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k eJi https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Dee0514:- .4)04.4&-Z-7 31A, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Clark Warburton Federal Deposit Insurance Corporation • DaWIT =MAWS /N ALUMNA Preparerd by Clark 4arburtom, Chief Banking and Business Section Beselirh nna Statistics Federal Deposit Insurance Corporation Division f Resctarch and Statistics Federal Deponit Insurance Corporation JUly 1358 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis D20IT • nramuics isimA6KA TABLZ OF CONWITS . w Origin and constitutionality Of the deposit guaranty..4 Background of the"ilsmitierlegislation Constitutionality of the deponit guaranty lav Decision of the United states Circuit Court Decision of the United States Supreme Court 1 1 2 a 4 Character of the aarsnty legislation 4 ba of Admission 4 Deposits tasared Amassment. 9 Administration and custody of the fund 10 indebtedness of the guaranty fund 11 Method of paying depositors and or liquidating failed be 13 Bankers consarmatiLaa fund 15 Appease& of administration Supervision and regulation of paranteed banks • Superasory authority Samervtaurysomers 5uPervisor7 04Pitriene4 Statutory liMitationn on bank operations Closincof the guaranty rund Number, dnvealtal and failures ofparticipating banks Number of participating banks Deposits of participabing and nonparticipating banks Concentration of banks iepoaita Failures of participating banks Failures by size of bank Comparison of faiAures vith those in other states 16 16 17 18 25 25 4. 1 35 37 37 40 Causes of bank failuroa 44 46 Procedmres in handling railed banks 51 57 5T 59 Financial history of the guaranty fund Sources and adequany of information IncomT and obligations of the guaranty runa Compariboo of Wstaanenta and losses Bankers eomservation fund Administrativo coat of the depositors' guaranty fund Settlement of the affairs oi the guaranty rund 67 74 76 76 Anpraisal of the Nebraska depositors' guaranty fund 79 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis D203IT INMAN= IN N4BRAJKA • TABL;L OF CONTaTS Origin and constitutionality of thet..E.aarant.y Isv Daikground of the guaranty 1egis1stion — Constitutionality of the deposit guaranty law Decision of the United 8tates Circuit Court Decision of the United States t,uprume Court 1 2 a 4 Character of the psxanty leaislation k.4 oTh ion Admiss 4 Deposits insured 7 Assessments 9 Administration and custody of the fund 10 Indebtedness of the cuarnuty fund 11 Method of paying depositors and of liquidating failed banks 15 Bankers conservation fund 15 Expense& of administration • of gunrantsed betas Supervision and superAsory thority suPerfisair Pamirs Supery sory upezientc Statutory limitations on bank operations 16 16 17 18 25 Ciosipuff the Aparanty rurtl 25 NUmberj dsposita, and failures of participating banks Number of participating banki Deposits of participating and nonparticipating banks Concentration of banks deposits Fai)ures of participial"' banks Failures by des of bank Comparison of falAures vith twos in other Antes Causes of bank faituros Procedures in handling railed bans 35 35 35 37 37 40 44 46 $1 51 57 Financial hiutom or the SMOrantlY rund Sources and aduacy 4 information Incoma and obligations of the guaranty fund Ccaparibon of assessments and losses Bankers semswervintian fund Administrative cost of the depositors, guaranty fund Settlement of the affairs ol° the guaranty rund 61 14 76 76 Appraisal of the Kebraska depositors' guarentt fund 79 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LIST OF TABLAS • Table Supervisory dovtrs of btate banking board, and of department or trade and commerce, in Nebraska, 1911•1929 2. Statutory limitations on bank operations in Nebraska, 1911-1129 3. Member of operating banks in Nebraska participating and not participating in tho deposit guaranty aysten, 1912-1930, by pars 36 Deposits in operating banks in Nebraska participating and not participating in the deposit eparamty system, 1912-1930, by years 38 Nuebmrand deposits at state banks in Nebraska, October 31, 1914, and Ana 30, 1927 39 NUmber of state banks in Nebraska WA:wed because of financial difficulties, Ally 1, 1911, to Marsh 18,1930, by years 41 Deposits of state banks in Nebraska c1os4M because of financial difficulties, July 1, 1)11, to ?rah 18, 1930, by years h2 Size distribution of failed banks in Nebraska entailing obLigations on the guaranty lend annexed with average sise distribution of operating banks 43 Annual book fall:Mrs rates In Nebraska, 1912-1929, compared with rates in contiguous states and in the United States 145 10. Causes of bank failure* in Nebraska, 1921-1930, reported on schedules prepared for the federal reserve commivtee on branch, group and chain bankins 50 4. 5. 6. 7. 8. • 9. U. Banks closed in Nebraska during the life of the gunranty fund commission 53 12. Receipts, expenditure*, and deficit of the Nebraska depositors' guaranty fund 60 13. Rat's and amount or asessaments, Nebra&a depositors' guaranty fund 62 14. Receipts, expenditures, and balance, Nebraska depositors' guaranty fund, by years 64 15. Total deposits, insured deposits and obligations to depositors of failed banks, Nebraska depositors' guaranty fund, by years 66 16. Percentage of deposits insured, and percentage of insured deposits • paid by guaranty fund and recovered from liquidation of assets, bank failures under the Nebraska depositors" guaranty fund, by years https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 68 • LIX TABLL:; cc:attuned • Tabl.:: 17. Annual assessnents 1evi4, liability for deposits in failed bunAs, and cumulative deficiency, Nebraska depositors' guaranty fund 18. Comparison of c-rurl rates of assossmunts lovied with rates reVirod to malt deposit obligations in failed banks, Nebraska depositors' guaranty fund, hy years, 1911-1930 Balancii, bankers conservation fund, Nebraska, midyear and year-end iatos, 1):23-1929 . 20. Rezci.?t dely3a1torvi Jrtí £w, 1,14/ 1, 1)23, tc, t. 31, 192) 60 7'‘ 75 77 • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • DEYOSIT INSURANCE IN NABRASKA • The Nebraska law for guaranty of bank deposits was enacted April 25, 1909. At that time the depoeit insurance eystem of Oklahoma was in operaipioe and the Keeleas law had been enacted. The effective date of the dubraoka law was puetpoued for nearly two years pending litigation regarding itu conetitutioualitee were tu beein QU JU1y Am aweudlag eet in 1911 provided that assessments thet year. The insurance became effective when. the allot eeeeeeeeet Led beau paid. The eueeteuty iaw in eebrauka coutinued in operation for 19 years. By 193u the liabilitiee oi the emaranty euud far exceeded the amounts which were available to the the guaranty to Altmaa 144(1; and on March lb of that year applicability of ai.L.ure at a redueed rate for ten yeare. 6 repealed, with assessments to be continued dowever, under a decision oi the State Suprewe court reudered in le32 all assessments linAnr this act and those under the old at aubseepeut to kAati were declared, because of caaeged conditions, to have becume confiscatory and hence unconstitutional. In the next year the entire deposit inaa.e law was repealed/ and final settlement of the affairs of the fund Wild eeepleted in 144. ORIGIN AND COUSTITUTIONALITY OF TUE DEPOSIT GUARANTY LAW Background of the_glInty legislation. State banks in Nebraska had been subject to supervision, with r-gular emanations, for over twenty years prior to the adoption of deposit guaranty. In the 10901s, poor crops and the depressed economic conditions of the nation resulted in numerous An account of the origin of deposit guaranty legislation Le Nebraska is given by 1. Clark Dickenson, in Bank Deposit Guaranty in Nebraska, Bulletin NO. 6, Nebraska Legislative Reference Bureau (1)14). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2bank failures and a contraction, within a period of four years, by about 110 one-half in the total deposits of the nnconporated bunks in the State. In 1893, nilliam jemmIngs Bryan, representative in the Federal Congress from Nebraska, intrnduced a bill proposing deposit innurance for national banks; aud in 1897 and again in 1899 bills were introdueen in tne Nebras ka legislature to nstablieh a deposit insurance system for State banns. such bille were alao introduced in the lngislatures of 3.905 and 3.901 with the apprnval of the Banking and Currency Cummittee, but fallnd on paeaaag. In 1908, both the Dunocratic national convention, which mat in Jnly, and the Nntnanks. Democratic State convention, which met in Sept:caber, adopted planks Zavoriag deposit guaranty. . laxly in January 1909, the new Governor recommended deposit guarantn In inn lnsialature; and n bill eabonying his suggestions and approved by William Jennings Bryan was introduced in 410 March and enacted in the following month. Enactunat of the law, it may be noted, was not tne cnneequence of another wave of bank failures. In rant, luring the nix years juat prinx to 1909, there han been only three failur es (Jr State bank", one eaeh in 1903, 1904, and 1901. Constitutionality of thn - dsposit gparanty law. The deposit guaranty attacked immediately after its enactment in 1909 with the claim that it was unconstitutional. The basis for claiminn that deposit guaranty nas unconstitutional was essentially the swan as In Oklabnma and in Kansas . Decision of the United States Circuit Court. A few days bennna the Nebraska deposit guaranty law was to go into effect a temper ary injunction g For summaries ofrthe arguments that the deposit guaranty laws of Olonnnnn and Kansas were unconstitutioaal, the reports Deinnit Ouaranty In Oklahoma and Derosit Guaranty in Kansas. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis II! was granted by r.embere of the Circuit Court of the United States for the District of Nebraska restraining the State Banking Board from putting the law into operation. Shortly afterward the court declared the law to be unconstitutional and made the injunction permanent. This decision was based on the contention that the ley apliropriated the assets of one bank to meet the obligetiono of another bank, reaulting in taking the property of one person without compemeation to pay the debts of another, and thus was contrary to the Fourteenth Amendment to the Constitution of the United States and article 1 of the Constitution of Nebraeks. Decision of the United States Supreme Court. The decision of the Circuit Court mad* the deposit gmmranty law in Nebraska ineffective pending appeal to the United States Owego Court. In Oklahoma and Mamas, Uhere deposit guaranty laws had also been challenged, the constitutionality of the legislation had been upheld, respectively, by the Supreme Court of Oklahoma • and the United States Circuit Court of the District of Kansas; and the :Laws were therefore placed in operation pending the results of appeal to the United States Supreme Court. Arguments regarding the constitutionality of the deposit guaranty laws in the three States were heard by the United States Supreme Court at its fall term in 1909. On January 3, 1911, the United States Supreme Court rendered a unanimous decision upholding the constitntiunality of the Oklehoma law, and ---;71Iiit Stile bank 172 F. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of Holstein, Neb. v. Shallenb-rger (1909), -4- • :wide. the same decision applicable to the Kansas and Nelezsaka laws. CEARACTIN OF THE GUARANTY LEGISLATION Admission at banks. Particieation in the deposit operanty plan in Nebraska was muds compulsory for all State banks. No special examination was reauired for admission te the guaranty plan. At the time the law went into effect approaimately 650 banks were operating under State law and became participants in the eystam. In 1919, an amemdment provided that new banks ::ould operate for two years before being required to participate. Teo years later this provision was removed. In 1921 provision was made for a separate fund, to be known as the "Co-operative Bank Protective Fund," for co-operative banks. Novever, no mention is made of such banks nor of the Co-operative Bank Protective FUnd 411 in reports of the ,tate banking departeent or reports of investications of the depositors' guaranty fund. Duosits ipsered. The guaranty protected all deposits (modified in 1)25 to deposits not otherwise secured), including claims of holders of exchange. Pepmem4 of interest on a deposit, directly or Indirectly, at ft rate higher them 5 percent per year, reduced in 1926 to 4 percent, was prohibited; and permect of q higher rate was to be taken as evidence that the traneaction vas a loan and not protected by the guaranty. Under an Lendment in 1917 any evidence of indebtedness issued to a steckholder, officer or employee representing money obtained for the benefit of the 410 -TrliWatate Bank v. Haskell (1911), 219 U.C. 112; sad .)baIleuberier v. First State Bank of Holstein (1911), 31 s. Ct. 109, 219 U.3. 114, 55 L. id. 117. The decision cf the United States swims Court in the Oklahoma case is described inners detail in the report DeNnittt Guaranty la Olgebees, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 410 bank was to be construed as a loan to the bank and not protected by the guaranty. In the original law no special provision was made regarding public funds, but an ar4endment of 1911 provided that no security other than the peranty WS& necessary for such funds, thus superseding the previous requirement that depository banks furnish bonds covering deposits of public finds. In 1923 an amendnent provided that receipt of deposits upon any collateral agreement or condition other than an agreement Per rate of interest and lengte of time to maturity was prohibited, and that aey now deposited under such an agreement was excluded from guaranty: this was repealed two years later. In connectiou with the payment of deposits of failed teaks* nmmeroue eases arose of interpretation of the law regarding insurance coverage. The lines of 410 rcation resulting from these decisions are indicated by the cases referred to uere. Accrued interest on a certificate of deposit to date of payment, or date of maturity if paid subsequently, was protected 1/ along with the principal; Money paid to a bank for purahase of a Federal Goverumwxt °mad, with the bond not delivered or the money diverted to the use of the bank, did not eonstitute a deposit within the meaning of thc guaranty act. A credit to a caecking account or a certificate of deposit issued in exchange for nesotiable paper, such as a promissory note or Government bond, was a valid deposit protected by the guaranty, because such negotiable paper ij 111 Neb. 300; 113 Neb. 679. 4/ 110 Neb. 6; • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis State v. imbraska State Bank of Million (1923), 196 N.W. 679, State V. Asrmerse State Bank of Culbertson (1925), 204 N.W. 795, In re Cronk, State v. Farmers Bank of Page (1923), 194 N.W. 865, State v. Atlas Bank of Neli$h (1926), 209 N.W. 334, 114 Neb. 650. 11 -6- • was the equivalent of money. But a certificate of deposit issued for paper that had no real value, euch as a third mortgage on real estate with prior liens eqpialing the value of the property, or in circumstancee ineicatiug an attempt to defraud the bank, MO not protected. A correspondent bank, Which in the ordinary course of business had honored drafts of a bank that failed in excess of it balauce, was protected on the overdraft by yubrogation to the rights of the original holder of exchange. In various causes, certificates of deposit were found to represent funds procured for the benefit of the bank, or in the interest of the owners or stockholders, and thus to represent loans rather than deposits protected 2.41 by the guaranty. e certificate of deposit issued at the maximum permissible rate of interest, but with a bonus of 1 portent, or with interest for a longer period than the duration of deposit, was held to be a loan and excluded • from guaranty. A cashier's check, payable at a future date, issued in pigment of a loan, and including interest in excess of be excluded on the same ground. 5 percent* was also held to However, payment of a bonus to a depositor by an officer of a bank, even though Charged to the bank but this fact unknown to the depositor, did not remove the protection of the guaranty. Similarly, if State v. American State Bank, Lincoln (1924), 199 N.W. 21, 112 182; Neb. aate v. American State Bank of Aurora (1924), 199 N.W. 501* 112 Neb. 272; State v. Neveastle State Bank (1926), 207 N.W. 683, 114 Neb. 389. 1 State ve Werre State Bank (1925), 205 N.W. 297, 113 Neb. 772. / Nebrilha Matiaaal Bank of Hastings V. Bruning (1926), 209 N.W. We Neb. 719. 510, 14/ E.g., State v. Marmara State Bank of Ansi& (1924)L 199 &W. 812, 112 Neb. 380; State v. Orass Otate Bank of Gross, 202 N.J. 460; 113 Neb. 119; State v. Faraara State Bask of Bayard, 203 N.W. 572, 113 MO. 348. 14/ Is v. Farmers' State Bank of Decatur (1917), 165 S.W. 145, 101 Neb. 8; State v. Security State Bank of Eddyville (1927), 216 N.4. 169* 116 Neb. 165. 6/ State V. Beakias House of A. Castetter, Blair (1923), 194 N.W. 564. 110 ab. 784, State v.. Selling (1924)* 199 N.I. 839, 112 Neb. 474; State v. *Yee County Bank of Sholes (1924), 201 N.W. 907, 112 Neb. 792. 1 Si! https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -1. a depoelt eagle with a collateral agreement -with a third party, unk)oewn to the depositor, was protected by the guaraety fund, eut a deposit with a collateral agxeement for the benefit of thu depositor was not so pretected. Also, elearanee of checks at par by a correspondent bank agaleet an aceount on which it paid interest at the maximum legal rate did not constitute additional 2/ interest nor deprive the deposit of proteetion by the guaranty fund. Where a county treasurer had deposited funds in excese of the amount / permitted in a single bank (50 percent of the paid-up capital of the basil, the court held that the entire deposit was protected by the guaraaty fund. In another case the court held that a surety coupany which had paid its liability on a bend covering deposits of a ecunty treaeurer in excess of the limitation, tdiinganassignment of the rights and remedies of the treasurer, It/ was entitled te payment out of the guaranty fund. Unpaid taxes of a failed bank that were not eettled by the receiver were ordered paid froa the guaranty fund, inasmuch as the tax lien had priority over depositors' claima. Assesseents. Assessments for wasting the cost of deposit wirenty were levied upon the banks on the basis of total average daily deposits exclusive of eublie money otherwise secured. Seml.annuel reports of such rr State 116 Neb. 852; State 118 Neb. 743. State 118 Neb. 6 3/ State 112 Neb. 156. This of the court. 