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Federal Reserve Bank of St. Louis

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Federal Reserve Bank of St. Louis

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Federal Reserve Bank of St. Louis

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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


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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


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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,


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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).


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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


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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
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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.
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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.


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-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

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-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.


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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.

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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.


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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.
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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.


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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


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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./


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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.


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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.


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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.


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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.


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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


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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.


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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


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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.


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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.-_


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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.


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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).

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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.


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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.


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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


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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.


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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.


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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.


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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.


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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.


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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.

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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.


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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.


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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
--"--(--._


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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


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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.


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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


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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.


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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.


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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.


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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


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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.


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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.


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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.


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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.


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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.


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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


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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.


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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.

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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.

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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.


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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.

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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.


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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


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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.


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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.


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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

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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.


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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


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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


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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.


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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.


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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.

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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:
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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

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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


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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


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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.


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Federal Reserve Bank of St. Louis