Lkt participating in deposit guaranty 1/ )61.3,621 51,046 59,703 62,694 76,924 89,i02 84,526 109,693 180,550 244,963 215,338 322,171 273,691 247,112 317,963 Percentage of deposits in all banks held by participating banks 29.6$ 42.0 51.8 50.7 41.2 31.14 34.1 34.6 30.6 31.9 3).9 35.6 37.2 36.9 31.3 1).1 g Fad of riei7KIWilli7Ki-ZZI-Tates on or nearest to DeceWber 131. The call dates for State and,national banks are not identical in several years. 3 ../ Deposits of all State banks and trust companies, with deposits of trust companies deducted as follows: 1911, $600,000 (est.); 1912, 4701,000; 1913, *500,000 (est.). Figures for 1908-1920 from am-mixt reports of the Bank Commissioner; figures for 1921 and 1922 estimated by averaging the deposits for the preceding and succeeding 'Pine 30, as given in the annual reports of the Comptroller of the Currency. Reports of the Bank Commissioner were not published sUbsequent to 1920. The amount* of deposits given here exceed the amounts of deposits protected by the depositors' guaranty fUnd, since certified and osiblerts checks, public funds, and. after 1913 other secured deposits, vcre excluded from guaranty. V Deposits of natifIrml banks plus the deposits of trust companies given in note 2. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -37lible ). MUMMER AND Di2031ni OF 3TATL BMW IN OKLAHOMA, movimal 10, 1910, AND TILL:laUt 29, 1920 Banks grouped by aMOUnt of deposits Amount of deposits NUmber cf banks (in thousand0_ All stet: banks, ;member 10, 1910J Banks with deposits or $100,16100 or leas Peremaike of number of banks l'eru-Zair of aggregate deposits 100.0% 693 010612 5,20 133 34 26,590 19,15) 11,178 75.0 19.2 4.9 5 3,362 0.7 5.5 1 1,332 0.1 2.2 OW OP 400,000 to $250,000 $250,000 to $500,000 t50.:,000 to 4,000,000 $1,000,000 to g'2,000,000 2.2 6.7 1,332 4,157 6,513 Largest bank Largest 5 banks Largest 10 banks All State banks, DLcembor 22, 4302 31.1 18.1 621 $158,960 100.0 100.0 Banks with deyostts of -. 0000 or less 4b6- 174 12,053 $100,000 to $250,000 $250,000 to $500,000 268 119 43,671 40,437 23.0 43.2 19.2 7.6 27.5 25.4 41 14 5 27,512 19,833 15,454 6.6 2.3 0.8 17.3 12.5 9.7 2:..11 $500,000 to $1,000,000 $1,000,000 to $2,000,000 t2,000,000 to $5,000,000 -› ------ i Tibuistairom statenente for tatriauerbanks given 57iRe report. of the Bank Commissioner. Tctals differ slightly from the figures given in same dates in the Commissioner's reports, which are as ((f sammary tables for the 1910, 694 banks with deposits of 061,442,000; follows: November 10, December 29, 1920, 622 banks with deposits of 460,673,000. Largest bank Largest 5 banks Largest 10 banks --"--(--._ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4,222 15,454 24,507 2.7 9.7 15.4 • -38The figurta for 1910 do no; Show a:. geeet a concentration of the risk falling upon the guaranty fund as actually existed during the early years of the guaranty system. The largest bank in the State, with deposits of $2,742,000, had railer]. in Septeiber 1909. At the time at its failure, this beak held approximately 2 percent of the depOsits at all banks covered by the guaranty system. Number and deposits of failed banks. During the 15 years of the guaranty votes in Oklahoma, 140 participating baneu cloaed, or were absorbed or reorganized with linancial eupport from the guaranty. :ulagi# bzleause of financial difficulties. The aggrefelle deposits of these beaks at time of suspension annunzed to aggraminately $30 million. Several of the banks that closed were banks which had previously suspended and had reopened or reorganized. One of the auspended :eanks reopened without a payment, or obligation due, from the guaranty fund. Failures entailing obligations on the guaranty fund occurred each year that tee cyotee eats in operation. The average annual tette of failure, computce ae the number which failed per 100 in operatioe at the beginning of the year, vas 1.6. The deposits of the suspended baes averaged .2.34 per year for each 400 of deposits in operating IJOU44.4 'NM& by years are given in Table 6. Tbe heaviest failure rates, with respect to the number of banks, vers in 1921, 1922, <And early 1923. A substantial part of these failures „ccurred after the fund was eabeasted in the autuan of 1921 and the officials had ceased to pay off the depositors of closed banks. In terms of deposits, failures in 1921, which exhausted the fund, were loos serious relative to the deposits of the participating banks than those in 1909 and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Table 6. NUMDa AND DLPOSITS OF STAT; BANNS IN OKLAHOMA 0LWED UCAUSS OF FINANCIAL DIFilaILTILap FEBRUARY 14,,1908, TO MARCH 31, 1923, BY YEARS Ranks entailincobligations on the depositors varanty fund Period Rumber Deposito (in dollars) 'Maser suspemded per 100 partie1pating basks Deposits in closed banks per $100 of deNolte in participating banks 441tatt IV 49,486L076 1.6 59 23 57 10,736,964 5,342,982 13,406,130 2.1 Year =908 1909 1910 1 3 3 36,745 2,872,514 661,308 1911 1912 1913 1914 1915 4') 4 16 6 6 1,143,882 655,983 1,993,450 501,216 360,451 1.2 1916 1917 1915 1919 1920 1 2 40,337 .2 84,998 1,202,975 1,183,105 2,375,357 .4 .5 1.0 1.3 .98 1.24 4.5 5.9 9.3 3,/ 4.05 7.47 7.63 Total Sub-totals for cte-aTiiirst FaZds 119 Jan. 1920-Oct. 1921 Nov. 1921-March 1.923 1921 1922 1923 2/ 3 6 8 28y 6,509,045y 33 8,404,257 1,460,453 11 .9 2/ 7.3.1 .2 2/ .5 .4 .6 2.6 1.0 1.1 1.46 g/ 3.46 .22 3/ 9.09 1.21 1.87 1.49 4.35 1.09 .81 .08 .10 .88 1/ In addition, 1 bank With deposits of 494,000 suspended in 1921, and reopened without any payment, or obligations due, from the fund. 2 Computed on an annual basis. After February 14. Of these banks, 15 with deposits of $2,967,625 closed prior to thL time payments to depositors ceased because of insolvency of the fund. 2/ To March 31. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4o- in 1913. In fast, the rand was as insolvent in 1909, aftee the failure of the largest bask in the Otate, with deposits of $2,742,0o0, as it vas when payments to depositore ceaaed in 1921. However, the 1909 crisis was succeeded by a period with failure rates sufficiestly low and aseesmest rates eufficiently high to permit the fund to be recouped, while the failuree in 1921 and 1922 resulted in obligations so great that, with the reduced rowilma rate of asecessent, maay years would have been z]-eriuired to meat them. Nearly one-half of the closed banks were very small, having less than $100,000 depoeits ameh. These banks held about one-tenth of the depoeitc of all of the suspended banks. Only three of the closed banks had deposits of more than $1,000,000, but these accounted for 22 percent of the deposits of all of the closed hanks. A distribution of the closed bahks and of their deposits according to the amount of deposits held is given in Table 7, and compared with an average of the size distributioac of operating banks for dates for which such data are available. During the period of the guaranty fund, that in, from February 144 1908, to March 31, 1923, failures among State banks were positively correlated with size of bank. The smallest banks had the lowest, and the largest basks the highest, failure rate. Failures among banks with less than $100,000 of deposits, for the entire .1 -year period, were about onesixth of the average number of operating banks of this size, while failures among banks with more than $1,000,000 deposits were four-fifths of the average number uf such beaks in operation. If failure rates are computed for the period ap to October 31, 1921, whes Ayments to depositors in closed https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 7. SIZE DISTRIBUTION OF FAILED BANKS IN