2.41 State State 740 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/ v. Citismi )State Bank of Chadron (1928), 219 ma. 186, v. Farmers,State Bank, Erickson (1929), 226 N.W. 332, Y. Nebraska State Bank of Harvard (1929), 225 N.w. 776, v. Peoples State Bank of Anselmo (1924), 196 N.W. 1016, was a reversal, upon rehearing, of the original opInion v. State lea of Gering (1925), 206 N.i. 758, 114 Neb. 213. v. American State Bank of Lincoln, 209 N.W. 621, 114 Neb. -8- • or Juno and the first deposits' were reqmired on the or Decealxr each year, with aSeessments lovied on JUly 1 and January 1. The first four seal/ annual assessments war at the rate of one-fourth of 1 percent. The succeeding regular $t-'3 assessments were at the rate of one-twentieth of 1 ptrcant. Mew beaks ware to pay 4 ;exigent of their capital stock into a credit fond, together with a further assessment to a "just and ecyltable sum", arrauged so that the first two scmi-annual assessments, plus -Wit credit rued, would asiount to not lean than 1 percent r:f averss daily deposits. The 1.911 amenlata provided that the regular somi-annual assesammts of one-twentieth of 1 parcant o thc avarngp daily deposits Should cease When the fund readhed 1 1/2 percent or such doposits, to be renewed ehea the fund became depleted below 1 percent. Special asaessm.;nts were authorized if the fund should be r-Auced below 1 percent of •Ltal average daily deposits (one-half of 1 percent during the firat year of operation of the fund). The special assessments were not to cgmceed 1 percent of average daily depacits in any one yr. In 1923 an amendmeat provided that special aescsaients sabse7,uent to that year Should not emceed one-half of 1 percent of average daily deposits in any one year. No provision VS4 em4e for the depoeit of bonds or other security as a gu!'ranty for the payment of assessments. A/ Under the smdMia law of these were levied in July 1911, January 1913. and 1912, June 2/ Fr= April 4, 1919, to rebruary 25, 1921, a different provision was in force. This pequired a new bank, within two years after it had opened for business, On pay 1 percent of its average claily deposits, as 'Shown by its last two semi-annnal statements. assery • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis an -9edoielatratiot and cuetedy of the rued. The administration of • the guaranty fund was placed in the hands of a State Banking Board, composed of the Governor as chairman, the euditer of Public Aceounes, and the Attorney General. The State Banking Beard was also responsible for the examination t.t banks and other aspects of bank supervision. In 1919 a Department of Trade and CiAllatr2e was organized, 4th a Secretary appeinted by the Governor. eleinictratien of the banking laws wee; placed in that department, and handled et; a Bureau of Banking under the Secretary of the department. Dieuatiefaction with the administration of the saaranty fund resulted in the creatioe in 1923 of a Guarantee Fund Commission, composed of the Secretary of the Department el' Trade and Commerce as chairman, and seven other ameba= appointed by the Governor from among panels of three persons each, recommended by representatives of the banks in zeven regions • ef the State. each person neminated on the panels wae required to have been an executive officer of a State bank for five years. Another change in the administration of the fund was made in 192) when the Waranteu Fund Cemmission was abolished, efleivistration cf the fund reverted to the Departnent of Trade end Commerce, and the pouitien of Bank Commissioner was created. No part ef the assessments was collected at the time they were levied. The assessments were kept in the banks assessed and eredited to the account of the Secretary of the State Berkiug Board (in 1919, the Departeent of Trade and Commerce; and in 1923, the Guarantee Fund Cemmission) in the form of deposits subject to cell by draft. The law also provided that funs received by the State Banking Board (or Department of Trade and • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10Commerce or Guarantee Fund Commission) from the liqpidation of banks which had failed and the deposit liabilities of which had been paid by the guaranty fund should be deposited in solvent banks in proportion to the guaranty fund assessments levied on those banks. Banks going into voluntary liquidation or changing to a national tank charter were reanired to pay to the Secretary of the State Banking Board any aassauents Which had been leviad uaon them but had not been called for by the Board. These funds were to be deposited in any bank designated by the Secretary of the State Banking Board. In 1919 such funds were ordered held in a special reserve of the guaranty fund which could not be used until the fund itself was depleted but were to be used before a special assessment war levied; an!! the State Treasurer was authorized to invoet the special reeerve in certain types of bonds, the 411 interest being added to the special reserve. Twe years later an ameadment provided that the apecial reserve ehculd be drawn against alona with calls upon the operating banks for payments from their parts of the guaranty fund, with any balance remaining after three years from data of surrender of authority to transact a banking business to be refunded to the stockhold ers of the bank or their representatives. IndalAtdnees of tht guaranty fund. The original law contained no prevision against the contingency that the regular and special aseessments authorized by the law might be inadeauate t ay all of the depesitc in closed banks. In 1923 an ineirect method was devieed by Which funds could be borrowed. The receiver of a failed bank could borrow money or a "redeiver 's aartificate at a rats of interest to In fixed by the court supervising the • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -11- O receivership. In the case of a failed bauk the depositors of which had been paid fran the proceeds of a draft on the guarunty fund, the amount of the receiver's certificate couid not exceed the estimated market value of the aseete remaining in the receivership and the money thus borrowed was paid over to tho guaranty fund. In the mile of a failed bank the depositors of which bad not yet oeen paid by the guaranty fund, the amount of the receiver's certificate could not uxeeed the ameunt needed (in addition to available cash) to pay the depositors. In either case the debt thus incurred was to be paid so far as possible fraa the proceeds of liquidation of the assets of the totailis and the guaranty fund was reeponsible tor the peyment of any such certificates still unpaid upon completion of liquidatieu of the Wink. All receivers' certificates were to be registered by the Secretary of the Eepartment of Trade and Commerce and were required to oe paid by the snarkInty Auld in the oreer of registratien. 4eth4J1 or wingt depositors and of ltskuidating failed banko. The State Banking Board, or Department of Trade and Commerce, was authorized to SeAt pore.4.416LOU or ay Oank fur a sufficient eengta of time to make a tlwrougn examination of its affairs, and if found inselvent, until a rscAliver was appointed. The iuselveaey of a ban e reported ny the state Banking Board to the lAturney Geoeral, who appiied to the district court of the count4 in Whien the imiult Ois located for appointment of a roceivvr or, IM the abeenee of judge or judges thereof, to any judge of the State Lure Court. The district court held jurisdiction over the receivership. The depositors La a bent placed in r(Jceiverahip were to De paid • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12- 411 promptly. The exeunt necessary to pay the depositors, in addition to available cash froei the assets of the bank, is determined by the court having jurisdiction over the receivership, collected from the guaranteed banks by the State Bankind Board, or Department of Trade and Cemmerce, and paid to the receiver of the failed bank for distribution to depositors. An amendment in 1.923 provided that holders of certificate of deposit were not to be paid until their maturity. The law provided that depositors' claims in a failed bank wire to have priority over all other claims, except taxes, and that the guaranty fund was to be subrogmted to the rights of depositors paid froa the fund. After 1923 receivers' certificates reereueating borrewiegs by the receiver underwritten by the guaranty fund, had priority over the guaranty fund with respect to payment* frail the proceeds of liqeidation of the assets of the bank. 111 Stockholders of an insolvent bank had the right, vhile a bank was in charge of an exmminer or of a receiver, to restore the bank's credit, capital, and reserves, to repay ary advances made by the guaranty fund, and to reopen the bank with the permission of the Department of Trade and Coemerce. In 1923 an amendment to the law provided that the officers, stockholdere, or owners of an insolvent bank could furnish to the Department of Trade and Commerce a bond sufficient to assure full settlement of all the liabilities of the bank within a stated time, and then proceed with the liquidation of the bank. This made it possible for the owners to reduce the cost of a receiverehip and thus to reduce the amount of assessment on account of double liability, in • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OSSQS where collection of double liability from stoek- .13holders provided sufficient funds to pay all of the liabilities of the bank. The 1923 amendments also provided alternative methods of handling closed banks, designed to permit prompt reopening and to keep as maw banks operating as possibls'. One of these alternatives was sale by the receiver of all the assets of the bank to new stockholders, with the approval of the Guarantee Fund Commission and under the direction of the court, with the receiver authorized to draw on the guaranty fund to meet any deficiency after the sale to meet claims payable from the guaranty fund. This procedure was prohibited in case the majority owners of the capital stock, Whose acts did not show criminal liability, objected and Showed the court that the bank could be made solvent within one year. In 1925, sale of assets in this manner to new stockholders was permitted without actual payment of the 411 deficiency by the guaranty fund by permitting the reorganized bank to hold receivers' certificates as bills receivable in an amount approved by the Department of Trade and Commerce. The second method for handling closed banks, adopted in 1923, was a provision that the Department of Trade and Commerce, after taking possession of a bank, could turn it over to the Guarantee Fund Commission to operate as a going concern, with the consent and assignmant of the owners of a majority of the capital stock. A °bankers conservation fund," described below, was established to make loans to banks operated bAy the Omission. A bank operated by the Guarantee Fund Commission could be closed at any time either by the Commiesion or by the Department of Trade and Commerce. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The 1923 law placed the 1iqeidation of closed beaks Which could not be reopened in any of these Awe in the hand of the Guarantee nod Comassioe. This was done by a provision that ehe Department of Trade and Ccmmerce should as the Attoruey General to app4 to the District Court for an order directing the Department to take charge of the bank and. wind Up its affairs, and that the bank should then be liquidated he a receiver appointed by the Guarantee Fund Commission. The same act provided that receiverehipm pending at the time the act became effective Should, after four months, be handled in the same wey. Supervision of the receivershie remathell wider the District Court. Ole more provision of the 1923 ameudmeuts designed to provide more efficient liquidation should be noted. At the request of the Department of Trade and Cummerce, the court with jurisdiction over the liquidatiou could • order all or part of the assets to be sold, with the Department of Trade and Commerce permitted to bid. In case the Department was the highest bidder, the aseets of the bank were turned over to the Guarantee Fund Ca:mission for liquidatiun, the proceeds thereof being used to reikburse the guaranty fund Zor the payments it made to the depositors. fhis procedure made it possible to eliminute tee maintenance of liquidating ageate for each of the various closed bank:5 until all assets were disposed of, and enabled the Guarantee ?wed COMMiGkAQU to consulidate the process of dispositiva of the assets of the various closed beaks. In 1929, wheu the Guarantee Fund Comaission was aboiianed, the District Ccurts were required to appoint the Secretary of the Depaxtmcnt • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 111 of Trade and Coeeerce as receiver for all failed banks, thus concentrating the handling of the affairs of closed banks in that Department. Bankers conservation fund. The szenOsntz in 1923 provided for a "bankers conservatien fund" for use in preventing the closing of banka and conserving the guaranty fund. Assessments for this fund were authorized at not more than one-fourth of 1 percent of average daily deposits in any year with a maxieum fund at any time of one-third of 1 percent of average daily deposits. The bankers conservation fund ems used by the Guarantee Fund Commission to make "deposit" in banks operated by tile Comeinsion. The fund remained the property of the contributing banks, to be carried on their books as an asset until repaid or charged off. When a bank °pentad by the Commission vas pieced in receivership a deposit from the bankers conservation fund had the same, priority as other deposits. Expensee of administration. no provision was made in the original deposit searanay law regarding the expense of administering the law. euch expenses were part of the cost of administering the general banking code by the State Banking Beard, and were met by appropriations from the general fund of the state. Operating banks were aasessee examination fees designed to meet the cost of bank supervision. In 1923, when the Guarantee Fund Commission was created, provision was made for an administrative fund not exceeding $15,000 in any one year, to be collected by On assessment on all State banks on the basis of average daily deposits at the time of the last semi-annual statement of the banks. This assessment for the a4m1nistrative fund wee collected through drafts drawn on the banks by the Secretary of the Department of Trade and Commerce, • and was then transmitted to the Secretary of the Guarantee Fund Commission. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • Closed banks were assessed by the State Banking Board, or Departelent of Trade and Commerce, to meet the cost of receivership, with minimum and maximum amounts per day specified by the law. SUPERVISION AND REGULATION OF GUARANTEED BANK:6 State banks in Nebraska had been operating under the supervision of a State Banking Board and a State Bank Examiner for approximately twenty years prior to enactment of the deposit guaranty law. At the time of enact- ment of the deposit guaranty law the banking code was revised. Supervisory authority. General supervision and control of banks and banking under the laws of the State was entrusted to the State Banking Board, composed of the Governor as ex officio chairman, the Auditor uf Public Accounts, and the Attorney General. • The Governor appointed a Secretary of the State Banking Board, Who must have had at least three years/ practical experience in actual banking. A suitable number of bank examiners, who were also required to have three years' experience in banking, were awointed by the Governor. No member of the examining force was permitted to examine the affairs of a bank in which he had a personal interest, or cf which he had been an officer or employee within one year of his appointment as examiner. In 1919 supervision of banks wan transferred to the Department of mrade and Commerce, with a Secretary appointed by the Governor with the advice and consent of the Senate as executive officer of the Departaent. Examination and supervision of operating banks remained directly in charge of the Secretary of the Department of Trade and Commerce until 1929, when • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • e -17the office of Bunk Coshissiener WWI crested. The Bank Ceumiesioner„ under in the whecutive direction of the Secretary of the Department, mes placed banks. dharge of ndainictratiou of tho banking laws pertaining to operating TUe thauruntee Fund Comuissiou, whiCh vas create_ in 1)23 and doellshed in 1A), hod ue duties with respect to eromthntion and euipervidion of regularly eperailug Conte. The dutios of the Guarantee Fund Coomisdion were eonfined to th4 )0,1,1(411)4 of euspended beaks, ivaluding olidration 4)f banks taken over or the Cemmission, ditibureemenht from the gnaranty fund, liquidation of eadets of failed banks pledeain receiverehip. Jupervisory yowerb. The supervisory' pemers of the State Banking Board, at the time of adoption of depoalt guarenty, related chieny to 4. aiu,aud to requests for appointment of a receiver. Tmcc Y.Aminatienn could be y...c dere reeulre‘ and additioniel , made at any tide. .--. for examinations dere specified in the lamp ran6Lng from to 4>k, eadh examination, buo not dere then two feee in a goer, payable into tile general funi of the State. Foes wvre increneed in 1919 SAd 1921. In the letter year the mine 1.44 for eseh examination vas 425, and tae sessisma 4125 plus one euut per thousand dollars of rescevces in excess of fivw aillien dollar. Ac bard: eould .peu without the uutherixation of the State BankinE Bohrd, but the bLard Wit4 ..o4elred to Lague euehautheriemtien It the bank had been urgeuieed in. the prescribed manner. Tim State Banking Beard ma. Authorised terui ani beak to rester impaired capital or reeerveas It ums DA given puwee te order rabowil of undesirable or Illegal assets, or the removal of officers, teiployees, or directors. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis O Additional powers were conferred on the supervisory authority by particularly in 1919 and 1921. latammdisoka, er All easeutive .,firicers of teas were required to be liceasedby the Department of Trade and Cooxw'rce. Such officers *nal: required to be of good :moral Character, knoun 1ntcgritY, 10001aaaa enpurienos mai responsibility, and ovehle of condeNaelge bank on sound Wain prineiples. Bank officers at the time this provision vent into street mere deemed to have a three months' license subject to revocation by the Department. In the OWAC year the Legislature and Governor approved a Urinates the promotion of public necessity, convenience, sad advmsbage a condition for the goonttag of a bank charter. Novever, thia provision vas Berg by a retereades petition and later detested by a vote of the people. The Rupervisory powers of the State Banking Board from 1911 to 411 1919, end of the Department of Trade and, Commerce from 1919 to 1929, are summarised in Table 1. Superv1.eor4 overtones. Tbe Seeretary of the Rate Banking Word Mhea the deposit guaranty Ise vent into effect, dward Reyes, had already held that office for several years, and remained until his death in 1917. ConteAporary cohuentators reaarded his administration of the office Melly end considered this to have been an iaportant factor in the mall numbr 2/ of failures during that time. Thornton Cooke, in one of his articles 4. ,. . of Nebraphs, 4922, section 7997, and. Final , .,., p. T. The Final Report of the . m ot a 377 lde licensing provision mos on by la* this is not supported by other seems of intormstiou bf Iva 1903 to 1917, inclusive, there were five State tanks placed in receivership, me eget in 1903, 1904, 1907, 1914, awl 1916. of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a . . 