OKLAHOMA COMPARED dITH AVERAGE SIZE DISTRIBUTION OF OPERATING STATE HAM: PERIOD OF OPERATION OF DiXOSIT GUARANTY SYSTAM Percentage of total number Opera- Failed banks ting banks Average annual number of failed banks per 100 active banks Average number of operating banks 1/ NuMber of failed banks 592 139 100.0 100.0 1.6 Banks with deposits of ------359 054,000 or less :000 to 4250,000 t100 166 66 42 60.7 27.9 47.5 30.2 1.2 1.7 2.9 Total number of banks 250,000 to 4500,000 21 8.1 15.1 V.,000,000 to 42,000,000 4 7 1 2.4 .7 5.0 .1 42,000,000 or more 1 2 .2 1.4 14 4500,000 to 41,000,000 Average deposits of operating banks (thousands a dollars) 2.1 Total deposits 157, 4741, Banks with deposits of -1Z7056 4100,000 orTless 25,174 4100,000 to $250,000 $250,000 to $500,000 15,911 Deposits of failed banks (thousaaide of dollars) posits in failed banks per 4100 deposits in operating banks 100.0 100.0 3,556 23.1 12.1 1.31 6,412 7,564 32.2 21.7 1.70 20.4 25.7 3.17 12.2 7.3 4.8 18.6 5.6 16.3 1.92 9,540 5,487 1,656 42,000,000 or more 4,807 3,760 Average annual amount or de- 429,466 $1,000,000 to 42,000,000 5,716 000,000 to 4,000,000 Percentage of total deposits Opera- Failed banks ting banks 3.3 1.7 10.0 42.51 3.84 8.51 enterages of number operating on dates for which data regarding 4 are available in the reports of the Bank Commissioner, as follows: individual .eptember 23, 1908; November 10, 1910; November 26, 1912; December 8, 1914; November 17, 1916; November 17, 1918; and December 29, 1920. 2/ Banks closed because of financial difficulties which entailed plyments, or obligations due, from the guaranty fund, during period of operation of the deposit guaranty system, February 14, 1908, to March 31, 1923. Note: Because of rounding, data may not add precisely to the indicated totals. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -42- banks ceased, the same relationship holds. This relationship of failures to size of bank was also characteristic of national banks in Oklahoma during the same period. The failure rate of national banks with more than 4,000,000 of deposits was five times as high as that for banks with deposits under 400,000. Comparison with failures in other States. The number of bank failures during the yeare, 1908-1922, relative to active banks, was eearly twice CIA large in Oklahoma as in the United States as a whole, or as in the six States contiguous to Oklehoma combined. However, in one of the contiguous Statea (New Mexico), the relative number of State bank suspensions 418 higher, and in two other contigueus :tastes (Colorado and Arkansas), the rate was nearly as high as in Oklahoma. In terms of deposits the Oklahoma rate for State banks was apparently higher than 111 any of the contiguous :Aatee, though not far above that in New Mexico. A comparison of the Oklahoma rates with those for contiguous State and the United States is given in Table U. In two of the contiguous States, Kaneas and Texas, deposit guaranty systems were operative during most of the period embraced by these figures. The failure rates for both of these States were far below those for Oklahoma. These figures suggest that the existence of deposit guaranty in Oklahoma wee not a significant causative factor in the high rate of bank :Auspensions, as has beea claimed by opponents of the principle of deposit insurance. The high rate of failures in the State appears more probably due to causes which operated also in New Mexico and Colorado, and to a lesser extent in Arkansas and Texas, but were of much less consequence in Kansas and Missouri. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -43Table a. ANNUAL BANK FAILURE RATES IN OKLAHOMA, 1)08-1922, COMPARED WITH RATES IN CONTIGUOUS STATES AND IN THE UNITED STATES 1./ Failures per 100 operatintbanks State and State National national banks banks banks Deposits in failed banks per 4100 in operatin(banks State and State *Aims' national banks banks banks Oklahoma 1.1 1.5 211 41 . 0T Six contiguous States 0.5 0.6 0.2 .31 0.3 0.2 1.0 0.4 0.2 0.1 0.6 0.3 0.8 0.3 .28 .09 .61 .62 .80 .73 1.85 1.92 .22 .43 .20 .31 Kansas Missouri Arkansas Texas 2 . / New Mexico. Colorado 0.5 2.3 0.9 1.1 0.8 3.0 1.3 Entire United States 0.5 0.6 0.2 MMINI••••• y 121L .56 .0) .44 .06 .17 .07 ••••••••• Tigaiated fraa data from the f011iming sources: reports and records of bank commies:Loners in the various :tats; Willis, Banking Inquiry of 1925; annual reports of the Comptroller of the Currency; Padeval Reserve Bulletin, ember 1937. 2/ For the years 1)12-1922. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CSMief of bank failures. Brous circumstance contri1: to the financial difficulties which result in bank failures. However, in most cases the factors responsible for failure are predominantly associated with one of the following groups: (a) dishonesty on the peat of officers or umployees; (b) excessive loans directly or indirectly to certain business interests, often to the intereets of an influential official or stockholder; (c) adverse economic condit ions in a dee:leant industry and collapse of property values associated therewith; and (d) general managerial incompetence. For 35 failures which occurrel during the years 1909 to 1)18, Biennial Reports of the Bank Commissioner of Oklahoma contain brief _lents regarding the cause of failure, the character of the bank's anagement, or other aspects of the bank's operations. In about one-half of these cases sufficient information is given to indica te the major factor responsible for the failure. /n twelve eases deftleatioa by officers or eaployees is mentioned, and was assigned primar y responsibility for the failure in the majority of these eases. In four cases excessive loans to certain interests were noted, and in four cases failure oss ascribed to bad or incompetent management. In on4 two cases was any eention made of business depression or of adveipe economic circumstances. The operation of the deposit guaranty law in Oklahoma during the first 12 years of its history, from 1908 to early 1)20, was carefully studied by Thomas Bruce Robb. Of 57 failures during that period, a number were selected as typical. In 18 cases Mr. Robb cite* specific https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis y Robb, IEttiloranty of Beak DepositsL pp. 42-73. -45causes of failure, or gives sufficient information to warrant lon. Of thietic, six were attributed chiefly to fraud or defalcation an the part of bank officers, and 12 to speculative and excessive loans U. interests associated with the bank managements. The Comptroller of the CUXTIMAy, in his report for 1921, summarized the experience of States with deposit guarauty plans in operation. Hit. statement regarding the causes of bank failures in Oklahoma is as follows: The closing of 42 of the 95 banks was due to a decline in the value of the assets, poor managasent, and slow loans, inability to realize on loanz, injudieiena investments, and shrinkage in deposits. in 34 oases cleaing was due to criminal acts on the part of officers, including enbeislanent, misapplications, or use of the banks' funds in speculation for private gain. In 19 cases the cause of closing is not on recora here. The failures described in the Bank Commissioner's reports, and those reviewed by Mt. 'Iobb, took plate prior to the collapse in prices of fare products and the business depression in 1921. The failures in 1921 and in 1922 were more directly associated with adverse economic circumstances than were those in the preceding years, though such evidence as is available indicates that incompetent management and speculative loans also played a part in these failures. Thcl%1 is no evidence that thc nuMber of failures during this period WII4 affected by the insolvency or the guaranty null. High failum rates in 1921 and 1922, in eomparison with those during tne preiions th:eade, occurred not only among the State banks in Oklahoma, but also among national Walks in the State, and among both State aml national bankc in most of the contiguous StaU-s. p.188. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis y Annual Report of the Comptroller of the Currency, 1)21, • -46Procedures used in bandling_failed banks. The affairs of the first three banks that failed after estahlishmeet of the deposit guaranty systflm in Oklthoma were liquidated by the Beek Commissioner. Of the 79 other banks thot failed before the State Beeeg Beard discontinued payeente from the guaranty fund, only seven were liqpidated directly by the Bank Commissioner. In the other cases, the liabilities of th failed -auk, or most of thou, were assumed by another operutieg bank or ey a newly organized bank, or the affairs of the failed bank were liquidated by another benk, with an iumediate eeyment or a guarantee, or both, by the depositors' guaranty fund. The reasons for tieing thee° procedures were given by the Bank Ceeeissioner as follows: we can liquidate a bank much more ecommically through smother bank located in the ammo town, or by permitting the failed bank to be rempsnilmkivoidier another name. The notec are paid or secured more readily, and the Bankihg Board is only requirt to handle auall over as the Bank purchasing the assets is unable to colicv.L or have renewed to their oaticractiou. By this method, a very small am000t of money will take care of the liquidation of faiioa bank, and no financial disturbance whatever is crusted in the commuoity Where the bank is located. 1/ Them was considerable variety in the details of the arrangements 4th the auceeseor, absorbing, or liquidation-handling bank. This is illustrated by tilt: folloving oases described in the reports of the Baa. Commissioner: Bank of °chalets, closed December 31, 1909. The Commissioner entered into an agreament with Mr. G. D. Davis of Claremore and his associates, to liquidate the Bank of Oahelata, through:knew institution to be known as the Oklahoma State Bank... the Commiaelomer agreeing that the State Banking Board would protect the said Oklahoma State Bank against loss in assumieg the obligations to the depositors of the Bank of Ochelata. On July 25, 1910, the Oklahoma State Bank asbeitted a report...4%ewing that there vas due thee for notes which they were unable to collect, the ems of 46,968.48. /be Banking Joard ieelled their warrant for the above amount and took up the notes. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Cecond Biennial Pepert of the Beek Cemmissioner, 1910, p. xii. • Oklahoma State Bank, Durant, closed April 28, 1910. An agreement was entered into with the Omazunteed State Bank, of that city, to liquidate the Oklahoma State Bank, and the State Bankiag Board deposited with the said Guaranteed State Bank, the sum of $25,000 to protect it against loss. Creek Bank & Met OsmPanY, 0110144, r'i,miedllovesdrer 11, 1910. Mr. U. aussa at Bristov and his assooiatss offered to reorganize the Usk under thi name of the Oklahoma State Bank, of Sapulpa, sag pay in the 100 percent assessment, on the condition that the Mak Commissioner enter into an agreement to place all =eh and atteanits on the books in baleeee, and obtain the guarantee belonging to the assets of of the 51011Manking Board on such not Ve2s2eeem State Bank mig'et &Trust Compaey, as the the Creek lank Such after dare' investigetion. guaranteed thirty to have desire confirmed by the agreement wee entered end the same 4 4E; into an Banking Board at a meeting on Dec. 1st, 1910. II 5, 1911. The American State Bank of Geary wane4 all of the depecita Of the said bank and took over certain of its assets. The Banking Board paid it the difference between the deposits which it aosamed and the assets Which it took over. Ronk of Commerce, Geary, cloaed May Citizens Bank, MOuntain Park, closed April 10, 1911. .! Bank of MOuntain A new charter was granted to the Planters Stat, Park and it purchazed the good assets of the Citizens Bank, and the Banking Board made ye the difference between the linnets purchazed and the liabilities of the failed beam Night & Day Bank, Oklahoma City, closed June 7, 1911. The Night & Day Bank was taken over by the :ilkin-Nale State Bank, September 18, 1911, the Banking Board taking all doubtfUl aseetu not accepted by the Wilkie-Hale State Bank, and paying thee the difference between the liabilities assumed and assets taken over... First State Beak, Shattuck, closed Octole:r 3, 1911. This benk eas voluntarily liquidat. through the Guarantee State Bank of Shattuck...The Banking Board advanced $20,004.29 in the liquidatien... Fareers State Beek, Tuehka, closed eepteeber 28, 1911. The Banking Board made an agreement with the stockholders that If they would Day in their double liability and put up an additional capital stock, that they would be protected. pi Second Biennial Report of the Bank Commissioaer, 1910, pp. ix, x, ana xi-xii. 2/ Third Biennial Report of the Bank Commiesioner, 1912. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The reccrds of the amounts paid by the fund ouggest that the objectives of reducing the liquidation cost and the diebursement of the guaranty fund were not always achieved, particularly in some of the eases in Which the fund made an immediate paymeet to the absorbing bask and also gave a guaranty against additional loze ee the liquidation of the assets. In some eases; liabilities other than guaranteed deposits were protected, with direct or indirect losses to the fund, and in som,2 eases the absorbing or successor banks do not appear to have been in making collections. A particularly striking case was the Citizens State Bank of Coalgate, Which cloeed November 19, 1920, with deposits of $496,000, of which $429,000 are eutimated to have been covered by the guaranty. The initial payment to the successor bank was $328,000, partly in cash and partly in warrants of the depositors guaranty fund. During the next twelve months several additional payments were made, as the successor bank reported its inability to collect on assets taken over, bringing the total disbursement of the fund to ?496,000. The reported 1/ recovery by the fund was only V6,0007 In several other failures in the latter part of 1)20 or in 1921 the disbursement by the fund, less the reported recovery, was nearly as large, or larger, than the deposits at date of failure. These large losses may have been due to inefficiency, or corruption, in the administration of the Bank Commissioner's office: they occurred during the time when Fred Dennis, later convicted for taking a bribe from a bank in difficulty, was Bank Commissioner. y Minutes of dm 3tate Banking Board and other records in the Bank Commissioner's office. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -49- A large majority of the banks that failed after cessation of payments from the guaranty fund, up to the repeal of the law, were liqpidated by the Bank Commissioner. The method of liquidation ueed in theae eseeel and in liquidating suca assets as were acquired by the fund from the failed banks that were succeeded or absorbed, was also expensive. The procedure 4MS described by a later Bank Commissioner as follows: In fairness to the guaranty fund system of Oklahoma, it should be mentioned that during most of the time it was in operation the cost of liquidating failed banks was an expensive proeese. Liquidations were handled on a fee basis. The contracts of liquidating agents usually called for ten per cent of collections the first year, twenty-five per cent the second year, and fifty per cent the third year. In addition to this, they were allowed all traveling and other expenses, and when it was necessary to place an instrument in the hands of an attorney for collection, another large fee had to be paid. With such a contract it is not unreasonable to suppose that most collections were made during the ascend and third years. Anyway the cost of liquidation in virtually all instances amounted to fifty per cent or more of a bank's assets... Ll/ FINANCIAL HISTORY OF THE GUARANTY FUND Zources and adequacy of information. Published information regarding the operation of the Oklahoma depositors guaranty fund is inadequate. No statements of the fund were published in the reports of the Bank Commissioner except for the last three months of the years, 1914, 1916, and 191b. For several years, free 1911 to 1919, quarterly statements were made available to the participant banks and published or summarized in local and regional banking journals. A partial statement for the entire period up to the end of 1922 appears in a report made to the 2./ Linwood 0. Neal, The History and Development of Jtate Bank ,3upervision in Oklahoma, p. 71. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -50- Oklahoma House of Sepreeentatives. Some additional information is available in surveys of deposit guaranty plans made by students and 2/ agencies outside the State: Information is given in the pUblished reports of the Bank Com. missioner regarding the cost to the guaranty fund of most of the banks that failed during the period 1908-1919. Additional information re- garding some of these failures is given by Robb in his book published 3/ For the failures from January 1, 1920, to the cessation of in 1921. payments from the fund in October 1921 no information is given in reports of the Bank Commissioner regarding bank failures or the operations of the fund, except the names cf banks taken over by the Commissioner during the year 1920. Considerable additional information has been obtained from surviving records of the fund, consisting of minutes of the State Banking Board and various registers and ledgers, in the office of the Bank Commissioner. These reeords provide statements of the fund for certain periods, and a complete register of the guaranty fund warrants outstanding from 1911 to 1923, but no file of the quarterly statements of the fund. The minutes of the State Banking Board include an audit of guaranty fund transactions for individual failed banks as of February 9, 1922, Showing the amounts advanced by the fund in the respective failed banks, the amounts returned to the fund, and the balance due on that date. y House Journal, February 1923, pp. 773-75. , These include Robb, The Guaranty of Bank Deposits (Houghton Mifflin Company, 1921); Thornton Cooke, articles in the Quarterly Journal of Economics, November 1913 and November 1923; Federal ROMMO Board, in Federal Reserve Bulletin, September 1925; Blocker, The Guaranty of Bank Deposits (The school of' Business, University of Kansas, 1929). Robb, pp. cit., pp. 57-73. These records were examined by the writer of this report in December https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4% i95::). • -51Another audit, or "inventory," as of October 1930 also provides figures for the amounts paid out in the case of most of the individual failed banks, uut not for recoveries or the balancee due. An undated volume, apparently prepared at some intervening date, gives asset and liability statements as of date of failure for amen bank in which a payment had been made from the gemearty fund, eith a few exceptions, together with the amounts paid by and returned to the guaranty fund. Information regarding the banks that failed between the date of cessation of payments from the fund and the repeal of the law was not found in the surviving records in the Commissioner's office. For these banks the principal source of information is schedules submitted in 1931, prepared from records in the Commissioner's °face at that time, to the Federal eserve Committee on Branch, Group, and Chain Banking. The data for the individual failed banks from the various sources Show eome inconsistencies, but for the most part these are relatively small. No data have been found for the amount of deposits in the re- spective banks subject to the protection of the fund under the provisions of the guaranty law, :ler for the amount of guaranteed deposits assumed by banks taking over the business or liquidating the affairs of the failed banks. However, in most of the oases the amount of guaranteed deposits must have been approximately the same as the amount of deposits shown in the statements of the banks at time of closing, excluding cashier s checks, Which were not regarded as deposits, and accounts of governments and of banks, which were mostly secured and therefore excluded from guaranty. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -52- The court records pertaining to the final disposition of the fuud provide some additional information regarding the fund's operations, particularly as to assessments levied that were not collected, the assets and liabilities of the fund in 1929 when the court proceedings were initiated, the claims approved by the District Court and by the State Supreme Court, and the remaiLing assets applied to those claims under the decisions of the courts. Income, expenses, and indebtedness of the guaranty fund. estimate of the receipts and expenditures of the Oklahoma depositors' guaranty fund during its entire existence is given in Table 9. The figures take into account receipts and disbursements subsequent to repeal of the law, including the final disposition of the fund in 1934. The estimates in this table exclude borrowings of the fund which were eventually repaid, and uloo payments to depositors of failed banks made directly from the cash or liquidated assets of those banks. The total receipts of the fund throughout its entire period of operation, inclnAing borrowings from participant banks that were never repaid, amounted to more than $8 so-Ilion. Nearly half of the receipts were frem assessmenta on the participating banks, about one-fifth from diversion to the fund of aasets pledged by the participant banks as a Guaranty of psyment of future assessments, and about two-fifths from the liquidation of assets of failed banks acquired by the fund. The fund paid out about 7.7 billion to depositors or to banks that assumed the deposits of failed banks, and spent approximately 40.6 million in interest and admintstrative expenses. DintIct Ctturt LCLAALh,rave no. 6o838, at the OkJebomn City Court House, and 6upreeae Court records, ease no. 24551, at the state Capitol. These records were examined in Decefther 1955. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 9. BLCEIFTS, LXPLNDI7M3 AND UNPAID OBLIGATIONS OF TEL OKLAHOMA WOSITORS GUARANTY FUND 1/ Receipts Assessments collected to 1925 3./ M729,937 Additional assessments, and securities pledged for payment of future assessments diverted to the fund 1,549,4°2 Total collections from participating banks, including warrants of the fund sold to those banks that were never paid 5,279,339 P4coveries from assets of failed banks 2,913,174 23,729 Interest on daily balances Total ru-eipts $8,216,242 fJ Expenlitures Payments to depositors of failed banks or to banks for assuming insured deposits _V 7,667,311 Interest on warrants 5/ 304,016 Operating expenses V 252,261 8,223,588 Total expenditures y Unpaid Obligations To depositors of failed banks 8/ 6,225,437 1/ All items are partly estimated. 2/ Au given in Federal Reserve Bulletin, SepteMber 1925, p. 631. Jee Table TO. .1/ For method of estimate and component items, see note 6 to Table 10. 4/ Tabulated from data for the individual banks. See Table U. 2/ Amounts reported in periods for which income and expense data 7 are available, plus estimated amounts for other periods. 6/ Difrerence between expenditures and receipts is attributable to errors of estimate for the various items. 7/ Warrants issued tc January 31, 1923, for salaries, expense of examiners, office supplies, bank robbers and miscellaneous. House Journal, February 21, 1923. Losses to depositors in banks that failed from cessation -f payments by the fund to repeal of the law. See Table U. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis y -54- Annual data regarding iSiesammta and the cash balance and indebtedness of the fund are shown in Table 10. The information available does not permit a tabulation by years of the disbursements of the fund, nor of the receipts from assets of failed banks. The annual range of asseeaments ranged from a high of one and one-fifth percent in 1911, When a speeial assessment of 1 percent was levied, and a by of one-fifth of 1 percent in 1916 and subsequent years, when additioaal itaaessments were not permitted. The amounts collected ranged from 8, MMELMOK of about *600,000 in 1911 to a low of about 90,000 in 1916. Thill Maxim= amount of outstanding warrants, or indPbtedness, of the fund prior to the World War I period was $844,4= in June 1914. This was all retired by 1919. The warrant indebtedness arising from the failures of 1920 and 1921, up to the time of cessation of payments frau the fund in October 1921, vas $2,4040000 at its maximum. This was reduced to about $1,300,000, and remained close to that figure until the final settlement of the affairs of the fund. Unfulfilled obligations to depositors of banks that failed from October 1921 to the repeal of the law in March 1923, as shown in the preceding table, amounted to more than *6 million. Insured deposits and losses in failed banks, by years. Table 11 gives the estimated awount of insured deposits of the banks that failed each year while participating in deposit guaranty, and the estimated A/ W-giiona..U.-71uarterly statewents, for the period for which Uv. were made available, have been located in banking journals, and some of these are incomplete. Only part of the earlier and later years are covered by statements found in the surviving records of the guaranty fund. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 10. RAT AND AMOUNT; OF AZ E - 6SMLNT, CASH BAIANC, AND ARRANT'S OUTSTANDING, OKLAHOMA 112061'1M3 GUARANTY FWD, BY TZARS ReWar asseeement (percent of depouits) Year Amount of assessment Cash balance (end of year) 4arrants outstanding (end of year) 4./ Total 5,279,339 1908 1909 1910 1911 1912 1913 1914 198,837 327,388 .20 285,433 600,538 511,054 201,825 148,084 $6620 72,510 15,131 44,714 *31),847 146,000 660,889 768,682 161,817 89,964 133,356 208,800 231,962 77,703 153,738 35,560 45,691 680,009 666,379 389,936 136,961 301,658 e88,534 ldV,697 2,222,118 1,413,246 1,303,916 1.20 •95 .40 •40 .40 .20 1915 1916 1917 1916 1919 .20 .20 .20 .20 .2U .20 .20 1920 1921 1922 1923 Additional 1.00 .95 6/ 246,T71: 82,451 371,536 none 1,549,402 INelides reviler and special aseessmento. These rates were applied to aversive daL4 deposits during the preceding year, except in the case of the ini1Lt1 assessment which was applied to deposits as of December 11, 1907. Rates for 1)08-1)20 from Robb, The Guarauty of Bank Deposits, p. 73; for 1921-1923, according to provisions of law. 2/ For 1908-1920 amount of aseessnents levied, Federal Reserve Bulletin, Septeeber 1925, p. 631, or1atna14 derived from Robb, op. cit., Asseauments collected for these years probably did net differ greatly frem the amount levied though there were some refunds and adjustments. For 1921-1922, estimated as the difference between net collections (i.e., total collectione less refunds and adjustments) to the end of 1922 from House journal, February 21, 1923, amounting to $3,647,466, less the total levied for the years 190e-1920, amounting to $3,400,715. For 1e23, difference betweee total aaseasmants collected to 1925 as given in the Federal Reserve Bulletin, op. cit., amounting to $3,729,937, and the net collections re7W7 end of 1922. Most of the assessment levied in 1923 remained unpaid. Assessments due at the time of repeal at the law, ae given in court records pertaining to the dispooition of the Node amounted to $109,928. For the amount indicated in this table as "additional" see note 6. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Nut to Table 10. Frem quarterly statements of the feed published in bunking journals and in the Bank Commissioner's report, and etatements for the fund for certain periods in the surviving records in the Bank Commissioner's office. The figmres indicated for 1919 and 1921 are for May 31, 1900, and February 9, 1922, respectively. From vaerant register in the surviving records in the Bank Commis:stoner s office. The maximum amount of warrants outstanding in 1914 was $844,342 in June, and the maximum outstanding in 1921 was 4:2,403,618 in November. Not available. j Includes: (a) $10,064 of assessments due by banks to which securities posted as security for payment of future assessments were returned under the court decision regarding settlement of the fund and which were required to be paid as a condition for such return; (b) *3950224 of guaranty fund warrants deposited as security for payment of future assessments eh/eh were cancelled by the 5tats Banking Board bemuse the banks concerned had nationalized or liquidated; (c) 431,000 of other securities deposited as security for payment of assessment by banks that had nationalized vbidb were sold for cash by the State Banking Board; and (d)T1,113,114 of guarenty fund warrants outstanding at the time of final settlement of the affairs of the fund which were never paid. The last item is included because almost all these warrants were owned by the participating bank and deposited as security for payment of future assessmeets with the amen derived from their sale having been used by the iparentof fund, and thus in effect represented an additional final assessment upon such banks. By the time of settlement of the affair, of the fund almost all of the guaranty fund warrants which bad been issued to depositors of failed banks or to auccesser or absorbing banks had been retired and were no longer outstanding. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 )/ Table U. INSURED DZPOSIT3, AND OBLIGATIONS TO DEPOSITO1 OF FAILED BANKS PAID AND UNPAID, OKLAHOMA DEPOSITOILi GUARANTY FUND, BY YEARS, 1908-1923 Year or period of failure Insured deposits 1/ Paid dfrectly from liquidation of assets 2/ Insured deposit obligations paid and unpaid Paid by fund Unpaid (loss Not reRecovered ---71UFar. to defrom liqui- covered from liquida- pository) dation of 4/ tion of assets 3/ assets (loss to fund) 4/ t25,067,885 44175,137 $7,E67,311 12,913,174 80573,019 5,537,038 10,957,828 • 4,120,026 142 : 2,264 4,790,969 4,452,993 3,172,539 41,779 2,010,163 903,011 11,781 1909 36,745 1,741,078 24,964 1,064,269 615,633 1910 1911 1912 1913 1914 587,959 1,065,149 534,837 1,715,525 451,124 61,156 313,062 294,961 312,209 796,443 202,178 24,964 1,679,922 274,877 770,168 222,628 917,082 248,946 34,250 230,577 72,778 388,498 88,120 240,627 539,591 149,850 528,584 160,826 1915 1916 1917 1916 1919 332,463 40,337 84,217 1,077,546 906,039 198,720 37,837 84,217 1,028,628 776,794 133,743 46,544 87,199 2,500 48,918 129,245 14,389 45,754 34,529 83,491 1920 1921 1922 2,008,581 5,415,002 8,033,344 1,037,939 686,646 1,994,874 3,791,672 581,919 1,321,935 309,887 593,124 1,012,048 1,264,959 14,300 Total alEiZtals 1906-1919 Jan. 1920-Oct. 1921 Nov. 1921-March 1923 1908 1923 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2,500 .40.1111. 