1 -19Table 1. SUPERVISORY POWERS OF STATE BANKING BOARD, AND OF DEPARTMENT OF TRADE AND COMMERCE, IN NEBRASKA, 1911-1929 Item Organization of banks: Opening of new banks Consolidation of banks Examinations and reports of condition: Frequency of examinations 2/ Powers 1/ Board (in 1919, Department) to issue certificate and charter upon approval of bank's organization statement and certification of paid-in capital, if satisfied that the applicants are of integrity and responsibility; and in 1921 that public necessity, convenience and advantage will be promoted. To be approved by Board, or Department. Twice a year, and any additional deemed necessary or proper by Board. In 1919, at discretion of Department. Scope of examinations A thorough examination. Reports of condition Reports of assets and liabilities at least four times a year, in 1919 on form prescribed by Department; and any special reports requested or required. • Bank management: Removal of undesirable assets or discontinuance of undesirable practices No specific provision. Impairment or deficiency of capital or reserves Board (in 19190 Department) to require impairment of capital or reserves below legal minimum to be made good within a specified time. Removal of bank officers, directors, or employees No specific provision. In 1921, executive officers to be persons of good moral character, known integrity, business experience and responsibility, and capable of conducting affairs of a bank on sound banking principles; and all executive officers to be licensed by the Department of Trade and Commerce, with existing officers to have a 3-months license subject to revocation. Department empowered to revoke license of an executive officer of a bank conducting its business in an unsafe or unauthorized manner or endangering the interests of the stockholders or depositors. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -20- 411 Table 1. a1PMVISORY POWERS OF MAU MOMS BOARD, AND OF DCPARLMMT TitAa AND COMILIBICE, a IIIIMASKA., 1911-1929 ocutinued powers or closing *banks poesession for examination Takizpossoseion Request court to apeoint receiver • Exmminer on direction of Board (in 1919, Department) sabborized to take possession of any bank, and if found insolvent, or conducting balminess in an unsafe or unauthorised manner, or endangeriag the interests of depositors, to retain possession Until appointment of receiver. Whenever froa an examination or report it appears that capital. is lapaired, bank is conducting business in an unsafe= V111111A-. thorized manner, or endangering the interests of depositors, or (in 1919) flails to make required reports or statements or to comply with all provisions of the banking law. Also, if affairs placed by beak in hands of Board (or Department). Take possession and place bank in In 1923 aesortmeot to take possession under charge of Guarantee Fund Commission any of faralliog conditions, or if officers or eiployeee lofts* to submit becks or affairs to anNIMMISMW, or an officer renames to be eamined under oath, or negloets or refuses to observe ans order of the assortment, or it is eamaidared unsafe and inexpedient for beak to oontimuu business. After taking possession, bank to be placed in charge of Omarantee Food Commission. BaLdling of closed banks: ,31 Peturn to owners Liquidation https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Upon investigmtion and finding by Board (or Department) that bank's credit and funds are in all respects restored, law has been complied with, and ray indObtedness to Guaranty Fund repaid with interest. Mises rotornod to owners, to be liquidated br mdrs? appointed by Court; assets to be sold an terms approved by Court. in 1923, Court to direct the Guarantee Fond Commission to name receiver. In 1919, Department of Trade and Commerce nay turn bank over to owners for liquidation upowareaanaliion of satisfactory bond by an ineerserated surety company, with such liquidmilaa process subject to review by Department and if not satisfactory appointment of receiver. • V 41,Fcotnotes to Table 1. wy As at the beginning of the deposit samenty veto* (i.e., as Wes lathe the law or assmiseal la 3911) with ameadments during the period of elpsrailes or 1 4wposit or as terminati the to prior system, exoept those adopted less than aye's State aMarenty cm March 18, 1930. The supervisory authority until 1919, use the of Department the 1929, until then Basking Board, referred to es the BoOrdi from executive as Secretary its with , Trade and Commerce, referred to as the Deparimeat officer. Ei In 1915, examination by Federal Reserve of State meiher banks acceptable at discretion of State peaking Board in lieu of State requirements. Zxcluding the handling of closed banks by the Guarantee Fund Ccanission after its creation in 1923. • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -22on depouit guaranty, emerented as follows, quoting first from a resident of 411 Nebraska: "In Nebraekse" writes Mr. N. B. Gurney of Frew*, a keen observer we have had a capable and vigorous administration of our elate neneing Department for something like fifteen years past. Our banks, therefore, are sound frog the standpoint of asset and also from the influence of supervision* . Asa Mr. ours', Nye of the Nebraska Banking Deportment is true. The Secreteney of the Board, Mr. Royse, has done such excellent work that the oberogies stets eAneteistrations of ten years have wisely kept him contineeeely in officc.1/ It is to be Observed that under the administratiun of the Nebraska banking department the promise to pay depositors immediately an failure seem not to have caused reckless banking. gi Subsequent to 1917, there was less continuity in the headship of the supervisory office. Five persons held the office during the 13 years, serving from two to four years each. the services of bank eeeeinere. There was also less continuity in When the State Banking Board was abolished, and the Department of Trade and Commerce established, there was a complete turnover of examiners. As in other etates with deposit insurance, the rang load was heavy. For a number of years, this Was an increasingly serious situation in Nebraska because of a large increase in the number of banks with no expansion of the examining force. In 1911 the Board had nine examiner* and this number remained unchanged until 1919, while the number of beaks Thornton Cooke, 4,Four More Years of Deposit Guaranty,"emarterly Journal or‘Conomics, XXVIII (Nov. 1913), pp. 99-100. fbid., p. 104. by the names of persons signing the biennial reports As of the department. Mame of the names of examiners in the last report of the Secretary of the $ta Banking Board (for 1918) appeers in the first report of the Department of Trade and Commerce (for 1919-1920). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -23- 411 increased by 1) percent. With two examinations a year of mot tank, each examiner vas apparently reqvired to make about 150 exmminstions a year at the beginning of depesit guaraety, and over 200 a year by the and of the decade. In 1.919 the require:me:at of two tecatainations a year vas removed, and during the succeeding years the number of examiners is increased to 14 in 1927, while the nueber of batiks reached a peak in 1920. Consequently, the number of bankd per examiner declined from over 100 to about 60. The salary of the Secretary of the State Banking Board from 1909 to 1919 vas $3,000 and that of examiners $2,000. Appropriations for the booking department for this period were about $30,000 per year, or from about $50 to about $30 per bank. With establishment of the Deportment of Trade and Commerce in 1919, the salary of the Secretsee was 52000. Saleries of examiners, which were fixed by the Governor, are not available. Members 111 of the GUarantee Fend Commission, free: 1923 to 1929, were on a per diem basis for time spent on the work of the Commission. Appropriations for the Department of Trade and Commerce increased from about *600000 in 1921 to about $95,000 in 1928: in additien from 1923 to 1920 appropriations for expenses of the Guarantee Fuzee Commiesion were $15,000 per year. In additiou to enlarged spyropriations after witablishment of the Deyortmeut of Trade and Commerce, more powerful aepervisory tools were available. The requirement, in 1921, fur the licensing of executive officers of banks was of great potential importance and helped to strengthen supervision for a time. The soemelled license law passed by the legislature of 1921, Ms dome mob to remedy the situation. Prior to that time the department had no mithority to remove a bank official. The only https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -211-- • remedy was to close the bank if it could be shown to be insolvent. 4ith this licensing law the department can, and has in maey instances, removed an executive officer of a bank Who was not properly qpelified to perform Me duties. 1/ Nevertheless, the quality of bank sepervision appears to have continued to decline. The retiring Governor of the State in 1929 stated that two weeks after he assumed office in 1925 the Secretary of Trade and Commerce eave him a list of 123 banks that were hopelessly insolvent and should have been closed long before, and an additional list of 92 banks with the report that nothing 2/ short of a miracle could save then. Shortly after repeal of the ueplicability of deposit guaranty in 1930, the Bank Commissioner comeeuted as follows: A supervision which permits banks to operate as going institutions until their accumulated losses exceed their capital stocks by hoo to 600 percent can not be defended. It at be replaced by soaething better if Nebraska is to maintain a vitas of State banks... • The banking department has been charged with suddenly Shifting from one extreme policy of slackness in its supervision, to an opposite extreme of rigid severity. This charge is not denied.... The Hank Commissioner attributed this change in the rigors of supervision to the revision of the banking laws made in April 1929, but this explanation does not appear to be adequate. The previous powers with respect to capital impair- ment, Wesel actions of bank officials (for which there were criminal penalties, fines, and imprisonment, specified in the baaking code), and revocation of licenses of executive officers, were adequate, if properly enforced, to have prevented the deterioration described by the Commissioner. 0 if C. H. Randall, Pacts and Fallacies on the Guaranty Law," address as retiring president before the 1922 convention of the Nebraska Bankers' Association, The Northwestern Banker, Vol. 27 (November 1922), p. 72. 2/ Message of the retiring Governor, Nebraska House Journal, Forty-fifth Sessiorl19'42, p. 47. 3/ Ta1k-Eir George W. Woods, Bank Commissioner, before Group I of the Nebraska tinkers' Association at Lincoln, May 18, 1930, as reported in the Commercial and Financial Chronicle, May 31, 1930. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -25Statutory limitations on bank operations. The principa.i. anatutory limitations ou awaking operations, under the baektng law at the time the insurance vat= wont into effect and during its operation up to 1929, are summarized in Table 2. Some of the statutory limitations on bank operations which have been found helpful in other States were not a part of the banking code of Nebraska during this period. :Odle loans to officers and employees were prohibited, until 1925 no provision covered loans to corporations controlled by an officer of a bank. NO maximum limit was placed on loans secured by real estate. There was no limitation on the amount of deposits relative to capital, as was the ease in same of the other States with systems of deposit insurance. In general, penalties and sanctions other than closing a bank, or prosecution of individual bank officials through the offices of district and state attorneys, were not available to the State Banking Board (or Secretary of the Department of Trade and Commerce). As in other States, the drastic procedure of closing a bank was used sparingly, and prosecution of bank officials under criminal proceedings for irregularities disclosed by bank examinations was not in practice an effective procedure. CLOSING OF THE GUARANTY FUND From the beginntng of deposit insurance in Nebraska in 1911 to the end of 1919 only two State banks failed. In 1920 there were five failures. dith the depression of 1921 and continued adverse conditions in agriculture, failures became more numerous, with 25 placed in receivership in 1921 and 22 in the following year. By the and of 1927 about 155 other insolvent banks had been taken over for operation by the Guaranty Fund Cummission or had been placed in receivership. • About the middle of the 19200s, after the maximum assessment rate had been reduced in 1923, it became necessary to make use of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -26- • Table 2. STATUTORY LIMITATIONS ON BANK OP4RATION3 IN NORASKA„ 1911-1929 Item Revonsibility of officers, directors, and stockholders: &mediation of bank Provision of Limy Directors to make at least twice each year a thorough examination of the books, records, funds and securities to be recorded in detail and copy forwarded to Secretary of State Banking Board (in 1919, Department of Trade and Commerce). Losses resulting from loans milmie in violation ,-;f lesal limitations Officer or epployee knowingly violating such limitations liable (in 1919, under his bond) for spy resulting loss. In 1923 every director participating in or knowingly assenting to such violation to be liable for damages sustained by the bank, Shareholders, or any other person. Liability of stockholders Usual double liability. Bonding of officers and 010.0101041 Board of directors may require cashier and other officers handling funds to give bond. Limitations on loans and investments: loans to be& asiminers In 1925 loan to a person connected with Bureau of Banking or an mployeel of Guarantee Fund Ccamission prohibited. Loans to officers and employees PrOhibited. In 1925, loan to a corporation of which an officer of the bank is a member . to be approved by Board of Directors. Loans to directors Must be approved by Board of Directors. Loans to stockholders Aggregate amount limited to 50 percent of paid-up capital and surplus. Maximum to single borrowers (not applicable to discount of bills of exchange or of cow.. martial paper owned by negotiator) Twenty percent of paid-up capital and surplus. WWII= secured by real estate '741nen reserve is deficient • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis No provision. New loans or discounts prohibited. -271'4)1.2. • amp= LINITP2IONS ON BANK OPERATIO13 IN NEBRASKA, 1911-192) continued Item Limitations on loses _ and investments continued: Maximum total loans and investments Secured by own capital stook Limitations on ownership of real estate sod stook** hisximum in heaciall Munn end equipment Provision of law Hight times, amended in 1913 to ten tiees and in 1919 to fifteen times, capital and surlama° Prohibited unless necessary to prevent loss on debt previously contracted. Ome-third, amineled in 1919 to one-half, of paid-up capital. Other real estate Prohibited, except acquisition for collection of debt, with maximum of 90 percent of paid-up capital (in 1919, 75 percent). Corporate stocks PrOhibited4 except to prevent loss on debt previously contracted, with amthins of 10 percent of paid-up capital. In 1915 ownership of stock in Federal Reserve bank peel. witted. Time limit on ownership of assets acquired by collection of debt Five years for real estate, six months for corporate stock. • Limitations relating to depositsi Misaimma amount of deposis No provision. Maxima rate of interest on deposits Five percent; in 1925 (effective April 1, 1926), 4 percent. Receipt of deposits when insolvent Prohibited. Required reserves: Total required In cash 1/ • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 percent of deposits for banks in places under 25,000 population; 20 percent for banks in cities over 25,000 pepulation. In 1921, on savings deposits pepehle on preseutation of passbooks, 5 percent. For bunks with 15 percent total reserve, une-third; for banks with 20 percent total reuerve, two-fifths. e,r) 41.. • Tabla 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN NEBRASKA, 1911-1929 continued Itma :: reserves ssible charac eneltmainder Nogg: itation on borroi4a4: Maxima Provision of law 1911, balances due from other solvent banks. Two-thirds of paid-up capital (modified in 1915 to full amount of paid-up MAUL and surplus) except borrowing for papas* of depositors. Additional borrowing permitted after 1923 with written consent of Secretary of Departacnt of Trade and Coerce. Power of supervising authority to require reduction No provision. Maximum value of assets pledgable as security No provision to 1923, when limited to 1 1/2 times amount of obligation except with comment of Secretary of Department of Trade sad Commerce. Limitations on mama of dividend** atrninge to be carried to surplas prior to dividend • Oas-titth of earnings until surplus reaches 20 percent of paid-up capital. When losses exceed or equal undivided profits Prohibited. When reserve impaired Prohibited. When capital impaired Prohibited. Maximum Net profits on hand less the looses and bad debts. Minilanu capital stocks il4W banks Other banks • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Graduated by population of village, town or city: 100 or leas jetpulation - $10,000 25,0001 100 to 900 pOpulation - 15,000 500 to 1,000 population - 20,000 in 1921, 1,000 to 20000 population 05,000. 2,000 to 5,000 population - 35,000 50000 to 25,000 population - 50,000 25,000 to 100,000 population - 100,000 100,000 to more population - 200,000 No reduction below above amounts, and any king reduction to tee epproved by State and Cowmarce). Board (or Department of Trade •29irtnotes to Table 2. As of the hesimmlni of the dimpeeit searasty system, el* emosimests during the p=iod of °perm:Um of the system, emospt those adopted lees thin a year prior to termination of depoitt guaranty cm March 18, 1930. 3pecial provisions tor strings banks, or for cooperative banks, are omitted. 2/ Not applicable after 1915 to batiks cogAying with reserve requirements of the Federal Reserve Act. 1/ In 1919, two-fifths of the cash reserve was permittl to be in United States Government bonds, reduced in 1925 to one-fifth. 