0010 -45W$7 16;7 $4,754,13(2,442,83o 2,269,528 41,779 -- 0.01. 100,357 6,125,080 •••••• 411. .011.110 •••• 111•• 4MONI. 1,878,063 14,300 Oa OP OM WO IMP 41•1 AMON. 1,542,045 4,227,372 456,020 lotes to Table 11. : 11 Zstimated as the deposits at date o2 failure, excleatez cashier's checks and accounts of geveruments and benks (tabulated from statemete for the individual banks in the surviving reeords ef the guaranty fund, with estimates for a few cases for which such statements are unavailable), or OA; the amount paid by the fund if in excess of the foregoing. 2/ For banks with deposits assumed by another bank or paid from th, fund, residual between the estimated insured deposits and the payment by the fund. For banks with no payment from the guaranty fund, recoveries from liquidation as reported to the Federal Reserve Committee en Lranch, Group and Chain Banking in 1931. 1/ From data for the individual banks in the surviving recerde of tLe fund, with an allowance for recoveries subseouent to repeal of the law derived from data for the status of the fund. Balance of the estimated insured deposits. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -59eventual recoveries and losses on those deposits. Table 12 shows for each year the percentage or the depouitc of the failed banks estimated to have been insured, and of the insured deeosits the percentages paid by the guaranty fund and recovered from the liquidatioe of assets. For the years, 1908-1919, over 70 percent of the insured deposits in the failed banks were eventually paid directly or indirectly from liquidation of the assets of the failed banks. But in subsequent failures, to the repeal or the law, recoveries from liquidation of *soots amounted only to about one-half of the insured deposits. The difference between the 1908-1919 and the 1920.4923 failures is doubtless due in part to the great decline in prices and property values associated with the depression of 1921 and the continued adversities of agriculture. In part, however, the difference between the two periods should be attributed to the deterioration in the quality of bank supervision and the handling of the Bank Commissioner's office. Information is not available regarding the recoveries and lea—, on sect red deposits and cashier's checka, which were not covered by the guaranty. However, up to the time of cessation of payments by the guaranty fund, such losses vere negligible, because successor or absorbing banks usually assumed all the liabilities of the cloeed bank, or if not, the .assumed the remein er. For the banks closed in 1922 and 1923, and not taken over by another bank, some losses eay have been incurred on secured deposits, because the pledged collateral may have been disposed of at a loss, and losses on cashier's checks were presumably at the same percentages as on insured deposits. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -6oTable 12. P:=XrAGE OF DEPOSITS INSURED, AND PERCENTAGE OF INSURED DEPOSITS PAID BY GUARANTY FUN!) AND RECOUTED FROM LIJJIBATION OF ASSETS, BANK FAILURLS UWDLII THE OKLAHOMA D4053IT INSURANCE SYSTLM, BY YEARS Year or period of failure Percentage of total deposits insured Total Percentage of insured deposits Paid directly Paid by guaranty fund Unpaid (loss from liquiNot recovPecovered to depositors) dation of from assets ered; i.e., assets loss to fund Moll! C5.0 100.0 44.6 11.6 12:2 24.8 79.8 103.6 81.7 100.0 100.0 100.0 48.1 23.4 40.9 16.3 26.5 41.0 1.8 43.7 -- .4 55.9 1908 1909 100.0 60.6 100.0 100.0 32.1 3.5 67.9 61.1 -35.4 1910 1911 1912 86.9 93.1 81.5 100.0 1000.0 100.0 53.2 27.7 58.4 5.8 21.6 40.9 50.7 1913 1914 86.1 90.0 100.0 100.0 46.5 13.6 22.6 26.0 30.6 44.6 19.5 35.7 1915 1916 1917 1918 1919 92.2 100.0 99.1 89.6 76.6 100.0 100.0 100.0 100.0 100.0 59.8 93.6 100.0 95.5 85.7 14.0 _. ._ 1.3 5.0 26.2 6.2 -3.2 9.2 1920 64.6 1921 1922 83.2 95.6 100.0 100.0 100.0 34.2 36.8 47.2 15.4 11.0 -. 50.4 23.7 .2 100.0 56.1 -- -- Total ..Abtotals 1906-1919 Jet.. 1920-Oct. 1)21 Nov. 1921-March 1)23 1923 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11.1 1•11. 11014111D mom, Mb MID ••• -MD Oa MID 41•1. alb MN •111 , InD -S 4111.011. Mb MD 28.5 52.6 43.9 For the entire period during which the guaranty law 40X on the statute books, about 56 percent of the insured deposits, and more than 60 percent of the total deposits of the failed banks were eventually paid from the proceeds of liquidation of the assets of those banks. The guaranty fund provided additional recoveries equivalent to 16 percent of the total deposits of the failed banks. Ceeferison of assessment receijpts and losses in failed banks. Table 13 compares the amount of assessments levied or collected each year with the eventual net loss to the guaranty fund or, after cessation of payments from the fund, to depositors in the banks that failed in that year. The figures are also shown cumulatively, with the cumulative excess or deficiency of aseeesments. Such an excess or deficiency, it should be noted, is a different concept than that of the accumulated surplus or deficit of the fund. It does not take account of interest paid or accrued on the fund's indebtedness, nor the amounts used or needed to pay depositors that were eventually recovered or recoverable from liquidation of the assets of the failed banks. ;hat the deficiency figures in this table show is the additional assessment that would have been necessary to have paid all insured deposits without incurring interest costs or other expenses. For the first twelve years of the fund, except for 1909 and 1910, there was a cumulative excess of receipts. This was achieved because the heavy _losses of the fund during its early years were met by large special asuesements in 1909, 1911, and 1e12. By the end of 1919, with smaller special assessments during the years 1913-1915 and none thereafter, the cueulative excess of assessments over losses amounted to about $650,000. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -62- Table 13. ANNUAL ASSESSMENT RECEIPT:3, LIABILITY FOR Da,CGITS IN FAILED BANKS, AND CUMULATIVE DEFICILNCY„ OKLAHOMA DEF0SIT( ' GUARANTY FUND Year Net deposit Assessments lj liability of collected th,:. fund 2/ Assessment receipts 1908 1909 $198,837 327,388 -461.5,633 $196,637 1910 1911 1912 1913 1914 265,433 600,538 511,054 201,625 146,084 240,627 539,591 149,850 528,584 160,826 811,658 1,412,196 1,923,250 2,125,075 2,273,159 1915 1916 161,617 , ) 87,19 89,964 133,356 208,800 231,962 21500 .. 34,529 83,491 2,434,976 2,524,940 2,658,296 2,867,096 3,099,058 301,658 1,012,046 3,400,716 1917 1918 1919 1920 1921 1922 1923 246,7711 82,451 Additional 1,549,402 2,827,004 4,241,672 456,020 526,225 Cumulative Excess of Deficiency Deposit liability receipts (excesc liability) of the fund 4615,633 856,260 1,395,01 1,545,701 2,074,285 2,235,111 2,322,310 2,324,810 2,324,810 2,359,339 2,442,830 $198,837 OD OP $.6:406 134,010 16,345 377,549 50,790 38,046 112,666 200,130 333,486 507,757 656,228 54,162 3,454,876 6,281,682 3,647,487 10,523,554 3,729,938 10,979,574 6,87467 7,249,636 5,279,340 10,979,574 5,700,234 ./ Frau Table 10. j Deposits paid from the fund, adjusted for recoveries, plus deposits unpaid (loss to depositors). From last two columns of Table 11. 1/ Not available. 