21/ In 1923, effective until Jan. 1, 1925, in places of less than 1,000 inhabitants, if no other bank was available, $15,000. • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -30the borrowing procedure established at that time. • By 1927 difficulties were encountered in marketing the receivers' certificates, which were guaranteed by the Guarantee Fund Commission, because of the prospective insolvency of the guaranty fund, and their issue was halted. Under the changed condition of the guaranty fund, the attitude of bankers toward the system rapidly altered, and they attempted to have the law repealed or declared unconstitutional. Late in 1928 a suit was instituted to enjoin collection of the special assessment of December 15 of that year, renewing the contention that the guaranty law was unconstitutional, and asking for a review and reversal of the decision made in 1911. In April 1929 a district court acted favorably and granted an injunction prohibiting collection of the assesart. This made the law temporarily inoperative, pending an appeal to the State Supreme Court. • The decision of that Curt, rendered in December 1929, dismissed the complaint of the bankers, held the law constitutional, 1/ The bankers then appealed to the United States and dissolved the injunction.— Supreme Court which heard the appeal early in 1931. In the meantime, more banks had failed, the law had been extensively revised and the Guarantee Fund Commission abolished in April 1929, and all the banks it had been operating were placed in receivership except a few that were reorganized and reopened. At the same time another act authorized the .^7crnor to make a thorough investigation and audit of the business transactions . and activities since the beginning of 1919 of the Department of Trade and 1/ Abie State Bank v. Weaver (1929), 227 N.W. 922, 119 Neb. 153. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ejle Commerce and the Bureau of Bankiag, the Guarantee Fund Commission, and receivere of State ban4s. In the next month the Legislature had voted to repeal the deposit guaranty law, but the repeal act failed to receive the Governor's approlal. In the Spring of 1930 a epecial session of the Legislature was held to deal with the guarauty fund. A preliminary report of the banking investigation was prepared and eUhmitted by the Governor in his mesaage to the special aession. On Mareh AB, 1930, the legislature repealed the law 60 far as it re- lated to fUture failures. TO aid in paying existing claims against the fund, the seed act establiehed a Depositors' Mel settlement Ymmd eemaisting of the remaining balance of the guaranty fund and of receipts from annual 4411415,-* ments upon the books for ten years of one-fifth of 1 percent of average daily deposits. An appropriation was mado by the Legislature for the reimbursement 411 of deposits lost in the bftrikla which had been operated by the Guaraateeo Fund Commission, and a constitutional amendment vas me:ratted to the et:Kole providing for an appropriation of $8,000,000 to diseharge the obligations of the deposit guaranty fund. It vas hoped that collection of the assassmeuts or 1928 and 1929 which had been held up by the injunction, the appropriation to be authorized by constitutional atmendment, and the aasessmcnts to be levied for the Dimositors" Final Settlement Fund would be sufficient to pay all claims in full. In February 3.931 the United States aupreee Court rendered its decision on the appeal from the State Supreme Court decision of 1929 holding the conetitutionality of the guaranty fund law. in this decision, the United States Supreme Court upheld its former decision of 1911 and the 1929 decision of the Nebraska Supreme Court that the guaranty lam was constitutional. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e -32However, in the course of the opinion, the United States Supreme Court noted that the law was sustained as a police regulation, and that a police regulation, though valid when mode, may become, by reason of 'later events, arbitrary and confiscatory in operation, and that the decision upholding the constitutionality of the act would not preclude a subsequent suit for the purpose of tostinee ie the light of later actual saperience, the validity of assessments made thereunder, alleged to be unreasomable and confiscatory, and hence repuensnt to thc due process clause of the Fourteenth Amendment. The C ourt also took judicial notice of the legislation of March 1930 which had altered the situation he transferrieg the Decceber 1928 and sehsequent assessments under the former 8Maranty law to the use of a Depositors' Final Settlement Femde and by limiting future asnessaents. Considering this reduction in the extent o the obligation for future assassuente, the Court declared itself unable to sey that the modified statute was confiscatory or other then a reasonable method of liquidating the gaaranty plan. The legislation of March 1930 for settling the claims on the deposit aranty fund use not successful. The tate Supreme Court held that the appropriation for the reimbursement of deposits lost in banks which had been operated by the Guarantee Fund Commission Vas unconstitutional. The proposed constitutional ameeement authorizing an Appropriation for payment of the zeneral eblisatiuns ei the fund was rejected at the polle. Further, in the light of the opinion of the United Antes Supreme Court about the possibility 17 Ake State Bank v. Balran (1)31), 51 S. ct. 252, 282 U.S. 765, The opinion of the Court was delivered by Chief Justice Hughes. However, it is perhsps worthy of note that Willis Van deVanter, was one of the judges of the United States Circuit Court which declared the original Nebranka law unconstitutional, was a.Pestics of the United StateeS4kleeme Court at the time of this decision, having been sppoieenlafter the hearth.by that court on the constitutionality of deposit gmaranty laws in Oklahoma, Maas, and Nebraska. .2/ Weaver v. Koehn (1930), 231 N.W. 703, 120 Neb. 114. 75 L. Ed. E90. 41, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -33- 111 tit assessment under a law originally constitutional might becume unreasonable sad confiscatory under changed conditions, the bankers brought another suit contesting the validity of the assessment provisions of the March 1930 law. This suit, after a favorable decision by a district court, was appealed and lienrd by the State Supreme Court in 1932. The state Supreme Court, in its decision reedered in November of that year, held that the part of the 1930 law repealing the application of the guaranty to future failures was constitutional, but that the part of the act establishing the Depositors' Final Settlement Fund lacked the „allelic purpose necessary to support it as an exercise of the police power, and that it took the property of one perm= and gave it to another, thus depriving the one of his property without due process of law. Recognizing that this would make the asses4m,mta from December 1926 to March 1930 valid under the original act, the caurt ruled also on the contention that changed conditions made those assessments confiscatory, noting that the failure of the United States Supreme Court to find them so was because that court had been unable, in view of the new iegialation, to determine whether the assessments were confiscatory. The reasoning and opinion of the State 3upreme Court on this point is given below. The public purpose sufficient to support the constitutionality of the depositors' guaranty fund WM3 the stabilization of commerce anc the creation if "Olio confidence in the banks. It hada public It was within the reasonable exercise of the police power... Challenge the constitutionality of the assess...state banks gents levied medlar the provisions of the Depositors' Guaranty Pad Law beginaiag with the special assessment of DeceMber 1.5, 1928... for that by reason of changed conditions the regulatory act in its operations has beccrt* comfiecatc4y... It eider the feet, it is confiscatory it is violative of the Fourteenth Anseiment to the Federal Constitution. If it is confiscatory, then it cam sts'caw be sustained as a cosetituLional legielative enactment ender the police power for a public purpose. /f confiscatory, • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e the public advantage does not Justify taking of private property for What, in its purpose, is a private use. In addition to the changed condition relating to changed statutory enactments, there are facts and circumstances inherent in the conditions of the banking business in this state since December, 1928. nese facts are established by the record. It was a fact determine& in 1926 that, due to the unprecedented number of failures of state banks, the depositors' guaranty fund was faced with a deficit of millions, and that it use impossible to restore the solvency of the fund. The comparatively small regular assessments had been levied and collected. In addition, the larger and more oppressive spatial assessments have been levied regularly for years, in the vain hope of restoring the solvency of the fund. The bamke were faced eith an indefinite continuance of these regular and special aseesements, At the same time, the public purpose which this legislation undoubtedey had in the beginning was no longer served. From the condition of the fund itself, instead of a stabilizer of the state banks, it became a menace and threat, sufficient to cause a great loss of peolic confidence in the banks with subGeolpent loss of buminese and earning power... • From any viewpoint free which we consider these assessments, it is ayparent that all public purpose has been abeedoned in relation thereto and that it now amounts to taking the property of one class of citizens to pew another class in contravention of the conetitutional rights of the plaintiffs. . .4./ This decision stated in effect that the deposit guaranty plan was constitutional as long as depositors were protected. It became uneonetitutional when it bad been clearly demonstrated that this public purpose is not fulfilled. This decision was not specifically confirmed by the United States Supreme Court, but was in effect approved by that Court by declining to review the ease. Hubbell Bark v. Charles Bryan, Governor (1932), 245 N.W. 20, 124 Neb. 51 : 1 3/ Bryan v. Hubbell Bank of Hubbell (1933), 53 S. Ct. 765, 289 U.3. 753, 77 L. Zd. • https://fraser.stlouisfed.org f Federal Reserve Bank of St. Louis -35 • The action of the United States Supreme Court, announced in MAY 1933, made impossible auy collection by the guaranty fund of the diaputed assessments. In the same month the Legislature of Nebraska repealed all remaining portions of the deposit guaranty law. The Department of Trade and Commerce then proceeded to wind up the affairs of the fund. Final payments to depositors from the small remaining balance in the fund were made in July 1934. NUMB, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS NuMber of participating banks. The number of State banks in Nebraska, all of which participated in the deposit guaranty system, and thnumber of national banks in the State, which did not participate, are given in Table 3 for each year of operation of the deposit guaranty fund. At the time the guaranty law went into effect, about 73 percent „. the banks operating in the 6tate were operating under State law and therefore 4ecame participants in the guaranty system. During the next eight years, thie proportion steadily increased, due primarily to the conversion of national banks to State banks, and reached 64 percent in 1919. This percentage remained stable for the next eight years. During the rmaieing two years of the guaranty system, the proportion operating under State law declined, falling to 80 percent of the total number of operating banks at the end of 1929. Dsposits of participatino and noverticipating banks. The proportion of total deposits in all operating banks held bj the State banks was much smaller, throughout the period of deposit guaranty, than the pereentage of =Mbar of banks. The national banks were, on 'ate average: considerably larger banks than the State Canes. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3*Tubie 3. NUMBER OF OPERATING BARKS In IMAM PARTICIPATING AND NOT PARTICIPATING IN THE DEPOSIT GUARAMMIN 1912-1930, BY YEARS • Year ;midi] III All bunks operating in Aubruska Participating in deposit ituaranty 2/ Percentage Not particiParticipating pating in deposit earanty ji aou 1912 1913 1914 916 935 965 983 669 694 72e 765 247 241 237 218 77.8 1915 1,007 803 1916 1917 1918 1919 1920 1921 1922 1,031 1,110 1,133 1,138 1,196 1,170 1,137 839 920 942 999 1p009 966 955 93b 928 903 204 192 190 191 189 187 164 182 leo 173 169 79.7 81.4 82.9 83.1 &4.1 84.4 84.3 84.0 63.9 84.3 84.2 1923 1,118 1924 1925 1914 1,101 1,072 1,043 1927 1928 1,012 882 883 655 726 1929 834 647 160 157 156 157 73.0 74.2 75.4 34.7 64.5 82.3 80.5 y Dec. - ,audiarete. Call dates fur Stiarind aaa national banks are not identical in several years. 2/ All State banks, from annual reports of the Bureau of Banking. For 1919, 1920, and 1921, sone of these banks may not have been participants, because of the provision of the 1919 law (removed in 1921) that new banks were not required to participate until they bed b041 operating two years. The only information regarding nompertiolpante is for Nov. 13, 1920, when 40 banks did not chow the item, "Depositors Guarant:7 Pane in their statement as publisned in thereport of the Bureau of Banking. Two years later no bank omitted this item. lidional banks, from annual reports c,f the Comptroller ,Df the Currency. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 669 694 247 241 77 73.0 74.2 -37- • At the beginning of deposit guaraety, about 40 perceut of the bank deposits in the State were held. by State banks. For a nuMber of years this percentage increased, reaching 59 percent in 1921, and remaining between )7 and 59 percent until 1925. During the last twe years of deposit euaranty, the deposits in 3tate banks declined relative to those in national beneee se that by the end of 1929 only 47 pereant of the devoeits in the State were in banks participatieg in tee deposit euarauty system. The depoeits of participating banks, all of which were insured, and those of nonparticipating banks are given in Table 4 for each year of operatioe of the guaranty eysteme Cancautratien of bank depositee eaole 5 shows the ameuuts of deeesite held an October 31, 1914, and Jude 30, le27, by the tate tanks in Nebraska grefeeed according to their depoeits. These years are chosen as representative or the earlier and later parts of tee period during Which the • deposit euaranty syetee was in operation. In 1914 the 'largest State bank in Nebraska held 1.1 pereent, and in 1927 the largest beak held 2.3 percent, of the deposits in all State band.‘!. The largest 10 banks held, on these dates, respectively, 7 and eerceut of the depocits in all Etate baake. The concentration of deposits in a few of the lneeent baa'es was net so great In Nebraska az in Kansas and in Oklahoma during periods of eperatieu of gueranty deposit elaee. Failuree of participeting banks. Duriee the 19 years of operation of the deposit guaranty Gersten in Nebeaake, .36o participating banes closed because of financial difficulties. Only seven of these failures occurred during the first half of the period of operation of the fund. One or the banks which closed ma* a bank which hud previcue4 impended and had been • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -38• Table 4. D2POSITS IN OPERATING BANKS IN NFBRASKA PARTICIPATING AND NOT PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1912-1930, BY YEARS. (In thousands of dollars) Year end 1/ 411 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 All banks operating in Nebraska 193,591 204,925 213,726 216,796 240,870 342,671 419,232 477,761 513,211 432,113 387,641 433,992 430,220 484,897 487,291 470,090 474,300 461,646 406,850 Banks participating in deposit guaranty 2/ 73,890 82,528 92,747 100,812 114,488 165,528 223,499 259,875 278,769 255,067 216,478 238,754 239,985 271,529 281,547 275,552 274,525 252,460 191,658 Banks not Percentage of participating deposits in all in deposit , banks held by participatihgA2VE ItsRaranty 119,701 122,397 120,979 115,984 126,382 177,143 195,733 217,866 234,442 177,046 171,163 195,238 190,235 213,368 205,744 194,538 199,775 209,166 215,192 38.2 4013 43.4 46.5 47.5 46.3 53.3 54.4 54.3 59.0 55.8 55.0 5.8 56.0 57.6 58.6 57.9 54.7 47.1 1/ Dec. 11, or nearest available date. Call dates for State and national binks are not identical in several years. 2/ Deposits in all State hants, from annual reports of the Bureau of Banking. Includes dividends unpaid. See note 2 to Table 3 regarding banks that may not have been participants in 1919, 1920, and 1921. The 40 banks omitting the item "Depositors Guaranty Fund" from their statements as of Nov. 13, 1920, had deposits on that date of 0,336,000. 3/ Deposits in national banks, from annual reports of the Comptroller of the Currency. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -39Table 5. 411 AMER. AND D7130SITS op sm.% BAKB IN !EMMA, OCTOBER 31, 1914, AND JUNE 30, 1927 Banks grouped by amount of deposits Number of banks All Statt, b Aks, Octob-:r j14 1914 Banks with deposit of -or 1.65 $100,000 to $250,000 2240,00u tu .4:ioo,uco #500p000 to $1,000p000 $1,c00dl0o to ::32,o(J0l000 • Banks with atigaait $100,000 or less $100,000 to *250,000 .93,420 100.0 100.0 387 303 22,684 45,783 50.9 24.3 64 5 1 20,451 3,479 1,023 39.9 8.4 .7 i •.,. 49.0 21.9 3.7 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A.V..... 1.1 1,023 1.1 3,991 6,418 4.3 6.9 2M038 100.0 100.0 7,380 11.5 6o,511 102,826 6-),362 39-9 34.4 11.7 2.7 22.0 uf -- $250,000 to $500p000 4500p000 to 4,0wp000 $1,000p000 to *2,000,000 $2,000,000 t() $5,000p000 Over $5,000p000 Largest bank LarG:st '.5' banks Largest 10 banks Petediames ofmispossbil 410. 0 1*1 7±9. Largest bank Largest 5 banks Largclit 10 baLmis All State bolas, Aim 301927 Amount of Percentage of amiber deposits (thousands of beaks of dollars) 100 348 300 102 37.4 23.7 8.1 17 22,301 1.9 4 1 :1°,3)8 6,260 4.5 3.: .1 2.3 6,260 16.,658 2=t1853 2.3 6.1 9.0 or reopened. 411 tne closed banks, 317 entailed obligations on the geveanty fund. The other 43 were ravened without obligations on the fund. The deposits in the guaranteed banks closed because of financial difficultiee aueleated to $65 Onion, of which $74 million were deposits in the cases entailing obliditimes cm the guaranty fund. The eugher and deposits of the banks closed each year, with ratios to the nuMber and deposits of operating banks at the beerning of the year, are given in Table s6 and 1. /be average annual rate of failure, computed at the number of banks whieh failed per 100 ceerating at the beginning et each year, was 2.2. however, as has been mentioned, nearly all of tha failures occurred during the latter half of tee:: period of 'p ration of the fend. For the 9i years that the fund was in operation prior to 1921, the average annual rate of failure was 0.1 per 100 operating banks, and the deposits in the closed banks averaged 4409 per 000 in operating banks. For the revtreteiez 9 years of the systee, the average annual rate of failure was 4.2 per 100 banks. The deposits of the closed banks, for this period, averaged 13.57 per year for each 4100 of deposits in operating banks. The latter rate, for the entire period of operation of the fund, was 42.25 per year for each $100 in operating banks. Failuresby size of bank. In Table 3 the size distribution of the failed banks which entailed obligations on the guaranty fund is cceepered with the average size distribution of operating banks. The failures ahow very little correlation with size of bank, except for a low failure rate ameag the largest- sized banks. Tha largest bank among the failurea was the Security Lltate bulk, • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -41Table 411 Total closed Per 100 Number active banks Year or period 1/ Total • 360 2.2 8/ Subtotals July 1, 1911 to Dec. 31, 1920 7 .1 Jan. 1, 1921 to March 18, 1930 353 4.2 1914 1 .1 1916 1 .1 1920 1921 1922 1923 1924 43 Placed directly in receivership 4/ Number W Taken over for operation by Guarantee Fund commission 5/ 135 82 Commission operaTotal entailing ted banks placed obligations on in receivership 6/ the guaranty — fund 7/ 182 7 43 128 ••• 1 41W4M, 1 317 7 182 182 310 1 1 w0,01, .5 __ 5 __ __ 2.6 2.3 2.3 1 1 _- 25 22 12 __10 -_- 25 22 1 __ __ 7 8 7 1 __ 37 9 10 31 29 4o 54 8 3 6 15 13 12 20 22 22 79 11 if Reopened or affairs closed without dbligation on the guaranty fund 3/ 5 41 58 1929 1930 NUMBER OF STATE BANKS IN NEBRASKA =six BECAUSE OF FINANCIAL DIFFICULTIES, JULY 1, 1911, TO MARCH 18, 1930, BY YEARS 26 23 22 18 39 36 1925 1926 1927 1928 6. 1.9 4.2 4.0 4.6 6.8 10.9 8.18/ 4 34 2 15 21 46 79 5 46 116 9 No failures occurred in 1911-1913, 1915, or f917-1919. -27 Tabulated from information regarding the individual banks in the bimnial reports of the Department (Bureau) of Banking, reports of special investigations ordered by the Legislature, schedules prepared for the Poderal Reserve Committee on Branch, Group, and Chain Banking, surviving records in the Department of Banking, and receivership records in custody o1 the library of Nebraska State University. 3/ Reopened, taken over, or liquidated. Includes 10 banks (2 in 1928 and 8 in 1929) which had been taken over by the Guaranty Fund Commission. Of the 43 banks, 33 were reopened subsequent to Anrtl 30, 1929, When the Secretary of the Department of Trade and Commerce was authorized to approve a reorganization plan of a fatled bank to milmidb owners of 85 percent of the deposits and unsecured liabilities had agreed. 4/ Three of these banks (1 placea ir receiverships in 1923, 1 in 1924, and 1 in 1926) were .;.ater reopened taken over with a payment from the guaranty fund. 5/ Excluding the 10 banks mentioned in note 3. payment from the guaranty fund. E/ In 1925 includes one bank reopened and another taken over with a placed in receivership. banks: operated Commission 7/ BAnks placed in receivership directly plus -8/ Annual rates. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -42Table 7. • banks eloped Per 4100 of t date Amulet fel deposits in Closed or taken active blinks over by Guaranty And Commission) roar or period Subtotals July 1, 1911 to Dec. 31, 1920 41 Banks reopened or affairs closed without obligation on the guaranty Amd!/ ....L699A746 $816,959,817 Total Banks pissed direetky la rectiveraida 125,5561804 1,258,257 to or .... =tam over for operatioe by Quezantee Fund Commission isf 08,703126-r ComMission operated banks placed in reeeiverahip 05,932,301 Banks entailing Obligations on the guaranty fund (at date placed in receivership) g1114.$9,10 1,258,257 1,258,237 .09 83,701,560 3.57 1914 122,418 .13 eawas 122,418 41•1, .111. 122,418 1916 110,244 .10 ••••• 1100244 ellb Mir 40 AO 110,244 1920 1921 1922 1923 1924 1925 1926 1921 1928 025,595 1, 6,090,037 4,957,906 4,134,588 4,886,130 11,244,134 8,468,402 11,825,928 13,367,757 .37 2.39 2.29 1.73 2.04 4.14 3.01 4.29 4.87 1929 1930 17,075,467 10651,211 6.76 4.10 3/ Jan. 1, 1921, to March 18, 1930 • Da)OSIT OF 6TAT BANKS IN NaIRASKA CLOBLD B=AUSK OF FINANCIAL DIFFICUIXIS, JULY 1, 1911, TO MANCil 18, 1930, BY YZARS 10,699,746 48,621 200,344 iar ••• 197,519 .•.10 *. 24,298,347 4025,395 6,041,46 4,757062 1,574,124 525,59 2,058,a6 1,024,06 43,412 823,472 9,050,824 372,966 6,995,127 1,21b,* .10 4b) 703,267 MN Oa 35,932,301 __ Mr Oa 2,560,1164 4,162,692 9,186,108 78443,996 11,782,806 12,544,285 1,022,916 ••• 1/ For amilsor of banke in eacE group, and Sources of dam, see Tirale 6 az.v1 notes thereto. Of the total deposits of these banks, 46,812,583 were in 33 banks reok,std after April . fa __ 843,425 1,019,893 ;',195,825 4,622,674 5,566,104 7,724,723 12,639,657 OR 00 60,230,848 1,025,595 6,041,416 4,757,562 2,417,549 1,545,812 5,153,851 5,847,080 5,629,226 7,724,723 19,835,384 1,276,245 30, 1929 (see note j to Table 6). Annual rate. in ex,..esi: of those received while the 182 banks Imre oi>erated by -/ The difference between these ag6xegates rL.presents deposits paid the Guarantee FUnd Commission. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -143Table 8. WE DI3TRIBUTION OF FAILED BANKS IN NEBRAbla ENTAILING OBLIGATIONS ON TEL MARA= FUND COMPAR= WITH ATMAGE SIZE DISTRIBUTION OF OPERATING BANKS Number of banks Deposits Average Failed Average Failed Waage number banks anaual deposits banks at operanumber of of opera- (in lamp banks failed ting thoutanks per banks (ill sands) 100 active thousands) pi banks 11 Total 852 2.0 . 06, 6i1 7,2(32 2.0 2.1 1.8 2.3 12,873 61,979 4,769 23,462 .6 11,287 7,757 Average annual amount of deposits in failed banks per $100 deposits in operating banks 2, ./ $1.92 Banks with deposits of-- 411 $100,000 or less $100,000 to $250,000 $250,000 to $503,040 $500,00 0 to $1,000,000 4,000,0 00 to 200 356 214 61 $2,000,000 9 $2,000,000 or more 2 74 11+2 73 27 •11111111 Gm Wm 73,280 39,435 1.98 25,050 2.02 1.83 19,354 1,627 2.62 .77 Compria - -6in Aita in the foregang columns and the length of time the deposd antes was in operation (18.7 years). 2 VW beaks operated as "going concerns", deposits are as of the date taken over by the cumentes Fund Commission. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Omaha, with deposits of approximately 41,500,000. 110 No other bank with deposits of more than 41,000,000 failed during the life of the guaranty fund. The Security State Bank was the seventh largest bank operating under State law. Deposits of this bank constituted 2 percent of the deposits of all guaranteed banks which failed prior to repeal of the applicability of the law. Concentration of risk in large banks, and failure of these banks, does not appear to have been an important factor in the insolvency of the Nebraska guaranty fund. However, there is evidence that the majority of the large banks in the fund were not in good condit ion. Of the six banks larger than the Security State Bank, Omaha, three failed within eighteen months after the repeal of the guaranty provisions of the law, and one was absorbed prior to the close of deposit guaran ty under conditions indicating that the bank was about to fail. The ether two consolidated and converted to a national bank at about the time the guaranty law was repealed. Comparison of failures with those in other States . In Table 9 bank failure rates, for both number and deposits, are shown for Nebraska, for banks in contiguous States, and for the entire United States. The table covers the years 1912-1929, which includes the period of operation of the Nebraska deposit guaranty system except for the last half of 1911 and the early part of 1930. The failure rates in Nebraska were substantiall y higher, both for national banks and State banks, than for the entire United States. For number of failures, the rate for State banks in Nebras ka was higher than in three, lower than in two, and the same as one of the contiguous • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Table 9. ANNUAL BANK TAlLURE RATES IN NEBRASKA, 1912-1929, COMPARED WITH RATES IN CCNTIGU0U3 STATES AND /N THE UN/TED STAT'3S .2j Failures per year per 100 operating banks State tState gational and banks banks nat.' banks Deposits per year in failed banks per $100 in operating banks State State National and banks banks nat'l banks Nebraska 2.0 2.3 0.9 $1.40 $2.25 Six contiguous 6tates 1.8 1.9 1.1 .92 1.29 .44 3.9 4.2 2.1 1.2 1.3 3.49 1.38 .31 4.48 1.63 .52 1.86 .92 .70 1.13 2.3 3.7 2.5 1.5 .3 .3 .9 1.7 .02 .15 .54 1.72 .95 2.27 .38 1.41 114 1.6 .6 AR .43 412. South Dakota Iowa Missouri Kansas Colorado Wyoming Entire United States 2.0 1.1 1.1 1.8 3.1 • .-.1•01••••41140.6011•1. 11 Tabulated from data from the folloviag sources: reports of bank commissioners in the various States; Willis, Inquiry of 1p5; annual reports of the Comptroller of the Currency, Committee an Branch, Chain In,1 Group Banking, "Changes in the Number end Sise of Banks in the United States, 1934-1941;" and Federal Reserve Bulletia, Sepeeiber and November, 1937. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • States; in terms of deposits, the rate for &breaks was Usher than in four, and lower than in two or the contiguous States. Deposit 'Wanly vetoes were in eperatien in twe of the contigeme etates, Kansas aud South Dekota, luring most of the period covered by thie table. The failure rates in Nebraska were higher thuu in Kansas, but lower thee in eoute Dakota. Causes 0: bank failures. In 430 the legeseature of Neeraaka ordered a special investigation and audit of failed banks in the State. The report ef this invegtigatica contains a discusaeen of the ilaUge8 of failuxe without =king an attappt to estemate the nunber due to specific causes. An analysis of the evidence collected by the inveetigatien which vas made by M. T. Bruce Robb far the Department of Bueluess eeseareh of tee Mayersity of bentesee is also without an estimate of the number of failures due to the various eeee 2/ mentioned: • Relatively little is said in the report al the Seeking Investisation about theft, cebezzlement, or defalcation on the part of bank officials. auch overt acts were apparently not regarded az a major cause of failure in many of the banks which failed during the period of operation of the guaranty fund. More attention is seven to dishonesty by the study of the Department of Business Reearch of the Mayoralty of Nebraska. A number of cases are cited of dis- honesty on the part of bank officials, shortages due to the abstractions of cashiers, forged notes, and loane obtained on worthless paper, to ehieh the following statement is addeds g A. C. eheIledberger, Final Report of the HankiagInvestigation, ep. 6-e. 2/ T. Bruce Robb, State Bank Failures in Nebraska (1934), pp. 27-28. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -47- • If space permitted the recital of ouch sordid banking transactions, it would unfortunately be greatly exteodede The first impression one gets from this record is the complete lack of any fceliag of public responsibility for their actions on the part of these bank maeagere. Both the haeking investigation and the Department of Business Research placed great stress on speculation, loans to interests with Which bank officials were aszoctated, and loans in excess of the lei limits. The report of the Banking inveetleation described the influence of those elementa as The world wer inflated prices, both of land and other property, to such an extent that a business boon developed which swept any bankers, business nen and even firmer, into a mselstrom of speculation. Standards of values and normal basis of credit were completely lost Si.* of and sound business principles ..ere forgotten...Land speculation, a most dangerous economic disease for bankers to contract, became epidemic either through loans on lands er by indirect purchasem tr bank officers... Millions of dollars of worthless loans encumbered the note cases of the banks audited by this office. Very often more than half of the notes in failed banks were famed worthless because the efficers asking them were speculators, not bankers. The same aspect of the situation was described by Mr. Robb, in the report or the Department of Business research, as follows: One of the great weakeesses of a decentralised system of unit banks as developed in this country is the opportunity it affords to eee of affairs to eeter the hankie* busintes and use the community's deposits to 11:brio:its 1001r private ventures. No .an can eueccesfully sorve two mendere, and the spectacle of a banker in the role of a credit iOni making loan:, to his own enterprises is grotesque. The period of rapid growth in the =ter of beaks was especialir productive of this type of banker. It was a period of rising prices and speculative eneeesee, and the banking business was disgraced by bankers eh° were using their institutions to finance their own • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -48- • mercantile operations, or the tenants on their own farms, or as a dumping ground for the paper collected by their automobile agencies or that growing out of their cattle transactions. Almost without exception, the losses following in the train of this kind of be.eing were appalling. An excessive number of banks, inadequate earnings, and manageuent by incompeteat officials are also eeehasized as important joint factors in the widespread collapse of banks in Nebreeka. Ineompetence may wreck a beek with good earning power. However, incompetent management appears most frequently When new backs are opened freeey; and an excessive ;weber of banks ia a locality in relation to the volume of business available in the locality is 4 major factor in inadevate eareiegs. The report of the Banking Investiga- tion deecribee the ieeeuence of these ractoro in Nebraska as follows; • ...hundreds of banks were charttgred for Which there was no economic eft -I. am permitted to operate them who, for want of abilitrandl'misty, have disgraced the business of banking. T00 hany haat and too few bankers bred bankruptcy in the hAnkipg business. ...The unsafe and unnecessary expansion in banking during th,:it boom period because of no limiting of charters led to an extraordinary and dangerous increase in loans and credits. Where too saw banks make competition ruinous, bad loans become common because there are not anoug4 este borrowers to absorb the funds that must be loaned to mske a show of profit. Ur. Robb, in reviewing the evidence colleted by the banking investigation slakes similar statements regerdieg incowpetent mamaemment and an excessive number of 'make. It is net out puepoec...in this section to consider oases where, more often than not, bank officers were honest and well meaning, but where either throueh iudolessa* or stark ignorance of sound banking practice they showed themselves grossly incompetent to optimist* a beak. It woeld only be soorted that *here banks were orgmnized with such leverish haste as ofturred between 1910 and 1920, .any cases would come to light of men permitted to operate banks who were utterey unfit to receive ane loan other people's money. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -49. evonumic cireumstances and rapid econemic changeu, particularly shaep reversal in prices of agricultural products after the close of the World der and the rue:eyed decliue in those prices which set in about 1926, were also important elev,-ats in the large nuMber of bank failures in Nebraska. Nevertheless, the report -f the nking investigation and the analysis by the Department of Business Research of the University of Nebraska give only a moderate stress to the decline in agricultural prices. Thie decline is considered to be the occasion for bank failures, but speculation, leans to eank officials and their interest, incompetent management, and an excessive number of banks ex.:: emphasized as =re furion,aturtai causes. A sieteee oaphasis is iudicated in the causes of failure of banks Which closed during the period 1921-1930, as reported in the schedules coil/ lected by the Federal Reserve Committee on Branch, Group and Chain Banking: Out of 380 failures for Which a primary eause of failure is mentioned, only 34 are attributed to the decline in real estate values or to losses due to unfcreseen agricultural or industrial disaster, while 38 are attributed to defalcation and 264 to inceepetenteemezgement. However, laud values and agricultural conditions are stressed as an important contributing factor in a great majority of the failures. A classification of the primary and contributing causes of failure reported on these schedules is given in Table 10. J Schedules prepared in1.931 in the office of the Bureau of Banking of Nebraska, for the Federal Reserve Conalet:e on Branch, Group and Chain Banking. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Male 10. MAO Or ME MINIMS IN N.'llm‘sIA, 1921-1930A Rz?mrT ON beurv=1 ninutso FOR TES FERAL Rums coserra ON litANCH, GROUP AND CHAIN DUO= ',Umber of oases Item 2,./ cause Reversal of prosercu eonditionst deeliwt in values-Unforeseen agricultural or industrial disaster, ouches flood, drought, etc. General deflation, or general depression Decline in value of fara products, or deflation of agricultural prices Decline in real eats** values Incompetent ear=4::::!Ccrat--total gleampeteit tametfleisat diveraification Long-term loans am real estate Excessive operating cost Other oausee--total Heavy Wihdravals Failure of other banking tasttentions Insufficient Operating income Lack of baelneala Lax safetoement of State banking lain Mleoslismose • • 1 3 ••• 4.1110 21 1. 2 • • Ob. 3 85 227 28 36 16 23 30 32 143 231 7;4 16 V- tilf, iiiIMILALUMILSMOLLJNINMAYM-1461a.. Mcmagaidigaa—totel *Louse or niaapplication of bank fa Mous loans, or overloaning Weessive end illegal loans Loans to stockhelders and relatives Failure of 1firip dcbtew Violation of state banking lams .4 3 !NW 81 11 21 2 6 ,t- r plekonesty of officers—total bidlacatice Officer's irregnIeritiee or shortages Inside bank raillery DiWIrmiesty of tomer timaseement cauec- specific items are free isigailes collected by th4 Federal Reserve Committee on Branch, Cramp aid. Chain Banking, tbolk drouPiug hY 'Um author of this report. %a tabulattom ins mode ny the author of this report from the schedules, which Vero made svalltble tarough the ooartosy of the Board of 00,11rmors or th',t federal Maestro diatom, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S. Froceduree in handling felled banku. Until organization of the Guarantee Fund Commission in 1923 alwout all the banks closed ause of financial difficulties were placed directly in receiverahip, with the receiver appointed by the district court ana the affairs f the bank closeu trader jurisdiction of the court. In only two cases had banks been reopened without a receiverwhip. In the ruceiverthlp casou the procedure was for the smarantj rund to pay the receiver an amount which, together with tha proceeds of the readily ldated assets of the bank, enabled hia to pay all the deposit claim*. 1L4wever, when failurea becawa nuserous iu 1921 the amount that was reqpired to be drawn froci. the guaranty rIlua A114 r4aWida by a device far receivers, borrowings developed ny a grow of basks participating in the deposit guaranty aystem. This ass later described as follows in a massage of the Governor to the leislature sod in ourt testimony by one of the bankers associated 4th it. (1...state banaexs...orgaaised the 3tate Agricultural Loan Association and sold stock and association notes to member banks to the amount: .J.L' two aillien anllars.- The ,:r:;:;:eta.:s :Jr the stalc note sales were used in paying off depositors in failed banks. The assets of the failed banks then beoswe the property of th... association." y "...I served with the Agriculture Loan Associatiou... With the consent of the various District Cclurts we issued receiver certificaUs Which were endorsed and guaranteed by the Agriculture LOLA Asaociatiou then sold to solvent beaks aud the proceeds used to Ay oil* depositors lameediately. in fact, the only dilTerenco Cetwesu what we did and ahat hao been done since by the Guarantee Fund Commission was that it, the latter, was legalised by the law. This was more or less voluntary; no legal provision had bream& for it. 3tockhaders were all voluntary stockholders and. the Agriculture Loan Association assumed responsibility of endorsing receivers certificates and the banks vtho bought them assumed the responsibility or their bolas paid • 1/ Farewell message of Governor Aaam McMillen to the Nebraska Legislature, Jan. 3, 1929, Nebraska House Journal, Forty-fifth Session, 1929, p. 'D. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -52- • but the depeeitors get their Matey Sad the object wee to keep the Guarantee Fled from breaking down. The failures at that time, occurred so rapidly Old with mak largo liabilities that the assessments were not bringing in 400140 mammy to pay the depositors." 1../ After establieheent of the Guarantee Fund Commission in 1923 banks in difficulty were turned over to that Commission for operation as a "going concern" or appointment of a receiver; and a few months later existing receiverehips were transferred to the Commissiun for appointeent of a new receiver to eopplete the process of liquidation. Members of the Ouarantee Fund Commission served as the receivers, with the receiverehip process supervised, as previously, by the district courts. The Commission organized two departments, one for going banks and ene for those in receivership, with the Secretary of the Commission as an executive officer. The Commission inherited 56 receiverships, and handled the affairs of 226 other banks before it went out of existence in 1929. The hope that banks could be rehabilitated by operation as going concerns proved futile. Of 226 banks cloeed because of financial difficulties between May 4, 1923, and May 1, 1929--the estebliehment and termination dates of the Commission,..about 200 were treated as "Being concerns" for varying lengths of time ranging from a portion of a month to more than three years. Table 11 gives a distribution of 192 banks according to the length of time they were operated by the Commission, and also the number operated as going • g Testimony OrCerge W. Woods in District Court of Lancaster County, in Alois State Bane v. Bryan, from records of the United States Supreme Court, Trazasrps of Records and File Copies of Briefs..1930, Vole 38, Case No. 63, pp. • Investigation. The difference Final Report of the between the figure of 226 and that of e': in the next paragraph is probably due to banks reopened without being handled by the Commission. The letter figure is derived tram information collected regarding the feelividual closed books, from the sources used in preparing Table 6. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -'53Table U. BANKS C Sc,Ni IN NIORASKA LURING TH;i, LUZ OF THY; GUARANTY FUND comma._ :winks failed Nay 4, 1923, to Ney 1, 1929 Number of banks operated as "going concerns" 1./ •••••=1.0.1•11•41•011•••••.....- Total number 2/ 228 Sperated as "goimg ooserns" For iess than, 6 moths 6 to 11 moaths 12 to 17 months 18 to 23 months 24 to 29 moths 30 to 35 months Over 3 years 1• Other failed 0 maks y 24 71 35 15 7 2 1925.midyear 1925 - year•end 1926 - midlear 1926 - yearised 1927 - aidlyear 1927 - year-end 1928 - midyear :028 - year-end 1929 - Pob. 5 33 30 36 44 57 62 75 72 67 .;6 g Poores,1925 and1927 from reporii of the Bureau of Baia* for those years; for yeaXwaMail 3,927 and 1928 from United states some Court records, Transcripts of IlsaerAp and Pile civics of iris% 1930, vol. 38, pp. 46 and 60; FA. 5, 1929, free oflibmist Sub4ommitiee on Guarantee FUnd Commission, .'.929; for other dates, asnks. g7 Tabulated trails list of the banks. The Guarantee Fund Commission took over banks, acoordina to information in "Bibibit A, Statement by Governor 40aver on Hank Situation," 'Omitted with the meow of Arthur J. Weaver, Governor, to the Legislature, March 4, 1930, Bfaboasha senate and Rouse Journals, Forty-sixth session (extraordinary), 1930, 24-24. 1/ Tabulated from information relating to the individual banks, from the sources used in preparing Tables 6 and 7, aad lists of banks operated as "going ...:oncerns" at various dates. The total amber operated as 'going concerns"for various periods was 201„ according to *Werner Weaver's statement (see note 2). .4j includes 31 banks plass" in reealverahip and 5 taken over, with no evidence found in pOblished reports or surviving records that they were operated as "going concerns." However, five of those placed in receivership amd four of those taken over must hove been operated as"goiag concerns'for a abort period, in view of the figures in Governor Weaver's statement (see notes 2 and 3). • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -54- • concerns on several dates. Only ten of these were reopened without being placed in receivership, and those were banks that closed after the guaranty rund was exhausted. Operation of failed banks as "going concerns" resulted in greater, rather than eeeller, losses on deposits. "Every bank so operated," according to the report of the special investigation ordered by the Legislature when the Guaranty Fund Cummission was abolished, "showed a continual monthly operating loss and few reorganizations and sale of closed banks resulted from 1/ The total operating loss in 167 banks operated az "going this policy." — concerns", according to the Governor's repert to the 1930 special session of the Legislature, was *1,322,72 . Many or the banks taken over by the Commission and later placed in receivership, particularly those taken over during the last two years of the life or the Commission, after it became difficult or impassible to sell receivers' certificates, were in fact in the process of liquidation • while they were officially operated as "going concerns". The reason for this procedure was to reduce the amount of interest on deposits to be Aid rrom the guaranty fund. In receivership eases the deposit claims +Approved by the court became a judgeent against the guaranty fund and bore interest at the rate of 7 percent until paid. In the banks operated by the Commission no old deposits were paid 4nd no time certificates renewed, and assets were liquidated as rapidly as possible. ghen most of the assets were sold, a 3/ dividend on the old deposits was paid and the bank placed in receivership. if Final Report of the Banking Investigation, p. 9. As reported in Commercial West, vol. 59 (March 22, 1930). C. M. Skiles, general counsel of the Guarantee Fund Commission, in an article, "How I Alould Change Nebraska's Guarantee Law," The Northwestern Banker, Vol. 33 (march 1928), pp. 17-18 and 144-146. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -55- • Few about four years after sale of receivers. ccrtificatz.e authorized in 1923, auch certificates were issued as the beaks were placed in receivership, and the depositors wore paid at once. in 1923 the amount was $1.7 aillion and the next year $2.4 million. The receivers' certificates were repaid from the proceeds of liquidation and free receipts of the gearantY fund from the next assess:44,a an participating banks. The receivers certifi- cates were issued at a rate of interest set by the court, usually for a term of ome year, and until 1927 it was possible to pay them before or When due. Dy 1928, When there was mere than a, million dollars. of such certificates outstimAing, bearing 7 percent interest, it rale impeseiblo to sell any more tc, the banks that had been investing in then. Thereafter the depositor* held the judgments, and received diviOnnAs on them from the liquidation of the assets of the bank. With the assessments on participating banks sdbeequent to 1928 withheld from use by court injunction sad eventually declared unconstitutional, addltieaal payments Prattles amaxanty fund were to comparatively mall amounts. Such pememats were made as partial dividends to the depositors of 25 banks from the Depositors' Final Settlement Fund, before its establishment was held unconstitutional by the State Court, and to those of 3 banks upon final 24;n1M4 settlement of the affairs of the fund. Ttatimany of PlYson b. Mardhall, United States Sumas Court, Transcripts of Reeerds and Tile Copy of Briefs, 1:y30, Vol. 38, Case lb. To 190b, receivers' certificates were issued with nataritics of one year or less, bore interest at 6 percent, and had alweys been paid before maturity, according to statement by NIrk Origgi, Secretary of the Department of Trade and Commerce and Chairman of the Guarantee Fund Commission, in The Northwestern Banker, Vol. 31 (Septeiber 1926), p. 15. A report the next year of a ialk by the Oovernor also stated that receivers' certificates had alueys been paid before maturity, The Northwestern Sinker, Vol. 32(At 1907), p. 81. C. M. VAiles, fa atateaculas reported in the All stmt Journal, Feb. 7, 1928. 15r 110 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 63. -56- • Relatively little use appears to have been made of the authority given in 1923 to a receiver of a failed bank to sell all its assets to new stockholders, with the approval of the Guarantee Fund Commission and the court, with the receiver drawing on the guaranty fund to meet any dificiency in the amount needed to meet depositors' claims payable from the guaranty fund. Only five banks placed in receivership during the life of the Guarantee Fund Commission were reported to have been reopened or taken over, with a payment from the guaranty fund, after having been placed in receivership. More use was made of the power given in 1923 to the Department of Trade and Commerce to request the court with jurisdiction over a receivership to sell its assets and to bid for the assets at such sale. used in 74 cases. This process was However, the amounts were comparatively RnAll, representing remaining assets after the receiver had liquidated most of the assets and • repaid as much as possible to the guaranty fund. When the Guarantee Fund Commission was abolished, existing receiverships were transferred to the Department of Trade and Commerce, and that Department took charge of the banks that were being operated by the Commission. The Department also took charge of other banks closed because of financial difficulties prior to the termination, about ten months later, of the applicability of the guaranty to future failures. No payments were made from the guaranty fund nor from the Depositors' Final Settlement Fund in any of these banks, most of which were placed in receivership, with the Secretary of the Department as receiver and the receivership process supervised • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -57- • by the district court. However, some were reorganized, under a provision of the 1929 law, with depositors reducing their claims in a sufficient amount to absorb the losses. FINANCIAL HISTORY OF THL GUARANTY FUND 3urces and adequacy of information. The balance of the depositors' guaranty fund held by the participating banks at each call date, but very little additional information regarding the operation of the depositors' guaranty fund, is gives in the periodic reports of the Bureau of Banking. The amount held by the State Treasurer on June 30 of each year is given in the reports of the Auditor of Public Accounts. Considerable information regarding the financial history of the fund is available from special investigetions ordered by the Nebraska legislature. flerly in 1929 the Rouse of Representatives requested its Banks and Banking Committee to make • a thorough investigation of the books and records of the Guarantee Fund Commission. The report of this investigation, which was published as a document of the Legislature, gives a statement or the guaranty fund and of each closed bank as of February 5 1)29. • In April of the same year, a t In 1933, the judicialship procedure in handling beak receiver s 411011 terminated, and the Department of Banking become an administrative receiver for future failures. However, former reseiverchips not yet tereinelmas Including wee banks that had failed 'dale the guaranty Avid system VMS is Sparntion, and the records relating to alined receiver'hips, were retmLeallhylnr. E. R. Luikart, the last Secretor)' at thc Department (amdinperiatendent of Banks for the nit two ywers) until all of such reemiverehipe ears finally closed. The records of these receiverships were removed tram the Department Of Banking (which had gmoeeeded the Department at wade and commerce), emd eventually trenaterraltal the custody of theftiversity of Nebraska. The author of this report MOS provided diocese to the remainiag records in 'Meagher 1955 thremgb the courtesy of the library of the University. 2/ legislature of Nebraska, Porty-fitth session, 1929, Boort of House SubZoeeittee on Ouarantee Fund Commlasions https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -58the Legislature ordered an examination and audit of failed banks and of • the departments charged with responsibility for the banking laws. This was conducted frae May 1929 to &Ay 1930 by A. C. Shallsnberritr, who was appointed by the Governor as Chief amminer for this purpose. The reports of this investigation give a summary of the assessments and disbursements of the fund, and also the disbursmaents to depositors and recoveries from assets of each of thc failed banks, to January 2, 1930. Annual data for WW01141Ment8, recoveries, and drafts on the guaranty And were submitted at the State &wine Court hearings in 1929 on the constitutionality of the Decedber 1928 and subsequent assessments, and are available in the United States Supreme Court record of the case. In the case of guaranteed banks which failDd subsequent to January 1, 1921, payments to depositors by the guaranty fund and repayments • to the fund from the liquidation of assets, are given in schedules prepared in 1931 for the Poderal Reserve Committee an Branch, Group and Chain Banking; these figures differ only slightly from those given in the reports of the special investigation of the previous year. For most of the banks that failed sUbsevent to April 1927, When payments free the fund ceased, the percentages sad amounts of dividends paid from the liquidation of assets and snail amounts in 25 cases from the Depositors' Final Settlement Fund, have been obtained from surrtring receivership records, or from j The remelts of this investigation are given in three documents, as follows: (1) Tbe Associated Certified Public Accountant of Nebraska, !Report on Depositors' Guaranty Fund," submitted to Mr. Shallebberger, dated August 1, 1930; (2) A.C. Shallenberger, !Report of Bank Investigation," dated March 3, 1930 (preliminary report submitted to the Governor); and (3) A. C. Shallenberger, Chief t:maminer, Final Report of the 'milking Investigation. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -59schedules at the Department of Banking prepared from those records. Vary little additional information regarding the financial operation of the Nebraska fund has been found in pampillets on the history of the Nebrauka system or special surveys of deposit emernarty systems in operation 2/ in various Stated: Income and obligetions of the guaranty fund. A snteenry statement of the income and obligations of the Nebraska depositors' guaranty fund, for the entire period of its existence, is given in Table 12. The figures take into account receipts and disbursements subsequent to the repeal of the applicability of the Guaranty to future failures, including Pinal disposition of the fund in .1934. The estimatee in this table exclude indirct borrowings of the fund in the form of receivers' certificates. Payments to depositors Jr., failed banks which were made directly by receivers from the cash and immediately available assets of the banks are also excluded. The total receipts of the euaranty fund, excluding the assessments declared unconstituional by the State Supreme Court, are estimated at $19.0 williou, of which $16.5 million yes derived from assessments and $2.5 million from the liquidation of the banks in Which depositors' claims were paid by the guaranty fund. The total obligations incurred by the guaranty fund, after allowance for depositors' recoveries directly or indirectly from liquidation of the assets of the failed banks, are y These records were examined by the writer of this report in November and Decedber 1955. No information about receipts or disbursements of the fund were found at the Department of Banking at the time of the writer's visit in 1955. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U -60Table 12. RECEIPTS, EXPENDITURES, AND DEFICIT OF THE NEBRASKA DEPOSITORS' GUARANTY FUND Receipts Assessments levied (excluding those revoked by court decision) 1/ Less: miscellaneous credits (S53,908) and uncollected (estimated at $298,997) 2/ Assessments collected Recoveries from liquidation of assets of failed banks . 3/ Total receipts $18,960,116 Expenditures Total payments by fund to receivers for distribution to depositors 5/ • 19,106,009 6/ $23,305,772 1/ From Table 13. 2/ Table 14, note 5. Tabulated from data for the individual banks, including estimat ed interest of $4ff,04o in two banks (Table 15, note 4). Of this recovery $2,211,259 was received by April 29, 1929, and deposited in the participating banks, Final Report of the Banking Investigation, p. 33 (see Table 14); this amount, together with the assessments collected, totals $18,7150786, which equals the drafts paid (Table 14). Of the subsequent recoveries estimated at $244,330, $42,077 had been received between April 29, 1929, and January 2, 1930 (Final Report of the Banking Investigation, p. 29). The remainder ef approximately $200,00 0 represents recoveries from sdme banks subsequent to January 2, 1930, the date to which the Banking Investigation total refers, as indicated by data to June 30, 1930, shown on schedules prepared for the Federal Reserve Committee, in Branch, Group and Chain Banking. 4/ The difference of $145,893 between this figure for receipts and the total expenditures of the fund presumably largely represents errors in the data for individual banks (for which some estimation is involved in some cases), either for payments or recoveries, but may in part represent collect ions on unpaid assessments subsequent to May 28, 1930, particularly from failed banks, or interest on the remaining balance of the fund between that date and the final settlement of the affairs of the fund in 1934. 5/ Tabulated from data for the individual banks (Table 15), including . :nterest (note—4 to that Table). Of this amount, $18,717,021 was paid prior to January 2, 1930 (Final Report of the Banking Investigation, p. 30). The balance represents payments from the Depositors' Final Settlement Fund between March 18 and June 30, 1930(given as I2k73795 in the Final Report of the Banking Investigation, p. 1() the final distribution of $134,008 from the fund upon settlem ent of its affairs in 1934 and a mall difference between the sum of these amounts and the total tabulated from information for the individual banks. 6/ Tabulated from data for thjlaividual banks (Table 15). The total losses to deiiositors in banks that failed While the deposit guaranty was legally effective was about $2.6 million larger than this figure (see note 5 to Table 15). '3/ • 327,905 $16,504,527 2,455,589 4/ Unpaid obligations To depositors of failed participating banks $16,832,432 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -61estimated at $40 million to the date of repeal of the law. The final deficit of the fund, representing the loss to depositors, is estimated at appraxteately $23 million. Annual data for assessmnts levied are given in Table 13. jpecial aesessments were levied in 1916, and each year froa 3.919 to the termination of the insurance in 1930. The highest rate for the special assessments wee tenths of 1 percent in 1921 and in 1922, Which was lees than the maxiskss of I percent permitted by the law until 124. As previously indicated, the special asseesmerte in the latter part of 2.928 and both the special and regmlar assessments in 1929 and 1930, amounting to nearly $3 million, were revoked by the decision of the State Supreme Court on the ground that they no longer served a public purpose and bad become unconstitutional. lAccluding these, the total assessments lsvied were $16.6 million, of which $16.5 were collected. Table 14 above the annual receipts of the guaranty fond Ivor assesaments and recoveries from 1111 ., banks, and the annual disbursements as measured by the drafts drawn the balances with the various tanks and paid. The table also shows the balsam, in the fund each year as computed from the reeeipts and disbursemente, and as ahown in the call reports of the participating hanks. The call report figures mcclude balances due from banks that bad failed, become national banks, or gone into voluntary liquidation. Table 15 gives the amount of insured obligations of the banks that failed each year while participating in the insurance system, the recoveries tree liquidation of assets, the amounts paid from the guaranty fund and the mcoveries of the fund, and the losses to depositors in the hanks for Which the fund was unable to meet its obligations. The estimated loss to other • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -62Table 13. • Year RATES AND AMOUNT OF ASSESSMENTS, NEBRASKA DEPOSITORS' GUARANTY FUND Assessment rate (percent of deposits) Special Regular $4,943,343 $14,868,036 16,832,432 4,729,161 12,103,271 _-- 176,863 406,858 271,807 176,863 406,858 271,807 .10 140,647 144,684 421,472 219,904 318,029 140,647 144,684 196,837 219,904 318,029 .20 .20 802,477 639,244 290,869 292,463 .80 2,317,808 302,693 .80 .70 .30 1,971,580 2,046,320 228,345 245,341 511,608 346,781 2,015,115 1,743,235 1,800,979 1,004,86o 1,616,330 1,672,339 1,653,207 885,413 122,590 249,259 281,973 290,244 285,818 263,937 122,590 755,601 1,334,357 1,382,095 1,367,389 -621,476 ,... 2,978 947 214,182 2 764,765 622,948 2,355,999 214,182 622,948 2,141,817 Total collectible 2/ 0 .25 .50 .30 1914 1915 1916 1917 1918 1919 .10 .10 .10 .10 .10 .10 1920 1921 1922 1923 1924 .10 .10 .10 .10 .10 1925 1926 1927 1928 1929 .10 .10 .10 .10 .o5 .50 .50 .50 .25 Revoked by court 3/ 1928 1929 1930 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .25 .05 .05 Special $19,811,379 Total levied 1/ 1911 1912 192 Amount of assessments Regular Total .50) .50) -224,635 -- -63ii;c4.notes to Taie 13. / Total levied from Final Report of the Bankiag Invest&E. tle, p. 17. Total regular and total special, kmm of annual date: in tkg; Final Isport of the Baning Investisatiaa the :ormar iiLOWD as 440684,331W1 --the latter, as $15,131,042. A somewhat largpr flows for total assessments levied, 419,926031, was given in Uovernor Weaver's amenegs to the Iegialature, March 4, 1930, Nebraska Senate arid Houee Journals, YOStri.sixth session (extraordinary) 1930, p. 2/ All aasessmnta levied except thous deemed unconstitutianal by decision of th,.; Askt 3upre Court (Hubbell Bank v. Bryan, 1932). Data for 1911-1928 from iOchibit No. 44, received in evidence by District Court of Lancaster County (submitted by Lacretary of the Department of finale and Commerce) in Able Statc Bank v. Weaver, obtaiaed from record at United States Supreme Court, /lie State Bank v. Bryan, Trans of Rmoords and File Copies of Briefs, 1930, Vol. 38, Case No. 63; for k p asseeasmat due an. 1, eatiied a one-fifth the special assessment of Dec. 15, 1928, OR assumptioa that the assessment base covered the aims period. • 1/ Millesimal** declared unconstitutional by State Supreme Court in Hubbell Bank Y. Bryan (1932). Rates fraa evidence in this case, obtained from record at United States Supreme Court in Bryan V. Hubbell Bank of Hubbell, 1932, Case 861. Amount for special assessment in 1928 from transcript described in note 1: total for 1929 and 1930 estiaatedae residual from total levied, with 1/11 assumed to be the regular assessment, and the balance the special assessment. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 3.4. Reran's, acPM1Drn", AND BALANCL, 111:11.Ritin • PLTosrroRz Year GUARANTY FUND, BY YLARS Asseasseals 1/ Recoveries -) 46,8x84& 211,259 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1)23 1924 1925 1926 1927 1928 • 1929 1930 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1761663 4068858 271,607 140,647 1448684 421,472 219,904 316,029 802,477 639,244 2,317,808 1,971,580 2,046,320 1,004,860 1,616,33o 18672,314 1,63,207 885843.3 122,')90 •11.111110 Or OP 715,7§6 ••11, OP AO 10IV -;4•526 eV MP.0 a• 79,052 • ea Ow ow 23,715 OP AP IMP 4.1. 35,550 370,927 182,6;0 193,287 .33,700 427,283 157,23) 257,717 •••• at year-end Repoaed 4/ Drafts 737,709 2,172,766 2,0610962 1,010,026 3,566,093 2,625,757 28270,436 1,256,910 142021c.) 21,117 476,663 563,721 855,526 941,649 086,333 1, 11428,753 186488657 1,990,401 2,792,876 0.76,646 573,275 814,228 889,552 1,020,104 1,193,924 1,601,375 1,841,125 2,1748257 2,694,413 2,230,769 2,350,549 1,990,818 2,520,290 2,015,587 687,307 28082,915 2, 2,875,426 2,529,729 1,439,365 1,238,402 621,954 913,230 453,221 339,441 349,022 327,905 201,814 30,427 135,651 193,278 -65Footnotes to Table 14. 411 1/ See Table 13. TOtals for 1911-1929 and amount of drafts paid in 1930 froa Final Report of the BsnkL14 Investigation, p. 17. Annual amounts for 19111926 from transciiit i.ssrtbM la nae 2 to Table 13; for 1929, difference between total for those years and that for 1911-1929 (recoveries are described in these sources Si reftads). *der the 1919 law, amounts this the depositors' guaranty fond by basks placed in veluntary liquidation (to cease business or become national banks) were paid to the state Treasurer. The bimodal reports of the Auditor of Public Accounts 'how receipts for the depositors' 0100145, fund of $32,873 during the years 1920-1929, and disbursements of the ONO amount. No motto* Li nude of these transactions in the Final Report of the Banking investimation, and it is assumed that the amount invUvt is included in *drafts paid." j/ Assessments plus recoveries minus drafts paid. Za call reports of participating banks (prior to 1921 at last call date in the year). The amount for 1930 is described IL3 Depositors' Final 6ett1ement F. 0 2/ If miscellaneous credits of $28,908 (shown in Fins/ Report of the king investimetion, p. 17, are deducted, this balance is redeced to $20k9D7. t amouniTilus the assessments revelled, as estimated in Table 13, totals $3,277:944. This is the amount shown as unpaid assessments ($3,299,061 on An. 2, 1930, less $21,117 of drafts paid in May 1930) in the Final Report of the Ranking inveetlgatioe, p. 7. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .4‘. Table 15. 12EXCAL DEPOLMIS, MEMO MCI= • Dewed deposits y Tairatilay fres Ltesidetion ot assets Total OILIONIONB NEFOSTIVIS Cil FAILED BADICS, VINI13 (leas to frost Ugaidatton ar assets end "sale assets" Not rseurersd fan 11,psideties of sweets (lass to rand) difesitors .21 Loss an gemeral claims (not deposits) I/ ••••••-. Total .461111 % 3,168 1914 1916 1920 3.923. 1922 423 104. 1925 1926 1927 1928 1929 122,021 46° 6j,4 $19,063,969 14 55/5.21 ) 416,608,380 les,526 8 70 35, 16,656 32,003 79,048 35,131 43,917 967,699 6:304,409 le,Ab0188 2,648,310 ,497 14470 , 0-19 230 2,076,24L 1,21:42,53 Me:• 276,342 737•Etau 4,227,3.68 3,633,235 243,890 , 2 155 , 1,194 8E4255 1,244,20. 5,004,559 5,963,027 5,940,839 7,813,634 19,306,863 4811,10 2,91161189 1,054,94 1,482,4,4 7.045,01 3,122,765 3,020,738 519s8 153,964 17,024 295,127 83,502 12,53 114051 1.0162 • 011 • 19122e_c_V•4 644,545 412,244 i7,8; 72 , •v3 /Axle 649,365 2,982,964 3,220,991 2,064052 4121,272 2,1327,63/1 2,937,236 567,30-1 153,964 17,o214 MOW. ti23.30:7T2 $1/733•5TT UMW OP.* MN, -era awe., deal. 278,087 59,821 90,945 1341157 31,383 74,479 1,977 141,589 , 306,456 4 6 , 237,199 120244,651 179,N6 517,1466 65,163 For and first Zstrb .. _ total • .. , --, Far V-) for - 19 except as prepared for Federal Deserve Committee on Drench, Group med. Chaim Deakirap Far II911-1927 inelmant blatill rilogaled or Ulm o'er if there ins a mount from the appranty feed. gee figure for total lataired deposits slums *me is shoat emeollalt of I percent larear *has that for total deposits in the failed beans show in Mlle 7. Differenoes beans& total deposits ad lasinead Aliposite arise tram deposit claims allowed than were not as the books cm not taelmied in those teadalmel as of date of galiaire5 or te deposits as the books tor Adak claims were not filed or iddeh verge disallowed cm the grand that thew were not deposit liabilities. In additive, an miaow semen at interest oa deposit elates, mostly accruals fres the dates claims had been swami and jadpent entered neminet the soreatly feel to their papeent lay the toad, ray be inclasled tvit the flan* for *preferred claims" as the sehadeles pragsmi tor the Federal. Skarn Cunittes. Daerver, ememealated interest paid from the ammenty and to depositors of two balks at time at firma settlement at the anal= of the feed (me Note 4) i.e not Imbeds& Tabulated fres dean for tho individual bents free the following sources, (a) &Whits D,C, sod D amannagi which are referred to on pens 29-31 of that report, and furnished to the tadand. Deposit Disemenae ng the 71ac1 Deppopt of the Doehiss by Adam C. elfillsaberips, 100-Or the larnatieption (data free those exhilxLts are as of ammary 2, 1930); (b) eshodales prepared tor the Federal Deserve Committee an Duansh, Creep esti Cala Brilday made anitiabLo bY the Dosrd of Onrarnors of the Federal Resortk: beta* awl (e) surviwing reseivership records at the library of the adversity at Obese* end adisidas at the thapertnsat of Diencing prepared frees recclurde lp records (data free these records, idaleh pertain chiefly to banks clamed in 192/ end seibisessait years, are as at the closing of receiverships). For 1914, 1916, and 1920, negligible became the reported proved. claim are idwztical for sant of the beaks with the reported deposits at time ,Af fallure. For 1921-1930, tabulated from data for the individua1 hooka tram the seheduies and surviving ressiwarship records mentiamed in note 2. 21. j In edditicts, emendated interest at I pares& per year was paid to depositors of two banks in latch the remaining deposits were paid in full by the onrenty fUnd at final settlement at its &Mehra in 1.934. This interest is einitsned at $42,040. 2/ In additice to the.. looses, depositors of 33 beak* that tailed prior to larch 111. 1930, and were reargenised zeider the lest of April 30, 1929, which aro not covered by this table (see note 3 to Table 6 and note 2 to Table 7), had losses estimated at about $2.6 iii.Uics. This is based as se ,latleate of a 30 percent loss in 22 of the heats (message of Oovermor anger to the Leginisterst, march 4, 1934 Ilebeaska Senate sod The Jemeals„ corty-sizth session (extraordinary), 1930, p. 27. sli -ft • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1•••I." V creditors is also given in the table. Table 16 shows for each year the 411 insured obligations relative to the total deposits of the closed banks az reported foe the date placed in receivership, and the percentaaes of the insured deposits recovered from liquidation of assets, paid by the guaranty fund, or lost by the depositors. For all the failed banks as a group, the insured oblieatione were about one-half of 1 idercent greater than the deposits of the banku when they were placed in receivership. This is due in part to deposit claims allowed that were not on the books or not includel in those tabulated as of date of receivership. However, it pert it may be due to interest on claims that went to judgment when the guaranty fund was unable to pay depositors immediately. But this does not include interest an receivers' certificates issued to permit payment of depositoes in advance of payments from the guaranty fund: 411 such interest wms charged to the receivership as an expense item. For the entire period, ,D percent of the insured obligatioas WS* paid from the liquidation of assets. The remainder was paid from the fUnd, for banks which were placed in receivership to May 1927, and lost to the depositors for the remaining failures before the repeal of the guaranty as of March 181 1930. It the deposits paid off by banks operated as going concerns are included, as measured by the net change in their deposits while in the hands of the Guarantee Fund Commission, and the deposits at time of closing, rather than those shown in the receivership records, are used for all failed, banks, the amount realized from liquidation of assets is raised to 41 percent. Ceeperison of assessments and losses. Table 17 compares the assessments levied, including those revoked by court decision, with the • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -66Table 16. PERCENTAGE OF DaOSITS INSURM, AND PMCENTAGE OF INSURED DEPOSITS PAID BY OUARANTY FUND AND RECOVERED FROM LI4UIDATION OF ASSETS, BANK FAILURV3 UNDER TWE NIBRASKA DEPOSIT(RS' GUARANTY FUND, BY YEARS of insured deposits Unpaid iiiy aid by gparantg fund Paid .7.6ta1 percentage Year of to Not re(loss &cowfrom liquidsfailure of total depositors) covered; from ered assets tion of deposits i.e., loss assets iasure to fund and on "sale sante Total 0 100.5 100.0 31.4 4.0 26.9 1914 994 100.0 55.3 29.4 15.3 1)16 100.7 100.0 26.8 31.6 39.5 1920 1921 1922 1923 1924 94.3 104.3 103.3 109.5 95.1 100.0 100.0 100.0 100.0 100.0 23.8 ..9 26.1 15.3 18.8 9.1 19.7 8.4 6.6 5.0 67.1 47.3 1925 1936 1927 1928 97.1 102.0 105.5 101.) 100.0 100.0 100,0 100.0 37.6 49.3 17.8 18.8 1929 97.3 100.0 36.5 1930 90.9 100.0 55.5 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 37.7 84.1.........• ••• 111. ••••10 gob OP .100 a/MP 76.3 5.9 56.5 1.4 49.3 .2 9.5 2.0 .1 410 40 al• • ea 40 4111. 72.5 79.2 63.4 44.5 -69.. • PULED BANKS, Table 17. ANNUAL ASSESSULTTS MIND, LIABILITY POE DEPOSITS IN FUND GUARANTY S9 AND CUMLATIVL DZIGIACY, Ni3RK DE2O3r2OR Year Assesamen6s levied A/ Cemmlative Access of Deficiency Deposit ts Assessmen Deposit liebillithil- assessments (excess ity of the fund 3/ levied levied liability) ity of the fund al•••••••••• Total /221811,372 091914,152 176,863 583,721 855,528 996,175 1911 1.912 1913 1914 46,863 406,856 271,807 i40,647 1915 1916 1917 1918 1.919 144,684 421,472 219,904 313,029 b02,4T( 1920 1921 1922 1923 .1924 639,244 2,317,808 1,971,580 2,046,320 1,004,660 649,3 2,982,9611 3,220,991 2,066,052 1,121,272 1925 1926 1927 1926 1929 1,616,330 1,672,339 1,653,207 1,508,361 1,375,981 2,827,638 2,937,236 8(3,757 , 4 6,391,163 12,261,675 12,498,883 12,932,655 14,171,222 15,870,091 15,824,429 20,743,646 17,332,790 27,135,011 18,708,771 39,396,686 030 1,102,608 517,466 19,811,379 39,914,152 • • • • a• 16,656 -43,917 •• •• VOW 1,140,659 1,562,331 1,782,23.5 2,100,264 2,902,741 11.01. • • 181(.4_16 176,663 583,721 855,528 977,519 18,656 1,122,203 62,573 1,499,758 62,573 1,719,662 62,513 2,037,691 62,573 2,840,168 3,541,98 711,938 2,830,047 2,164,891 3,694,902 5,859,793 91),4ao 6,915,893 7,831,373 8,983,945 893,748 9,877,693 10,882,553 10,105,217 777,336 • • OW. IND • • •• el.OM -e dion• 04..0 • MO IMOD. ••• •• •411. •10 •• •1110 433,972 1,698,669 4,919,419 9,802,221 20,687,91;' 20,102,4 in 1/ Prom Table 13 with ihi avvormsdassesessmia forl9s9 and 190, estimated in deposits of the basis on that Iable as a residual, divided between the two years parti.cyating banks at the telAssamg of the yeari;. Incluling 2 Deposits paid net the fond, adjusted for recoveries by the fund paced in banks the s) that on "sale assets", and deposits unpaid (loss to depositor law thk tultV:fr reopened banks in receivership. Including the loss to depositors in million. $42.) at is estimated fund of Aril 30, 1929, the total deposit liability of the y deficienc j21 If the loss in seeepoised banks is taken into consideration, and the deficiene figure computed from assessments collected (instead of those levied), the final figure becomes $25.7 million. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis liability of the fund on accountof failures. The data are given for each O year, and cumulatively, with the cumulative excess or deficiency. This excess or deficiency, it Should be noted, is a different concept from the accumulated surplus or deficit of the fund. 4hat the deficiency figures show is the additiowe assessment that would have been necessary, in addition to those levied, to have paid all the insured deposits, after taking account of recoveries from the liquidation of the aeeete of the failed beliefs. It does not include any allowance for interest or °tiler expenses, or for funds needed to pay depositors at once the amounts eventually recovered from liquidatiou of assets. By the end of 1919, with only two failures, the assessments levied had accumulated to nearly *3 million, or bout 1.0 percent of the deposits of the participating banks. This amount, together with the additional regular 411 and special asseeeeents, provided a emulative excess of assessments for another fivu years or until 1925. During these years the fund was rapidly declining, mad thomdh it fell far below 1 percent of deposits, the maximum special assessment was not levied in any year. Mad the maximua assessments been levied, an additional $2.2 million would have been collected., extending 1/ During the years. the net cumulative excess of assessments for another two remainder of the period of applicability of the insurance, with the siazinu. annual assessment reduced to three-fifths of 1 percent of deposits, assessment receipts were far below the losses, aed would have been insufficient to nest them had none of the aseeasments been revoked by court decision. to testimony in ig-ffstrict Court in Anic State Bank v. Bryan, levy of the maximum assessment would have yielded the following additional amounts: 4503,778 in 1921, 035,309 in 1922, 7/7,346 in 1923, of the United .4, or a total of $2,221,169 (from Few and $503,734 in 199 of Briefe, Copies States Supreme Con rt, Transcripts of Records and File 1930, Vol. 33, Case No. 63 p. 6564 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis According -71m For the entire period, a4gragate assessments of 442.5 million would have been necessary to have met the claims of depositors in excess of the recovery from the assets of the failed banks. The assessments collected provided 39 .percent of this &somata but had all the assesscio nts levied been collooted, they would have provided 46 percent. In Table 18 the rate of aeaesonent saeh year, and the amount .ievied i)er 4100 of depocits in participating banks, end also per *100 of the hainkmf to;.ai capital 4A:counts 'are compared with the rat. that would have been necessary to have met the eventual losses from the failures in that year. For the entire period the assessments levied averaged one-half of 1 percent per year of deposits in participating banks, while the losses in failed banks, including those in the banks reorganized under the 1.929 law, avenged over 1.1 percent of such deposits. The nexieue annual essessmeut under the original 411 law was 1.1 percent or just enough to have covered the iu.Ll net cost or deposit gmaraaty daring the time the insurance wee applicable, nad it been poxLible to have levied this maximum each year throughout the period. This vas not possible during the first nalf uf tee period oeomuee failures were few, and onLy the initial assessment and the very amall regular asuesement could be levied. It eau not possible during the latter part of the period because of the reduction or the maximum to eix.tenths of I percent which was made in 1923. The assessmente levied on the banks averaged ancut 3 pereent per April 30, 1929. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in wines reorganised wider the law of • -72- 111 Table 18. COMPARISON OF ANNUAL RATES OF ASSESsKTs LEVIED wITE RATES REAUIRED TO MEET DEPOSIT OBLIGATIONS IL FAILND NAND, NSBRASKA DEPOSITORS' GUARANTY FUND, BY YEARS, 1911-1930 Year 1911-1930 averse 1911-1920 1921-1930 1911 19.1.2 .1.913 1914 111 Assessment rate per $100 of deposits 1../ !AP ON la Ix NI .25 Per $1400 or deposits Ier $100 of total capital in participating accounts in .larticipating beaks at beginning °V /ear bents at beginning of year Losses on Assessments Losses on levied. g/ deposits levied _ 4/ deposits in failed in failed banks V tanks 4/ Aime.amssta /2122 .24 .65 .50 .25 .55 .10 .33 .15 .3o .g.:9152/ .05 1.67 45.24 06.85 1.33 4.71 .28 12.06 .02 1.00 2.18 1.35 .67 .09 7o4 .62 1.61 .1.7 woo. •••••• ••• 1,15 1916 1917 1916 .10 .10 .14 .37 .13 .14 1919 .30 .31 1920 1921 1922 1923 1924 .30 .90 .90 .8o .4o .23 .91 .91 .86 .23 1.1.7 1.49 .87 1.51 .5.00 4.64 1.53 6.44 7.59 5.02 5.06 .42 .47 3.02 3.37 1925 1926 1927 1928 1929 .go .6o .6‘.) .6o .6o .59 .6o .55 .55 1.04 1.04 1.77 2.33 4.86 4.85 5.18 5.16 4.31 4.92 8.49 9.1u 15.23 20.38 43.87 1933 .55 .58 1.29 6/ 4.26 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .10 .2o WM , .4.1w .77 .97 2.27 art • ON. 9.53. §./ -73_ —)1.11vse • Footnoteb iftble 18. Frua Tubla 13. j Fres assessments 1 (Tables 13 ,nd 17), gad deposits in Partici-' 1-/g// puting bunks (Tia10 14). lecongle, • 7141", `kiLt4"4'-ad”"--1`j"-in depaiisits and 3/ From deposit lidbilit4r of the fend (Table 17), participating banks (20ble 4). Pros abasements levied and deposit liability of the fund (Table IT), anki capital accounts of State banks as given in Quil reports for ciats nearest the beginning of the year. If clle .-4.3438 in reorganin,a baths are incluLed, this azure becomes $1.13. 6/ 'otwil-.1 rate for failures t;) March 16. 2 • • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -74. year of their vepital investment, as meaeured by their reported tctal O capital accounts. During the 1921-.L930 ported, this average vas nearly 5 percent. aza aspesements zufficient to meet lossee been levice, they would have averaged ever 12 percent of total cepital accounte during the 1921-1930 period, and nearly 7 percent for the entire period of the deposit insurance zysteme Banker.; Conservation Yuad. Table 13 shows the =mate reported each year by the earticipating Uenee as investmeate in the Buillers Couservatiou Fund, authorized by the 1923 amendments to the aepoe!.t gmarauty law. Asseeswente for this fund, in the form of drafts by the Secretary or the Department of Trade and Ccumeree, could be leviod gp to eve-fourth of 1 percent of the average daily deposits in the participating beaks, with a asaimua fund at av time of on-third of 1 pereent of such depomits. The proceeds of these azeeements were uecl as "deposits* or loans to the banks operated by the Guarantee Mad Commiesiun. The remittances by the banks on the draits were carried on their bons., as an asset until repaid or charged off. In the case of liquidation of a bank with a loan or "deposit" frau the Bankers Conservation Fund, such deposit was given the some status as other deposits. It appears likely, therefore, that a part of these deposits in the banks closed in 1927, 192b, and 1929, Which had been operated by the Guarantee Fund Commiesion, were lost. Such losses were a cost of the guaranty system to the State banks in Nebraska in addition to the assessments levied for the guaranty fade Newever, no information is available regarding the recoveries and losses by the participating banks on their assessments for the Bankers Conservation Fund. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -75Table 19. MANCE, BANKM0 CONSSRVATION FUND, Nic.MRASKIA, M/DTEAR AND YEAR-END CALL DATES, 1923-1929 rate • Beakers Conservation Fund Per $100 of deposits on amac date 1923-JUne 30 1923-Dee. 31 478,776 533:393 $0.03 .22 1924-July 21 1924-Dee. 31 548,255 374,591 .22 .14 192,-June 30 1925-Dee. 31 375:613 628,945 .13 .22 1926-Jtme 30 1926-Dee. 31 629,546 639,473 .22 .23 1927-June 30 1927-nee. 31 634,009 613,656 .23 .22 1928-June 30 1928-Dee. 31 541,046 442.38T .21 .18 1929-June 30 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis none • -76- • Adminietrative cost of the depositors' parent/ fund. The administrative cost of the depositors' guaranty fund is also excluded from the figures of the fund given in preceding tables. From the beginning of deposit guaranty to the creation of the Guarantee Fund Commission in 1923, the fund vas administered by the State Banking Board, and the cost of its operation was not segregated from& other expenses of the Board. The expenses of the State Banking Board were met by legislative appropriations, but the State Treasury received the proceeds of the examination fees levied on State banks. From the time of establishment of the Guaranty Fund Commission in 1923 to the end of 1929 the Guarantee Fund Commission and its successor, the receivership division of the Departmmt of Trade and Coomerce, spent an average of about $100,000 a year. The greater part of this A94 obtained from assessments on the banks in charge of the Ccmmission or the receivership division, but some of it enme from legislative appropriations, and a small part from an assessment on the banks participating in deposit guaranty, intcreat, and miscellaneous sources. The receipts free these sources during the period, the expenses met therefrom and the unexpended balances at the end of 1929 are Shown in Table 20. In addition, an n-ae:e.opriation of $150,000 was made in 1929 to conduct the banking investigation, of which $99,000 had been opent by August 1, 1930, when the investigation was coepleted. Settiement of the affairs of the 42Eanty fund. Under the law of March 18, 1930, which repealed the applicability of the guaranty to future failures, the remaining assets of the guaranty fund, including claims for unpaid assessments and further recoveries from the failed participating banks, were transferred to the Depositors' Final Settlement Fund, administere • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -77Table 20. RECEMPT6 AND EXPEMSES FOR ADMINISTRATIVE PURPOSES, ZEBRA= DEPOSITORS' WARM"! FUND, Msv 1, 1923 to Dec. 31, 1929 Receipts, expenses, or balance Legislative appropriations Ousrmmtee Fund Commission -*i7, 1923 to April 30, 1929 1/ Department of Trade and Commerce, Receivership Division May 1 to Dec. 31, 1929 1/ $190,000 $90,000 4,538 4,538 Assesiments on banks operated as going concerns 164,213 164,213 Assessments co banks in receivership 267,464 212,040 55,424 7,701 7,547 154 633,916 633,9 --16 478,33e - 23,829 454,509 155,576 / 23,829 179,407 534,50 454,13a Asessanents OR $100,000 part- telpating hanks Interest and miscellaneous 111 Total Total reeeipts Transferred..4/ Adjusted receipts Administrative expense total From appropriated funds 99,618 Freon assessments and miscellaneous receipts 434,687 Unexpended funds 99,412 89,628 464,,lo 372/ .... 9,990 70,377 99,040 NFL--boes not Liolude Pram .L - 1. apprQpriatEdrns for 5 Noma o Banking mhi supervised operating ban4s, nor for the office of VA Secretary of the Department of Trade and Commerc.c. 2 From the Commission to the Department. Returned. j Includes *90,010 unseipmmtediegamlature appropriation, and *9,030 unexpended other receipts. Available for expenditures in 1930. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -78by the Department of Trade and Camerae. The previous priority of payment 7,t depositors' claims in order of the dates of receivership of the failed banks was eliminated. All unpaid claims certified to the Department, incleeieg unpaid deposits of barks reorganized under the law of April 30, 1929, and also including unpaid claims for refund of assessments made to the Bankers Conservation Fund, were given equal states, subject to the qualification that payments should be made first to claimants whose claims had been allowed and certified for at least a year and had been paid the aeallest percentage of their respective claims. Under this act, the Department of Trade and Commerce paid dividends ea depositors' claims ringing from 1 percent to 81 pant in 31 banks, in an 1/ $271,000; or amount approximately lama the assessment and aggregite settlement provisions of this act were oballmmeollb, the bombers and were declared unconstitutional by the District Court, further payments were held in abeyance until the decision of the State Seprie Court and dental of a review, announced in May 1933, by the United 3tates Supreme Court. The result of the decision, which nullified the settlemant previsions of the 1930 act, was to restore the priority of payments to holders of receivers' certificates under the law of 1923 and to prevent collection of the disputed assessments. 034 only romAtining resources from which further payments to depositors could be made were additional collections from liquidation of assets of failed banks Uhose depositors had been paid from the fund or from Tabulate& from .aata for the faividual banks and included as payments time the guaranty fund in Tables 12 and 15. The Final Report of the Inrsetigation, p. 16, Shows *243,995 as paid from the Depositori/ rra:Mttlemeni Pund to June 30, 1930. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • =Paid assesseento an the particinating banks other than those revoked by the court decision, and any interest thereon While awaiting the final court decision. in 1934, the funds available from the sources, amounting to $134,000, were used to complete payments to depositors holding receivers' certificates in two banks that had been placed in receivership in 1927, with accumulated interest at 7 percent per year, and to make a partial payment on 2/ another in bahk: the remaining deposit claim APPRAIaL OF THE NUMASKA DEPOSITORS' GUARANTY SYSTIN The deposit insurance system of Nebraska maintained full payment of all the obligations falling upon it for nearly sixteen years, a longer period than that of any of the other eystems of deposit guaranty daring the 1908-1930 period, eecept for Texas. The proteetion it afforded uan greater than that of Texas, covering all deposits in comparieon with only noninterest- 111 bearing deposits fiA Texas, and the aggregate amount of deposits paid from the fund, adjusted for recoveries from liquidation of the assets of failed banks, was roughly 50 percent more than in Texas. Its burden on the banks in terms o.‘ the average annual rate of assessments paid, vas substantially hillier than that in any of the other systems. However, its unpaid oblieations were very la. though less than in South Dakota, as a consequence of a high eailure rate and a low rate of recovery on the allots of failed banks, relative to th ther States with deposit guaranty. graurvivirigresords of the banks that failed prior to cessation in 1.927 of payeents to depositors fro& the guaranty rarld show dividends sdbeequent to mid-1930 of on1y 0,000. No record has been found of any collection of unpaid assesamente subsequent to January 2, 1930, except the small amount in May of that year Sheen in Table 14. 31 ilv!, r,eerican_,Banitor July 18, 1934, and The Northwestern Banker, ------w portion of this amcarreprommaagamvald . ri.,---42(August—ugy 39 Vol. deposits is included as payments tram the guaranty fund in Bibles 12 and 15, and the interest is shown in note 4 to Table 15. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The operations of the Nebraska deposit insurance system were also subjected to a more searching investigation of its weaknesses, at about the time it ceased to function, than any of the other syste:us. The report of this investigation summarized the defects of the system as follows* Three sound banking principles were essential to the succes s of the Guaranty Law) if the insurance plan was to prove sound and safe. First--Limitation of bank charters to the requirements of business and safe credit of the community served. Second--Bank earnings of sufficient amount to insure a fair return and the charging out of losses that came in periods of business depression. No bank that can honestly show a fair profit ever fails. S Third—Competent and efficient supervision and examination by the department in charge of the administration of banking laws and requiring from all officers and managers of banks a state licens e certifying as to their honesty, ability and character. Failur e to observe and enforce these essentials undermined and wrecked the Guaranty Fund. The Guaranty Law brought prosperity and strength to the state banks and saved depositors from losses of millions of dollar s. It has been discredited and destroyed by those who should have been its staunchest defenders. Betrayal of their trust by faithl ess bankers and inefficient supervision nullified the law and destro yed the confidence it had established. The Department of Banking Administration is required by law to close banks shown insclvent by its examiners. It is a felony for officers of a bank to receive deposits after it is insolv ent. If an insolvent bank is permitted to operate, the depositor is grossly deceived and his supposed security becomes a state swindle. In case of failure stockholders are liable for an additional amount equal to their capital investment. Under careful supervision the double liability should insure liquidation with little loss to depositors. A former Governor stated in a message to the Legislature that early in his administration his Banking Commissioner • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • 4Lt4 that there were 12, Aate banks hopelossly insolrepc,rt vent. A BankinE Commiesiomer of another adeiaistration stated to ma that a few months after he took offiee **made a written report that 150 beaks were at the* dote insolvent. Permitting brOkeu banks to run only deleyed thc deluge. Lax law enforcement did not save the banks. It did east deponitors large Iodises OM piled up a mountain of bank failures When conditions could no longer be concealell.. The greateet blot oft our State and Patit:nal governments i allure to enforce laws sainted for the protection of property and tho puniahment of crime. ill Ir. T. Bruce obb, Chairman, C.:mmitto 0:1 Businecs Rzssardh, University of Nebraska, has node the following comm‘nts on the facts revealed by the banking invebtigation: probably the most bitter complaint made by the auditorl in connection with the bank examination use that relating to th,.; enforcement of the banking lava. In practi7waly avery bank audited the accountants went out of their way to emphasise how the depositors' money had been put in jeopardy through the lack of enforcemont or the banking laws. In precediag sections it was pointed our how banks officers used thc bank's funds to finance their own private ventures, how the law in respect to excess loans and excess real estate was flagrantly violated, and how th2 embezzlumwat of baLh :Lunde by officers was extensive and carried on over long periods of time. ThrourAout this sordid story surely the reader must have wondered abeut the wetter of Iaw entorceeent. TO this section, however, a different aspect of this vestion will be considered. Banks were examined periodically. It has often been assume1 that the weak place in the supervision or state banks vac in the matter of bank examinations. the auskroom of the State banking viten in the decade preceding the debacle nnturally placed a heavy strain an the mmehinery for awanining banks. Bank examiners were poorly paid, and as soou au a young examiner of promise acquired proficiency he usually left the service and went into banking. Jut a careful study of the audits of the titled banks indicates that the trouble WOW not primarily with the ememlastions. lo doubt bens examinations were too inXrevent and often mad, bra= with little experience, yet the fact remains that if the informmtion disclosed by bank emanations had been acted. on aggressively each lose to depositors would have been avoided. .21 -Final- Report of the Beaing fnvestigation, pp. 8.9. T. Bruce nddb, State Bank Failures In Nebraska, pp. 42.43. -7 .1 • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 -820. An additional Comment may be made on one of the problems mentioned in these quotatiens, because it was much acre serious than in most of the other States with deposit guaranty systems. The excessive nuMber of banks operating in hibrasihs is indicated by the fact that in 1920 a beak was in operation for each 1,100 of the population. 2bo maximum overstep clientele, computed by assuming that every family in the State had a bank aceount, was thug about 275 fmailies. Since a considerable preportion or the banks must have had fewer customers than the average, it it apparent that some of the banks were dependent for their business upon•relatively smell rateber of families in agricultural areas populated by people in the low and medium come groups. The inability of the State Banking Board to check the birthrate of banks was thus a serious deficiency in supervisory powers. The excessive nure'oer of be, eau also doubtless one of the conditions conlucive to the 411 making of illegal or unduly risky loans, and to the low general level of competency among bankers. A thousand good bankers cannot be round as readily au a third of that number. • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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