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -63However, a part of this had been used to pay expenses and intereat on warrants, so that the cash balance of the fund in May 1920, when no warranti were outstanding, was only about ;;370,000. This was less than one-fifth of 1 percent of the deposits in the participating banks, Whereas the original law contemplated that the fund would always be restored, by special assessments, to a figure equal to 1 percent of the deposits of the participating banks. The large lessee in the failures from the latter part of 1920 to the repeal of the law, together with the limitation of assessments to the regular rate of one-fifth of 1 percent per year, resulted in a rapidly mounting cumulative deficiency relative to losses. By the date of repeal of the law, it bad reached more than V million. If the warrants of the fund and other securities deposited by participating banks as surety for peyment of future assessmente that were forfeited to the fund or never repaid are treated as additional assessments, the final deficiency of the assessments relative to losses vas samevbat less than 46 million. In Table 14 the rate of assessment levied each year, and the amount collected per $100 of deposits in the participating banks, are compared with the rate that would have been neaessary to meet the eventual losses froa the failures in that year. During the first five years of the system the collections, becauee of the initial levy and the special assessments, averaged nearly nine-tenths of 1 percent of deposits in the participating banks. Had this average been zaintained until the date of re- peal of the law, it would have been sufficient to meet all the losses in the failed banks, including the abnoreeelly large losses of the early https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 14. COMPARISON OF ANNUAL RATES OF ALiSi2Mi2T dITh RATEZ nLquram TO MEET DEPOSIT OBLIGATIONS IN FAILED BANKS, OKLAHOMA DePOSITORS' GUARANTY FUND, BY YEARS, 190-1923 Year Per $100 of deposits Assesament in participating rate per banks at beginniag of year $100 of Losses on Assessdeposits manta deposits colin failed lected banks 3/ Per $100 of total eapital accounts in participating banks at middle of year Asseesments Lossee on gollected deposits in banks failed .4/ 1908-1923 averae $0.44 tto.41 00.86 $322 's;5.24 1908 1909 1.00 .95 1.06 1.04 1.95 2.47 248 5.22 1910 1911 .20 1.20 1912 1913 1914 .95 .140 .40 .52 .98 1.16 .44 .32 .44 .88 .34 1.15 .35 2.04 4.84 4.26 1.80 1.36 1.72 4.34 1.25 4.71 1.46 1.48 .82 .ao 1915 .40 .36 .19 1916 1917 1918 1919 .20 .20 .20 .20 .19 .16 .15 .19 .01 en. .03 .07 1.10 1.45 1.42 1920 .20 .20 .20 .20 .16 .53 1.50 1921 1922 1923 Additional ) .09) .11 2.07 5/ 1.76 3.77 2.44W .75) .71 .02 .24 .51 5.04 13.97 33.54 15.67 4/ 13.31 5/ Taisii7.37-iaa g Computed from assessment receipts deposits in participating (i.e., State) banke in Table 4. i Computed from deposits paid from the fund, adjusted for recoveries, plus deposits unpaid (loss to depositors) from Table 13 and deposits in perticipatir., banks (Table 4). 1/ Total capital accounts used in computing these ratios are from the revised Federal Reserve tabulations. 4/ Annual rates (i.e., four times the rate for failures occurring prior to March 31, 923). R lative to deposits and capital accounts as of December 31, 1922, and June 30, 1923, respectively. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 1920's. Had the gUaranty law remained in its original form or as amended in 1909, under ehich the special assessments were limited to 2 percent per year, but without tne assessment amendments of 1913, it would have survived the impact of the depression of 1)21, though borrowing in 1922 and 1923 would have been necessary. /f, in addition, the quality of bank supervision and the efficiency of handling the affairs of closed banks had not deteriorated after 1918, it is probable that the fund would not have found borrowing necessary except to pay depositors promptly while proceeding with the liquidation of the affairs of closed banks. The assessments paid by the banks, including their loses on warrants and other deposited securities, averaged about 2i percent per year on their capital investment, as measured by their reported total capital account. Had all the losses to depositors been met by aseees- ments, the average would have been a little over 5 percent per year on their total capital accounts. eettlement of the affairs of the guaranty fund. Settlement of the affairs of the guaranty fund, after repeal of the law, was delayed because of pending suits and other problems pertaining to the completion of liqpidation of the affairs of the various closed banks. In 1929 litigation was instituted to determine the method of disposition of the remaining assets of the fund, including such collections as had by that time been made from assets of failed banks whose depositors had been paid by the fund. The Bank Commissioner recommended treatment of the remaining assets of the guaranty fund as a trust rued to be distributed 2E2 rata among holders of the outstanding warranty. and unpaid depositors of banks that had failed from the time of cessation of payments from the fund to the date of repeal of the law. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 -66The District Court in charge of the litigation set a date by which all claims should be submitted. The claimants who filed claims fell into four classes: (1) holders of the numerically first outstanding and unpaid warrants of the fund, who cIaiwed that under the law they had priority; (2) holders of other outstanding warrants, who contended that because of the insolvency of the fund and rellal of the law the remaining assets Should be applied rata an all warrants outstandlnij (3) banks seeking recovery of securities, other than warrants of the fund, pledged with the Banking Board to secure payment of future assessments; and (4) holders of other claims, mostly for unpaid deposits in certain banks that failed between the date of cessation of payments from the fund and the date of repeal, who claimed they should be paid. an rata with the -warrant holders. The District Court appointed a referee to review the claims presented, who cobducted numerous hearings over a period of nearly two years. In 1932 the final report of the referee was made and the District Court entered its judgeent: (1) that securities, other than warrants, remaining with the Banking Board and pledged to secure payment of future aseesameets should be returned to the respective banks, provided that those with unpaid assessmeats prior to repeal of the law were first required to pay the same; and (2) that the approved claims, including all unpaid warrants and other allowed claims, were to Share ET rata in the distribution of the assets of the fund. Under this jueseent pledged securities) valued at about 4110,000, were returned to 65 banks; and it was estimated that a dividend of about 15 percent would be ee.lei on the allowed claims, Which included 41,197,000 of unpaid warrants and 4375,000 other clotting. The small amount of claims other than warrants indicates that only a fee of the depositors of the banks that failed subsequent to cessation of peements from the fund preseeted their claims. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -67- sight beekc, holding some of the earliest-issued outstanding warrants, did not accept the Judgment of the District Court, and appealed to the State Supreme Court, holding that those warrants, with interest, should have priority over other claims. The remaining warrant holders accepted the peg:welt of the District Court. Consequently, a sufficient portion of the remaining assets to meet the claims of the appealing banks 4M4 held pending the decision of the State alpreMe Court, and the rema-tuder of such assets was used for all:2 rata dividend of 7 percent on the rest of the approved claims. This was disbursed in February 1933. In September 1934, the State Supreme Court held that the decision of the District Court had been in error, and ordered the reenant of the fund paid the holders of the earliest-issued warrants who bad appealed. banks received about 4a30,000 on those claims, c The eight which about one-half was the principal of the warrants and about one-half the accumulated interest. APPRAISAL OF TILL OKLAHOW DZPOGIT GUARANTY SYSTIN The burden of assessments. To bankers in Oklahoma the assess- ments levied during the first few years of the Depositors' Guaranty Fund appeared to be heavier than could be borne by the banks. They pointed to the fact that the assessments amounted to ehat they deemed an wctramely high percentage of their capital and surplus, averaging during the first six years of the fund approximately 3 percent per year ef the total capital and eurplus of the banks, mud thus presumably absorbing a very large proportion of the profits available for dividends to stockholders. if Security Bank and Trust 'Co., of Nivea, Oklahoma, et al., v. Barnett, 36 Fag. 874: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis no. 24551, Supreme Court of Oklahoma, Sept. U7134, -65Whether the ausesements did in fact absorb a large proportion of profits which would otherwise have been available for dividende is unknown. No figures of profits or dividends of iAate banks in Oklahoma during the period are available. Nor is informatien available regarding the extent to which the limitation on the rate of interest paid on deposits, teposed by the deposit guaranty law, reduced the expenses of operation of the banks. The problem of making adequate profits is not so much a problem of the magnitude of expenditures which have to be borne by all banks as a part of their cost of business, as it is of the =argin between the charges which they can make for their services end the aggregate expenses which they must incur. Since the rate of interest currently charged on loans by the banks in Oklahorn was very high, judged by average rates in eastern money centers or by average rates for the United States as a whole, and the rate of interest paid by the banks on deposits was also comparatively high, and since the latter rates are determined by competition among the banks themselves, it ehould have been possible for the banks participating deposit guaranty to have maintaieed their profit position by reducing the rate of interest paid to depositors. However, the presence of another group of banks in the State, operating under national rather than under State law, provided a competitive situation which made it .1ifficult for State banks as a group to make these adjustments. For two years prior to 1913, when the law was amended in such a way that adequate assessments could no longer be levied, there had been a substantial tendency for State banks to convert to national banks. The proportion of the total number of banks operating under State law and therefore participating in the deposit guaranty system had declined from https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 75 percent to 67 percent, and the proportion of aggregate -69leposits in the participating banks from 51 percent to 37 percent of all hoax& in the State. There la good reason to believe that the guaranty eystem could have bean successful had it embraced all banks operating in the State, and had the originni aezesszeat provisions, or those of 1909, been retained. If all nee'ee in the State had been covered, without affecting the quality of bank supervision or other factors determining the number of failures, the necessary assessment rate for the entire 15-year period would have averaged less than four-tenths of 1 percent per year. HIgh failure rate. The high rate of assessment Which would have been necessary to have prevented insolvency of the Oklahoma depositors' guaranty fund was much higher than the rate necessary to have operated a similar fund on a national scale during the same period of time because of the relatively high frevency rate of bank failures in the State. This abnormally high failure rate, as has been noted above, was due in substantial part to deliberate bank mismanagement - sheer dishonesty, participation in unduly speculative enterprises, and overextension of loans to enterprises with which bank officials or favored customers were connected. It Should also be noted that the abnormally high failure record of the larger banks in the system was an important influence in the rate of assessment which would have been necessary to have met the burden falling upon the guaranty fund. Approximately one-fourth of the total loss in failed banks during the 15-year period wac incurred in four hanks in the larger size groups. The failure of large banks were also responsible for the periods of crisis in the operation of the guaranty fund. The https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -70Coludbia Bank and Trust Company, of Oklahoma City, which failed In Leptember lf)091 when the guaranty law had been in operation les& than two years, had become the largest beak in the swat= after a mushroom growth which increeeed its assets and liabilities by sevenfold. Also, it was primarily the failure of the Bank of Commerce, Okmulgee, the second largest bank in the system, at the beginning of liovember Which increased the out 1921, obligations of the guaranty fund so much that guaranty fund warrants could no longer be sold and the fund beeeme inoperative. Inadequate supervision. The high bank failure rate among participants of the Oklahoma deposit guaranty syetea could probably have been considerably reduced had there been a continuity of reasonably effective supervision. The powers of the Bank Commissioner, Which have been outlined above, appear sufficient, had they been adequately used, to have checked many of the malpractices of Oklahoma banks. The two ereadinations required to be made each year, if thoroughly conducted, would have disclosed, long before failure, the conditions described in Robb's account of the affairs of the Chief banks which failed. Use of the legal power of the Commissioner to close banks for violation of the banking law by its officers, and more vigorous use of the power to order the removal from office of bank officials found to be dishonest, reckless or incompetent, would have prevented much of the dissipation of bank assets. During the early years of the eystea, ac shown by Robb's careful study, examinations and supervision were inadequate. Later, after several years of more competent supervision under J. D. Lankford, the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -71.- Bank Commissioner's office was not only inefficient but also corrupt. 'Iowever, the severity of the losses to the guaranty fund in that period should not be attributed solely, or even prinarlly, to the laxity of bank supervision and the corruption of the Commissioner's office. 4ith the best of supervision, the failures resulting from the collapse of values of the 1921 depression would have been severe. Nevertheless, one conclusion of vital importance to the success of other systemc of deposit guaranty or insurance can be drawn with certainty. That is, that dishonesty, favoritism to special interests, and speculative setivitiez on tha part of the larcest banks in th,c system will lead to disaster, and that the supervisory authorities must be alert and vigorous in watching the policies of the banks in which ths risk is concentrated. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis