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413.1a — Source Material
Possible Methods of Improving
Study #10
Bank Supervision
Pa t 1
Bank Sussensions Stud of 1 '6
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Federal Reserve Bank of St. Louis
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Study No
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED. RES. DIS.
By — Chas. O. Hardy & Jacob Viner — 1935
SUMMARY OF RECOMMENDATIONS
Detailed recommendations are scattered throughout the main body of the report, of which
the following are the more important:
1. That banks should be encouraged to make sound working-capital loans of 6 months'
maturity and to renew them indefinitely so long as (a) the borrower is able to pay interest out of
\-1 current earnings, or has the prospect of adequate earnings over a reasonable period of time,
and (b) ps statement continues to reflect a sound position as to net working capital and net
worth. I (See pp. 16-17.)
2. That the rules of eligibility for rediscount at the Federal Reserve Banks be modified
so that paper shall not be ineligible merely because it has a maturity as great as 6 months, nor
because of the number of times it has been renewed. ((See p. 17.))
3. That bank examiners be instructed to abandon the claisification of loans as "slow",
so that loans will be criticized only on the basis of doubt as to their repayment or the certainty
of loss, and that examiners be more closely supervised and given more specific instructions by
tne examining authorities, to assure greater uniformity of policy. (See p. 23.))
4. That the Reserve banks be relieved of the responsibility of making direct loans to industry. We make this recommendation because we believe that the extension of this type of
credit conflicts with more important responsibilities of the Reserve banks as supervisors of
the lending and investment policies of the member banks.)(See p. 38.)
5. That in case the Reserve banks are not relieved of the responsibility of making direct
loans to industry, the industrial advisory committees be abolished. This recommendation is
based on the belief that the work of the committees is essentially a duplication of the work
of the lending officials of the banks and results in an undesirable division of responsibility.
(See p. 37.)
6. That if the Reserve banks continue to make direct loans to industry, lending officials
be given considerably greater latitude, by legislation if necessary, in making loans to clear up
existing debt. Specifically, we suggest that the Reserve banks entertain applications for the
purchase, on a 20 percent participation basis, of adequately secured notes now or hereafter
held by banks representing working capital advances already made. In passing upon applications for such advances, attention should not be given to the date when the advance was
originally made, except as it bears on the adequacy of the security. (See p. 35.)
7. That in case direct lending by the Reserve banks is continued, the question whether a
given concern is a "commercial or industrial" enterprise within the meaning of the law should
be regarded as a legal question and that no applications should be rejected for this reason
except on the basis of legal advice. (See p. 34.)
8. That until the practice of the commercial banks has been liberalized along the lines
indicated in recommendations numbers 1 to 3 above, the Federal Government continue to make
direct loans to industry. This might be done either through the agency of the Reconstruction
Finance Corporation or through a new intermediate credit system which might succeed to the
responsibilities of the Reconstruction Finance Corporation at the expiration of itspresent
authority to make these loans. We make no recommendation as to which alternative should
be followed.' (See p. 47.)
9. That the policy of the Reconstruction Finance Corporation with regard to the making
of loans to clear up existing debt be liberalized. (See p. 42.)
10. That the Reconstruction Finance Corporation relax the stringency of the regulation
which restricts the field of eligibility to applications for "loans made primarily to supply needed
working capital * * * as contrasted with fixed capital." While we do not recommend
unrestricted lending to finance expansion of plant and equipment, we believe that in some cases
loans to rehabilitate or complete fixed-capital equipment will not only give employment to labor
in the creation of the capital itself but facilitate future increased employment of labor and
enlargement of the national income. (See p. 41.)
consolidated
I In case the direct-lending functions of the Federal Reserve banks and the Reconstruction Finance Corporation are
recommendations 5 to 7 and 9 to 17 inclusive, will apply in principle to the work of this new agency.
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in a new agency,
10
VIII
11. That the policy of the Reconstruction Finance Corporation with regard to the acceptance of a pro rata share in the protection afforded by collateral, along with existing creditors,
be liberalized. (See p. 42.)
12. That the Reconstruction Finance Corporation abandon its policy of requiring applicants to show a probability that a loan can be repaid out of profits, in cases where the security
offered is such that the Corporation need not rely on prospective profits to protect itself against
loss. (See p. 42.)
13. That the Reconstruction Finance Corporation abandon its stated policy of refusing
applications for loans from the brewing industry. (See p. 43.)
14. That there be instituted a more liberal policy than is now followed by the Reconstruction Finance Corporation with regard to the pledge of inventories and the assignment of accounts,
particularly in cases where local banks are willing to participate in the loan and to take responsibility for the "policing" of the loan. (See pp. 43-44.)
15. That the Reconstruction Finance Corporation introduce into its procedure the use of a
brief preliminary application to the end that loans which are clearly ineligible may be rejected
without subjecting the applicant to the delay and expense involved in the preparation of the
present form of application. (See p. 45.)
16. That the Reconstruction Finance Corporation cease to require audit and appraisal
except in cases where such procedure is necessary in order to establish the adequacy of security
for loans otherwise acceptable. (See p. 45.)
17. That the local agencies of the Reconstruction Finance Corporation be given authority
to grant loans of 810,000 and under, without the necessity of such grants being confirmed in
Washington. (See p. 46.)
18. That in case the direct-lending operations now performed by the Federal Reserve banks
and the Reconstruction Finance Corporation are united in a single agency, whether the Reconstruction Finance Corporation or a new agency, and in case lending standards are liberalized as
recommended above, local offices be maintained in or near all cities of, say, 50,000 population
or more, to assist would-be borrowers in preparing applications. (See p. 47.)
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Federal Reserve Bank of St. Louis
Study No.,,10
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED. RES.
DIS.
By — Chas. 0. Hardy & Jacob Viner — 1935
IV. THE CREDIT SITUATION
a
al
Is
fl
In addition to the statistical data drawn from the reports of our investigators, we have
collected a very large body of qualitative information including comments made by business
men and bankers to our investigators, letters written to the Treasury Department in connection
with the survey, and general reports submitted by the investigators summarizing their impression
of the situation in their respective territories. In this section we present a summary of our findings with regard to a number of phases of the credit situation based chiefly on these general
reports and letters, but in part on statistical data drawn from the case reports.
New working-capital loans.—By far the most important issue which arises in connection
with the availability of bank credit in the seventh Federal Reserve district has to do with the
so-called "working-capital" or "slow" loans. In accepted banking theory in Great Britain and the
United States, it has always been taught that banks should make only self-liquidating loans,
that is, that they should advance funds to manufacturers only if they were to be used to buy
raw materials or meet pay rolls, or to produce goods already sold, the proceeds of the sale being
used to retire the loan; or to finance seasonal operations like cold storage or the merchandising
of agricultural products; or to enable retailers to carry inventories through a seasonal peak.
In practice, however, at least in America, banks have never confined themselves, either in
the distant or in the recent past, to this type of loan. To a considerable extent they have financed
the purchase of equipment and even buildings, knowing that the money could not be repaid out
of turnover, but only very slowly amortized out of profit.. To a still larger extent they have
pursued a similar policy with regard to the permanent working capital of the business, by which
is meant the minimum investment in inventory, accounts receivable, and miscellaneous supplies
which is never liquidated so long as the business goes well, as distinguished from the seasonal
or other temporary peak load which is actually liquidated from time to time.
In the normal course of business, inventories are sold and accounts receivable are collected
frequently, so that the money comes in just as it does in a true commercial or "one-turnover"
loan. But if it is a working-capital loan, the money, though it comes in, cannot be used to pay
off the bank loan without restricting the operations of the business.. Unless there is a seasonal
!decline in the amount of working capital needed, or the business is going backward, the inventory
is replaced as it is sold and the accounts receivable as they are paid up are replaced by others.
Before the depression it was common banking practice to let such loans run on year after year
so long as the interest was paid and the borrowers' financial statement continued to show a
satisfactory working-capital position. A satisfactory statement meant one which indicated that
a substantial proportion of the working capital was furnished by the borrower himself or had
been obtained from investors through the issuance of long-term obligations. This requirement
was frequently phrased in terms of a 2:1 ratio of quick assets to current liabilities. The 2:1
requirement was partly a safeguard against overvaluation of the assets, but in large part it was
designed to insure that the borrower himself held a substantial stake in the business.
The most striking difference between the present situation and that which prevailed for
many years prior to the advent of the present depression is the disfavor into which these working
capital loans, nominally short-time, but really long-run, have fallen. This disfavor is evident in
the attitudes both of bank examiners and of bankers. Many examiners have been pressing
the banks to secure drastic curtailment of loans classified as "slow", pretty much regardless of
the quality of security, and this attitude seems to have the approval even of many bankers.
The following report, made by one of our investigators, indicates something of the strength
of this reaction:
In the early part of 1932 two of the largest banks in this town closed and were very painfully reorganized.
Other banks closed and were never reopened. In the following 6 months the chamber of commerce, the leading
local paper, and other agencies engaged in a great educational campaign concerning the proper function of a
bank. A college professor wrote a series of articles on this subject which appeared in the leading local newsPaper. The purport of these articles was the "good bills" doctrine. Banks should make only short-time loans
of a self-liquidating sort upon the most unquestionable security. This doctrine was imbibed to some extent by
the remaining bankers, but even more especially by the public. It came to be understood by the public that
the banks would make no loans except of the highest grade, so that a situation arose where only people offering
this kind of security applied to the banks for loans. Consequently the banks have in the past year had no
°PPortunity to refuse loans.
(13)
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14
An investigator working in northern Iowa says:
* * * With regard to mercantile and manufacturing loans, banks in
my territory have swung back to
the short-time loan running from 90 days up to a maximum of 6 months. They are trying to re-educate the
business community to think in terms of short-time credits, whereas the business men have so long been accustomed to think in terms of semipermanent lines of credit that they find it hard to think in any other terms.
Most of the important loan rejections in my territory arose out of applications for loans running from 1 year to
5 years, and again, most business men frankly said that they saw no use in borrowing for 90 days—that often
plans for the business could not profitably be made on so short a time basis. Certainly this difference between
bankers and business men is the sorest point of all in the bank-credit situation in my territory.
A Detroit investigator writes:
Since their lesson which climaxed in 1933, they [i. e., the banks] are not willing to risk depositors' money
for any but the shortest terms and except under conditions which assure speedy liquidation of the loan. In
this respect the bankers seem to be reverting to old-fashioned commercial-banking theory—but the trouble
now is lack of applications for old-fashioned commercial loans.
A Wisconsin investigator says:
There never has been and there is not now much demand for so-called "self-liquidating loans." The few
that there are, are adequately taken care of. * * * It is obvious from a study of the cases that I sent in
that most of them concerned capital loans. * * * Here is a case which illustrates my point: The examiners
"forced" the officers to reduce local 6-percent loans. The bank officers maintained that practically all of these
loans were good, but slow, and that their forced reduction hurt the local situation and caused a deterioration
in general business.
An investigator working in the suburbs of Chicago and adjacent Illinois points writes:
The banks in this territory have had a very definite "about face" in the matter of retirement of bank loans.
From the prosperity idea of more or less permanent borrowings from the banks, the banks have gone to the
other extreme by limiting loans to business to projects which are "self-liquidating" in character. Hardly any
bank will extend a loan for over 60 or 90 days. A few banks insist rather rigorously upon the retirement of
the loan at the expiration of this period; most of the banks, however, will renew the loan providing the borrower makes a reduction in the principal. The objective is to have the loan retired within 1 year or less.
Loans of the 60- to 90-day variety are not the type which many of these applicants need. The realistically
minded applicant will admit as much; many of them state that if loans are limited to 90 days and must be retired
at the end of this period they are not interested in becoming involved.
The situation is made worse by the fact that some, though apparently not very many,
hankers have the idea that in order to qualify as a good commercial loan, not only must the
transaction be a self-liquidating one, but the liquidation must occur within some arbitrary time
limit. For example, a few insist that a loan to carry goods in cold storage over the summer
is a capital loan because the period of liquidation is more than 90 days. Others regard 6 months
as the limit; in the case of agricultural loans 1 year is frequently mentioned as the longest liquidating period that will keep a loan out of the capital class.
This wave of righteousness among the banks and the bank examiners accounts for a very
large proportion of the current discontent over the unavailability of bank credit. Of the cases
which we have investigated and tabulated, 65.2 percent are applications for capital loans, and
only 23.5 percent are for commercial or self-liquidating loans. With any marked expansion
in the volume of business, the pressure for expansion of working-capital loans will become much
more serious.
To be sure, the channels through which investment credit for fixed capital is ordinarily
obtained, are blocked up even worse than are the banking channels through which working
capital has been obtained in the past. But in the early stages of expansion this is a less serious
matter. The country's existing equipment of fixed capital is adequate in most industries, to
permit of a substantial expansion of business activity without involving the development of a
serious shortage of fixed capital.' This is true also of the working-capital position of the very
large corporations, as is pointed out in detail elsewhere (p. 66). But for smaller business concerns
to whom the open market for securities is not accessible, the only important sources of borrowed
capital have been in the past the banks and the real-estate mortgage-loan market. The latter
market is now extremely restricted; hence the withdrawal of the banks from working-capital
financing constitutes a serious obstacle to any wide-spread expansion in the volume of employment
and production at present wage and price levels.
Real-estate loans.—The disfavor mto which all slow loans have fallen has naturally reacted
unfavorably on the market for real-estate mortgage loans, since in the past the banks have
extended a large volume of credit on this sort of security. Information concerning the attitude
of banks toward real-estate loans was collected by the survey only incidentally, because the
1 Much of the existing fixed capital, however, is undoubtedly inefficient and costly to operate and with good business prospects and satisfactory
capital market conditions could profitably be replaced by new equipment.
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Federal Reserve Bank of St. Louis
Study N .,10
111.111.1
REPORT ON THE AVAILABILITY OF BANK CREDIT IN ffit, 7th FED. RES. DIS.
By - Chas. 0. Hardy & Jacob Viner - 1935
15
plan of our study limited the field of investigation to industrial and commercial loans, and
because most real-estate loans are made either for agricultural purposes or to finance home
ownership. However, a significant proportion of the credit needs of industrial and commercial
business, especially small-scale business, has in the past been met through loans secured by
mortgages either on the industrial property itself or on other real estate owned by these who
control the industrial business.
A southern Wisconsin investigator writes:
* * * The thing that strikes me here is the plight of the small business man, with a due or overdue
mortgage on his store, or place of business, or home. I know quite a number of such cases. In every one, the
business man was overlenient in extending trade credit to his customers, and as a result is in a precarious financial
position now. He has had to reduce inventories, and has a terrible current cash position. With his mortgage
due he is in a poor position for refinancing (the Home Owners' Loan Corporation will not take business property,
and he is not quite bad enough off for the Home Owners' Loan Corporation anyway). The banks feel as if they
cannot take any more such doubtful loans, and there are no other agencies of sufficient resources to fill the gap.
Although our investigators did not collect data concerning cases of refusal of real-estate
loans or pressure to liquidate them, enough incidental information was collected to indicate
that there is a pronounced tendency for banks to withdraw from the large place which they have
heretofore occupied in the financing of .real-estate ownership. . This is particularly true in
Wisconsin, Iowa, and Illinois, where our investigators were told in a number of banks that no
real-estate loans are being made. In this connection frequent mention was made of State
mortgage moratoria and the Frazier-Lemke Act as deterrents to lending on real-estate security.
On the other hand some banks, especially in Indiana and Michigan, expressed an interest in
increasing their holdings of real-estate mortgages.. An investigator who worked in both Illinois
and Wisconsin reported that out of 13 banks winch he visited, 11 were opposed to real-estate
mortgages, while 2 were desirous of increasing their holdings. An Indiana State law restricts
the ownership of real-estate mortgages by banks to 35 percent of total deposits; this law was
mentioned by two banks as a reason for not increasing their holdings of such investments.
Old capital loans.—During the period of rapid liquidation of bank deposits before the
banking holiday, a strong pressure for liquidation of old debt at. the banks was set up. In
many, though by no means all, banks this pressure for liquidation has never been relaxed.
Borrowers who have been able to keep up their interest throughout the depression and to make
small payments on the principal, now find themselves handicapped not only by the impossibility of getting new working capital through banking channels, but also by the steady drain
of their working funds to repay their old debts. This liquidation of old debts is possibly a more
serious disturbing factor in the present business situation than is the difficulty borrowers have
in getting new working-capital loans.
Even if there were no change of policy on the part of open banks, the existence of a large
number of closed banks which are being liquidated would necessarily create a credit problem for
the business men who are their debtors. But the situation is made very much worse by the
large number of open banks that are being administered, as far as their local accounts are concerned, pretty much as though they were closed banks.
Among the large cities in the seventh Federal Reserve district, the pressure is most severe in
Milwaukee and Detroit; there is little evidence of it in Chicago, Indianapolis, and Des Moines.
9utside the large cities the national banks seem to exercise about the same degree of pressure for
liquidation in one State as in another. Among the State banks, Michigan shows less evidence of
such liquidation pressure than do the other four States..
An investigator who visited a large number of Indiana towns said:
does not expand.
I think that the changed attitude toward debt is one of the reasons why banking credit
as long as the company
Debt was formerly regarded in most instances as a permanent part of the capitalization;
made money, the creditor did not expect or want, in most instances, to be paid, and if he did the debtor might
borrow elsewhere. Now creditors and debtors both regard debt as a temporary expedient, and expect that the
debt will be retired as quickly as possible. Bankers, business men, and bank examiners all talk in terms of reduction. As long as the People regard debt in this manner, it is difficult to see how we can have any great expansion
of bank credit.
A field man who worked in a Wisconsin town wrote as follows:
The picture is this: 3 banks in the community, 2 liquidating according to general practice and accepted
Orthodox finance theory, and 1 liquidating very little and attempting in its feeble way to :uphold the credit
structure of the community.
-}
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16
An investigator who worked in eastern Iowa reports:
The Reconstruction Finance Corporation is contemplating the purchase of $350,000 of preferred stock of
this bank. Apparently considerable pressure is being brought to bear on this bank to liquidate its slow accounts
as rapidly as possible and most of the interviews with the officers centered around this topic. They took the
position that the examiners were too severe in many cases and that they were forcing reductions too rapidly both
from the standpoint of the community welfare and from that of the bank's earning power.
Another Iowa investigator writes:
My interviews with leading business men in * * * convinced me that the present policy of the
* * * bank in bringing pressure on its business borrowers to steadily reduce long-standing lines of credit has
resulted in considerable irritation toward the bank and threatens to undermine the basis for a satisfactory
credit expansion in this community in the future. Many business men are declaring that ff they survive the
liquidation of their present loans and get out of debt to the bank, they will never again go to the bank and ask
for credit, working rather on a hand-to-mouth basis as far as their inventories go.
A Michigan investigator writes:
I recall the interesting case of the *
* * company. It is paying the interest on its old loan, but is
refusing to reduce it. If it were to pay the bank, its working capital would be depleted. This concern says that
it has all the money it wants, but is sure that it is going to keep it. The bank has been invited either to "keep
quiet", or come in and operate the business. This concern is now in fairly good shape so far as working capital
is concerned. Not so with those concerns which attempted to pay their debts (and succeeded in part) and now
cannot secure further accommodation.
That our investigators did not more easily find cases of refusal of meritorious applications
for credit is in considerable part due to this situation. A business man who is being pressed
to pay his old loan or knows that he will be pressed to pay a new loan before he is prepared to
liquidate it will not ask for a new loan, even though he is in urgent need of one.
An Illinois investigator wrote as follows:
There are few applicants because all who have money now borrowed from the banks are being pressed for
payment, and those who are not at present borrowers know of others who are being pressed and do not wish to
put themselves in that position * * * A bank is also unwilling to extend additional credit to a borrower
who has a debt with the bank upon which he has not been able to make significant reductions of late,even though
such funds could be used with apparent advantage.
And a Wisconsin investigator says:
There are a lot of concerns here for which I have made no case report as they have not been refused loans.
* * * Because they are indebted and being pressed by the bank, they know that they cannot get credit
even though their business now is moving upward. This cripples their operations. A lot of these concerns
are old established firms.
Obviously, a man who is quite unable to repay the principal of an old working-capital loan
may be a very good candidate for a short-term commercial loan to be used in carrying out a
specific operation or to finance a seasonal peak load; a new loan which could be paid off without
difficulty at maturity. Indeed he may be a good risk for an increased working-capital loan.
In large part the pressure for liquidation of these slow loans has come from examiners, but
it would be a mistake to put the responsibility entirely on examining officials. The attitude
of many bankers seems to be much the same as that of the examiners. All capital loans are
in disfavor. Presumably this is a result of the past wave of bank failures. It is not evident
that the slow loans contributed disproportionately to the insolvency of banks, but they did
prove embarrassing to banks which were trying to meet depositors' claims without closing.
They may be good assets to have in a closed bank but bad assets in one which is trying to
avoid becoming a closed bank, since they cannot readily be shifted to some other bank or
rediscounted indefinitely with the Federal Reserve banks.
The importance of liquidity of bank assets, as distinguished from soundness, has been
greatly reduced by the establishment of a system of Federal deposit insurance. It could be
reduced still further by making sound working-capital loans rediscountable at the Federal
Reserve banks.
We believe that every effort should be made to minimize the disfavor which now attaches
to sound slow loans on the part of commercial banks. We believe that commercial banks should
not make loans of a maturity of more than 6 months, on the strength of financial statements
submitted by borrowers which show that the chief reliance for the repayment of the loan must
be on profits or the liquidation of working assets, but we believe banks should be encouraged
to make loans of a duration up to 6 months and renew them indefinitely so long as (a) the borrower is able to pay interest out of earnings, or has a prospect of adequate earnings over a reason-
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Federal Reserve Bank of St. Louis
Ime
Study No.,10
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED. RES. DIS.
By — Chas. O. Hardy & Jacob Viner — 1935
17
able period of time, and (b) his statement continues to reflect a sound position as to net working
capital and net worth. In order to encourage the making of sound working-capital loans by
commercial banks we recommend that the rules of eligibility for rediscount at the Federal
Reserve banks be modified so that paper shall not be ineligible merely because it has a maturity
as great as 6 months, nor because of the number of times it has been renewed.
Old debt and new borrowings.--A closely related difficulty arises with concerns which have
established themselves and their products and have proved their ability to produce goods and
carry on satisfactorily, but because of the abnormal conditions of the last 2 or 3 years, have
become involved in financial difficulties and find themselves unable to carry their existing debt.
Their mortgages are falling due, or their indebtedness to closed or open banks is being pressed.
Many of these concerns have profitable business on their books and if they could get fresh capital
to finance themselves they could show a profit. Some of them have to turn away good orders
because they do not have the funds to meet their pay rolls, but banks are unwilling to advance
funds to them because of the danger that the old creditors will clamp down on them and perhaps
throw them into receivership or bankruptcy as soon as they appear to have any liquid funds.
In these cases some sort of capital readjustment or composition of the existing debt is necessary
to place the concern in a position where banks can safely extend them credit for working capital
purposes; but a good many banks have refused credit to concerns whose owners have taken such
action. An investigator who interviewed nine of the smaller Chicago banks says:
The banks have a rigid policy on business records. Bankruptcy, or a creditor's settlement within four
years of application for credit, apparently makes borrowing impossible.
An Illinois investigator says:
In several other instances, businesses which are indebted to a bank on an old loan were unable to get credit
from other banks even where such credit could apparently be used to profit in current operations.
•
Bank examiners as a factor in the lending policies of banks.—One of the reasons freqily
given for the supposed failure of banks to make commercial and industrial loans has been that
bank examiners are too exacting in their standards of what constitutes a proper bank loan.] In
the hope of determining whether bankers are actually refusing, because of the attitude of
examiners, to make certain types of loans they would otherwise grant, or whether this restriction
is a convenient fiction used by bankers when refusing to make loans, it was decided to interview
a large number of bankers on this specific point. Accordingly, the field investigators were instructed to question each banker interviewed on the question of whether he had refrained from
making loans which he ordinarily would have made because of fear that examiners would criticize the loans. In an effort to eliminate any hesitancy on the part of bankers toward freely commenting on bank examiners, Mr. Stevens, Federal Reserve agent for the seventh district, cooperated in the survey by writing a letter to all of the member banks in the larger cities and some
of the nonmember banks, advising them that he had been assured that all comments made by the
bankers would be held in strict confidence and that none of them would reach any examining
authority, either State or Federal.
The comments received from bankers as to their attitude toward examiners and whether
examiners have had a restrictive effect on their lending policies are summarized below:
TABLE 5.--Number of banks commenting and not commenting on examiners' standards
1
Number commenting
Class of banks
______
National banks ______________________________________ ______
State banks:
Illinois ____________________________________________________________________________
Indiana
Iowa
Michigan
Wisconsin
Total
Total
Criticizing
Not criticizing
87
39
28
30
23
18
19
5
10
15
5
4
118-- 39
--78
205
Total
Number
not commenting
126
33
40
38
23
23
157
_
283
Total
number
interviewed
74
33
24
14
24
27
200
66
64
52
47
50
122
279
196
479
The relative proportion of the banks offering criticisms, those having no criticisms, and those
making comments, is shown in table 6.
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Federal Reserve Bank of St. Louis
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18
TABLE 6.-Results of interviews with bankers concerning examiners' policies
!Percentages]
Banks interviewed
Banks commenting
Class of banks
Commenting
Criticizing
Criticizing
Not criticizing
Total
National banks
63.0
43.5
69. 1
30.9
100.0
State banks
56. 3
42. 3
75. 2
24.8
100.0
50.0
36. 6
73. 1
48. 9
46. 0
50.0
46.9
44. 2
38. 3
38.0
84.8
75.0
60.5
78. 3
82. 6
15.2
2.5.0
39.5
21.7
17.4
100.0
100.0
100.0
100.0
100.0
59. 1
42.8
72. 4
27.6
100.0
Illinois
Indiana
Iowa
Michigan
Wisconsin
All banks
It is evident from these tables that a larger proportion of the national-bank officers commented on examiners than did State-bank officers, whereas a larger proportion of State than of
national banks criticized the examiners. Of the individual States, the bankers in Illinois were
more critical of their State examiners than were those of any other State in the district, and
, those of Iowa were less critical than any of the others.(In connection with the criticisms received
from Illinois State banks, the following citations from the Monthly Bulletin issued August 1,
tep, 1934, by Edward F. Barrett, auditor of public accounts, State of Illinois, indicate official pressure
for liquidation and against new capital loans of any kind:
Cash reserves have increased, whereas loans and discounts have contracted. The demand for credit in
the form of loans in which a bank may properly employ its funds is at present negligible.
A bank, subject at all times to the demands of its depositors, cannot safely invest its funds in other than
readily marketable securities, nor can it safely make equity loans. * * *
The maturity should depend upon the nature of the borrower's business and should be set with the point
in view that the loan will be liquidated upon the completion of the normal turnover period.
. The shrinkage in property values and of income during recent years has resulted in a high percentage of
"slow" and "frozen" loans. Before the banking situation can be in a healthy condition, such loans must be
liquidated.
The point is frequently made that, if the banks proceed with the liquidation of slow loans, such action will
add to already abnormally high reserves and will further reduce earning power. However, experience has shown
that, unless such loans are adequately secured and a definite program of liquidation established, an excessive
amount of lossa,s develop, that a bank cannot meet the normal and proper demand for credit, resulting in the
loss of desirable business, that the bank cannot collect interest when due and that it accumulates undesirable
and unprofitable assets. Paper of this kind should be renewed for short periods so that frequent contact with
the borrower may be made, interest collected, and reductions insisted upon.
It is realized that liquidation may be a slow process, but that fact merely intensifies its necessity and also
the need to obtain every possible safeguard through additional security while liquidation is in process.)
Possible explanations of the fact that 40.9 percent of the bank officers interviewed made no
comments on examiners are that the particular officers interviewed had not had contact with
examiners and were not in a position to make comment, though every effort was made to interview the principal lending officer in each bank; that the investigators failed in some cases to
raise a question about examiners; that the bankers had criticisms to offer, but refrained from
making them for fear that the comments would reach a supervisory authority; or that the
bankers had no particular feeling, one way or the other, on the question of examiners and considered that their comments were unnecessary. No effort is made, therefore, to estimate what
proportion of the bankers who made no comments on this question might have favorable or
unfavorable comments to make. It appears sufficiently significant that 43.5 percent of the officers of national banks who were interviewed, and 42.3 percent of the State-bank officers who
were interviewed, or 42.8 percent of the total number, very definitely found fault with the
attitude of bank examiners with respect to the lending policies of the banks.
We have classified the bankers' comments concerning examiners on the basis of the aggregate resources of the banks involved. The results are summarized in tables 7, 8, and 9.
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Federal Reserve Bank of St. Louis
Study No. 10
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED.
RES. DIS.
By - Chas. 0. Hardy & Jacob Viner - 1935
19
TABLE 7.-Number of banks commenting on examiners compared with number interviewed, classified as to size of bank
National banks
Resources (in thousands of
dollars)
Commenting
State banks
Not commenting
Commenting
All banks
Not commenting
Total
Under 500
500 to 999
1,000 to 2,499
2,500 to 4,999
5,000 and over
Total _
Number
Percent
Numher
Percent
5
16
43
22
40
55.6
M.7
59.7
57.9
70.2
4
8
29
16
17
44.4
33. 3
40.3
42. 1
29.8
126
83.0
74
37.0
Commenting
Not commenting
Total
Number
Percent
Number
Percent
9
24
72
38
57
19
33
65
26
14
51.4
67.3
58.0
52.0
45.2
18
16
47
24
17
48.6
32.3
42.0
48.0
54.8
200
157
56.3
122
43.7
Total
Number
Percent
Numher
Percent
37
49
112
50
31
24
49
108
48
54
52.3
67. 1
58.1
54.5
61.4
22
24
76
40
34
47.7
32.9
41.9
45.5
38.6
46
73
184
88
88
279
283
59. 1
196
40.9
479
TABLE 8.-Number of banks criticizing examiners, compared with number commenting on examiners; classified as to
size of bank
State banks
National banks
Resources (in thousands of
dollars)
Criticizing
Not criticizing
Criticizing
All banks
Not criticizing
Total
Under 500
500-999
1,000-2,499
2,500-4,999
5,000 and over
Total
Number
Percent
Numher
Percent
4
10
32
13
28
80.0
62.5
74.4
59. 1
70.0
1
6
11
9
12
20.0
37.5
25.6
40.9
30.0
87
69.0
39
31.0
Criticizing
Not criticizing
Total
Numher
Percent
Numbet*
Percent
5
16
43
22
40
14
26
51
18
9
73. 7
78.8
78.5
69.2
64.3
5
7
14
8
5
26.3
21.2
21.5
30.8
35.7
19
33
65
26
14
126
118
75.1
39
24.9
157
Total
Percent
Numher
Percent
18
36
83
31
37
75.0
66.7
76.9
64.6
68.5
6
13
2.5
17
17
25.0
33.3
23.1
35.4
31.5
24
49
108
48
54
205
72.4
78
27.6
283
N11111-
her
TABLE 9.-Number of banks interviewed compared with number of banks criticizing examiners, classified as to size
of bank
State banks
National banks
Resources (in thousands of dollars)
Under 500
500 to 999
1,000 to 2,499
2,500 to 4,999
6,000 and over
Total
All banks
Number Number Percentage Number Number Percentage Number Number
criticizinterintercriticiz- Percentage
criticiz- criticizing
intercriticizing
criticizing
ing
viewed
viewed
ing
ing
viewed
9
24
72
38
57
4
10
32
13
28
44.4
41.7
44.4
34.2
49.1
37
49
112
50
31
14
28
51
18
9
37.9
53.1
45.5
36.0
29.0
46
73
184
88
88
18
36
83
31
37
39. 1
49. 3
45. 1
35. 2
42.0
200
87
43.5
279
118
42.3
479
205
42.8
These analyses indicate a somewhat greater tendency on the part of small banks than large
banks to criticize examiners, particularly when the combined national and State banks are
reduced to two groups. This grouping shows that of all commentuig banks having less than
$2,500,000 resources, 75.7 percent criticized examiners; whereas, of those having more than
$2,500,000 resources, 66.7 percent offered criticisms.. Of the banks in the smaller resources
group which were interviewed, 45.2 percent were critical and of the larger group 38.6 percent
of those interviewed were critical.
The investigators working in the larger cities were definite in saying that the large banks
were much less critical of examiners than the small institutions. The Chicago investigators
reported very little complaint from banks as to examinations. A Detroit investigator says:
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20
"The large Detroit banks had little or no kick about bank-examination policies and procedure."
An investigator in Des Moines comments:
Large banks with the benefits of an expert staff seemed to have confidence in their own judgment and
express little fear of examiners' criticism. On the other hand, smaller banks, without exception, expressed
their opinion that examiner criticism was a factor in their minds in rejecting certain applications they would
have been disposed to grant. It should be pointed out in this connection that most, if not all, of these small
banks have fresh in their memories their closing and reorganization under the pressure of examining authorities.
There appears to be sufficient evidence to indicate that the smaller banks have a considerable
fear of examiners and that their lending policies are thereby directly restricted. Moreover, it
appears natural that the smaller banks do feel examiners' pressure to a greater degree than the
larger banks. Several factors might easily account for this situation. The large banks are
able to have more efficient staffs than the small banks, with much better records and information
relative to their loans. They also generally follow more persistent collection policies and are
readier to charge off losses. Then the type of examination made in a small bank is very much
more detailed than that in a large bank, and hence uncovers more items proportionately that
might be criticized. Finally, there is the inevitable tendency of examiners to feel freer in
assuming a critical attitude toward the officers of small banks than toward the officers of large
banks with prestige and experience generally superior to that of the examiners.
In making their comments, many officers failed to specify the particular criticism that they
had of examiners, merely stating that they were "too strict", or "much stricter than formerly", or that they would not pass that type of loan." This failure to make a specific
criticism makes it difficult to show conclusively where the greatest pressure from examiners is
falling. However, the comments have been classified as follows:
TABLE
10.—Criticisms
of examiners' practices offered by banks
By national banks
By State banks
By all banks
Nature of objection
Number Percentage Number Percentage Number Percentage
Criticism of unsecured loans
Criticism of real estate and capital loans
Classification of loans as "slow" or "doubtful"
Pressure for liquidity
General strictness
Unspecified
Total
2
24
19
22
29
8
2.0
23.1
18.3
21.0
27.9
7.7
3
31
23
37
19
8
2.5
25.6
19.0
30.6
15.7
6.6
5
55
42
59
38
16
2.2
24.3
18. e
26.2
21.13
7.1
104
100.0
121
100.0
225
100. C
Of the State banks which criticized the attitude or practices of examiners, the following
percentages in the different States expressly singled out the Federal Deposit Insurance Corporation examiners for special criticism:
State:
Illinois
Indiana
Iowa
Michigan
Wisconsin
Percentage criticizing
the Federal Deposit
Insurance Corporation
17. 8
40. 0
8. 7
3& 9
26. 3
It is interesting to note from table 10 that where the examiners are criticized, the reasons
given for such criticism appear in very nearly the same proportions for national and for State
banks, with the exceptions of "pressure for liquidity" and "general strictness." Whereas, 30.6
percent of the comments from State banks emphasized the pressure for the banks to keep in a
liquid condition, in the case of the national banks only 21 percent of the comments related to
this point.
On the other hand, it is unfortunate that the comments which have been classified under
"general strictness" were not elaborated upon by the bankers in order that we might know more
definitely the particular types of loans against which the examiners have definite objections.
However, there seems to be conclusive evidence that examiners have waged a campaign against
certain types of loans, particularly real estate loans and so-called capital loans, which to many
examiners appear to include all loans that will not be liquidated within 90 days to 6 months.
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.....001141L"
Study Nc\10
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED. RES. DIS.
By — Chas. 0. Hardy & Jacob Viner — 1935
21
This attitude on the part of examiners may have been adopted on their own initiative, but there
is no evidence to show that until Treasury interest in the matter made its appearance there was
any substantial effort by the supervising authorities to check it. In any case, it appears to be
entirely unwarranted, inasmuch as the statutes.do not provide that examiners shall advise,
much less instruct, bankers on their lending policies as long as the loans are sound and conform
to the legal requirements.
Comments made by the field investigators in summarizing the impressions gathered from
their interviews throw further light on the attitude of bankers toward examining procedures
and policies. A report from northeastern Iowa says:
The examiners, both State and national, came in for plenty of criticism. It has already been pointed out
that examiners have tended to criticize capital loans to business men. But, in addition, it appears that in many
banks the examiners have criticized all loans running over a year, whether adequately secured or not, and that
their failure to distinguish between "slow" loans which are good, and "slow" loans which are not good, is
com ening the banks to remain more liquid than necessary.
An investigator working in the smaller Chicago banks says:
The bank examiners in the Chicago area and vicinity have reversed their traditional policy in the past 3
Years. Before 1931 they were too lenient in bank examinations. In 1931 they started to tighten their standards. Since then they have become too strict. It is an almost universal complaint that examiners classify as
slow, loans which are in reality not.slow. Such classification retards the making of such loans. Real estate
and real-estate collateral have become anathema to the examiners, who apparently will not concede that a loan
collateralized by real estate may be acceptable.
An investigator in Indiana made this report:
The day your investigator called at this bank, the * * * examiner had left. The president was in a
very disturbed state of mind as a consequence. He said that the examiner had marked the paper lie had renewed
several times as slow, and required collection in part at least. "He won't let us do a banking business." He
then proceeded to tell your investigator of several recent applications for loans he has been considering, but
"this settles it", he said, "we can't let them have the money." He further said that if he hadn't a lease for 3
Years on the bank building, "he would liquidate and quit."
The most frequent comments had to do with the examiners' treatment of "slow" loans.
An investigator in Wisconsin reported this impression:
The banker's antagonism to the examiners is largely that the latter arbitrarily place loans in the "slow"
Classification without knowing anything about the loan. They say that most of these loans are admittedly slow
but they are good—the banker himself has no question in his mind as to the payment of the loan. Several
instances were cited where loans were called "slow" by the examiners and the borrower came in within a short
time and paid up. The bankers claim that the examiners are forgetting that there is a depression. The examiners expect individuals to pay up just as rapidly in a period of depression as in a period of prosperity—in fact
even more rapidly in the depression period.
Another investigator in Wisconsin reported:
I don't think the banks are doing any sabotaging. They are all kicking on the examiners, the national
examiners and the State examiners mainly, but also the Federal Deposit Insurance Corporation. They all claim
When they have been hard it is because the examiners make them be that way. The lists of criticized loans are
very extensive in a good many banks and the examiners have forced liquidation on notes which were being kept
up in interest and some slight payments on principal, and where the borrower was willing to eollateralize whatever
he had.
In addition to comments received directly through the survey, numerous letters were
received from bankers and business men throughout the country commenting on the credit
situation. Some of the letters pertaining to the examiners which were received from the Chicago
district are quoted in part.
A stockholder and director in several Iowa banks for 20 years writes:
, It has been my pleasure and sometimes my displeasure—to sit in session with bank examiners passing on assets
for various banking institutions in which I was interested, and I must say that in many instances their appraisal
and method of elimination of credit lines would bear much criticism on the part of several business men who were
really desirous of building and maintaining a volume of commercial business and exchange. I personally know
of many business concerns whose credit was eliminated at a time when liquidation was difficult and sometimes
at a severe loss when, on the other hand, had they been permitted to carry on, they would have liquidated their
accounts in full and at the same time their operation would have benefited their stockholders and everyone
concerned.
An investment banker in Chicago says:
There has continued to exist, however, a vicious contradiction of policy between the banking department
and the administration proper.
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Federal Reserve Bank of St. Louis
22
I feel that the attitude of the individual bank examiner is what the Comptroller is going to find very hard to
change. The typical examiner, it seems, must be guided by rule-of-thumb methods; and if there is the slightest
doubt in his mind as to the soundness of an asset, he feels that he is on the safe side if the entire amount is considered a loss. Banking is not so simple that it can be handled in this way. It calls for the exercise of judgment.
From the president of an Indiana corporation:
* the bankers assure me that the bank examiners raise cain with them for making almost any kind
of a loan, even though the banker knows the loan to be secure. * * * Is it not possible that the policies of
the Reconstruction Finance Corporation on the one hand and of the Comptroller of the Currency and his bank
examiners on the other hand are diametrically opposed?)
It has been pointed out that of the banks interviewed in the course of the survey, 42.5
percent of the national and 42.3 percent of the State banks criticized examiners with regard
to their restrictive influence on the lending policies of banks. In numerous instances the bankers
said that loans were criticized on which interest was being regularly paid and as to the soundness
of which they were thoroughly satisfied. In many cases these loans constitute a necessary part
of the working capital of the borrower. Apparently most examiners for the past 2 years have
classified these loans as "slow" and have not only threatened to classify them as "doubtful"
or "loss," if curtailments were not made before subsequent examinations, but have also given
the impression that they would treat in a like manner any new loans made to these borrowers.
If such practices on the part of examiners are ever proper they are assuredly entirely out of
place in the incipient stages of a recovery from a protracted depression. If these methods are
to be used at all, it should be in a period when a restrictive policy is desirable.
We cannot present a statistical analysis of the proportion of loans criticized or classified as
"slow" this year as compared with past years, because it has not been the practice of the Office
of the Comptroller of the Currency or of other examining authorities to compile such information
from examiners' reports. As an indication, however, of the extent to which loans have been criticized recently, the results of an analysis by the Treasury Department of all reports of nationalbank examiners completed during June and July 1934, and on file in the office of the Comptroller
of the Currency on August 15, 1934, are enlightening. This analysis of 776 reports showed that,
for the country as a whole, 20.83 percent of total loans and discounts were classified as "slow."
For the seventh Federal Reserve district, the percentage so classified was 24.05. A subsequent
analysis, made by the Comptroller's office,covering 5,275 national banks,shows that the nationalbank examiners classified 27.05 percent of the loans of these banks as "slow," but does not show
the information separately by Federal Reserve districts.
If it is a fact, as the evidence presented here indicates, that bank supervisory agencies
through the examiners and their superior officers have exerted a restrictive influence on the lending policies of banks, their action is partially excusable. These agencies were faced with an
unprecedented situation in 1933 when every bank in the country was closed. It was their
responsibility to see that only sound banks were permitted to reopen and subsequently to become
members of the temporary insurance fund. Under these circumstances it was only natural that
all of the persons charged with any responsibility in this matter would tend to be unduly rigid
in appraising assets. However, such an attitude should not have been permitted to continue
after the initial period of readjustment)
It should be pointed out that some bankers did comment favorably on examiners, stating
that examiners have made no undue criticisms of their loans, that they did not attempt to
dictate lending policies, and that in general their attitude had been one of cooperation. This
fact suggests that either the supervisory officials failed after the early period of reorganization
to instruct their examiners as to changes in policy, thereby making it necessary that the individual examiners decide for themselves as to the proper procedure to follow, or that,if instructions
were issued, the officials failed to take steps to see that they were understood and carried out
by all examiners.
A considerable liberalization of the attitude of examiners toward so-called "slow" loans may
be expected to result from the conference of chief examiners of the several Federal examining
agencies held in Washington on September 10 and 11, 1934, at the request of the Secretary of
the Treasury. At this meeting the problem of the treatment of "slow" loans was given extensive consideration. Since the conference, the Comptroller of the Currency has instructed
his examiners that real-estate loans and other similar loans shall not be classified as "slow ",
if there is sufficient evidence to indicate ultimate collectibility. The Federal Deposit Insurance
Corporation has also instructed examiners to differentiate between the "slow" loans which are
entirely safe and the "slow" loans which are properly subject to criticism, stating that "slow'
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Federal Reserve Bank of St. Louis
im
0
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Study No‘:‘,10
&maid!
REPORT ON THE AVAILABILITY OF BANK CREDIT IN rHE 7th FED. RES. DIS.
By — Chas. 0. Hardy & Jacob Viner — 1935
23
loans which are not subject to criticism would include properly secured real-estate loans in good
standing and other loans—both secured and unsecured—wluch are unquestionably good, but
cannot be readily liquidated."
As an indication of the willingness of banks to change their policies in response to changes
in examiners' attitudes, we may cite a case reported to us from Wisconsin. A bank which had
refused to make a certain loan because the examiners had criticized existing loans to the same
company reversed itself and granted the loan, after seeing press comments to the effect that
examiners were to be instructed to take a more lenient attitude toward "slow" loans.
We believe that a satisfactory examining procedure will not be obtained until a system of
supervision of examinations is adopted by the examining authorities which more adequately
promotes uniformity of policies, standards, and practices. When such a system is developed,
it should provide safeguards against the arbitrary criticism and adverse classification by individual examiners of sound working-capital loans.
We recommend that bank examiners be instructed to abandon the classification of loans
as "slow" so that loans will be criticized only on the basis of doubt as to their repayment or the
certainty of loss.
Collateral.—It is generally agreed that there is much more general insistence on collateral
and much less disposition to make what are called character loans than was the case a few
Years ago. Our Des Moines investigator wrote:
Apparently loaning standards have not been stiffened to any extent by the banks, but failure to relax them
Justifies much of the borrowers' opinion of undue tightness, because the borrowers are no longer able to meet
former standards. The most conspicuous point on this score is the applicants' almost universal statement that
banks now demand first-rate collateral. To the applicant this is in most cases tantamount to refusal. One
hears repeatedly "If we had the kind of collateral required by the bank, we would not have to apply for a loan."
I do not believe this requirement of the banks is a new and stricter requirement but is merely the coming to the
surface of a requirement that was waived when borrower's statement of condition and earning power gave a basis
for repayment of the loans. So-called "unsecured notes" which borrowers constantly refer to, with a wistful
backward glance, as "character loans", were made by banks on the basis of net worth and of earning power,
Providing funds for liquidation of the loan. Today, in the absence of a recent record of earning power and an
uncertainty as to the future, the banks feel that collateral is imperative to assure collectibility, even admitting
Character aspects as unchanged.
From northern Illinois an investigator writes:
As a general rule many business firms in this area are unable to get bank credit unless they possess marketable securities (United States bonds or listed securities preferably) which will provide a considerable margin over
the loan desired. If applicants possessed the type of collateral desired by the banks they would hardly be seeking
credit from the banks. Real estate is in extreme disfavor as collateral for bank loans.
Some banks will not lend upon the basis of accounts receivable to topnotch credit standing industrial and commercial firms, even where the orders have already been shipped and accepted by the buyer. * * * Probably
the second most common reason for turning down specific applicants was that they lacked acceptable collateral.
[The most frequent reason was the attitude of examiners.] * * * Very few of the applicants possess what is
now collateral acceptable to the banks.
A Chicago investigator writes that banks formerly made loans for almost any purpose on adequate collateral. Today the borrower wants the funds for the same uses as before, but he has no
collateral to offer.
Trade credit.—Both retail and wholesale trade have long been financed in this country in very
large part by the use of "trade credit," that is, credit extended to wholesalers by jobbers and
Manufacturers, and to retailers by wholesalers and others from whom they buy. To a certain
extent manufacturing is also financed in this way, but a manufacturer's costs are apt to consist
More largely of wages than do the distributor's costs; hence he must either have more working
capital of has own or get it from banks. Moreover, for a number of basic raw materials, notably
Most farm products, trade credit is ordinarily not available.
In general, the trade credit situation seems to be much easier than the bank credit situation.
Of the 1,500 concerns which answered our query as to whether they had been able in 1934 to get
the usual amount of trade credit, 1,141, or 76 percent, answered in the affirmative. It should
be remembered that these were all concerns reporting difficulty in obtaining bank credit. Table
11 shows that this condition is general throughout the district. Moreover, in a number of the
!
eases where credit is reported harder to get than in previous years, the reason is found in the
unpaired credit position of the individual firm, rather than in the general trade credit situation.
Aside from these cases, nearly all the complaints we have received concerning trade credit refer to
the provisions of certain National Recovery Administration codes, which shorten credit terms
and prohibit the allowance of discounts after the established discount period has expired.
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Federal Reserve Bank of St. Louis
24
TABLE
11.—Availability
of trade credit
[Answer to question: "Has the applicant been able, in 1934, to secure the usual amount of trade credit from those from whom he buys?']
Locality
Chicago
Detroit
Des Moines
Indianapolis
Milwaukee
Illinois, excluding Chicago
Michigan, excluding Detroit
No
Yes
No
Yes
Locality
Num- Per- Num- Percent ber cent
ber
Num- Per- Num- Percent cent cent
ber
222
115
14
23
74
104
128
83
77
78
79
86
67
75
46
34
4
6
12
53
43
17
23
22
21
14
33
25
Iowa, excluding Des Moines
Indiana, excluding Indianapolis
Wisconsin, excluding Milwaukee.
Unclassified
Total
94
138
118
111
75
77
68
78
31
42
56
32
25
23
32
22
1, 141
76
359
24
A Milwaukee investigator reports that older and wealthier firms are carrying their customers
by lending them the money with which to discount their bills. One drug wholesaler is said to
have 75 accounts, totaling $100,000, which are being amortized on the monthly principle. An
investigator who worked in central Illinois reports that "the small business men find that it is
the suppliers of their raw materials or their inventories who are their genuine bankers."
By and large, the credit difficulties of manufacturers, whose expenditures are chiefly for
labor and for basic raw materials that are customarily sold on a cash basis, are greater than
those of distributors, who have access to the channels of trade credit. This seems to indicate
that in general the larger manufacturers from whom this trade credit directly or indirectly
emanates either have freer access to bank credit than do the smaller firms covered by our survey,
or else are provided with ample capital of their own to enable them to carry their customers.
The latter explanation is in harmony with what we know of the practice of the larger industries
in converting their indebtedness into stock equity during the boom and of their present cash
balances.
Beer and liquor loans.—In spite of the changed attitude of the public toward the trade in
alcoholic beverages, there is considerable evidence of discrimination against it. One large
Chicago bank refused to make a loan on Liberty bond collateral because it had reason to believe
that the proceeds would be used to finance a whisky transaction. This loan was granted by a
smaller bank,however. Another Chicago Loop bank has indicated a desire to avoid liquor loans
"until such a time as the liquor business becomes solidified and stabilized." An investigator working in a large city states that the brewery business in that city has been booming and showing large
profits, but that the banks feel that the peak of the business is passed, and anticipate price-cutting, and are consequently unwilling to make loans for further expansion of the industry. A few
bankers in smaller places reported that they had declined to make loans where they considered
that the business contemplated was injurious to the community on social or moral grounds.
The feeling of the breweries that they were being discriminated against has probably been
accentuated by the fact that no loan application from this industry has been passed on favorably
by either the Reconstruction Finance Corporation or the Federal Reserve Bank of Chicago. An
investigator working in Indiana says:
I called on several breweries. The proprietors feel that they have been unjustly treated. Breweries say
they are regarded as being not quite respectable. In two cases the companies are short of working capital
because of their rapidly expanding business. The fact that the Government tax of $5 a barrel has to be paid in
advance adds materially to the working capital requirements of breweries. I feel that the Government should
definitely announce what its credit policy toward breweries is. Two operators expressed surprise that I was not
openly antagonistic toward breweries.
Finance companies.—One consequence of the reluctance.of banks to make working-capital
loans has been an expansion of the activities of finance companies which advance funds to business
men for working capital purposes, chiefly on the basis of the pledging of accounts receivable.
These concerns give a larger volume of credit against a given body of assets than banks would
ordinarily concede even before the appearance of the current wave of opposition to working
capital loans. Finance companies keep a closer check on the borrower's accounts and on his
collections, frequently requiring that trade debtors be notified of the assignment of their accounts
and asked to pay directly to the finance company. Their rates are much higher than those of
the banks, 12 to 20 percent being very common. There is considerable feeling against these
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Federal Reserve Bank of St. Louis
j
Study No
REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED. RES. DIS.
By — Chas. O. Hardy & Jacob Viner — 1935
25
25
23
32
22
24
D
is
companies on the ground that their charges are so excessive that a business concern which falls
into their hands can never pay them off, but is gradually bled to death.
A number of banks have indicated unwillingness to make loans to finance companies. One
large city bank declined to make such a loan simply because "they were not going to lend money
at 6 percent that someone else was going to make 20 to 24 percent on." On the other hand,
there are several reports of cases where the finance company is apparently run in close cooperation
With the bank. An investigator working in Indiana reports that in one case the assets of a
finance company are all pledged to the local bank and vice versa, and the finance company is
owned by the shareholders of the bank in the same proportion as their share holdings in the
bank. No secret was made of the fact that when the bank was unable to take care of the loan
applicant, the finance company extended credit at higher rates. In two other Indiana towns
there were numerous claims that banks were making it hard to get loans in order to divert business to finance companies which are controlled by the same interests. This was denied by the
bankers.
An investigator who worked in several Illinois towns reported for his locality as follows:
The directors and officers of the banks appear to be directors in the finance companies and building and
loan companies, and in such cases the finance companies seem to be privileged to obtain loans. In a few finance
Companies where the directors were not connected with the bank they seemed to have difficulty.
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103979-35---------3
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Federal Reserve Bank of St. Louis
10
Study No
REPORT ON THE AVAILABILITY OF BANK CREDIT IN 1HE 7th FED. RES.
DIS.
By — Chas. O. Hardy & Jacob Viner — 1935
VI. FEDERAL RESERVE BANK DIRECT LOANS TO INDUSTRY
Direct loans to industry are authorized by section 13b of the Federal Reserve Act (a section
enacted June 19, 1934) as follows:
First. The Reserve banks may make loans or purchase obligations of established commercial.or industrial businesses within their respective districts for the purpose of providing such
businesses with working capital, or may make commitments relative thereto, the maturity of
such obligations not to exceed 5 years.
Second. Every Federal Reserve bank has power(a)to discount for or purchase from any financial institution operating in its district, obligations having maturities not exceeding 5 years
entered into for the purpose of obtaining working capital for established commercial or industrial businesses; (b) to make loans or advances direct to financial institutions on the security
of such obligations, and to (c) make commitments with regard to such discount or purchase of
Obligations, or with respect to loans or advances on the security of such obligations. Such
discount or purchase must be on a participation basis, the commercial bank or other discounting institution either carrying 20 percent of the risk or advancing 20 percent of the amount
Of the loan at its own risk.
The Treasury advances to the Reserve banks the funds necessary for these loans, up to
$139,299,557, taking in return a claim against the stock of the Reserve banks in the Federal
Deposit Insurance Corporation. The Treasury is to receive any dividends paid on such stock,
and also the net amount earned by the lending operations, up to a total of 2 percent.
To aid in the work of passing on direct loans, an industrial advisory committee is set up in
each district, composed of leading industrialists. This committee passes on all loan applications
and advises the Federal Reserve bank as to its recommendation, which the bank is free to accept
or reject.
Investigation.—Our investigation of the direct-loan policy of the Federal Reserve Bank of
Chicago included (a) the analysis of 98 cases in the Federal Reserve files by members of our field
or office staff; (b) numerous interviews with Federal Reserve officials, and with the chairman of
the industrial loan committee; (c) attendance at one meeting of a committee of the bank which
Iwas passing on loan applications; (d) compilation of statistical data; (e) interviews of our field
investigators with persons who had applied for Federal Reserve credit and with bankers who
had assisted them. Thirty-nine cases were investigated both at the Reserve bank and in the
field, 73 at the Reserve bank only, and 25 in the field only.
Participation.—The provisions in regard to participation are of little importance under
Present conditions, but might acquire increased significance if the present surplus of loanable
fluids in the banks were to disappear. At present, with idle funds in the banks pressing for disposition, the banks often take the position that if a loan is desirable they want it all, unless the loan
needed is greater than the bank's legal loan limit, and if it is undesirable they are not willing to
take 20 percent. Obviously, if the time comes when banks are relatively short of funds, they
'flay be more interested in participations. From the standpoint of the reserve bank, the provision is chiefly valuable as a means of getting the local bank to watch the borrower's business
Progress and "police" the loan. Participation is especially valuable in cases where borrower
offers an assignment of accounts receivable as collateral. In one such case, the Reserve bank of
Chicago granted a loan on condition that the local bank would participate, and finally declined
the loan because of the local bank's refusal to take a share.
Commitments.—By a commitment is meant an agreement on the part of a Reserve bank to
Purchase a given note or a renewal of it from a local bank at any time within a stipulated period
Without recourse to the selling bank beyond 20 percent of any loss which may result. The purPose of this provision is to permit a bank which has funds available for investment to employ
them in making working-capital loans to its customers with the assurance that if the funds are
needed later for some other purpose the loans can be sold to the Federal Reserve bank. A comInitment really amounts to credit insurance in favor of the lending bank to the extent of fourfifths of the possible loss. At present the banks are so well supplied with funds that this provi-
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Federal Reserve Bank of St. Louis
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10
32
sion, like that in regard to participation, is of minor importance. The bank is usually in position
to take the entire loan and is willing to do so if it thinks well enough of the borrower to be willing
to take 20 percent of the risk.
The Chicago Reserve Bank does not make commitments. It has received some application
for commitments, but the position of the officers of the bank appears to be that the effect would
be merely to give the bank concerned the option of keeping the loan for itself so long as it looked
good, or unloading four-fifths of the risk on the Federal Reserve if things went badly within the
period of the commitment.
Up to October 31,the total amount of commitments made by the Reserve banks was $3,218,000,
of which amount three Reserve banks had made $2,328,000. Besides the Chicago bank, two other
Reserve banks had made no commitments.
Description of applications.—Table 13 analyzes by industries the 548 applications received by
the Federal Reserve Bank of Chicago up to September 26, 1934. It will be noted that over twothirds of the applications are from manufacturers, processors, and contractors, only 31 percent
of the total coming from those engaged in service, and miscellaneous industries.
TABLE 13.—Applications received by the Chicago Federal Reserve Bank to Sept 26, 1934, classified by industries
Number
Producers goods (heavy):
Building contractors and engineers_
Foundries
Iron and steel products
Machinery
Tools and dies
Building materials
Lumber and wood products
Other
Consumers goods (durable):
Automobiles
• Furniture
Paper and paper products
Other
Consumers goods (light):
Breweries
Clothing
Grain milling
Leather goods
Shoes
Canning factories
Dairies
Meat packers
Printers and publishers
Other
Services (retail, wholesale, and other):
Grain elevators
Gas, oils, and accessories
Food products
Clothing
Automobile agencies
Hotels
Other
Miscellaneous
Total
Amounts (in
thousands)
Percentage Percentage
of total
of total nunher of tippli- amount of
ipplication:
cations
$220
11
13
51
060
4, 442
1, 60s
30
529
23
3
24
24
14
1, 253
708
$9,508
29.7
43.3
2,900
11.1
15.0
252
26. 1
22. 1
174
7
2,4(13
128
31.7
1.3
12.9
.7
548
19, 281
100.0
100.0
1(13
1,012
857
26
4
19
3
35
1.035
61
10
21
8
9
5
273
338
I 11
9
9
22
42
2(11
543
365
1, 183
223
193
157
8
4,
143
151
331
10
14
29
24
12
251
206
225
150
5
1, 106
70
require
In spite of this preponderance of applications from industries which ordinarily
of the
percent
79
14
shows,
table
as
e,
predominat
s
application
small
,
investment
capital
large
course
Of
less.
or
for
$10,000
percent
40
over
and
$50,000,
total number being for less than
the size of applications is held down by the fact that the law permits loans only for workingalways
capital purposes, since a concern which uses a large amount of fixed capital does not large I
very
a
that
clear
s
is
nevertheles
It
capital.
working
of
amount
large
require a very
large units
proportion of the applications have come from the smaller units in industries where
ers
manufactur
and
dies,
and
tools,
machinery,
of
ers
manufactur
predominate. Iron foundries;
s
application
of
total
number
the
th
of
of other iron and steel products account for one-six
for.
applied
amount
total
received and for 35 percent of the
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Federal Reserve Bank of St. Louis
Is
re
Study Na
REPORT ON THE AVAILABILITY OF BANK CREDIT IN 1HE 7th FED. RES. DIS.
By — Chas. 0. Hardy & Jacob Viner — 1935
33
TABLE 14.—Direct loan applications at the Chicago Federal Reserve Bank, to Oct. 10, 1984, classified according
to sizel
Amount applied for (dollars)
10,000 and under
10,001 to 49,999
50,000 to 99,999
100,000 to 149,999
150,000 to 199,999
Net number Percentage of
of applica- net number of
applications
tions
261
237
63
36
11
41. 4
37. 6
9.11
5. 7
1.8
Amount applied for (dollars)
Net number Percentage of
of applica- net number of
tions
applications
200,000 to 299,999
300,000 and over
Total
2
21
0. 3
3.3
631
100.0
1 2 applications received were not for specific amounts.
The relative scarcity of applications from the larger units in the heavy-goods industries may
Plausibly be explained by the fact that large concerns which were able to sell stock during the
stock-market boom are now generally well supplied with working capital; indeed in many cases
have money to lend.
The comparative lack of applications from concerns engaged in distribution is probably also
an indirect result of the same phenomenon, the abundance of capital in the possession of the
large manufacturing units. During the boom, wholesalers and retail stores as a rule were not
able or did not find it expedient to provide themselves with working capital by selling securities
and thereby to render themselves independent of the banks. Now, however, they are apparently
able to get trade credit directly or indirectly from the large manufacturers who have an abundant
supply of funds.
Disposition made of applications.—Table 15 shows the disposition which has been made of the
!Vplications received up to October 10. It will be noted that the applications approved by the
Industrial advisory committee numbered 51, of which 11 were approved conditionally. The
Federal Reserve bank approved 32, of which 4 were approved conditionally. We do not have
data as to the proportion of these cases of conditional approval in which the conditions were
accepted, but a number of cases have come to our attention in which the conditions attached
Were either impossible of fulfillment, or such that the concern preferred to go without the loan.
These include cases where leading stockholders were asked to endorse; where concerns were asked
to pledge accounts receivable and alleged that such action would injure them too much in their
trade standing; and where compliance with conditions involved putting a mortgage on the plant
for an amount so small that the concern felt it could not afford to tie itself up in its future financlug. The primary reasons for rejection are shown in table 16.
TABLE 15.—Disposition of applications for direct loans received by the Chicago Federal Reserve Bank up to
Oct. 10, 1934
Number
A, PPlications received (net)
unconditionally:
By Industrial advisory committee
A BY Federal Reserve bank
‘PProved conditionally:
By industrial advisory committee
b BY Federal Reserve bank
imlected
P
ending,
Percentage
of number
Percentage Amount Percentage of indusapplied for
of net num- (in thousof amount trial advisber received
applied for ory comands)
mittee approvals
620
Percentage
of amount
of industrial advisory cornmittee approvals
$22,127
A PProved
cr-
ts
rs
is
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Federal Reserve Bank of St. Louis
40
28
6.45
4.51
11
4
483
105
1.77
.65
77.90
16.94
1,575
1,276
7. 12
5.77
973
357
14,945
4. 40
1.61
67.53
54.90
50.08
7.84
14.01
34
TABLE 16.—Classification of primary reasons given for rejecting applications by the Chicago Federal Reserve Bank, to
Oct. 10, 1934
Reason
Not established commercial or industrial enterprise
NSrrong district
In receivership
Not for working capital
Bank credit not exhausted
Apparently no need for loan
Creditors' agreement involved
Amount
applied
Number for (in
thousands)
28
1
1
86
7
4
2
$887.9
100.0
12. 5
3, 558. 7
100.0
37.8
168.0
Reason
Insufficient security
Unsatisfactory financial condition
Unsatisfactory prospects
Unsatisfactory management
Insufficient information
Other
Total
Number
Amount
applied
for (in
thousands)
188
142
2
2
16
4
$4, 592.4
4,335. 5
254.0
110.0
403. 7
385.0
483
14,945. 5
Loans notfor "commercial and industrial" purposes.—Of the 28 cases in which rejections were
made on the ground that applicant was "not an established commercial or industrial enterprise", some were applications from concerns which had not been operating long enough to
become "established"; the others were concerns whose line of business was classified as "not
commercial or industrial."
The restriction of eligibility to "commercial or industrial" is found in the law, and a strict
interpretation of the phrase operates to exclude from the benefits of section 13b concerns which,
from the standpoint of the law's purpose, appear to be just as worthy of credit as those which are
included.
For instance, we were advised at the Reserve Bank of Chicago that the operation of an
apartment building is not considered as commercial or industrial business, though the operation
of a hotel is. Of course the credit needs of operators of such buildings are primarily for fixed
capital, which is excluded under other terms of the law, but insofar as such a concern's need is
for working capital, it might well be held to be eligible.
Building and engineering contractors have been held by the Chicago Federal Reserve
Bank not to be carrying on a commercial or industrial business. The Reconstruction Finance
Corporation does accept applications from such contractors, though only "under exceptional
circumstances."
We suggest that the question whether a business is a commercial or industrial enterprise
within the meaning of the law (a) is one on which legal advice should invariably be sought when
rejection is contemplated; (b) is one on which the decision should in no case be left to the industrial advisory committee, since it is a legal, rather than a business issue; (c) is one on which
the applicant ought to be given the benefit of any doubt.
We studied a number of cases in which it appeared from the files that a doubtful ruling on
this issue had been the cause of a rejection. In each of these cases the Federal Reserve officials
pointed out other adequate grounds on which the application was unacceptable. We believe,
nevertheless, that friction would be prevented by the avoidance of any appearance of reliance
on this technicality, unless ineligibility is very clear.
"Established business."—The law provides that loans may be made to "established businesses", but does not say in the case of the Federal Reserve banks how long a business has to
law
run before it is established. (In the case of the Reconstruction Finance Corporation, the this
on
raised
was
objection
which
in
cases
noted
have
We
1934.)
sets the deadline at Jan. 1,
ground where the business had been established as early as May 1933. We question whether
a business which has maintained itself in full operation for more than a year ought to be refused a loan as "not established", if its record is good and there is no apparent reason to anticipate a decline in its volume of sales. As in the case of the definition an "industrial or commercial" business, dissatisfaction is certain to be created by making the reported ground for rejection a technicality rather than a point in regard to which discretion is vested by the statute
in the lending authorities.
"Working capital."—The category "not for working capital" raises another technical
shall
issue. The law does specifically require that the loans made by the Federal Reserve banks
subject
be for working-capital purposes, although the Reconstruction Finance Corporation is not
to this restriction.
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Federal Reserve Bank of St. Louis
Study No
REPORT ON THE AVAILABILITY OF BANK CREDIT IN al 7th FED.
RES. PIS.
By — Chas. 0. Hardy & Jacob Viner — 1935
•
35
In some of the 86 cases where this issue arose, the intent to use the proceeds of the loan
for fixed-capital purposes was so clear that the rejection cannot be criticized.
be applied in doubtful cases, however, the Reserve banks should be fortified If this rule is to
with legal rulings
as to what constitutes working capital, and these rulings should, if possible, be
uniform for all
Reserve banks.
Existing debt.—By far the most important question of interpretation of the term "working
capital" relates to the extent to which Federal Reserve funds can be lent to pay existing debt.
The present interpretation of the law is that money used to clear up debt is not for workingcapital purposes. Hence, if a man wants to expand inventory or accounts receivable, or the
volume of goods in process, and cannot get the money from a bank, either because the banker
does not believe in capital loans or because the bank examiners do not, and if his security is
adequate, he is eligible for a loan at the Federal Reserve bank. But if his working-capital needs
have already been financed by a bank on a short-term note, he cannot shift to the Federal
Reserve bank when the note matures, even though he is otherwise sound. This restriction
implies that banks which have made what are at least nominally short-term loans are to be
expected to renew them indefinitely. If they do not renew the loans, and working capital consequently becomes depleted, then, and presumably then only, will the borrower become eligible
for a Federal Reserve loan.
There seems to be no sound economic basis for this position. It is, of
necessary
to scrutinize applications with great care where the money is to be applied tocourse,
existing debt, in
order to make sure that the old lender is not unloading a bad loan on the reserve bank.
the issue we are raising now does not relate to bad or doubtful loans; it relates to cases But
where
the security is admittedly adequate but where the bank is pressing for collection because of
considerations of liquidity. We believe that the purposes of the law would be better served if
lending officials were given considerably greater latitude in the matter of loans to clear up
1
existing debt.
, It may be that the action here suggested would require new legislation.. In this connection,
nowever, attention is called to a provision of the law, apparently unutilized, which seems to
authorize the assumption of existing working capital debt by the Federal Reserve bank.
, Subsection B of section 13b of the Federal Reserve Act authorizes each Federal Reserve
ii
plank "to discount for or purchase from any bank * * * or other financing institution
oPerating in this district, obligations having maturities not exceeding 5 years, entered into for
;e
the purpose of obtaining working capital for any established commercial or industrial business,"
11
under the restriction that the financing institution shall obligate itself for at least 20 percent of
ally loss which may be sustained by any Federal Reserve bank upon any of the obligations
11
acquired from such financing institution. We find in the law no stipulation that obligations
tendered in this way to the reserve bank must represent advances made after the enactment of
Ii
section 13b. If this interpretation of the law is accepted, it is suggested that under its authority
the reserve banks entertain applications for the purchase, on a participation basis, of
Is
notes held
hY banks representing past working capital advances, where such action will facilitate the pro.c
curement of needed new capital, or will prevent the forced liquidation of the existing bank loans.
Need for loan.—The next two categories, "bank credit not exhausted", and "apparently
;ino need for loan", call for no criticism, as the plain intent of the law is that the reserve banks
to
shall make loans only to those who cannot get adequate credit on a reasonable basis from cornmercial banks or elsewhere.
19
Creditors' agreement.—The category "creditors' agreement involved" refers to a policy
er
of the reserve bank which has been the subject of some criticism, but which we believe to be
ecorrect. In numerous cases the applicant for a loan is clearly insolvent, but alleges that he
can get large concessions from his creditors and thus be restored to solvency if he can make them
.cash offer. Such an applicant may ask that the reserve bank make a commitment to advance
.efilln a certain sum provided his creditors will settle for an amount which can be paid out of the
to
an and still leave the applicant his necessary working capital. The position of the Reserve
l'ank of Chicago is that it will not make contingent offers which are to be used as a basis for
il
negotiation with creditors, but that if the debtor will get a definite proposal from his creditors,
illthe bank will then consider an application for the advance of the necessary funds. This position
t
teems to us a sound one even though the negotiation of agreements might often be facilitated
commitments on the part of the bank which would enable the debtors to make firm offers of
gefinite amounts to their creditors, instead of having to negotiate with them as to what they
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Federal Reserve Bank of St. Louis
10
36
will accept if it can be obtained. It is not the province of the reserve bank to determine what
concessions creditors ought to make, and offers on the part of the bank to finance specified compromise settlements would certainly be construed as attempts to exercise this function.
Credit standards.—"Insufficient security", "unsatisfactory financial condition ", and "unsatisfactory prospects", account for over two-thirds of the rejections shown in our table. Such
cases are bound to give rise to much criticism, as there is no objective test of security. Obviously,
lending officials must have very large discretion in the application of this requirement of the law.
The present situation is that the Federal Reserve banks do not consider themselves
authorized to make loans which a soundly managed commercial bank would not generally be
willing to make or would not be encouraged by supervisory authorities to make, with the one
exception that the Federal Reserve banks will make loans of longer maturity than is sanctioned
by present commercial banking standards. What it comes to in practice is that the Reserve
bank is authorized to furnish a considerable part of the long-term working capital of a sound
business, whereas by the standards now urged by many bank examiners and more or less
accepted by the majority of banks, a bank ought not to make long-term working capital loans,
even for purchase of assets which turn over rapidly, but should confine itself to financing seasonal
peaks of inventory or of accounts receivable, or specific transactions or groups of transactions
which will provide the proceeds to liquidate the loan when the transactions are completed.
In the matter of safety there should not be, we think, in the absence of explicit statutory
authorization, any recognized distinction between the responsibility of the Reserve bank and the
responsibility of a member bank; and on this point it is our judgment that in terms of the existing law (if one accepts the present interpretation of the law as regards old debt) no serious
criticism can be made against the officials of the Federal Reserve Bank of Chicago for overstrictness in the requirement of "adequate security." We have found less than half a dozen
cases in which we believe that a loan which was actually rejected on this ground should have been
granted, and we found two where we thought there had been overliberality. Yet a comparison
of the disposition of applications at Chicago and the other Federal Reserve banks seems to indicate that the policy of other banks is rather more liberal than that of Chicago. Up to October
3 the proportion of applications approved by the industrial advisory committee at Chicago was
8:1 percent, while the proportion for all districts combined was 13.6 percent. Final approval
by Federal Reserve bank officials was granted at Chicago for 4.5 percent of the number of ,
applications received; for all districts the proportion was 10.4 percent. Further details of the
loan records of the Chicago Reserve Bank, the New York bank, and all banks combined will
be found in appendix N.
1
Procedicre.—There are some complaints against the Federal Reserve banks of delays and
to
due
part
large
are
in
and
few
are
comparatively
these
but
tape",
of
"red
an undue amount
failure to distinguish between the Reserve banks and the Reconstruction Finance Corporation. Many business men and bankers make no distinction between the two organizations.
We found only three or four cases in which there was apparent ground for criticism of the Reserve
Bank of Chicago for delay, if loans are to be made on the basis of the existing law. The most
frequent interval between the filing of an application and the decision in regard to it was between
4 and 5 weeks.
In this connection it must be remembered that the Reserve bank or any other organization
handling such applications is bound to get the blame for some delays which are beyond its
control. For example, a would-be borrower complained to one of our investigators concerning
the long delay in handling his application at the Reserve bank, and stated that his bank had
ti
told the Reserve bank that it was willing to participate in the loan. Examination of the
Reserve bank's file showed that the delay was due to the fact that the local bank had failed
to answer two letters addressed to it by the Federal Reserve bank inquiring as to its willingness
to participate.
In general the attitude of the Reserve bank officials toward would-be borrowers seems to
have been cooperative and courteous, and we believe that they are making a genuine effort to
find ways to lend money within the terms of the law.
1)
Disbursement.—After a loan is approved there is often considerable delay before the funds
tm
are actually disbursed. This delay arises chiefly from the necessity for legal work in connection with the titles to property pledged, the preparation of mortgages, the execution and
at
approval of agreements to subordinate existing debt, and similar details. In some cases, moreover, the money is not all needed immediately and borrowers prefer to receive it on a budget
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Federal Reserve Bank of St. Louis
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REPORT ON THE AVAILABILITY OF BANK CREDIT IN THE 7th FED.
RES. DIS.
By — Chas. O. Hardy & Jacob Viner — 1935
37
basis, though this practice does not appear to have been used by the Federal Reserve Bank of
Chicago. As of November 17, 1934, the Federal Reserve Bank of Chicago had actually made
disbursements on 10 industrial loans, the total amount being $373,600. Two of these loans
were in the amount of $100,000 each, 1 was for $75,000, 1 for $50,000, and the other 6 were for
$10,000 or less. In addition, the Detroit branch of the Federal Reserve bank had made actual
disbursements on two loans, one for $260,000 and the other for $60,000.
The total amount of disbursements on loans by the head office and the Detroit branch is,
therefore, $693,600. Two additional loans, one of $1,000 and one of $800, had been disbursed
and repaid. The total amount of funds received by the borrowers was slightly larger than the
amount of these figures, as there were two cases in which local banks participated to the extent
of 20 percent, and these participations are not included in the figures.
The industrial advisory committee.—We are not convinced that the industrial advisory committee is a necessary or desirable feature of the system of Reserve bank, direct lending. This
statement in no wise reflects on the ability or public spirit of the individuals who compose the
committee which advises the Chicago Federal Reserve Bank. Members of the committee are
taking a great deal of interest in their work and giving it a very large proportion of their valuable
time. Unquestionably in a number of cases their advice has been extremely helpful. However, the work of the committee is essentially a duplication of the work of the lending officers,
and eresults in an undesirable division of responsibility. It also makes it incumbent on the
applicant to plead his cause, if he presents it in person, before two tribunals.
3
The Reserve bank officers whose responsibility it is to see that the funds are disbursed in
accordance with the law seem to give to each application that is reported favorably by the industrial advisory committee the same careful scrutiny as they would give if the advisory committee
had not already investigated. As table 15 shows, the bank has in fact declined a number
of
applications which have been favorably recommended by the advisory committee. In the,
Inajority of instances this was due to the fact that investigations made by the bank's examining force uncovered facts which had not come to the attention of the advisory committee. In
Other cases there was a genuine difference of judgment.
On the other hand,it appears that when the judgment of the advisory committee is negative,
though the case is reviewed by the Reserve bank officials, the finding of the advisory committee
carries more weight than when it is favorable. This is not surprising, since an outstanding
unfavorable feature brought out in the report of the industrial advisory
may suffice
to debar the application without further detailed study. To a considerablcommittee
e extent, therefore, the
advisory committee, which was intended to bring into the picture a nonbanking viewpoint, and
Probably to bring about greater liberality, works out as one more hurdle which the applicant
Pillst clear. In any case the advisory committee, unless it provides itself with a staff of trained
o
inyestigators comparable to that of the Reserve bank, cannot be expected to take final responsiWay for the decisions.
0
.
Moreover, the tendency is for the advisory committee, in dividing up its work, to place the
Initial responsibility for reporting on a given loan upon that member of a committee who comes
;t
• from the State or city, or general area, in which the applicant's place of business is located, and
IP some cases the unfavorable judgment of this one committee member seems to have been nearly
decisive. Such an arrangement can easily give rise to the accusation that the decision
of the
Committee is affected by the committee member's political or business connections in the applicant's community. Representatives of the survey came across a considerable number of rumors
of this sort. Regardless of the merits of these accusations (and
we have no real evidence that
there was any basis for them), we believe that such complications would be minimized and the
Work of the Reserve banks put on a sounder basis if the work of appraising loan applications
were unified and professionalized.
;s
Should the Reserve banks make direct loans?—The preceding discussion is all written on the
a,Ssumption that the Reserve System is to continue to make these direct loans. But we believe
:
()
tnat the making of direct loans to industry is a responsibility which ought never to have been
1:bnit on the Reserve banks, and one of which they ought to be relieved at the earliest possible date,
eeause the extension of this type of credit is fundamentally inconsistent with the more imporle!
taut functions and responsibilities of the Reserve banks.
Under our system, a Reserve bank is expected to exercise a guiding influence over the loan
.
e
investment policies of individual member banks, a responsibility to which the central
et 'linking practice of other countries affords no parallel. The primary resonsibility for the super-
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Federal Reserve Bank of St. Louis
38
vision of the operations of national banks rests with the Comptroller of the Currency, but the
Reserve authorities have undertaken to enforce several banking principles upon the membei
banks. The most important of these relate to the conditions under which the member banks
may borrow from the Reserve banks, but occasionally the authority of the Reserve bank has been
invoked to induce member banks not to utilize their funds for purposes that are deemed to be
contrary to public policy. Having this responsibility, the Reserve banks are obviously put in an
embarrassing position when they are required to make loans which because of length of term
would be deemed doubtful or inappropriate for the member banks.
It is arguable that the Reserve banks should be relieved of the responsibility of supervising the banking practice of individual banks (as distinguished from their efforts to control the
general credit situation). This would make the direct lending function less embarrassing foi
them than it is now. But even if the examining and supervisory duties of the Reserve banks werea
entirely transferred to some other agency, Reserve bank officials would still no doubt feel
moral responsibility to set an example of sound banking practice to the member banks. Since
it is not desired that the Reserve banks compete for loans which the member banks would like
to make, it is difficult for them to function as direct lenders without seeming to disregard sound
banking principles.
It is recommended, therefore, that if the system of direct loans to industry is perpetuated,
the Federal Reserve banks be relieved of all responsibility in connection with it.
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Federal Reserve Bank of St. Louis
dr-a
SOURCE:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Banking, May 1936, p. 91
It is unquestionably' true that it is much harder than ever
before for the banker to find profitable outlets for money.
And the expense side of the business is irritating.(Taxes particularly, as one speakeT.pointed out, are a serious deterrent
to the return of prosperity to the banking business. The
speaker in question pointed out that it was in the seven districts ofheaviest taxation on banks that the greatest number
of bank failures occurred. Adequate capital is discouraged by
taxes, he demonstrated. He cited figures on more than 1,100
banks whose deposits average $67,000 each and showed that
in 1934, after paying all operating expenses except taxes,
these banks had average earnings of $1,057, but, unfortunately', taxes took $361 from each, which left but $696 to
cover losses and dividendspz„
,(
•
SOURCE: THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Hoy. 17, 1934
Lest We Forget--by Jesse H. Jones, Chmn. RFC
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Federal Reserve Bank of St. Louis
Bank Examinations
There is no longer danger of bank withdrawals, or of anything else befalling banks that will prevent them from taking the lead in rebuilding the
business of the country, and the general morale of their debtors.
As a prerequisite to such a course by the bankers. it is necessary that we
reorganize or reform bank exarrunations, and bank supervision. One examination a year snould be enough for a well-managed bank with ample capital
to protect its depositors. Fewer examinations of all banks, and strict enforcement of bank laws, is desirable, and would serve the purpose.
Furthermore there should be one examination—a joint examination
when necessary—for all governmental agencies having to do with banks.
The RFC has the right under its preferred stock and capital note investments, to examine banks once a year. We are willing, where it appears
that banks are being honestly and efficiently managed, to rely upon the
examination of the supervising authority, State or National.
The Federal Reserve, the FDIC and the RFC could have a representative with the National or State bank examiner at each examination, if
neces.sary. This would be a joint examination, and accomplish the desired
result.
This subject was considered a few weeks ago at a meetingin Washington
attended by representatives of the Treasury and the Federal Reserve. the
Comptroller of the Currency and his chief examiners, FDIC officials and
examiners, and by RFC officials and representatives. Your President,
F. M. Law, discussed the subject at length, and very intelligently.
Every banker has pride in his bank, and is influenced in making loans by
too much examiner criticism. Bank examinations could very properly be
made on a basis of soundness arid solvency, rather than too much liquidity.
Bankers will not willingly make loans that they know from eXperience are
ikely to be criticized if found in the bank after a few examinations, and yet
most banks are now living off their slow loans.
With a great abundance of credit and credit facilities available—banks
chock full of money; the right to discount long-term paper with the Federal:
to borrow from the Federal on all kinds of collateral; access to correspondents anxious to lend; and the RFC ready to lend on favorable terms, or to
furnish capital stock at 3 % for five years and 4% thereafter until retired
from profits—banks should make loans that they are willing to carry for
several years.
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention*-Nov. 17, 1934
Deposit Insurance as an Aid to Banking--by Leo T. Crowley, Chmn FDIC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
13,000 Bank Examinations
MI
FDIC
) The first meeting of the Board of Directors of the
was held on Sept. 11 1933. The organization was pushed
ed,
vigorously. By Jan. 1 1934, a field force had been organiz
day
that
On
tions.
examina
bank
7,500
which made over
12,617 banks were admitted to membership. Of this number
der
6,754 were State non-member banks and the remain
were Federal Reserve member banks. To-day the number
thous- I
of State non-member banks is 7,700, an increase of a
After th i
and. The total membership on Oct. 8 was 14,170.
re-examinaoriginal program of examination was completed,
making a total
made,
was
banks
mber
non-me
State
of
tion
been made by ]
t f over 13,000 bank examinations that have
Ir.)
tion.
he Corpora
246
•
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Nov. 17, 1934
Address of iftv. Irving W.Gook, Pres. First Nat. Bank, New Bedford, Mass.
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Federal Reserve Bank of St. Louis
Bank Examinations
All of us were heartened a few weeks ago by the splendid presentatio
President
made by
Law of the American Bankers Association, before a
conference of Federal officials administering supervision over banks. He
spoke on the subject of bank examinations. He expressed forcefully the
conviction held by all bankers that the great number and the un-uniform
character of examinations, and the harshness of certain loan classifications,
have been a disquieting and a deterring influence in bank conduct and in
credit extension.
For a long time we have felt that so many tests not only are unnecessary,
but are confusing also by reason of their various and sometimes conflicting
requirements. Reduction of the total number of supervisory inquiries,
with results available to all agencies under the same control. is highly desirable. Without moderating in any degree the force of the supervision it
would lessen not only the costs. which have increased to the point of being
really burdensome, but it would also enable each bank to know that its
action, once sanctioned by a supervisory authority, would not be disapproved by another
In addition, some modification or modernization of
the theory under w ich loans are classified and judged seemed necessary,
especially in the light of the disposition aznong supervisors to regard certain
classes of loans too harshly. Recognition of the principle that a slow loan
is not necessarily a poor one, but, on the contrary, may be an especially
sound one, would exert a beneficial effect at this time when it is so griev-
)
ously needed and when all the encouragement possible should be given
to all business transactions.
245
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Nov. 17, 1934
Time Ripe for Alliance of All Forces Intent on Recovery—by Franklin D.
Roosevelt, Pres. of the U.E.
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Federal Reserve Bank of St. Louis
do the
What is a bank and what are its relations with the people? Why
put their
people through their Government supervise banks? The people
cases to
money into banks. They do this in order to protect it and in some
have it earn a small income.
are
banks
the
It costs money to provide this service and, therefore,
and t
Permitted to invest these deposits in order to pay their expenses
provide a reasonable profit to their stockholders
making sa
The public has no means of knowing whether the bank is
Gover
investments, so it turns to its Government to supervise the bank.
ment has accepted this responsibility.
P47
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 25, 1935
Interest Rates on Time Deposits--by 0. Howard Wolfe, Cashier of Phila.
Nat. Bank, Phila., Pa.
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Federal Reserve Bank of St. Louis
Then, finally, what we have come
to call the departmen
store banking system, by which we
have commercial deposit
and savings deposits and trust funds all being invested,
latively speaking, in the same funds.
As a result of those conditions I am afraid we have had
o accept, whether we like it or not, legislative action and
rigid supervision with respect to the problem of interest
on deposits.
Unfortunately I do not have enough tempered and soft
terms in my vocabulary where I am dealing with what we
are accustomed to call "banking problems." Therefore, you
will excuse me if I say that more crimes have been committed on the basis of interest than any other single feature
that I can think of in competition between banks. I will
mention just a few of them. I will let your own common
sense tell you whether or not I am correct.
First has been the competition on interest rates and the
payment of interest that bear no relation whatsoever to
the return upon money or the return upon sound investments.
Second, time a,ccounts have been treated as demand
deposits. You all know how true that has been; a secret
agreement with a customer to pay him his time account
whenever he needed the money. The third, allowing our
,ustomers to put into savings deposits what are really
emand deposits, or at best convenience deposits, as against
eeping in savings accounts only simon pure thrift accounts.
Then another crime of which many of us have been
guilty is the payment of interest upon uncollected funds.
Finally, and one that Walter Wilson and his Committee have
been working on in Pennsylvania for many years, the matter
of the calculation of incerest. No two banks calculate
interest in the same way.
, Those, briefly, are the circumstances under which we have
been attempting to regulate the payment of interest among
ourselves.
Before getting on the matter of regulation, I would like
to remind you of the experience this Association has had
with another very important phase of practical banking—
that of check collection. For 20 years at least, the old
Clearing House Section of this Association endeavored to
persuade bankers to use some better method of check collection than the old disjointed, clumsy, indirect routing
system which they were then following, but without success.
I think finally we had six Clearing Houses out of 406 in
the United States that did use modern, efficient systems of
check collection, and the result was as we might have expected—the Federal Reserve Act wrote down what we must
o and so again we have had exactly the same experience in
)nnection with the payment of interest. And we have
en Congress displaying a courage which we bankers have
la,cked. -
r
1
1
243
The Commercial & Financial Chronicle—Sept. 23, 1933
O. Howard Wolfe,-2
40
\
C
6
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Federal Reserve Bank of St. Louis
BANKEREI C
recent banking legislation, but at least I think we can admit
that Congress has had more courage than we bankers have
had in fixing the matter of interest.
I draw your attention to one sentence in the Act of
1933
which I think is an inclictment of banking practices. It says
that we shall not pay interest on demand deposits directly
or indirectly by any device whatsoever. Just let that
sink
in a little bit. The Senator or the Congressman
or the
draftsman that wrote that sentence may have known
very
little about banking, but he certainly knew bankers. If
you
Will stop and think a moment, the customer
s can't force any
banker to pay interest by any device and so you are lef
c
with the conclusion that Congress intends that bankers
must not be guilty of any device such as they have been
guilty of in the past, of paying interest on demand funds.
If you think bankers would not be apt to pay interest
or
want to pay interest by any device, I will ask you to come
in to our bank some day and have lunch with me and I will
dig out of our files letters we began to receive the day after
the Act was passed—not from our customers generally,
but
from other bankers who proposed, among other things—
one letter I have in mind; this banker wrote and
said,
"Now that you have 3topped paying interest on deman
deposits, what other service are you going to give free th
you have not given us heretofore to take the place
interest?"
1-00
Any number of bankers wroteTus and said,
"the way to get around this is this: We will
put our deposits on a time basis and will give
you standing notice so that after 30 days it
can be paid at any time."
•
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention--Sept. 23, 1933
The Need for Revision of the Glass-Steftgall Act and a Sane
Legislative Program for Banking--Geo. V. McLaughlin, Pres.
Bklyn. Tr. Co., Brooklyn, N.Y.
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Federal Reserve Bank of St. Louis
1
Another important supervision problem is the necessitY
for divorcement of supervisory authorities from political in
fluence. It has been said, that we should not permit ou
Li1'4 v rANTION.•
,
1
To i •
anking system to become a football for speculators.
it to become a .:1;,--this I will add that neither should we permit
been kicked
often
has
it
past,
the
In
ans.
politici
for
football
-",
all over the field by both teams.
s toward\
In New York State we have made some progres
of which',
solving this problem. We have a Banking Board,
of
consists
It
an.
Chairm
is
the Superintendent of Banks
of
,
four
tendent
Superin
the
to
n
additio
in
s,
eight member
memwhom must have had banking experience. All eight
of the
bers are appointed by the Governor, with the consent
ed from
appoint
are
s
member
banking
four
the
but
Senate.
g
nominees chosen by the banks of the State. The Bankin
cy,
emergen
the
in
recent
and
powers,
Board was given broad
it was empowered by the Legislature to suspend any provision of the banking laws, upon two-thirds vote, for the duration of the emergency. To the credit of the members of the
Board it must be said that. they have handled their great
responsibility admirably. This Board, in my opinion, represents the nearest approach that banking has made toward
1
self-government, and the principles that it embodies may
1
1
well be applied elsewhere.
prospects for Government
I am not very optimistic over the
credit. The Federal
bank
of
volume
total
egulation of the
control the expansion prior
to
unable
seemed
Board
Reserve
time little success has been ento 1929, and since that
efforts to expand credit in the
various
countered in the
. Moreover, even if it were
demand
ate
legitim
of
absence
of bank credit, it
possible to control the aggregate volume
, or rate of turnits
velocity
control
to
possible
would not be
Therefore, I do not bent.
importa
as
just
is
which
over,
over bank loans and
ieve that any form of public control
In
banking legislative
sane
a
in
d
include
be
should
vestments
rogram.
P50
•
THE COMMERCIAL AND FINANCIAL CHRONICLE-ABA Convention--Sept. 23, 1933
"Preferred Stock for Banks"--address by Jesse H. Jones, Chmn, RFC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
With deposit insurance, there will not be the occasion for such extreme
liquidity as some banks have felt necessary, and if 25, or 30, or 40, or
even 50% liquidity could be adopted as sound constructive banking,
bank management and bank supervision would have a standard to go by.
In this connection the supervisors of banks—National and State-might well take stock of their standards and methods. Certainly,
banks should have strict supervision, but continued criticism of sound
loans that may be slow is discouraging to the banker, destroys his
morale, and makes it difficult for him to accommodate his clientele.
And, too, there is inconsistency in one branch of the Government
asking the banks to lend and to co-operate in the recovery program,
while another branch insists upon further liquidation.
Banks can be perfectly sound even though they may accumulate a
bstantial amount of slow loans, and the mere fact that a loan stays
i a bank for some time, even for several years, does not mean that
i could not be collected on short notice if necessary. Therefore, such
a loan, if well secured, should not be in the slow column.
)
l
fe:52
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Federal Reserve Bank of St. Louis
Address of Gov. Paul V. McNutt (Ind.)
40th Annual Convention, Indiana
Bankers Association, May 1936
(Hoosier Banker, June 1936)
The State of Indiana, through the Deartment of Financial Institutions, has
recognized these conditions of uncertainty and along certain fronts in the
banking business has sought to assist in
remedying this lack of earning power. It
is perhaps trite for me to remind you of
the efforts which have been made in past
months by executives of the Department
of Financial Institutions to assist you in
bringing interest rates paid on both private and public deposits down to a basis
in keeping with the general trend of
money yields. And while we often in direct co-operation with your trade association have been helping to thus eliminate large proportions of your costs of
doing business, we have also encouraged
wherever possible the adoption of fair
and reasonable measured service charges,
designed to stop discrimination in the
treatment of depositors and to make each
account in your institutions profitable.
)13
I
1
Po7
•
Address of W. F. Gephart, V. Pres.,
First National Bank in St. Louis,
40th Annual Convention, Indiana
Bankers Association, May 1936
(Hoosier Banker, June 1936)
1
There have recently been issued Tit'irrules regarding proper investments for
banks. The substitution of statutory
standards for investment by banks as
against the judgment of bank officials
and directors in selecting investments
does not appear to be fundamentally
sound. The establishment of investment
standards should be determined in the
same way as loan standards in banks and
should be subjected to the criticism and
approval of properly authorized examining officials without relying upon some
permanent arbitrary rule, issued by
some government official.
To place the whole matter of the
proper kind of securities to be bought
in the hands of rating bureaus, however,
good they may be, will to a considerable
degree defeat the very purpose intended.
No arbitrary rules can replace the good
judgment of the banker himself always
subjected as he now is to proper supervision and examination. With all due
respect to rating bureaus, many years of
observation leads one to the conclusion
that they, like most individuals, have
better hindsight than foresight and ratings on securities are usually changed by
them after the price of the security has
dropped. Such a proposed inflexible
Then,Itoo, with all due respect to the
formula, especially under the present
Federal agencies controlling
numerous
rapidly changing conditions of the inthe operation of banks, it should never
vestment and money market can scarcely
be forgotten that these Federal boards
result in other than large losses to banks.
and
commissions are made up of averIt is easily understood that the large
"
*
Ae
citizens and there is no
American
banks with extensive facilities at their
suppose
to
that they have any
reason
command through their research and
superhuman
kind
of
wisdom not posstatistical bureaus are in a position to
rank
the
sessed
by
and
file of the averanticipate results in the future better
man.
business
age
Commercial
bankers
than the smaller institutions which do
still have to exercise their best judgnot have the organization or means of
ment in loaning depositors' funds.
obtaining this information. If the smaller
banks, under the present money market
conditions, have to confine their entire
activities to the purchase of Triple "A"
bonds with their present high prices and
low yield it may be a serious matter to
them. If they were given broader powers
to invest and especially avail themselves
of many sound local securities with which
they are intimately acquainted, they
would be in better position to handle
their investment account than by dgz,
1
1
pending solely upon rating bureaus. It
will add considerable expense to the
operation of the smaller banks to purchase these services and interpret them.
A further objection to such an arbitrary rule for bank investments is that
under present conditions a great many
corporations are on the upturn and a
security that might be classed as speculative on a price basis of 75 might easily
be a first class investment six months I
later and the rating bureau increase it to
an "A" rating, but no bank is in position to make such rapid switches in their
investment portfolio under the rules provided. If it were left to the judgment of
the management and directors of the
bank, subject to the criticism of the
examining forces, there would be more
opportunity to change the character of
the investment account. I
i . .
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Federal Reserve Bank of St. Louis
208
1
PROCEEDINGS NEW JERSEY BANKERS ASSOCIATION—MAY 1934
BANKING—YESTERDAY, TODAY AND TOMORROW--by W. Randolph Burgess,
Deputy Gov. FRBk, New York
(
sing influA weak and crippled banking system was a depres
Banks in
ry.
recove
ss
busine
to
ence on prices and a barrier
positheir
restore
to
sought
lty
difficu
pating
antici
difficulty or
securiof
ts
amoun
large
tions by liquidating assets. They sold
on borrowers
ties, depressing their prices, and put pressure
inventories.
reduce
which caused them to sell securities and
borrowers.
new
to
itable
inhosp
were
Banks in this condition
be sure of
not
could
ss
busine
for
money
needed
who
Those
of uncergetting it. The whole situation created a condition
busiThe
ible.
imposs
was
ss
busine
l
norma
tainty under which
It
cy.
curren
with
ally
ness of this country is not done princip
in
are
banks
the
when
and
credit,
,
money
is done with bank
trouble bank money ceases to operate properly.
bad banking
I shall discuss later some of the reasons for this
here, howsay
me
situation. For fear of misunderstanding let
bankers
the
of
fault
the
mainly
not
ever, that I believe it was
laws and
poor
to
due
system
bad
a
of
fault
the
y
largel
but was
long period.
poor administration of law •over
• a
• •
A sound banking system, and an ample
supply of money,—these are two great essentials for recovery
which are assuredly present. There are other essentials. if
of our
(Unification of Supervision: Still a third defect , has
pments
develo
a
)
('
banking system, clearly revealed by recent
which
been the weakness of our dual system of banks undernational
ised by
some of our banks are chartered and superv
ties. The reauthori
state
authorities and others by different
e, and conpractic
of
ty
diversi
laws,
of
ty
sult has been diversi
g.) Certain
bankin
of
stant impediment to raising the standards
d bringing
towar
g
tendin
taken
been
legal steps have already
t insurdeposi
The
ision.
superv
of
system
one
under
the banks
banks
ember
non-m
all
that
es
provid
ance bill, as it now stands,
must
ation
corpor
nce
the
insura
in
rship
membe
continuing their
1936.
1,
July
before
System
become members of the Reserve
agencies
Already through their contacts with various emergency
and through various provisions of the Glass Act, state banks
have been subjected to a certain measure of national control.
45
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Federal Reserve Bank of St. Louis
CJ--)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Address of Clark Hammond, Pres.,
Pa. Bankers' Association
Pittsburgh, June 8, 1927
(The Financial Age, Vol. LV, No. 29)
The wave of bank failures has brought
'i considerable demand for more legislaive safeguards to eliminate the unsound
anking practices which have been responsible for many of the failures, and
for more restrictions upon the loan and
1
I
[
Investment operation of banks. The solution of the problem would seem to lie
more in the direction of better supervision that will check incompetent management before the solvency of the bank is
endangered. The banking departments
of thP states should receive every encouragement from the legislatures and bankers necessary for the sound and efficient
administration of the banking laws. The
banking commissioners should be competent, adequately compensated, and as
free as possible from partisan politics.
They should be enabled to maintain a
sufficient staff of competent examiners.
Many of the states are not as fortunate
in these respects as we have been in
Pennsylvania under the leadership of
1 Tonorable John S. Fisher, the former
Secretary of Banking and our present
Governor, and his very able successor,
Honorable Peter G. Cameron. Strong
banking departments, with an efficient
personnel and adequate power to enforce
the banking laws and regulations, will
probably do more to prevent bank failures than anv other single factor. As
)ankers, W C, are interested in every effort
lp
that .raises thr! standards of banking suervision and makes for better and
sounder banking.
•
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Nov. 17, 1954
me Committee to Co-Operate
Resolution authorizing Pres. of Asso. to Na
es in Bank Examinations to
t
rkg
ou
ng
Cha
Ab
gi
with Treasury Dept. in Brin
n.
ce
ei
Ther
Etrengthen Public Confiden
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- -•
cation
------- --of
agitation for simplifi
----- • --- --an increasing amount
'
bank examinations by
ng
ucti
tWhereas, There is
cond
of
ods
ion of the meth
nd standardizat
ining agencies, and
ld
ers Association shou
ie various exam
American Bank
idence in the
eved that the nt
to inspire public conf
Whereas, It is beli
eme
mov
this
in
part
therefore
int,
ake a leading
bank examinations;ted President be authorized to appo
y elec
methods used in
isting of one Na, That the newl
se
a Committee cons
Hou
es,
ciat
ring
Be It Resolved
asso
Clea
his
iner, one
ion with
after consulatExarainer, one State Bank Exam
tional Bank
t
BANKERS'
kG\
30
sit
one Federal Depo
ed
k Examiner and
te with the Unit
ral Reserve Banstud
and
y and co-opera
e
Examiner, one Fede
sabl
to
advi
r
nine
med
Exat
tion
are dee
h
whic
ges
)
chan
Insurance C'orpora
bringing about
examinations; and
States Treasury in en
idence in bank
publ
. ic conf
which win .trength
•
SOURCE:
THE COMMERCIAL
& FINANCIAL CHRONICLE——ABA Convention
Bov. 17, 1954
"A Better Year for Savings" by Henry S. Kingman, Pres., Svgs. Div.,
Treas. Farmers & Mechanics Svgs. Bk, Minneapolis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
In several States
liquidity funds have
been devised through organ
of the banks of a State
ization
within their own group
. The withdrawal by mutu
savings banks in some State
al.
s front the FDIC and
funds in others, have
the formation of liquidity
of depositors in those exercised no perceptible effect upon the confi
dence
banks. It is a reasonable
a period of years
assumption that if throu
gh
depositors could be assur
ed that the character of
examinations vvas abov
ban
e reproach and the
recommendations of the
iners enforced, depos
exam
it insurance would
be entirely unnecessary
PeoPle's confidence
to continu
in banks.
‘,7C15
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
- The report of the Committee on Resolutions was presented.
Chairman:Law,
Fran
Mari
cis
on
as follows by
...m.1•1111t
.
•
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-
L
On behalf of banking we are
able to report a complete
public confidence. This has
put it in the position where restoration of
it can function
fully and vigorously in playing
its full economic part in
the progress of
recovery. The passage of a genera
lly constructive banki
ng law in the
Banking Act of 1935 has stabil
ized the banking situat
ion and enabled
bankers to devote undivided attent
ion to the normal admini
their institutions in promoting
stration of
the business and public
welfare of their
communitics. • We feel that it is
a particularly important
feature of this
las74hat it aims to create through
the revision of the Feder
al Reserve Board
a Supreme Court of Finance which
, with the non-polltical
appointment of
exceptionally competent men, shoul
d constitute one of the
greatest forward
steps in building a sound banki
ng and credit system for this
country)
" .•
(.1
(1
PAP;
THE COMMERCIAL & FINANCIAL CHBONICLE--ABA Convention--Nov. 1935
Address of the Pres., James C. Bolton, VP Rapides Bank & Trust Co.,
Alexandria, La.Ji--(State Bank Div.)
I Fully as important as
legislation itself are the men who
administer the
legislation. In the State bank
field these are the State Bank Supery
t must be a subject of regret
isors.
that the disturbed political condit
ions of the
ast year have resulted in an
unusual amount of changing in
these important
offices. In no less than 13 States
supervisors have been replaced.
no intention, in this, to
There is
reflect on the new supervisors
who
have recently
taken office. But there is reason
to deplore the obviously strong
which partisan politics still has
influence
over bank supervision, as demon
in the wholesale changes of
strated
the past 12-month.
For many years the State Bank
Division has urged that State
Banking
Departments be placed on a basis
as far removed from the influe
partisan politics as the judiciary
nce of
itself. Periodically it has made
surveys of the status of State bank
extensive
supervision, to determine to what
this and other desirable reforms
exten
t
had been accomplished. Such
a survey was
made on the current year, and
distributed to the Supervisors
of Staie Banks
and others interested in State
bank legislation. The surve
y directs attention
once more to the importance
of adequate terms of office
and salaries for
supervisors; the necessity of
well-paid, well-manned
examiping staffs,
selected on the basis of merit;
the helpfulness of banking board
s;\ the desirability of giving the supervisor
authority to limit the number
to the needs of the commu
of new banks
nities; and the indispensabi
lity of adequate
capital for such new banks.
It afforded also an opportunit
y for supervisors to express their views
on what new legislation would
be most helpful
o their various States. The
public
ation
and distribution of this
)
.t the beginning of the legisl
survey
ative session was of material
several supervisors in framing
assistance to
and advancing their legislative
program.
A
A
o,"'
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
:Le
14
•'
—'
-t
e
(
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
Business, Industry and Taxation--by Lewis H. Brown, Pres. JohnsManville Corp., NYC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Business men generally are
not opposed to the Gov
ern
ment providing regulati
ons to safeguard the
organization
and the current operatio
ns of banks. For, in prin
ciple, banks
are operating with other peop
le's money and it is the
function
of Government to protect
the general welfare just as
it does
in the issuing of licenses
to operate automobiles
upon the
public highways or in the
passing and enforcement
of traffic
laws.)But business is
opposed to the centralized
political
control of the Federal Rese
rve I3oard and to political
pressure
being exercised to forc
e the banks to invest the
people'.
money in unlimited quan
tities of Government obli
gation
to support the unlimite
d spending of governmental
bureat
cracy.
68
r.
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
Address of Pres., James C. Bolton, VP Rapides Bank & Trust Co.,
Alexandria, La.---(State Bank Div.)
/y
403
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
A further
dealt with
report forms recommendation
proposed
used by various
standardization of the
bank supervising
/ment," says the
report, "was
authorities. "This
inaugurated
moveby the FDIC.
Istandardize the forms as
to eliminate
The aim is so to
duplication of work by
departments, the examiners
of
State
the FDIC,
banking ••4
Federal Reserve
National Bank
examiners."
examiners and
vA
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention--Sept. 23, 1933
Address of the Pres., L.A. Andrew, V:P., First Bank & Trust Co., Ottumwa, Ia.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
---Tfie Banking Act of 1933 in a general way,
seems to emphasize the
trend in Washington toward a unifie banki
d
ng system and does not giv
the co-operative view of the dual banking syste
m. For a number of year.
State banking authorities have insisted
upon the recognition of State
examinations for State member banks. as
it is well known that the examinations of most of our State Banking Depar
tments are equal, and in some
cases superior, to the National Banking Depar
tment or Federal Reserve
examinations. However, the new Banki
ng Act goes back to the old
idea that all examinations should be made
by the Federal Reserve Board
or the National I3anking Department
. This is a deliberate attempt,
of course, to centralize the banking author
ities Into one group and the
entering wedge toward a unified banking syste
m. Also their record for
examining and re-opening of Federal Reser
ve member banks is not in any
way outstanding. Witness the large numb
er of failures of re-opened
...banks that belonged to the System.
The provision that
all State banks must
become members of the
Reserve System by
July 1 1936 in order
Federa
to continue as memb
"Federal Deposit
ers of th
Insurance Corporation"
is unfair and unsou
it is intended to
nd becaus
compel the liquidation
and to terminate the
a large number of
existence o
State banks which
cannot qualify for
the Ftxleral Reser
membership in
ve System unloss there
is a decided change
quirements. Many banke
in the rers all over the Unite
d States aro fearful
nsympathetic and
of an
discriminatory supervisio
n and examination
by th
)
q
ederal Reserve I3oard
and the "Federal
Also of the interpretati
Deposit insurance
on of the regul
Corporation.'
ations and the worki
tIcal way, of the
ng out, in a pra
provisions of the Act.
r
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 22, 1932
Remarks of Pres. Haas of ABA before State Bank Div.--Comments on Unified
Banking--Comparison of U.S. and Foreign Banking Systems.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
unt1011 i mentioned the amount
In my ad-dress before the (ietlerali ('On \
Federal Reserve System)
, f gross earnings of banks (members of the
on deposits as 30.4% and all
equired to meet the payment of interest
time deposits. Since I wrote
anks as 38%. I also discussed demand and
chart has come to my attention
nt
importa
very
another
pt
manuscri
that
ion of this nature has ever
and I believe this is the first time a calculat
demand and t.ime deposits in
been made public. I refer to the trend of
all banks not located in Reserve
eountry banlcs. My calculation shows that
deposits in 1921 of $3.788.cities or what we call country banks had de,mand
$2,915,000,000. a decrease of
(00,000, while on June 30 1932 they had
time deposits increased from
$873.000,000, while during the same period
of $1.223,000.000. Stated
$2,871,000.000 to $4,094,000,000, an increase
from 56.9% to 41.6% while
in percentages demand deposits decreased
time deposits increased from 43.1% to 58.4%.
rs to maintain as small
This clearly indicates the trend of the deposito
increase the amount on savings.
balances as possible in demand deposits and
of our people should
While we might expect that the accumulated savings warrant our country
figures
these
that
belleve
I
increase
matesial
a
show
.
bankers in analyzing their savings accounts
as the city bankers discovered;
Perhaps they might find the same condition
real
not
saving's.
are
hat all savings accounts
united action in defining
any cities have remedied this condition by
cannot act alone in matters of
savings. I realize that country bankers
of all banks in their section.
th' kind. They must have the co-operation
Houses nation-wide which I
he establishment of country Clearing
best method of approach.)
the
be
opinion
my
in
would
advocated
ha
,
J st one more subject. then I will have finished.
P-49
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 22, 1952
Annual Address of the Pres.--H. J. Haa_p, VP First Nat. Bk. Philadelphia
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
..„, ...... ___
There is another angle that has not
received due public understanding,
1
hat is, the cause and responsibility of
bank failures. The idea has become,
idely prevalent that the blame rests wholly
with banks and bankers and
heir faulty management.
k.
I will say without reservation that no
class of business or business men
in the nation to-day represents more capable
management, sounder financial
conditions and a greater capacity for
constructive public service than do
the present 19,500 institutions that make
up our banking structure.
Nor will I admit that the banks that
have passed out of the picture
through failure constitute the reflecti
on on banking as a whole that it has ,..;----been made to appear.
kWh() is to blame if Government officials
, in both the state and national
systems, for over a period of more than
20 years, permitted the organization
of great numbers of banks with insufficient
capital or in places where they
never could be successful? In many instanc
es in all parts of the country
this took place over the protest of the well
established banks. But what
happened was this—the applicant for a charter
would get the most influential
political sponsorship and the pi otest of the
well established banks was made
to appear as selfishness on their part; however
, we all know now that except
in rare cases they acted for the best interests
of the public.\ Before the
depression began in 1929. failures of the
class of banks I have in mind were
raising the mortality ratio to a point that was
causing serious public distrust
against sound banking. It is true beyond
question that if a great number
of uneconomic banking units had not been allowed
to enter the field, banking failures would have been localized and
would never have become a
national problem.
This is not to say that all failures are attribut
able to these conditions.
Some rural communities that once were good
bank locations have so changed
as to be no longer able to support banks.
It certainly was not wholly the fault of the
banker if customers to whom
he had safely loaned money year after
year suddenly failed to meet their
notes owing to the ruination that had
overtaken their own businesses.
Nor was he to blame for the fact that the
basic securities of the nation's
industries, municipal governments, even of
the national Government, suddenly suffered such market depreciations that
he could not realize from
I
them the deposits entrusted to them rapidly
enough to meet the hysterical
demands for cash from his rumor-scared deposito
rs.
1
As to such banking reform as can
be embodied in our laws, I
the approach in the past has been
believe
wrong. What has happen
ed? Have
we bankers been forehanded
enough ? I am afraid not.
We have seen
things developing in banking that
some of us questioned, but
have we been
aggressive enough against them?
Others have seen these
things too,
and then the first thing we know
we are suddenly confron
ted with an
insistent public demand under
skillful political management
for banking
laws that more often than not were
not based on practical
experience, or
else carried good ideas to bad extreme
s.
s
I think we might well consider the
Canadian procedure, where
it
provided by law that every 10 years
the bankers and the legislat
/ sit down together, review the
ors sh
banking laws, consider the
economic chang
/ that have developed, study the
lessons of experience, and
then amicably
' ,.,` work out a program of needed
legislation.
The Comm. & Financial Chronicle--Oct. 22, 1932
H. J. Haas (Contd.)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Improvements for Banking from Within.
Legislative mnasures are not the only mea,ns
for promoting improvements
in banking. The more
fundamental actions must come within the
spirit
and practice of banking itself.
Our banking methods at heart are
sound,
our established traditions are
fundamentally true. If there have been
anY
SESSION.
t. 29
deviations from them the remedy is in a return to standard principles, not
in a rigid formulation by law of those things that must be left to the dictates
of experience and free discretion.
I know of no more powerful means for keeping our banks of deposit and
discount sound, capable, public servants than an unswerving adherence
to straight. old fashioned commercial banking. It has been the best banking in the past. It is the best banking for the future.
This means that from our commercial banking operations capital loans
must be rigidly excluded. They are problems for private investment
bankers dealing in stocks and bonds. Neither should guarantees enter into
the operations of this kind of banking—they are for other kinds of business.
Investments are the secondary interest of commercial banking; therefore.
only the highest grade of securities should enter its portfolio and the primary
purpose should always be ready convertibility into cash to take care of the
bank's and its depositor's needs, not the question of profits to be made.
The payment of interest on deposits is one of great banking problems
of the day. Interest during 1931 amounted to 30.4% of the gross earnings
of all banks members of the Federal Reserve System. Undoubtedly this
percentage is greatly increased if all banks are included, and I believe some
estimates have been made that the proportion is 38%. Here, too, the
solution seems to be along the line of a return to first principles. What is a
commercial deposit? It is either a business convenience to the depositor
or it is a secure place for idle funds. In the former case the convenience is
all the yield the depositor should expect. If the bank makes a small profit
on the aggregate of such deposit funds it is entitled to it. In the case of
deposits that are idle fluids, both equity and competitive factors, arising
particularly from non-banking sources, entitle the depositors to a share in
the profits in the form of a moderate interest on their balances. As to the
competition within banking for such idle funds, there unquestionably should
be a higher degree of co-operation than has generally prevailed in the pa,st.
Cut-throat competition for accounts by means of over-competitive interest
rates on balances has been a prolific source of unsound ban ing. Places
where clearing houses are in operation are making good headway against
this evil and it has been greatly reduced. Banks everywhere should reach
mutual understandings in regard to it—for it is a problem in which banks
can hardly work singly and alone.
These sound like simple principles, but it was the violation of simple
things like these that complica.ted the banking situation during its most
unhappy period. To this category belongs that part of the blame for the
bank failure situation that must be assessed against bankers—for in all
candor bankers must bear personally a part of the responsibility. W e must
admit that many banks failed due to internal policies that should never have
been pursued by their managers. There was a growing tendency to wander
away from the homely commercial banking virtues of our banking forefathers. Bankers that did this spent many sleepless nights during the
depression. They realized then how easy it was to run a good bank by
right principles as compared with the difficulties that mounted up according
as they had wandered away from them.
I think the best, the most effective banking reform for the future lies
right in our own counting houses—and that is along the lines of a return to
the simple virtues of abnking that experience has proved best.
We ca,nnot made banks fool-proof by legislation—but we can come near
Foing so by good management and common sense.
)
Bankers Qualifications.
The cotmtry seems to demand that bankers of the future shall be trained
n their vocation as in other walks of life.
'rho principles of good bank management can be taught. and c,ornmon
sense can be cultivated, by means of technical education.
Promotion of banking education, therefore, is one of the major obligations of organized banking. The American Bankers Association must step
ahead in this field.
In the American Institute of 13anking we have what is considered to be
the outstanding project for adult education now being carried on in business
and industry. The Institute should be familiar to every member of the
Association, and every senior banker should insist that his employees
wherever practicable shall pursue its courses. It is one of the best practicai
methods possible for bringing about universal good banking for America
1
1
9I ST GENERAL ASSEMBLY,
FIRST SPECIAL SESSION,
S. B. No. 463
I935-I936
MR. McINTYRE
1
A BILL
To render more effective the examination, inspection and
supervision of banks and to provide an equitable distribution of the costs thereof, and for such purpose to
amend sections po-7, 710-17 and 710-130 of the General Code.
Be it enacted by the General Assembly of the State of Ohio:
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2
SECTION I. That sections 710-7, 710-17 and 710-13o of the General
3 Code are hereby amended, said amended sections to read as follows:
4
Sec. 710-7. The superintendent of banks may appoint a first deputy
5 superintendent and revoke such appointment at pleasure. During the
6 absence or inability of the superintendent of banks or during a vacancy in
7 the office of the superintendent, such first deputy shall have, exercise and
8
discharg,e all powers and duties by law vested in or imposed upon the
9 superintendent of banks. The superintendent may appoint and employ
10 from time to time such **I" assistants, clerks, examiners and an attor11
ney examiner as he may deem necessary to assist in the discharge of the
12 duties imposed upon him by law. Not more than three such examiners
13 may be designated as deputy superintendents and shall, under such regu14 lations as may be prescribed by the superintendent, be authorized to act
15 for and in the place of the superintendent in the administration of the
16 laws which the superintendent is required to administer. The first deputy
17 superintendent shall and such other deputy superintendents may be in the
2
18 unclassified civil service of the state. Excepting only a secretary, all
19 other employees shall be in the classified civil service of the state. No
20 Person shall be appointed first deputy superintendent or designated as such
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
21 other deputy superintendent who shall not have had at least five years
22 actual banking experience, or experience for a like period in the examina23 tion or supervision of banks, or both. **2** The superintendent may re24 move any such deputies, assistants, clerks, examiners or attorney examiner
25 and shall summarily remove any such deputy, assistant, clerk, examiner or
26 attorney examiner for violation of any of the provisions of section 710-1i
27 of the General Code.
28
Sec. 710-17. **3** The costs, expenses and salaries incident to the
29 maintenance and operation of the division of banks shall be paid fram the
30 general revenue fund of the state and for the purpose of assisting therein
31 the following payments shall be made to the superintendent of banks of
32 Ohio:
33
(A) On and after the first day of June, 1937, each bank **4** sub-
34 ject to inspection and examination by the superintendent of banks and
35 **5** transacting business **6** shall pay to the superintendent of banks
36 at the conclusion of each examination thereof a sum of money equal to
37 the actual cost of such examination, which cost shall coniprise only the
38 salaries and the necessary traveling and other expenses of the employees
39 of the superintendent of banks actually engaged in such examination work
of the
40 at the office or offices of such bank and the preparation thereafter
41 rePorts incident to such examination required by the superintendent of
42 banks, provided the actual cost of such examination, as herein defined,
43 shall not exceed the suni of eighteen ($18.00) dollars per day for each
44 employee of the superintendent of banks engaged therein. Any bank
45 within five days after the receipt of a statement from the superintendent
item or items ap46 of banks of the cost of such examination object to any
the banking advisory
47 pearing therin by notice in 'writing served upon
3
48 board, which board shall fix a time and place for hearing upon such
49 objection. Such hearing shall be had at a date not later than thirty days
50 after the service of such notice, at which the bank shall have an oppor51 tunity to be heard. The banking advisory board shall upon such hearing
52 have the power to change, modify, adjust or expunge any item or items
53 appearing in such statement and its decision in the. matter shall be final.
54 **7**
(B) Each bank, company, corporation, person, association and co-
55
56 partnership desiring and intending to transact business in this state, which
57 will be subject to inspection and examination by the superintendent of
58 banks, shall pay to the superintendent of banks for the preliminary exami59
nation required by law to be made by the superintendent of banks a fee
60 of seventy-five dollars, such fee to be paid prior to the consideration of
61 such application as provided in section 710-42 of the General Code.
62
(C) Each foreign trust company desiring and intending to do busi-
63 ness in this state shall annually pay to the superintendent of banks a fee
64 of **8** five hundred dollars for issuance to it of a certificate authorizing
65 it to transact business in this state, and such fees shall be paid before such
66 certificate is issued.
67
(D) Every railroad, steamship or express company transacting busi-
68 ness in this state under section 710-181 of the General Code shall pay to
69 the superintendent of banks on or before the fifteenth day of June in
70 each year a fee of two hundred and fifty dollars.
71
(E) **9** Each trust company domiciled in the state of Ohio not
72 subject to examination by the superintendent of banks shall annually on
73 or before the r5th day of January pay to the superintendent of banks the
74 sum of one hundred dollars to meet expenses necessary and incident to
75 the performance of the duties required of the superintendent of banks
76 under section 7.ro-r5o of the General Code.
77
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Federal Reserve Bank of St. Louis
(F) All fees, charges and penalties required by law to be paid to
4
78
the superintendent orf banks, and collected by him, shall be paid by him
79 into the state treasury.
80
Sec. 710-13o. The board of directors of any bank may declare a
81
dividend of so much of its undivided profits as they deem expedient.
82
Before such dividend is declared, not less than one-tenth of the net earn-
83 ings of the company for the preceding half-year, or for such period as
84 is covered by the dividend, shall be carried to surplus until such surplus
85 **Io** equals its capital stock.
86
In order to ascertain the undivided profits from which such a dividend
87
may be made, in the account of profit and loss there shall be charged and
88 deducted from the actual profits:
89
(I) All ordinary and extraordinary expenses, paid or incurred, in
90 managing the affairs and transacting the business of the bank,
91
(2) Interest paid or then due, on debts which it owes,
92
(3) All taxes due,
93
(4) All losses sustained by the corporation. In computing its losses,
94 debts owing to it which have become due "II** and on which interest
95
for one year or more is due and unpaid, unless same are "12** secured,
96
by first mortgage on improved real estate or collateral of sufficient value
97 or by added personal endorsement insuring proper security, and debts upon
98
which final judgment has been recovered, but has been for more than one
99 year unsatisfied, and on which also for said period of one year, no interest
100
was paid, unless same are "13" secured, shall be included, unless re-
101
serves satisfactory to the superintendent of banks have been set up for
102 such debts.
103
104
105
SECTION 2. That existing sections 71(3-7, 710-17 and 710-13o of the
General Code be, and the same are hereby repealed.
SECTION 3. The validity of any provision or part of this act shall
106 not be dependent upon any other provision or part thereof. If any pro107
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Federal Reserve Bank of St. Louis
vision or part thereof shall be for any reason found to be unconstitutional
5
108 or invalid, such decision shall not thereby affect or impair any of the
109 remaining provisions or parts of this act.
The following matter eliminated from the present law — see corresponding numbers with asterisks in body of bill:
10
1. other necessary deputies, and
23
2.
28
3. That for the purpose of assisting in the maintenance of the de-
he
partment of the superintendent of banks and the payment of expenses incident thereto, and especially the expenses of inspection and examination,
the following fees shall be paid to the superintendent of banks of Ohio;
33
4. which under the laws of Ohio is
35
5. is authorized to do
35
6. , or is in process of voluntary liquidation on the day preceding
the first Monday in May in each year, shall pay to the superintendent of
banks on or before the fifteenth day of June in each year, a fee for the
support of said department of banks, based upon the following schedule:
54
7. For the first eighteen million dollars or less of the total resources
of any such bank 1/90 of
per cent of such total aggregate resources of
such bank as shown by the report of the condition of each such bank
made upon call by the superintendent of banks last before such day preceding the first Monday in May of such year ; and in addition thereto
1/18o of
per cent upon the amount by which such aggregate resources
exceeds eighteen million dollars and does not exceed fifty-four million
dollars as shown by said report ; 1/36o of
per cent of the amount by
which such aggregate resources exceeds fifty-four million dollars and does
not exceed one hundred and twenty-six million dollars as shown by said
report ; 1/72o of
per cent upon the amount by which such aggregate
resources exceeds one hundred and twenty-six million dollars and does
*2 S. B. No. 463
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Federal Reserve Bank of St. Louis
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6
not exceed two hundred and seventy million dollars as shown by said
report, and 1/144o of
per cent upon the amount by which such aggregate
resources exceeds two hundred and seventy million dollars as shown by
said report; provided, however, that each such bank and each branch of
each such bank shall pay, at the time of each regular examination thereof,
m addition to the foregoing fee a fee of $37.5o; provided also that in
addition to the fees prescribed herein the actual cost of the examination
of the trust department of a bank, or any bank organized under the laws
of the United States, as fixed by the superintendent of banks shall be
paid by such bank.
64
8. one
71
9. All fees, charges and penalties required by law to be paid to the
superintendent of banks, and collected by him, shall be paid by him into
the state treasury to the credit of a fund for the use of the department
of banks, and shall be used upon the order of the superintendent of banks,
but shall not be used or paid out or appropriated for any other purpose.
In any year when such fund is sufficient for maintaining the department of banks for the ensuing year then the assessment provided for in
paragraph (A) hereof shall be omitted for such year.
85
io. amounts to fifty per cent of
94
1. and which are not in process of collection
95
2.
100
well
i3. well
41100
9IST GENERAL ASSEMBLY,
FIRST SPECIAL SESSION,
1935'1936
S. B. No. 462
MR. McINTYRE
MOM!
A BILL
To amend sections 710-59 and 710-126a of the General
Code so as to provide for the issuance by banks of
capital notes or debentures with the privilege of
conversion into or purchase of shares of stock.
Be it enacted by the General Assembly of the State of Ohio:
2
SECTION I. That sections 710-59 and 710-126a of the General Code
3 are hereby amended to read as follows:
4
Sec. 7[0-59. A corporation doing business under the provisions of
5 this act may increase its capital stock as provided by law for other cor6 porations. **1** Excepting zethen made to meet conversion rights or op7 tions, or both, previously authorized pursuant to law, such increase in the
8 capital stock of any bank shall be fully paid in within six months from
9 the date when such increase is authorized.
10.
11
Sec. 710-126a. A bank may issue its capital notes or debentures at
such times, in such amounts, and subject to such terms and conditions as
12 the superintendent of banks shall in writing approve; may grant, in con13 nection with the issuance thereof or as one of the terms thereof, the op14 tion to subscribe for or to Purchase shares of the bank at such amount of
super15 consideration, not less than par, and at such time or times as the
capital
16 intendent shall so approve, and may confer on the holder of such
17
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Federal Reserve Bank of St. Louis
bank
notes or debentures thc right to convert the same into shares of the
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Federal Reserve Bank of St. Louis
2
18 at such value, not greater than par, and at or within such time or times
19 as the superintendent shall so approve, or both; and may set forth in the
20 instruments evidencing such options or conversion rights, or both, any
21 such lawful terms and provisions as are authorized in like cases by the
22 general corporation act, and as the superintendent shall so approve; pro23 vided that in no event shall such terms and conditions require or permit
24 that the holders of such capital notes or debentures be held individually
25 responsible as such holders for any debts, contracts or engagements of
26 such bank or for assessments to restore the capital of such bank. Any
27 capital notes or debentures issued under authority of this section shall,
28 without affecting the negotiability thereof, be subordinated in payment to
29 the claims of depositors, in the case of the appointment of a receiver of
30 or a conservator for such bank, or the voluNtary or involuntary liquida31 tion or dissolution thereof.
32
All the appropriate provisions of the general corporation act govern-
33 ing the manner of granting options to subscribe for or to purchase shares
34 of stock of a corporation or the issuance of securities 7e7ith the right to
35
convert the sanze into shares of a corpration, including those governing
36 the release of shares front pre-emptive rights and those governing the
37 manner of adopting an amendment of the articles of incorporation of a
or
38 corPoration when necessary to authorize shares to meet such options
39 conversion rights, shall apply to a bank, its shareholders and directors, in
40 the issuance of capital notes or debentures conferring such conversion
41 rights or whereby or in connection with which such options are to be
42 granted, and shall govern the rights of persons entitled to exercisc such
43 options or conversion rights; and whenever, in order to meet any conversion rights or options which shall have been previously approved by the
45 superintendent of banks in the manner herein provided, it shall be neces46 sary to authorize the issuance of additional shares of capital stock, thc
47 filing of a certificate of amendment of the articles of incorporation of the
3
48 bank adopted for such purpose in any inanner authorized by the general
49 corporation act and by this section, together with a certified copy of such
50 written approval of the superintendent of banks, shall be considered as
51 an increase of the capital stock of such bank for all purposes of section
52
53
54
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Federal Reserve Bank of St. Louis
710-59 of the General Code.
SECTION 2. That said existing sections 710-59 and 710-126a of the
General Code are hereby repealed.
The following matter eliminated from the present law — see corresponding number with asterisks in body of bill:
6
"i** Such
Address of S. Nirdlinger, Pres.,
Illinois Bankers Association, and
V. Pres., First Galesburg National
Bank & Trust Co., Galesburg, Ill.
, aleThe American Bankers Association—
Central States Conference, of which our
Executive Vice President was Chairman of
the Legislative Committee, our Association and other State Associations took a
very active hand in the hearings on this
measure as a whole and were able to offer
many helpful suggestions. I think that
most bankers are of the opinion that this
Act was beneficial in character. However, I wish to call your attention to one
thing in connection with the Federal
Legislation that is open to some question
as to its results, and that is the authority
of the Federal Reserve Board, the Federal
Deposit Insurance Corporation and the
Comptroller of the Currency to issue regulations.
(Laws as complicated and comprehensive
as the Federal Banking Laws naturally
need explanation and clarification. It is
the purpose of these regulations to apply
these laws to working conditions. In practice, though, regulations are apt to become arbitrary and to apply to particular
offenders against the law with the result
that banks under good management and
using good judgment are very much restricted in their operation.( A minor example of this is the regulation regarding
interest on time certificates, in which it
is stated that no time certificate can be
dated back or interest allowed after
maturity. This certainly is good banking
practice; however, the Federal Reserve
Board has recently ruled that renewal
certificates may be dated back not more
than ten days, which is a common-sense
way of handling them and prevents the
loss cm good will among customers who
are unable to renew their certificates on
the exact day that they are due.
In addition to the danger of mechanical
banking, too many regulations iinpose an
additional burden upon the banker, himself, in understanding and adapting the
regulations to his particular bank.
I
3
•
V
'
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1
The Comptroller of the Currency has
recently issued a regulation on the purchase and owning of investment securities
by national banks. These regulations follow the accepted principles of investment
and are beneficial as a whole and should
be welcomed in principle by all banks.
Bankers should remember that regulations cannot take the place of study and
1
investigation, and that many securities
are suitable for banking portfolios that
may be on the border line in a strict interpretation of this regulation. It is hoped
that it will be clarified and liberalized as
to securities whose status may be questionable. A suggestion has been made that
banks be put to the necessity of defending
their securities before the Banking Department just as they are under the
necessity of defending their local loans
and discounts. This would have a two
fold effect in acquainting the banker with
the securities that he owns, and would
give the Department a better basis of
appraising an account that is generally
called a secondary reserve, but often is
not.
In summing up a discussion of regulations, I think that we will all agree that
laws cannot supplant good management,
so we must realize that laws and regulations together cannot do it.
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Federal Reserve Bank of St. Louis
Declaration of Policy of The Illinois
Bankers Association
by
the 46th Annual Convention
Adopted
I
'') It is recognized that laws, providing for
the organization and supervision of banks,
are necessary and desirable. It is also recognized that complete detail in statutory
law is not practical and that a certain
amount of discretion must of necessity be
delegated to the officials charged with the
responsibility of administering these laws.
1
is desirable
n our opinion, therefore, it
by the
that rules and regulations issued
broad
supervising officials be reasonably
conditions
to allow for local and sectional
of the
and that they may be interpretative
and eflaw rather than having the force
fect of law.
officials is
' The attention of supervisory
tion, with
sugges
this
to
invited
fully
respect
towar
ate
cooper
they
that
t
the reques
obli
aking the safety of banks a mutual
.
tion of supervision and management
it
•
•
STATE BANK DIVISION.
If the average bank is called upon to contribute 1,4% per
annum of its deposits to the guarantee fund, then this contribution will absorb just about half the net profit earned
on deposits by the average bank, offset, of course, by whatever interest payments on demand deposits that are saved.
Our experience would indicate that this saving in interest
payments on demand deposits in smaller banks will not be
very great for the reason that the greater part of the interest
so paid by them was on public funds, which will largely
continue to be paid.
The tendency of many large commercial depositors to
transfer a substantial part of their deposit to a time deposit
for the purpose of securing interest accentuates the need for
the accurate analysis of accounts to protect ourselves from
paying interest on a large part of our deposits and at the
55
same time incurring increasing losses on the handling of
other deposits of the same customers.
In attempting to control earnings, and particularly in
attempting to forecast them, the use of budgets will be found
to be of great aid. It is possible to accurately anticipate
earnings with the use of a budget and then by the constant
check of this budget against actual accomplishment to control earnings.
To attempt to outline in detail a plan for the control of a
bank's operations and earnings would require a paper many
times the length of this one. It has been my desire to cover
the general principles involved in such a plan in this paper,
and if I have succeeded, even partly, I shall feel that I have
partly repaid you for your kindness in inviting me here
to-day.
COMMITTEE AND OFFICERS' REPORTS-STATE BANK DIVISION
Address of the President, L. A. Andrew, Vice-President
First Bank & Trust Co., Ottumwa, Iowa.
The field of work of the State Bank Division is a broad one. Its members
are located chiefly in the smaller cities and towns. Therefore it represents in a large measure the country banking arm of the American Bankers
Association. As such it has been especially vigilant in looking after the
needs of country banks. State banks. of course, are chartered and regulated under the authority of 48 legislative bodies, and supervised by an
equal number of State banking departments. To the State Bank Division
has been committed the task of bringing about a reasonable degree of
uniformity and consistency in State bank legislation and supervision.
In line with this policy, the Division has conducted an active, continuous,
Nation-wide campaign through the press, by address and correspondence,
for more closely co-ordinated banking legislation and more efficient supervision of banks In the several States.
The Division has worked consistently toward the strengthening and
improvement of public supervision of State banking institutions by the State
banking departments. and has repeatedly gone on record favoring the
policy that the important office of State Bank Commissioner should be
kept free from entangling partisan politics, and should be entirely detached from all other functions of State Government, urging that the
tenure of office of State Bank Commissioner should be made more secure
and lasting than is now the case in many Statos, and that this important
public officer be granted sufficient compensation and discretionary powers
so that the office shall attract and retain the services of men of outstanding
executive ability and successful banking experience, also that the State
Bank Commissioner's ability to serve well should be strengthened by
providing him with an adequate force of bank examiners selected on the
basis of merit. from men having the requisite qualifications of honesty,
ability, training, and banking knowledge to carry the d .ties of their office
on the highest plane of usefulness to the public as well as to banking.
The most recent survey made by the State Bank Division reveals the
6:et that there is a very definite trend toward the policies advocated by
the State Bank Division as to freeing the office of State Bank Commissioner
from partisan political influence,lengthening the term of office, providing
for adequate salaries, more discretionary power, &c.
Among the projects which have received careful attention from the
State Bank Division are the following:
Increase of the minimum capital requirement of banks to $25,000 with
paid-in surplus equal to 20% of the capital, and provision for the required
building up of such surplus to at least 50%.
Increase of the discretionary power of the Bank Commissioner with
reference to the granting of denial or charters to new banks with authority
given for making reasonable rules and regulations for the government of
bank operations.
Creation of banking boards composed of practical bankers to act In an
advisory capacity to the State Bank Commissioner.
Empowering i;aiik Coninussioners to take complete charge of and to
liquidate insolvent banks as distinguished from liquidation through the
courts thereby a voiding delays :Ind iinneceisary exnense in sueisii(vddation
Legislation providing for the merger, conversion or consolidation of
banking institutions in communities and under conditions where such
action may seem to be warranted.
Provision for a more just and equitable taxation of bank shares.
A clearer and more exact definition of the duties and respoiasibilities of
bank officers and directors.
Increasing the compensation of Bank Commissioners and lengthening
their terms of office to six years with power to the banking department to
appoint necessary deputies and examiners from those having the requisite
qualifications and experience for this responsible task.
The Division with a large degree of success has consistently urged that
every bank immediately install a complete down to date credit bureau for
every borrower or unsecured loan of $500.00 or more as a basis for the
intelligent extension of credit.
ln co operation with a committee from the National Association of State
Bank Supervisors. a standard form of report for the use of bank officers
in reporting bank conditions to directors was preirtred. Th:s standard
report form, consistent and comprehensive. immediately met mith general
favor with the result that it is now in general use.
The Division has urged its member banks to make an analysis of checking
account covts and in.stall service charges as a stop-loss on services they
have been rendering without compensation, and as a result of this, has
supplied its member banks with literature outlining a plan for analyzing
checking account costs and providing for the installation of service charges
for small minimum balances. installation of measured charges for handling
checking accounts, float charges and numerous other charges to which
banks are Justly entitled.
The State Bank Division has remained unalterably opposed to any
unification plan which would destroy the American dual system of banking.
At all times its committees on State and Federal legislation have been
on the alert to sponsor any legislation helpful to all banking and to oppose
legislation which is not in the interest of its members or the Division which
they serve.
In this connection. the Division has at all times energetically opposed
the enactment of so-called Guaranty of Bank Deposit Laws, and from
time to time has called attention to the fact that wherever this scheme has
been put in the crucible of experience and tried out by the fires of adversity,
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such laws have always been found wanting, and that the fundamental
weakness of the Guaranty of Deposit Law iR that it Is an attempt to create
integrity and financial ability by legislative flat--it tends to penalize
prudent banking and to encourage reckless practices by reducing in the
public mind all bankers, honest and dishonest, efficient and inefAcient to
one common level.
Our Committee on Banking Practices and Public Relations adopted a
program of activity for the year, beginning with the adoption of a slogan
"Profitable Banking Creates Safe Banking." The Committee urged
member banks to use it as much as possible in their publicity and public
relations. It urged each State Bankers Association to adopt (and make
public the fact that thay have adopted) this code of sound banking
and furnished.
practice.
A suggested model code was drafted
State Bankers Association,
The Committee urged each
if it
has not already done so. to divide the State into districts for District
clearing house associations and organize such district associations. It
urged each State Association to fix as its minimum objective in carrying
out the slogan, the adoption by the banks through regional clearing house
associations, if possible (but not necessarily) of activity and exchange
charges. The suggested basis for these charges were furnished.
Our Committee on State Bank Research during the year gathered and
compiled some very valuable and interesting figures showing the resources
and liabilities of all State and National banks of the country for the calendar
year; details of changes that have occurred in these items during the year
of 1932; figures of bank suspensions, re-openings, and new bank charters;
together with schedules of the trend of savings deposits nationally as compared with postal savings deposits; and other interesting statistics. These
data are gathered each year by the Committee on State Bank Research,
making available as of the end of the calendar year, figures which aro of
particular interest and usefulness.
Our Committee on State Banking Department has been in close cooperation with the supervisors of State banks of the various States. The
Commissioners have worked actively with the Division along the line of
promoting better bank management in helping to build stronger and
safer banks in every State. During the year the Commissioners of the
several States actively co-operated with the Division in furnishing statistics
on resources and liabilities of State banking Institutions in response to the
questionnaire sent out.
Our Committee on State Bank Legislation has actively co-operated
with the Committee on State Legislation of the American Bankers Association and the State Legislative Council in the promotion of desirable
legislation, and the defeat of undesirable legislation. There have possibly
been more banking laws enacted in the various States during the past year
than in all the previous five years. Some of these enactments have been
very constructive while others have been to the contrary. The Bank
Collection Code has in most jurisdictions apparently been applied without
question as to its validity.
Branch banking has been the subject of legislation in many States, the
general tendency being to increase branch banking privileges. With
respect to deposits of public funds, the situation has become most unsatisfactory. The large number of enactments concerning deposits of public
funds testifies to the desirability of the effort to draft a satisfactory forrn
of law upon this subject.
The Committee on Federal Legislation has co-operated with the Federal
Legislative Committee of the American Bankers Association in looking
after the interests of banks in this connection. The Banking Act of 1933
outranks in importance all banking legislation enacted since the adoption
of the Federal Reserve Act.
Our Committee on Federal Reserve System has been active during the
year in an endeavor to keep informed on matters of legislation pertaining
to the Federal Reserve System which have been presented in Congress.
At the present time it seems that non-member State banks may not be
advised until late in December as to whether or not they can qualify under
the temporary insurance fund which becomes effective Jan. 1 1934.
No State banks!
Half of the banks in the United States forced out of business.
Your own good State bank destroyed with the rest.
Shall the State bankers of the country be forced to accept such a progTam
of destruction'?
The battle for the preservation of the American Dual System of Banking
has now reached the critical state and the issue will probably be determined within the next few months.
After winning the great fight over Section 19 of the Glass bill, those
of us who are determined tht the American Dual System of Banking shall
be preserved, have suffered a distinct reverse and there is no use of disguising the fact that our enemies are nearer victory to-day than at any
time during the battle of the last several years. A guaranty of bank deposits with the forcing of all banks into the Federal Reserve System is
now the new line of attack. We cannot agree with the deposit guaranty
25'9
•
•
•
•
56
BANKERS' CONVENTION.
feature of the -Banking Act of 19:3:3." We regard it as unfair, unsound.
and unworkable. It is unfair to well-managed banks in that it makes
them responsible for the failure of mismanaged institutions. It is economically unsound and unworkable because it has been tried in eight different
States and has been a failure in each one. A deposit guaranty law will not
tend to improve banking practices; on the other hand, it will put the
premium on the careless, unsafe banking methods. Good bank management is all that is required for safe banking and it can be enforced by
proper supervising authority. When deposits are guaranteed, all kinds of
banking are put on the same basis. There is no good defense for a deposit
guaranty law under any name and this part of the Act is simply the result
of the depression hysteria. Senator Carter Glass, sponsor of the "Banking
Act of 1933," made the following statement at the Democratic National
Convention in June 19:32:
"The guarantee of bank deposits has been tried in a number of States
and resulted invariably in confusion and disaster to the financial structure
of those States and if our Party, when returned to,power, should incorporate
such a scheme in the Federal organization, we would drive the strongest
member banks from the Federal Reserve System. These strong banks
should not be assessed to pay a premium for mismanagement."
The question of whether the State bank systems shall be destroyed and
about half of the banks of this country put out of business is now right
up to a decision. The State Bank Division of the American Bankers
Association has naturally been in the forefront of this battle for a number
of years, as the very existence of this Division and its thousands of members,
comprising nearly half of the entire membership of the American Bankers
Association, is threatened in this conflict. It is very unfortunate that the
issue is so entangled with the depression crisis that now exists. The
enemies of our great State Banking System are taking advantage of the
depression hysteria to conclude in their favor the battle that has been going
on for a number of years. It is unfair that a great economic and financial
question, involving the existence of thousands of banks and the financial
stability of thousands of American communities, should be brought up for
decision at this time. The fight regarding the American Dual System of
I3anking is a clear cut issue between those who believe in the sovereignty
of our States and home rule, and those who are in favor of a "unification
of our bankingsystems" into one Washington bureau. It is also a fight
between the unit banker, both National and State, and the proponents
of a foreign system of branch banking. In fact, a careful analysis of the
issue shows that the ultimate result of this battle. if it should be lost by
the State bankers, will be the placing of seven or eight large branch banking
organizations in charge of the financial business of this country. Those
who are using the propaganda that the unit country bank has been a
failure are putting forward the remedy of "Safety in Bigness"; that is, the
safety of the foreign system of Nation-wide branch banking. Their
argument is based upon an absolutely false position. They say that the
unit country bank has been a failure, and that the large number of failures
among the smaller banks, both National and State, make it necessary to
change the American Dual System of Banking to a foreign system. The
American unit bank has not been a failure. The so-called small country
bank, whether National or State, has indeed suffered from the great
Nation-wide economic depression, because the customers of these unit
country banks were unable to pay their obligations. and also, in an equal
measure, because the bonds sold them by the large investment houses and
correspondent banks turned out to be a poor secondary reserve. Losses
in the bond accounts of a large number of the unit country banks have
been as great or greater than the losses on local loans. These bonds were
the result of "Bigness in Business." Unit country banks held millions
of so-called "gilt-edged securities," sold them by "Big Business" listed on
the Exchange as collateraled bonds, which, investigation afterwards
showed, never had a dollar of collateral behind them. Millions more of
bonds were sold to the unit country banks in an effort to make good the
losses of large city banks with poor commercial accounts. Do not get
the idea, however, that the unit country bank suffered any more in proportion from this poor judgment in bonds than the large city banks, with
their expensive bond specialists. The losses in the large banks were even
greater in proportion. This argument for "Safety in Bigness" is false
from the ground up. The official figures on failures also prove that the
arguments used against the unit country bank are false. The year 1931
was probably the worst as regards failures. During that yedr 2,316 banks
closed. Banks with resources of under one million dollars closing during
that ye,ar totaled 1,890,and banks with resources of over one million dollars
closing during that year totaled 426. However, these 426 banks had total
deposits of S1,417,798.000, and the 1.890 small banks had deposits of
only $:396,2:37,000,000. In 1932 the record was practically the same.
Banks with deposits of one million dollars each accounted for 771
/
4 of the
total deposit liability in closed banks. In 19:30 the record is even worse,
as nearly half of the deposits in closed banks for that year were found in
two organizations, one a branch banking system in New York and the
other a group in Kentucky. In the face of these official records, we have
been continually told that banks with capital of less than 550,000 and
located in towns of 10,000 and less were really the cause of the depression
and all of the bank trouble. This has been repeated so many timit4 that
a great many people believe it. Official figures show this propaganda
to be absolutely untrue. It is also said that we must have branch banking
in order to provide safety. The official records for the past two years
show that 17 banks with 567 branchts have closed with $1,612,188,000
in deposits. If that is large branch banking safety, the record is certainly
decidedly worse than unit banking. The official records for closings of
Federal Reserve non-member banks are equally interesting. Only onethird of our banks are members of the Federal Reserve System. In 1932
with closings of 1.125 non-member banks and 3:31 member banks, nearly
the same proportion is shown in number, but the deposits of the member
banks were only a little over one-half the deposits of non-member banks,
the figures being $269,000,000 for member banks and S446,000,000 for
non-member banks.
The recent acute period of our banking trouble, followed by the l'resident's banking holiday, was brought on mainly by the failure of several
of our largest banks not in any State system. In fact a total lack of
confidence in the large reserve banks in New York and Chicago and a
total collapse of the entire banking system showed that the people of the
country had no more confidence in the so-called "Bigness" than they had
in the unit country bank.
Let us look for a minute at the comparative size of the foreign system,
held up as ideal for America. In Canada there are 11 banks with 4,08:3
branches, but three of these banks, with over 2,600 branches, control
more than 70% of the country's resources, and two banks in New York
have more bank deposits than all of the banks in Canada.
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Federal Reserve Bank of St. Louis
It may be that one of the main reasons for this propaganda against
the
unit country bank is the apparent ease with which certain interests could
control large groups of branch banks covering large sections of the country.
There is positive menace to the financial stability of the United States
in the stock market manipulations which may result if we have any large
concentration of banking power through branch banking systems. This
is a phase of the subject deserving careful study as it is a real danger.
Editor De Puy of the "Northwestern Bankers," in a recent editorial
stated:
"Let us not forget that under our present unit system of banking the
resources in the United States increased 600% in the last :30 years. Let
us continue to protect the sovereignty of our individual States. Let us
continue our dual system of American Banking and prevent a foreign
system of banking from being superimposed upon local American farming
and rural communities and upon the people of the United States. Let us
have rules and regulations and ample for both State and national banks
which will safeguard in every possible respect the money of depositors,
but let us fight to oppose a concentration of the banking and credit resources
of the United States through any system of unified or centralized banking
in this country upon the false idea that 'Bigness' can ever mean 'Safety.
Let us not easily forget the large business and banking crashes that have
come from 'Bigness' and these crashes have been heard from one end of the
land to the other since 1929.
"Let us continue to have State banks.
"Let us continue to have national banks, but let us see to it that neither
one of the groups nor any part of them be sacrificed or crucified for the
benefit of the other."
The "American Banker" in an editorial printed a few days ago said:
"If there was anything to distinguish the national record as better than
the State, we might admit for this plan some juctice. But we cannot
dodge the fact that the Federal Reserve System was used to stimulate and
prolong prosperity, despite a realization within the Reserve Board that
every step of credit ease was a step deeper into a trap out of which the
Board has thus far escaped, but in which scores and thousands of honest
bankers. putting their faith and trust in the Federal Reserve. lost their
banks, their reputations, and their all.
"If we could forget the fact that national bank examinations were not
distinguished by any foreseeing wisdom as to secondary reserve or other
requirements, that national charters were about as easy to get as State
charters--in New York City, if anything, a little easier—that the percentage
of errors at Washington was but little different from that in Columbus,
Baton Rouge, or the other State capitals, on the whole—if we can ignore
such points, we could concur in a move to give Washington greater powers
to lead the way to better banking.
"However, the role of strong banking supervision has been reversed.
State banking systems are leading the way with a strong banking policy."
Members of the State Bank Division assembled here to-day are entitled
to know the progress of this Division during the past year. At the Executive Council meeting held in Augusta last spring, your President made,
in part. the following report:
'"fhe State Bank Division has had a good year. It has been a year of
hard work for its members, who constitute over half the membership of
the Atnerican Bankers Association. When I say that the State Bank
Division has had a good year, I mean, of course, that Frank Simmonds
has had a good year. We think we have the best Deputy Manager in the
business, and he has done a wonderful work during the past year since our
last meeting.
"It has been a year of trial and sacrifice for all banks, national and
State, a year of false and misleading propaganda against the banker and
his business. That tne bank is an integral part of the community and
reflects primarily the condition of the community is a fact many times
overlooked. The unit bank, both national and State, particularly the
large majority of all banks known as country banks, have been fighting
for their very existence.
"The State Bank Division is regarded throughout the country by all
such bankers as their representative in the affairs of the American Bankers
Association. We have accepted that responsibility and, mindful of the
obligation, have consecrateu our efforts to the preservation of the dual
system of banking in this country. We are fighting for the continuation
of the American form of banking which has built up this country from the
first. The fight has only commenced. This unfortunate crisis is being
taken advantage of by the proponents of the foreign system of banking,
to do away with the American system and to destroy the dual banking
system for a so-called unification of banking idea. Those in favor of
foreign banking principles wish to destroy two-thirds of our banks. They
want to take advantage of conditions brought on by tne universal collapse
of credit and banking, to destroy instead of to construct. They want to
do this without proper study of the situation and without weighing properly
all of the conditions pro and con. They want to rush this revolution in
banking through without hearing from the millions of our people who would
be affected by this overthrow of banking and finance. We are unalterably
opposed to any unification of banking idea which will destroy the American
dual system. We demand a careful study of the situation before any action
is taken. The patrons and supporters of the country banks are the millions
of people back home who have sacrificed with their banks; who have seen
their banks prosper with the community; and who have seen tneir banks
in trouble because the people of the community could not pay their notes
because of the universal economic condition beyond the control of the
rirtreom
weort,
th
te
e sbo
kehreosrta
ba T
banking has not been a failure any more than the
national and Federal Reserve. The recent acute period of our banking
trouble was brought on mainly by the failure of several of our largest
banks, not in the State system, and two large groups of national banks.
The suspension of the fiscal agents of our Government, tne Federal Reserve
banks, followed on account of the almost total loss of confidence by the
people in member banks. We are sorry this is so and this phase of the
depression is mentioned only to keep history straight. We wish to emphasize, however, the fact that any plan for the unification of banking idea
on that basis is unsound. We believe in the Federal Reserve System. It
is a part of the Atnerican system of banking. It is not and was not conceived with the idea of being all of the American banking system. Some
of the men connected with the Federal Reserve System have been anything
but fair in their presentation of the proposal for the 'unification of our
banking systems.' Walter Wyatt, General Counsel for the Federal Reserve
Board at Washington, in the March issue of the Federal Reserve Bulletin,
proposes new law to force all of the State banks into one system, naturally
controlled, ruled, and dominated from Washington, and he would do this,
as he says, by:
"'Forbidding the receipt of deposits subject to check to withdrawal by
check by any individual, partnership or corporation other than a b:ink
organized under the laws of the United States and provide suitable penalties
for violations of this prohibition.'
"Only one-third of the banks of the country are member banks. The
people have had little more confidence in member banks than in nonmember banks. In 1932. 1,125 non-member banks closed and :3:31 member
banks, nearly the same proportion as they are in number, while the deposits
of member banks which closed were over one-half the deposits of nonmember closed banks, the figures being $269,000,00(1 for member banks
and $446,000,000 for non-member banks. The deposits of member banks
declined from 37 billion dollars to :30 billion dollars in 19:31, and from
:30 bUlion dollars to 28 billion dollars in 19:32. And during the year 19:32
when the deposits in member banks were decreasing two billions of dollars,
the loans to member banks actually decreased over 400 million dollars.
These figures are not given to disparage the Federal Reserve System in
any way but to get the official records before you for a study of the subject
and to show that the people had no more confidence in member banks than
in non-member banks during this crisis. A large number of banks have no
place in the Federal Reserve System and this applies particularly to the
many savings banks and the smaller commercial banks in country places.
Another point is that one who wishes to be fair should not take advantage
of a crisis to overthrow tne American system of banking.
STATE BANK DIVISION.
particularly of the countrY
"The State Bank Division is representative,
e in their present form
unit bank. We are fighting to preserve the existenc
country. Our thought is
this
of
ons
instituti
of two-thirds of the banking
interests are opposed
l
to preserve and to build, not to destroy. Powerfu
dual system of banking. Forto the country banks and to the American of
ent in this country
governm
form
ic
tunately we still have a democrat
home have a way of making
and the millions of the common people back that
should desire to
anyone
vable
inconcei
almost
is
It
their power felt.
this country in one autocratic
concentrate all of the ba.nking resources of
by political influence. We
bureau in Washington, swayed continually
national capitol have too
believe that those in charge of our affairs at the in proposing a plan which
good a knowledge of smart politics to go very far
are now, apparently. in
We
system.
banking
State
our
destroy
would
have had the collapse and there
the second phase of this depression, we will
be a hard road to travel, and
will be a long period of rebuilding, which
it may take two or three years to show much improvement."
c Policy ComAt this meeting of the Executive Committee the Economi
which proposed that all
mission presented a report, the first section of
Reserve
Federal
the
of
banks in the United States should become members
Bank System would
System. The Executive Committee of the State
t opposed that section
not agree to accept that platform and your Presiden
A vote was taken and
of the report of the Commission in open session.
Afterwards a
report.
the
it was decided to eliminate that section of
in brief, stated that
compromise of this section was approved. which,
System should be
the requirements for admission to the Federal Reserve
discrimination.
so amended that State banks could be admitted without
the interests of the State
The officers of your Division have looked after
banks t,o the best of their ability at all times.
Regards Its Relationship
Proposed Changes in the Banking Act of 19:33 as
to State Banks.
provisions of the Act
We wish to commend, in a general way, many
United States.
as they make for better banking methods throughout the
requirements
The Supervisors of State Banks have insisted upon higher
ents put
for several years and we are glad to see many of these requirem
into the National law.
parbeen
have
es
The abuses of bank affiliates and holding compani
Act. There are
ticularly notorious and are quite fully corrected in the
We want to accept
many provisions which are worthy of commendation.
those interested
the good provisions of this Act in a co-operative way, but
ds of all of the
primarily in State banks, which made up about two-thir
of changes
number
a
that
feel
banking institutions of the United States,
are necessary.
y feature of
As stated before, we cannot agree with the deposit guarant
unsound and unthe -Banking Act of 1933." We regard it as unfair,
guaranty law under
workable. There is no good defense for a deposit
of depression hysteria.
any name and this part of the Act is simply the result
to emphasize the
The Banking Act of 19:33 in a general way, seems
and does not give
trend in Washington toward a unified banking system
For a number of years
the co-operative view of the dual banking system.
the recognition of State
State banking authorities have insisted upon
known that the exatninaexaminations for State member banks. as it is well
are equal, and in some
Mons of most of our State Banking Departments
ent or Federal Reserve
cases superior, to the National I3anking Departm
Act goes back to the old
examinations. However, the new Banking
the Federal REserve Board
idea that all examinations should be made by
a deliberate attempt.
or the National Banking Department. This is
one group and the
of course. to centralize the banking authorities into
Also their record for
entering wedge toward a unified banking system.
banks is not in any
examining and re-opening of Federal Reserve member
failures of re-opened
way outstanding. Witness the large number of
banks that belonged to the System.
ion of affiliates of
Section 5, Subsection C,', provides for the examinat
s.
State member banks by Federal Reserve examiner
Reserve Act (SecSection 8 provides for an amendment to the Federal
tion" which shall
tion 1213) creating a "Federal Deposit Insurance Corpora
which have lren closed by
liquidate the assets of State member banks
by vote of their directors.
action of the appropriate State authorities. or
for the liquidation of
This is in direct opposition to State laws providing
zation or re-opening of any
State banks. It provides that in the reorgani
banks. This is a
State member banks they shall be changed to National
System.
direct discrimination against the State Bank
the
". .
states:
of 19:33
Section 12 (paragraph E)of the Banking Act
Board, in the case of a
Corporation shall request the Federal Reserve
the Currency, in the case of a
State member bank. or the Comptroller of
a thorough examination of
National bank. to certify upon the basis of
bank, the certificate
such bank . . ." In regard to a State member
le.
of the State supervising authority should be acceptab
members there
Several places in the Act where it speaks of State bank
a National banking
is the following wording: "or its conversion into
of how the Act tries to
association." This is another striking example
the doing away with
bring out a unification of our banking systems and
the American Dual System of Banking.
ent to the Federal
Continuing with Section 12A (being the amendm
in two places: "ThereReserve Act, quoted in the new law) Section L reads
bank." In the folupon the Corporation shall organize a new National
". . . the Corporation
lowing paragraph it again repeats the wording:
ce with the provisions of
shall organize a new National bank, in accordan
liabilities of such closed
this subsection, to assume the insured deposit
nation is unnecessary and
State member banks . . ." This discrimi
unfair, as its succassor should be a State bank.
Insurance Fund" it is
In setting up the "Temporary Federal Deposit
banks "with the approval of the authority
provided that non-member State
and certification to the Corporation
having supervision of such State bank
condition, shall, after
by such authority that such State bank is in solvent
of, the Corporation, be entitled to
examination by. and with the approval
." State banks should be admitted
become a member of the Fund . .
e Fund" upon the cerinto the "Temporary Federal Deposit Insuranc
y. The closing sentence in said
tification of the State supervising authorit
"The Corporation is authorit
paragraph is also discriminatory, as states:
ons for the further examination of such
ized to prescribe rules and regulati
of examiners employed to make
State bank. and to fix the compensation
examinations of State banks."
members of the Federal
The provision that all State banks must become
to continue as members of the
Reserve System by July 1 1936 in order
tion" is unfair and unsound because
"Federal Deposit Insurance Corpora
terminate the existence of
it is intended to compel the liquidation and to
qualify for mernbership in
a large number of State banks which cannot
is a decided change in the rethe Federal Reserve System unless there
States are fearful of an
quirements. Many bankers all over the United
ion and examination by the
unsympathetic and discriminatory supervis
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
57
Insurance Corporation."
Federal Reserve Board and the "Federal Deposit
the working out, in a pracAlso of the interpretation of the regulations and
tical way. of the provisions of the Act.
it provides member
While the Act discriminates against State banks,
rly in Section 25,
banks with the safety and help of State laws, particula
protected by the rate
paragraph 2, which provides that member banks are
of interest provided by the State law.
provides that only
We are in favor of paragraph 2 of Section 21. which
Federal law shall
banks under examination and regulation of State or
similar institutions,
accept deposits, but we believe that private banks, or
should be under the supervision of State authorities.
is threatened by the
The very existence of State banking institutions
System of Banking
Banking Act of 1933 and the entire American Dual
from the wording
is faced with a crisis in its existence. It is quite evident
" is to be forced on
of the Act that a "unification of our banking systems
good force.
with
and
tho American people if objection is not made at once
a success for over
The American Dual System of Banking has proved
48 States and banks
60 years. Banks under State supervision in our
after year, serving not
under National supervision have gone along year
and are responsible,
only their own communities, but the country as a whole,
to a great extent, for the development of the country.
this dual system of
The unit bank, which in a large measure makes up
systems of banking,
banking, is now attacked by those in favor of the foreign
bank as it exists
and an effort is being made to destroy the unit country
country bank, whether
to-day and has existed for many years. The unit
who have their homes
National or State, owned and officered by men
the greatest factor
in the community where the bank is located, has been
with the people and sufin building up that community. It has prospered
affected their community.
fered with them from the depressions which have
together the savings of
These so-called country banks have gathered
measure to build up their
their communities and used them in a large
has been ideal finanically
home towns and the country roundabout. It
s have been made, but
Mistake
r.
custome
the
and
banker
both for the
banking. Unit country banking
mistakes have been made in our largo city
who owed the bank could
has had its share of failures, because people
de economic connot pay their obligations on account of the world-wi
control.
ditions over which they or their bank had no
the American Dual System
The fight against the unit country bank and
but this fight has
of Banking has been going on now for several years,
crisis existing on account
been intensified during the po-st year by the
the American Dual System
of the deprassion. Those who wish to destroy
on and, by making
of Banking have taken advantage of this great depressi
of American business and
use of the hysteria resulting from the failure
unit country bank into great
untrue propaganda, have tried to bring the
ridiculous statement Inv; been
disfavor. This has gone so far that the
failure. It has not proved
made that the unit country bank has proved a
large National banks,
a failure any more than Federal Reserve banks,
, as the official records
branch banking, group banking and chain banking
has gone along attending
will show. For some reason the unit banker
nda to spread day after
to his business and has allowed this untrue propaga
confronted with a fight
day without proper denial. However, we are
both National and State.
for the very existence of the unit country bank,
19 of tin Glass bill would
We fought the first battle last year when Section
State banks. We wore
have put out of business all small National and
into the law. The unit
told that Section 19 was sure of being enacted
from the folks back home.
banker was aroused, however, Congress heard
who have been fighting the
and Section 19 was defeated. Then those
and proposed a unification of our
unit country bank changed their attack
seem, this "unification of banking"
banking systems. Ridiculous as it may
of our banks, making membership
idea proposed the destruction of half
necessary attribute of every bank in
in the Federal Reserve System tho
the program progrossed and tho
order to do business. As this part of
on to the Federal Reserve System,
bank deposit guaranty scheme was hung
surplus of the Federal Reserve
with the confiscation of half the earned
opinion. However, the hysteria to
banks, there was quite a change of
is in greater danger to-day
banker
destroy contintnli and the unit country
time during the period of its useful
of being exterminated than at any
existence.
n Dual System of banking and
Those of us who believe in the America
unit country bank may as well realize
the
preserve
to
wish
who
nf
us
those
a fight on our hands. The propanow before it is too late that we have
and to put in its place the foreign
ganda to destroy the American system
and England, is being pushed
system, represented pritnarily by Canada
money for promotion purposes. Stateby powerful interests with plenty of
in the program, next comes so-called
wide branch banking is the first step
as a matter of course, Nationtrade area branch banking. and then follows,
large systems having three or
wide branch banking with seven or eight
four thousand branches each.
bank is not political, but is a fight
lag The fight against the unit country
ate the banking power of this
that large interests are making to concentr
ning is carefully manipulated, untrue
country in a few hands. The campaig
unit banker fighting for his very
propaganda is spread broadcast and the
form of attack. The primary
life is confused by the rapid changes in the
banking interests of this country by
idea, of course, is to control all of the
bankers have known for
one bureau in Washington. Wise National
unwise National bank regulations
Years that the best check they had upon
bank systems were not more
was the State bank systems, in that the State
against National legislation
check
a
constant
were
they
that
but
lenient.
banks. It is nearly inwhich might seriously interfere with National
ge of Washington bureaucracy
conceivable that any man with a knowled
this country tied up in one
would want the entire financial resources of
politically governed bureau in Washington.
Federal Reserve System.
The movement to put all banks under the
country bank, is equally
another angle in the attack against the unit
have the support of all
indefensible. The Federal Reserve System should
a commercial business with
large commercial banks, and every bank doing
to the System, but any
resources of over a million dollars should belong
belong would not be wise
effort to compel all the unit country banks to
viewpoint. It would add
or even desirable from the Federal Reserve
System without material
infinitely to the detail and romon.sibility of the
thorough knowledge of the
benefit. In fact, the best posted men with a
that one-third of the banks
Federal Reserve System have repeatedly said
Their wants can be taken
in this country have no place in the System.
banks in Reserve centres.
care of better by the use of correspondent
thousands of unit country
The American Dual System of Banking with
fight for the continuation
to
going
are
State,
and
banks. both National
opportunity to continue to be
of their existence. All they want is the
58
BANKERS' CONVENTION.
of service to their conununities, to continue to have a large part
in the
building of their country. They are Americans that are in favor of American
banking. They have worked for two generations in many places
to build
up safe and helpful banks. They protest against the use of depression
hysteria to destroy their business. They have the right to
demand, at
the very least, a careful study of the entire situation before
Congress
takes action. The official records show that the unit bank has
not been
a failure. Paid propagandists with selfish interest. to promote
have continually misrepresented the situation. The millions of the
folks back home
who have prospered with the unit bank and who have suffered
when they
were unable to pay their obligations, causing the unit
bank troubles. are
ready to fight for a continuation of the American system.
They need
to be aroused because their communities are in danger of losing
the greatest
factor in their success. The unit country banker needs
to-day more
than ever before the fighting spirit of the pioneers, and with
this fighting
spirit he must have continued faith, not only in his country,
but in his
bank and in himself.
In closing we want to bring a message of hope to all bankers.
You
have fought a good fight. You belong to the army of "Captains
Courageous." Have faith in yourselves and in the thousands of good
banks you
have created, not built in a day. It may be easy to destroy
a bank or
banking system, but always remember that it takes years, many
times a
century, of effort to build a good banking property or a good
banking
system. Fight for the preservation of your property. Believe
and have
faith in America and the American form of banking. Fight on,
you will
win over the hysteria of this crisis and right will triumph.
Forum Discussion—Uniform Banking Law—Guarantee
of Deposits.
I am here to say to you, we are going to have some
kind of a guarantee
of deposits. We are going to try it out. The reason
why we have got
this kind that we have now is because we as bankers have
been against it
and the other fellow wrote the bill. If we are going to have
a guarantee
of deposits—and I am saying to you that we are--we ought
to come along
and exert the influence so that it will be the kind of a guarantee
that is
going to rest on the people who are demanding it and that is the
depositors.
If we don't get that and exercise that kind of an influence,
they are going
to say and prove it on us that our eyes are glass eyes, because
we are not
using them to see the conditions under which we are operating.
We want to bear that thing in mind, because it is the truth. That the
is
situation that we ought to come along and deal with. If we would
say
"yes" and go down to Congress and to this Administration and say that
we want to get this law so that it is not going to hurt anybody,
we would
get somewhere. We wont get anywhere by just being against something
all the time. The time has come when you have got to be
for something.
I would have liked tosee that kind of constructiv
e action taken here by
the American Bankers' Association and by this State
Division because
that is a reality that we are going to have to face and it
is just here--that
is all there is to it.
There is a way in which you can have insurance and that is that the
depositor pays this premium. If any one of your depositors
would come and
say he was going to c,ancel the fire insurance policy on
his house or on any
of his property you would say,"For God's sake, man,
don't do that. That
is false economy." He has insured his automobile
and his life and his
wife and all his personal property and real estate and
he as one of the very
important functions of banking comes and asks you
for an insurance
guarantee and we say, "It won't work." We have
educated him to that
point. We ought to say to him that the one who is
the beneficiary of the
insurance policy pays the premium, just takes that
and has that charged
up to him.
The Fletcher Bill that has been in Congress
for several years could
have been on the statute books and in operation in
place of this kind that
we are all agreed is wrong. If we had seen
the turn in the road and the
turn in popular opinion, we would have said,"That
is the kind of guarantee
we want, if we are going to have any, because if
it does fail the fellow who
is demanding it is going to stand the loss," and
we had better get around
on that track. In addition to being a banker I
would plead guilty to being
a member of the Legislature. I know what the
sentiment is of the people
who are writing the laws. They hear from
the people back home and
almost to a man they are demanding a guarantee
of deposits.
C.F. Dabelstein (Olmsted County Bank & Trust
Co., Rochester, Minn.):
I agree with this gentleman. Ten years
ago 1 predicted at the Minnesota
Bankers' Association, when we were fighting a State
guarantee bill there
that some day we were going to have a guarantee
or an insurance deposit.
I think you gentlemen are all wrong to call this
a guarantee of deposits.
There is not a thing in the bill that talks about guarantee.
It is an insurance of deposits. You are all kidding yourselves
to think that the
Anierican Bankers' Association can send a telegram
to the President of the
United States asking him to defer a law that was
put on the books by
our Congress and our Senate. How could he delay
it or stop it from going
into operation? It is the most ridiculous thing I
ever saw done on the
floor of any American Bankers' Association
Convention—and I have
attended a number of them. It is riduculous; it is
silly.
You folks do not have the first idea of what
the thing means to the
average country banker. Those few people who
talk about the failures
in their States of the guarantee law. In the
first place, they weren't behind
it or they wouldn't have failed. They were
slackers in the deal. That is
why it failed. The law never was properly
backed up. It won't be backed
up unless we get behind it now. The
depositors of this country have
lost too much money to let us fellows dictate
what we are going to do in
the future.
President Andrew: You know, gentlemen, that the State Bank Division
is regarded in American Bankers' Association circles as being the "fighting
Irish." That is, wry are always stirring something up. We don't always
agree with the other parts of the American Bankers' Association. Every
man present here has some ideas that he would like to express. I am
just going to take a chance with you in that you will agree to sit down
when I rap the gavel like that, because we are going to have to hold the
round table down to about four-minute speeches by each one who speaks.
When you get tired, why go out. If there is anybody left to hear the
last one, we will be here for 20 minutes to hear it. I am going to enjoy
this, and I hope you will, too. I am going to start it off on this side. One
person can speak on this side for four minutes and then somebody on
this side of the room will do so. I am going to call on the first one or
two
and then the rest of you fellows will have to get up.
I see Mr. Huxford over there, a former President of Iowa Association.
Will you say a few words on this round table?
Ed. Huxford (Cherokee, Iowa): It is a delightful pleasure to be here
again in the City of Chicago, after 18 years in attending meetings of the
State Bank Division of the American Bankers' Association.(We hear a
good deal of discussion these days about the dual system of banking. It
is out of date. It has no place in our American activities. The National
Banking System has outlived its usefulnms. It seems to me, gentlemen,
that the ideal banking condition for this country would be to have uniform
banking laws for each State. That may seem impossible, but you will
recall the fact that at one time we had a heterogeneous negotiable instrument act for every State, and that we finally got at it and had a uniform
negotiable instruments act passed by all of the States.
My thought is—in order to bring up a little discussion here—that if
we had a uniform banking law for each State which was approved, requiring
every bank to become a member of the Federal Reserve System and then
have the Federal Reserve System under the authority and power of the
banks that own it—instead of the politicians—that the banking situation
in this country would be solved.,
President Andrew: You see what we are coming
President Andrew: That is a gOod start. Over on this side I am going
to in this open forum stuff.
Earl Crawford (Fayette Bank & Trust
Co., Connersville, Ind.): You
to introduce the first speaker over here. I see Minn Beebe down there.
ought to have had that first and we
would have gotten the right kind of
He is a former President of this Division.
a resolution.
Plinn Beebe (Timber Lake, S. D.): I come from South Dakota and I
President Andrew: You can hit anybody
in this open forum.
represent a bank that has only S25,000 of capital in a town of not more than
Mr. Miller (Iowa): It surely is a problem
what to do about this guarantee
1,000. I am going to talk from the point of the average banker that makes
phase. These gentlemen have the right slant,
I believe. If we are going
up the background of the whole American Bankers' Association. I want
to have insurance we should get back of it.
How are we going to do it
to say one word about the guarantee of deposits because South Dakota
and how are we going to get under the wire in this
went through that siege of smallpox and I had the honor, you might say.
short time? I am at sea.
I would like to get information.
of being one of the parties who supervised the guarantee of the first four
D. B. Lyons (President, First State & Savings
Bank, Holly, Mich.):
years of its existence. That little fling that we had, which was from a
I do not want to be sarcastic, but I feel that if
the condition of our banks
political background only, if the banks of South Dakota had paid their
won't warrant an insured deposit or a guaranteed
assessments, would have cost us just 33% of our deposits.
deposit, we ought to
have some more liquidations right away and
receivers appointed.
Gentlemen, I may be in the habit of talking rather positively, but if
President Andrew: There have been three
speakers on one side here.
any of you boys have got it in your heads that guarantee of deposits is
You heard my speech, didn't you? I want
somebody to back me up.
a good things for you, forget about it. When I say that, I say that with
H. Herzfeld (President, Alexander City Bank,
the greatest respect for Congress. Even Congress can get in bad now
Alexander City, La.):
I am in Congressman's Steagall's district.
As those of us who followed
and then and make mistakes. I sincerely trust if we have this law forced
the legislation know, the Glass-Steagall Bill
is neight Seantor Glass's bill
upon us, that our best endeavors will be made, and at a very early date,
nor Congressman Steagall's. Mr. Steagall
is not satisfied, as I am into get the law off the statute books
formed, with the provisions of that bill. He
has in mind a number of
I am not a prophet but I want to assure you gentleznen, we have never
changes that might meet some of the objections
that we as bankers find in
had a guarantee law that has worked and we never have had one that
the guarantee plan. It would seem to me
that as President of this State
will work. I will prophesy to-day that this law that is now being forced
group--and Mr. Ste,agall has endeavored to
try to protect the interests of
upon us will only last until the next depression. I also want to give you
we smaller country banks—if you would
name a committee to confer
a leaf out of my own experience in banking. Anything that comes to you
with him that he would listen with an
open znind and be sympathetic
from the guarantee of deposits will be the most expensive money that
with our position in so far as he could
within the intent of the law, to
ever came into your banks because it is money that goes at the first flurry
protect depositors against bad banks.
or when the first storm cloud arises.
President Andrew: That is a very good suggestion.
Should we be unfortunate enough to have this put upon us, allow me to
Mr. Clyde is from
your State here; he is the President next year, and
warn you from the benefit of my experience, don't take this money. Just
he can name that Committee to see your friend Mr. Steagall. I went
don't. It is said that people demand it, but the people do not. When I
up to Washington and
saw him four or five times and if I ever saw
a man with one idea, it is Mr.
say that I am going against what some of our biggest financiers have
said.
Steagall, on the guarantee of bank deposits.
The politicians have demanded it and they are the only
admire
I
him for having
ones who have
a one-track mind like mine.
ever demanded it or ever will. The people of the United States
are still
Mr.
Meyer
(State
University)
:
Here is an editorial in to-day's Chicago's
able to take care of their own money. As it is, a great deal
of money
paper:
has gone into the sock and into the Postal Savings. If they
wish to put
"Bankers are in need of leadership. Verbal chastiseme
their money there. this is a free country, let them put it
there. But be
by Eugene R. Black, Governor of the Federal Rescrve nt administered
Board and Jesse
careful of money that comes to you on guaranteed deposits.
H. Jones, Chairman of the Reconstruction Finance
Thank you.
Corporation to the
President Andrew: Now this side over here.
delegates of the Convention of the'American
Bankers' Association affords
further
proof
that a great need of the banking
Earl Crawford (Connersville. Ind.): I just want to say this: The bankers
leadership. If those Government officials had system is aggressive, ethical
have been accused of having glass eyes. I think we are demonstrat
their way, the banks would
ing it
lend depositors' money freely in the interetsts
of reconstruction rather than
in that we are not using them to see. If I am going to be
at the safety of loans."
hit, I know
I am going to be hit and I can have something to do with picking
out the
It goes on to say:
kind of club I am going to be hit with
I think I am foolish if I don't
"And that the bankers accepted so meekly the
exercise that choice.
somewhat unmerited
Federal reproof is a revelation of their present weakness."
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Federal Reserve Bank of St. Louis
STATE BANK DIVISION.
read that because it ha,s seetned to me that it has been rather unforunate that most all of our legislation has been framed and proposed and
passed by politicians rather than by the men who know the banking busine,ss.
It does seem to me at least that the bankers should as a unit take a great
deal more interest in the legislation that is being proposed for their benefit
rather than by some one who has not the knowledge of banking but who is
looking back home for a few votes.
J. N. Kehoe (President, Bank of Maysville, Maysville. Ky.): I inquired
this morning to find out why it was that somebody hadn't been put on the
program that possibly had a difference of opinion about this bank deposit.
I was informed that there was but one side to it. That is a singular situation—that there should be only one side to a great question like this that
involves the security and safety of hundreds of millions of dollars of the
people's hard-earned money.
Remember that this is the established law of the country and that it
is the outgrowth of a half a century of investigation by Congress. Congress didn't hurriedly pass this law. I deprecate these allusions in here
to politicians and to politics. Members of the American Congress are
as able, as honest and as patriotic men and as far-seeing as ever lived
anywhere. Politics is not the getting of Government contracts, the
seeking of the appointment of people in a spoils system. Politics is the
orderly conduct of the Government itself. How are you going to have
an orderly conduct of government without political parties? Where
would your organization be here if somebody hadn't made a slate? Was
there ever a convention that didn't have a slate in it?
This question, gentlemen, has come to Congress from the people. Like
you I have always been opposed to a bank deposit guarantee. I have said
that if it ever came, I would quit the banking business because I had read
the history and experiences of States that had tried it, but when I read this
bill, I changed my mind; I said, "Here is one that will work," and, gentlemen, it will work.
I have not heard a single man here say it won't work except to look back
and say that State plans have not worked. Gentlemen, look forward.
This is a progressive age. Langley's flying machine didn't work at first
either, but it is working now all right. Radio didn't work until somebody
made it work.
Crentlemen, this bank bill will work
A gentleman said here this morning
that money was not a matter that could be insured. What is money?
It is property; it is a material thing. Why can't we insure it? You don't
get the sentiment of the American people if you don't know that after
they have spent their long years, patient and enduring years, to save for
their old age, to find it finally swept away by the mistakes, by the errors
or wrongdoing of bankers, they do want it guaranteed. Congress wants
it guaranteed. As Mr. Jones told us yesterday, the man who thinks it
is not going to be guaranteed doesn't know his Congress.
Here is the reason I think it will work. It does not provide, it does not
contemplate the payment of money when a bank fails at all. Nobody
seems to get that theory. Either I have it wrong or everybody else has it
wrong. The reason the State bank guarantee plans failed was that they
did not have resources behind them to sustain the operation. When a
bank failed they became a mere liquidating agency, a bankrupt clearing
agency. They didn't do anything constructive. They went in and
buried the corpse, that is all.
This law does not contemplate that. This law says that when a bank
fails, instead of people coming in and demanding their money, a new bank
will be instituted and go on with the guarantee and the people won't want
their money. If all the depositors of the bank came to get their money
in one day, how could you get your doors open? You can't do it. You
don't expect them to do it. The man who first thought of banking might
have thought it was foolish to try that. But it has worked. Now people
are not going to come to a bank that is organized under this Corporation
and demand their money. They are going to take credit, in the new bank.
All they want is faith that they can get their money in an orderly way
when they want it and as they want it and not in one day. My prediction
is that there will never be but one assessment against this fund and that
will be more than ample to take care of the situation.
William B. Hughe,s (Omaha, Neb.): I come from Nebraska where we
lad plenty of experience with the guarantee law. I want to tell you gentlenen that I heard a thousand speeches just like that back in 1909. The
entlemen says he has not head any one say that this law will fail. I
hink it will. I think I can give the reason briefly. In Nebraska they
mooed the banks as they purpose to do in this law; that is, they assessed
is stockholders of the banks. They started at a good rate and kept it
? until they got what they thought was a good fund ready. Then they
lopped the assessments during a long term of good years because they
new the stockholders couldn't earn money fast enough to pay them at
Aint rate.
Now when trouble came years afterwards, when they had wasted the
unity to collect a good fund to stand it, they couldn't do it, because
knew the stockholders couldn't stand it. Then. when trouble came,
y started frantically to assess the banks and, of course, they couldn't
d it. That is why the Nebraska law failed. This law they are proin Washington follows the same course. It does not purpose to
up a big fund during a long term of good ye,ars. It will not have the
when the time comes that it needs it. Long years? I hope I will
be here, Mr. Chairman.
on't know this man Crawford of your section, but I thank God for
He has the answer to this whole thing. I have preached it to our
in Nebraska for three years. I have not gotten a rise out of one of
then. Gentlemen, there is an inexcusable mixture of the two terms,
"gas:antes" and "insurance" in this whole question. Guarantee is where
YOu make the good bank pay for the poor one. Insurance is where you
raske those who get the benefit pay for it. This National guarantee
that is being proposed is no more insurance and has no more right to have
t he term "insurance" attached to it at any point than I have to be called
An Indian, and I'm not one.
Now, if they will change it the way Mr. Crawford here proposes, you
,% ill have the whole thing settled in my opinion because, in the end, when
losses occur in banks, the depositors will have to stand them. Why can
it not be insured? It is insurable, if they will put it on the depositors.
President Andrew: You folks have had :35 minutes of this and I have
enjoyed it as much as anything for a long while. I think we ought to
Jaye about 10 minutes more of it.
W. S. Elliott (Canton, Ga.): I want to say this: that I fully agree with
the last speaker, that the present plan is not an insurance plan. it is an
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Federal Reserve Bank of St. Louis
59
assessment plan and it is contrary to every principle of justice, every
principle of equity, every principle of right, and every principle of religion.
I will only touch on the last part of it. It is too late to argue this question.
We have it right on us. There is no modern religion that is practiced by
the civilized peoples of the world at the present time that places salvation
on the basis that another man must answer for his neighbor s sins. You
are requiring the good banks under this bill to submit to an interminable
list of assessments. You don't know how many. Whenever the fund becomes depleted, they can be assessed another
of 1% of their deposits.
That can go on until the good banks are themselves pulled down in ruin.
Character and capacity have been the basis upon which the American banking system has been built. Whenever we undertake to insure character
to any individual or banking institution by Government fiat, we can't do it.
I want to say this: I have studied this question from all anglos. I was
on a conunittee sent from the Georgia Bankers' Association that went to
Washington three times to combat this proposition, because it was unfair
and unjust to the banks, and it has been tried in eight States. We have
had it tried, and yet we insisted, through our Congress, in the hysteria of
the great depression and the suffering that was endured by the people,
on going into this thing on a Nation-wide scale, after it had been tried
out on a smaller scale in eight States and signally failed.
If we go into this thing, if we are forced into it, as it looks like we will
be, we will go into it with °lir eyes open. We have glowing accounts from
these States as to how it has failed and we know some of the liabilities.
The liabilities of one State amount to $40,000,000 at the present time,
liabilities that are unpaid.
I want to tell you one thing, the reason that this bill has been passed
and this Act is on the statute books, and we are going to try to comply
with it on Jan. 1. I want to tell you it is on the statute books simply
because the bankers of this country in the different State Associations
and the organizations of bankers throughout the country didn't comply
with the request of the American 13ankers' Association and other organizations and go to Washington and lay their views before the Congressmen
and the Senators. A few went up there. A bunch went up from our State.
We appealed to other States to send delegations. As a rule they didn't
send them. They stayed back, expecting Providence or somebody to take
care of them. The result is that this law has been passed. It is too late
now to cry for help. The thing to do is to adapt ourselves to this and
secure such modifications at the coming session of Congress as will enable
the banks, the good banks, the sound banks, to live under it.
I want to say this now. I am not casting any reflection on the gentlemen
who have spoken in favor of the guarantee of deposits. I believe they have
not studied the question. When our delegation went to Washington and
appeared before the Committees of the House and Senate in opposition to
this principle of so-called guarantee or insurance, we found there were other
gentlemen who went up there representing other banks and who took
the opposite position, and every one of those banks are now in the hands of
conservators.
Report of Resolutions Committee- —Insurance of Deposits Declared Unsound.
The report of the Resolutions Committee was presented as follows by
James C. Bolton, Chairman:
The State Bank Division of the American Bankers' Association pledges
its earnest co-operation to the President of the United States and the
Administration, in his plans for National recovery. It is evident that the
stability of banking is essential to the success of this program.
Any recurrence of a period of enforced and progressive liquidation of the
assets of the banks of our country would result in chaos.
Guaranty of bank deposits in any form has been opposegl by most bankers,
by all the various Divisions of, and by the American Bankers' Association.
The effectuation of the purposes of the NRA will be aided and augmented
by an armistice in the fight waged by those interested in the further concentration of the banking business, and In the elimination of banks both large
and small.
We respectfully call the attention of the President of the United States and
the Administration to the urgent desirability of postponing by new legislation or otherwise the initiation of deposit insurance until a survey can be
made of its probable effects.
WIIEREAS, The Banking Law of 1933, in its reference to the insurance
of deposits is not only a radical departure from customary procedure in
American Banking, but unsound in its conception and unworkable as devised
now therefore be it
Resolved, That the State Bank Division of the American Bankers' Association requests The Administrative Committee of the American Bankers'
Association to give proper consideration to this matter with the idea of
taking such remedial steps as in its judgment seems fitting and proper.
The following is the membership of the Committee presenting the
resolutions:
James C. Bolton, Chairman
W. C. Gordon
J. II. l'uelicher
C. J. Kirschner
Fred Brady
(The report was duly adopted.]
Report of Nominating Committee.
Felix McWhirter (Indianapolis): Mr.l'resident and Fellow-Members: We
have labored very diligently and as usual we have had some difficulty in
arriving at a conclusion that would be unanimously acceptable to you.
However, we do have a unanimous report.
The report of the Nominating Committee was presented as follows.
For President: Clyde Hendrix, President, Tennessee Valley Bank.
Decatur, Ala.
For Vice-President: James C. Bolton, Vice-Prewident, Rapldes Bank &
Trust Co., Alexandria. La.
For Executive Committee for three years: C. J. Kirschner, Vice-Prelsident ,
Markle Banking & Trust Co., Ilazleton, Pa.; Robert NI. Hanes, President
Wachovia Bank & Trust Co., Winston-Salem, N. C.
Felix McWhirter,
A. G. Kahn,
M. H. Malott.
[The report was duly adopted.]
TRUST DIVISION
AIVIERICAN BANKERS ASSOCIATION
Thirty-Seventh:Annual Meeting, Held at Chicago, Ill., Sept. 4 1933.
INDEX TO TRUST DIVISION PROCEEDINGS.
Trust Departments and the Bank Holiday, by Comptroller
Page 60
of the Currency J. F. T. O'Connor
The Legal List Under Present-Day Conditions, by Philip A.
63
Benson
Page 67
Address of President, R. M. Sims
69
Report of Committee on Norninations--Election of Officers__
Remarks of Francis H.Sisson—Segregation of Trust Activities
69
from Other Forms of Banking
Trust Departments and the Bank Holiday
T. O'CONNOR, Washington, D. C., read by GWILYM A. PRICE, ViceStatement By the Comptroller of the Currency, J. F.
Trust Co., Pittsburgh, Pa.
ttsburgh
President Peopp's-Pi
The emergency banking legislation known as the Bank
In explanation of the prepared statement ot the Compon Act was passed by the Congress and became a
Conservati
troller of the Currency, the President of the pivision, Mr.
law on March 9 1933. Under and pursuant to the provisions
Sims, said:
of this Act, conservators were appointed for over a thousand
The trust business experienced many things during:the past year but
National banks within a few days. Most of these appointnothing perhaps more unique than the bank holiday. The fact that several
were
that
ments were made by telegraph, and the conservators, except
hundred trust departments were operated by Natiorial banks
in a situation in the
re-opened under conservators after the holiday resul
for the Bank Conservation Act, were without explicit inunderstand how the
trust business entirely new. In order that we mig
structions as to their duties and rights, although most of
ng and after the bank
trust business was looked upon by the Treasury d
omic history may have
holiday and what the effect that incident in our
them seemed to be thoroughly cognizant of their responsiJames
upon the trust business we asked the Comptrolle of the Currency,
This, of course, resulted in a literal deluge of teleand
bilities.
policies
the
of
ment
sta
a
Division
the
Trust
give
to
F. T. O'Connor,
trust
and
accomplishments of his office in connection with the operation of
grams
long-distance telephone calls to the Office of the
to our
departments in banics under conservators. Re has reeponded
of the Currency, requesting instructions and
r
A.
Comptrolle
Gwilym
statement.
prepared
request with a complete and carefully
Pa., who
authority to enable the conservators to meet the exigencies
Price, Vice-President, Peoples-Pittsburgh Trust Co., Pittsburgh,
consented
is well-known to all trust men throughout the cOuntry, very kindly
of the situation existing in their respective communities.
Departmente
to read the Comptroller's statement, which lentitled,"Trust
Unless each of you had been in Washington during this
and the Bank Holiday."
)
period, it would be difficult for you to realize the number.
Mr. Price read the statement of Mr. O'Connor as follows:
To the Trust Division of the Anicrican, Bankers Association: variety and importance of such communications. Every
The Trust Division of the American Bankers Association effort was made to expedite the work, but the pihysical situahas suggested that a discussion of the a inistration of the tion was such that regretable delay was inevitable, notconservatorship
withstanding the fact that the entire staff of the Comptrust departments of National hanks
troller's Office worked day and night for many weeks in
might be of interest to you. I hope that th following stateof
g
derstandin
general
the
effort to dispatch the work.
better
a
ment may tend to promote
It is appreciated that the Trust Division of the Associatim
the Treasury Department's attitude towar trust departof is primarily interested in trust departments of Nationa
ments of National banks while in conservato ship, and
and
olicies
general
banks, and the foregoing statements are made only to remin,
the
underlie
which
some of the factors
you that, in addition to the affairs of trust departments 0
specific rulings of the Comptroller of the Curren affecting
banks in charge of conservators, countless other matte]
the
s.
the operation of such trust department
sident's
P
the
were
pressing for consideration.
preceding
y
immediatel
The hectic days
anking
Of the 1,026 banks placed in the hands of conservators,
inauguration, when State after State was declaring
was found that a total of 345 banks had trust departmen
moratoriums and banks were closing in ever Inc asing
xistsituation
with trust assets of an aggregate value of approximate.
the
;
history
into
passed
numbers, have now
6. $317,000,000, involving over 16,000 separate fiduciary re aing at the time of the President's proclamation on Ma h
ake
tionships and the affairs of countless beneficiaries. T is
closing all banks, is so well known to each of you as to
on
connec
this
value
represents only personal property and does not incl de
in
and
time
this
at
comment
any further
real estate owned by the several trust estates. The tr ist
wholly unnecessary. However, you are reminded of t t
departments range in size from the very smallest, having
situation in order that you may fully appreciate the unpar
facin
problems
one or two accounts, to the very large trust departmen
only
s
tremendou
the
and
of
affairs
state
leled
having many and varied fiduciary accounts. In this connec
the legislative and administrative branches of the Governtion it may be interesting and significant to compare these
ment in connection with our banking system. To the Office
responthe
with the figures compiled as of June 30 1932 relative
figures
with
charged
the
Currency,
r
of
Comptrolle
the
of
the
banks,
trust
departments of National banks, which figures reflect
to
sibility of supervising the affairs of National
office
this
were, as of the date mentioned, 1,774 active trust
there
that
that
in
e
significanc
problem was of particular
departments in National banks involving over 104,000 sepawas called upon almost over night to undertake an unprecerate trust relationships and trust assets of approximately
dented volume of work and was expected promptly to give
which
000.
of
$5,000,000,
most
vexing
problems,
to
many
answer
the correct
Of the 345 banks operating trust departments placed in
were entirely new and for which no precedents had been
the hands of conservators, there have been, as of Aug. 23.
established either in banking experience or law. •
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Federal Reserve Bank of St. Louis
STATE BANK DIVISION
AMERICAN BANKERS ASSOCIATION
Seventeenth Annual Meeting, Held at Chicago, Ill., Sept. 6 1933.
INDEX TO STATE BANK DIVISION PROCEEDINGS.
The Necessity of a Strong State Banking System Without
a Deposit Guaranty, by Alf. M. Landon
Page 50
Maintaining Earning Power with Liquidity, by J. J. Driscoll Jr.
54
Address of the President, L. A. Andrew
55
Forum Discussion Uniform Banking Law Guarantee of
Deposits
_ Page 58
Report of Resolutions Committee—Insurance of De-posits
Declared Unsound
59
Report of Nominating Committee
59
The Necessity of a Strong State Banking System Without a
Deposit Guaranty
By ALF. NI. LANDON, Governor of Kansas. Read by HENRY W. KOENEKE, Rank Commissioner of Kansas, Topeka.
Henry W. Koeneke: Mr. Chairman, Ladies and Gentlemen:
The Governor asked me to express to those present and to
the officers of this Division his sincere regret in not being
able to appear and deliver this address himself. He stated
to me that he was more keenly disappointed than probably
anyone here. With your indulgence and patience, I shall
attempt to read his address.
Mr. Koeneke then read the address of Governor Landon
as follows:
Chairman, Friends, State Bankers of America. The invitation to speak to the State bankers of the American
Bankers' Association was a pleasure to accept. When
urgent matters within my own State made it necessary to
cancel this engagement I was probably more keenly disappointed than anyone.
Each one of you, as a State banker, must inevitably be
interested primarily in one thing—and that is the Bank
Guaranty. There, is little need to use time in introductory
remarks. I am ready, as all of you are, to plunge into one
matter that is foremost in all our minds.
There is nothing particularly new in the features of the
Glass-Steagall Banking Bill that relate to the guaranty of
bank deposits. Deposit guaranty has been tried by eight
States, and in every ca,se has proven to be a complete failure.
In Kansas it failed to pay the depositors of the banks who,
we are warranted in assuming, relied, at least to some extent,
on the guarantee of the State when they deposited their
money. In our State it failed to the miserable tune of
$7,000,000. In Iowa the fund is now $17,000,000 in the red.
All. of these States have paid dearly for experimentation
with the fallacious principle of guaranteeing bank deposits.
These experienees should be sufficient to prove that the
principle is wrong, the cost prohibitive and leads to one
inevitable end, namely, bankruptcy. There is no excuse
whatever for trying it again, and I quote from Senator Glass's
own speech on inflation—changing but one word—using
guaranty for bank deposits instead of inflation, in which he
cites so pertinently the value of experience.
The history of guaranty for bank deposits has been recited. Bacon,
the wisest philosopher since Christ, the author of the inductive system,
from which we have drawn all of our inventions, valued experience.
Patrick Henry, the great advocate of human liberty, said that his feet
were lighted by the lamp of experience.
Yet here to-day we are flying right in the face of hurnan experience,
rejecting it all.
I believe Senator Glass recognized this fact when he said
in a speech on the Senate floor in a discussion of his I3ill,
that it was too costly for the Government of the United
States to stand behind and guarantee the deposits of the
customers of the banks of the Federal Reserve System.
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Federal Reserve Bank of St. Louis
By the same token, if it is too costly for the greatest financial
power in the world, the Government of the United States,
in my judgment it is also too costly for the banks of this
country.
What hope can there be that a guaranty of the deposits
of the member banks of the Federal Reserve System will be
any more efficacious, workable and satisfactory to either
the banks or their customers than the guaranty systems
attempted by the different States for the State banks?
Can it be said that the National banks are any more free
from the use of unwise and selfish political influence than
the State banks? Can it be said that their examination
is any more efficient than the different State banking
systems? The answer is found in the long list of National
banks whose doors are closed.
I realize that interested parties have often given the
impression that the National system excelled the State
systems in efficiency, but I do not think a careful examination of records will reveal a foundation for such a theory.
I do not believe there is anything in the management of
the Federal Reserve System to warrant this assumption,
and on which to predicate the expectation that the guaranty
principle will work for member banks of the Federal Reserve
when it did not for the State bank.
(Bank Commissioners, Comptrollers of the Currency and
Bank Examiners, both National and Stat3, too often have
been—under both Republican and Democratic Administrations—political appointees, and their jobs, to too great
an extent, spoils to be dispensed for the political benefit of
the party or clique in power. In May, the "American
Banker" published the account of removal of a Chief National Bank Examiner of Chicago for that district, and
charged that it was done at the demand of the Democratic
and Republican Senators from Indiana, Michigan, Iowa
and Wisconsin)
Senator Glass himself, in a speech made on the Senate
floor, charged that the Federal Reserve System has been
"the doormat of the Treasury"; that it had been subjected
to the influence of whatever Administration was in power.
In a speech on the inflation bill, he said, "I object to the
first section of the bill because, as I said yesterday, it creates
the Federal Reserve Bank System into a servile agency of
the Treasury Department."
Let us examine some of the arguments that have been
used in favor of the bank guaranty plan contained in the
Glass Bill. lt has been said that it will force the banks
to co-operate more closely to prevent unsound banking.
I think Carter Glass himself has used that argument. Is
he ignorant of the fact that that argument was used in
255
NATIONAL BANK DIVISION.
replete with innovations, some of them rather startling in their nature and
in their effects. During the course of our convention this week you will
hear frequent references to these new laws and especially to the one known
as the Banking Act of 1933. In fact so many changes have come into
banking through l'residential edict as well as through legislative direction
that henceforth banking history, except for purposes of comparison, will
date largely from this year. In a considerable measure bank problems as
they developed prior to this year are removed from further consideration.
Into their place are crowded innumerable uncertainties which only time and
patience and regulation and perhaps amendment will relieve. These new
enactments are too numerous to be analyzed here, and some of them are
too complex to permit ofcomprehensive statements in the time allotted to me.
So I shall content myself with just an enumeration of some of them.
This Division anaylzed minutely each bill which proposed a change in the
banking laws. These analyses were studied carefully to determine their
effect upon sound banking practices. I need hardly remind you. though,
that most of the bills by which banking is affected were introduced primarily
to accomplish other purposes. Their bearing upon bank conduct was
incidental, though very pronounced in some instances. Among these bills
which finally became laws are:
The Agricultural Relief Act which carries the following sections: The
farm mortgage readjustment law intended to lighten the mortgage burden
resting upon the farmer. The rearrangement of the Federal Farm Loan
Act to permit loans to be made by Federal Land Banks direct to farmer
borrowers. The inflation plan which authorizes the President to raise
prices by directing the Federal Reserve banks to engage extensively in
open market operations, or by directing the issuance of S3,000,000.000 of
currency. or by lowering the gold content of the dollar as much as 50%.
Another one is the Home Mortgage Law intended to relieve the owner of
a modest mortgaged home of some of the load he has been carrying. The
plan authorizes the Government to take over such home mortgages as
holders are willing to exchange for bonds issued by the Home"Owners'
Loan Corp., a Government institution. Under more strict limitations cash
may be paid for such mortgages which thereafter vrill be carried by the
Corporation. This law contains also a section creating Federal Savings
and Loan Associations under Federal charters and places them under the
supervision of the Federal Home Loan Bank Board. These associations,
however, are forbidden specifically to accept deposits, and the Federal
Home Loan Bank Board is charged with the duty of regulating such institutions in such way as to hold them within their legitimate sphere.
The gold clause abrogation law is another one of this character.
The Farm Credits Act comes within this classification also. It places
in the Farm Credits Administration all the various agencies of the Federal
Government intended to carry financial aid to agriculture. It authorizes
the creation of 12 Production Credit Corporations to act as the Central
banks for production credit associations to be organized by grouPs of
farmers.
It authorized the creation of a Central Bank for Co-operatives. and
regional banks for co-operatives, the capital of which is to be subscribed by
the United States Government out of a revolving fund. Both of these
groups of banks will make loans to co-operatives.
Another law belonging in this class is the National Industrial Recovery
law with its tax provisiona levying an excise tax of 5% on dividends paid to
recipients, other than domestic corporations, and an excess-profits tax
of 5% on corporation incomes in excess of 12;4% of the adjusted declared
value of their capital stock.
The Securities Act is in the same class. Its purpose is to force full disclosures concerning securities sold in inter-State commerce and through
the mails in order to prevent fraud in sales.
The foregoing proposals were Administration measures adopted in much
to
the same form in which they were introduced. Congress was asked
approve them and did so upon the representations of the Administration
that they were necessary to round out its plan of National rehabilitation.
Little or no opporunity was given to suggest chans'es which might have
made them more satisfactory and at the same time no less effective.
In this same general classification, though intended directly and igmost
solely to apply to banking, are the Emergency Banking Act and the GlassSteagall law known officially as the Banking Act of 1933. A few other
purely banking bills were enacted also, but they Were not eapecially applicable to National banks. Therefore, they are omitted from this summary.
The first legislative proposal of the new AdMinistration was the Emermet with
gency Banking Law. It was presented with such swiftness, and it
such generous response that it became a reality amid the confusion of a
really
but
plan,
the
of
people and a Congress shocked almost at the daring
happy in its boldness. This law vests in the Chief Executive, for use in
times of emergency, a general control over banking in a manner with which
all of you are more or less familiar. a carries its bank conservation section
authorizing the appointment of conservators when such steps are deemed
necessary to protect the assets of banks. Likewise, it makes it possible for
75%, in amount of the depositors and other creditors of a National bank to
bind all depositors and creditors to any plan of reorganization approved by
the Comptroller of the Currency. Also, it authorizes the issuance of
preferred stock by National banks. Is addition it makes permanent certain
features of an earlier temporary laut. It makes possible the issuance of
circulating notes to Federal Reserve banks upon deposit of notes, drafts,
bills of exchange or bankers' acceptances. To date only about $125.000.000
has been issued under this authorization, and most of it is secured by
Federal Government bonds.
In exceptional circumstances, when no further eligible paper is held by
a member bank, a Federal Reserve bank may make advances on notes
secured in any manner, so long as it is satisfactory to the Federal Reserve
Bank. Also. loans for 90 days are authorized to be made by Federal
Reserve banks directly to individuals. partnerships, and corporations.
Such loans must be secured by direct obligations of the United States.
The Glass-Steagall Banking Act of 1933. a copy of which, together with
a summary of its provisions, has been sent to each member of the American
Bankers' Association,is the one important banking enactment of the recent
session which was not sponsored and urged by the Administration. In
fact I think we may assume safely that some sections of the law are of such
character that they would not have been suggested by the Administration,
nor would they have invoked its active support. To many of us, especially
those of us from States which had such unhappy experiences with deposits
guaranty laws, the insurance-of-deposits section of this law does not arouse
much enthusiasm. Try as we have to visualize a real substantial benefit
developing from it. generally we have been unable to do so, and we have
found it impossible to accord to this section the same earnest approval
which we feel some other important and far-reaching features of the law
merit.
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49
However. this section is in the law. It is one of the prescriptions which
we must take. And while I have not been able to yield my conviction that
the plan is undesirable and fraught with many dangers, which do not appear
in theory, I submit to the experiment without any aggravated prejudice
and hope earnestly that it will prove its worth. If it can be made to produce
the advantages claimed so vociferously by its advocates, and if there can
be kept out of it the very real vices which developed in all the States which
tried it, I will be one of the first to applaud.
What I have recited here is but a brief statement of some of the various
legislative enactments brought to us since our last convention. Details
have been omitted. My purpose was simply to parade these subjects
before you, to call attention to them, to bring to your mind the collective
picture, to study the cumulative effect, and to indicate the forces back of
them. This set-up with its attendant circumstances and its supporting
background, leading along the path of Federal control and Federal aid for a
distance farther than ever had been traversed before in America. merits
painstaking study. But we have seen these and other similar legislative
proposals follow one after another in rapid succession until we have become
more or less receptive to what portends to be a rather basic change.
at least temporarily, in the functions and the purposes of National
Government.
But these changes, especially in the social order, need not be permanent.
It is the sense of those best able to interpret the developments of the last
few months that we are on the threshold of a greatly enlarged business
activity through which citizens and groups and business will be able to
reassert their independence and their individualism and cast away from the
temporary paternalistic offerings of the Government. Through this
privilege of again making their own way—of setting up their own plans and
fighting for their execution and their preservation possibly under Federal
protection, but not with Federal aid—individuals and business will experience a rebirth of their former determination to forge ahead on their own
responsibility. No better or more potent evidence of National virility
could come before us. No greater assurance of the permanence and the
stability of the current business up-turn could be presented. Indeed, to a
people steeped in the tradition of the doctrine of self-help, to whom opportunity always has been a spur to greater achievement, and from whose
recollections the joys of the fruits of generations of individual initiative
cannot easily be erased, the chance to move forward under the force of their
own power is tantamount to doing that very thing. My faith in the strength
of American perseverance and in the durability of this budding business
revival enables me to envisage an era so marked by rewards for individual
enterprise that as a Nation we may rise again to the plane of private
management wisely conducted. rather than Governmental control with its
consequent discouragement of individual effort.
The broadened scope of the upward movement has shown little of the
seasonal hesitation so typical of the months through which we have just
passed. The sustained strength of the up-awing, supported by the splendid
prospects for the near future, bring even greater substantiation to the
contention that during the last two years there has been laid a foundation
far more secure and much more productive than attendant circumstance
could reveal. I must not trespass further on your time. It has been
cifarged that bankers are cold and lacking in sentiment. l'ersonally, I
sh 11 never live long enough to cease appreciating the high honors you have
so enerously conferred upon me. Being called to official position at a
con ention at which I was not permitted to be present, was as fine a
man estation of friendship and good-will as I have ever experienced.
ate officers, committee members and individuals have been unfailA
ingly urteous and gracious and my associate officers and the members of
utive Committee of our Division are as fine a group of friends as
the E
one co d hope to have.
Of di inguished and outstanding service to your President. our Division,
the oth Divisions of the American Bankers' Association, all its agencies,
commiss vim and committees, and indeed to banks and bankers generally,
has been four genial. energetic and superlatively efficient Deputy Manager
and Division Secretary Edgar E. Mountjoy. Where is there another, so
superbly qfpilified and capable in the handling of the innumerable services
our Washington office is called upon to perform?
I was truly delighted recently to receive from the efficient Secretary of
at State associations, a letter voluntarily commending "the
one of the
surprisingly ompt" and "very able assistance" he had rendered. And it
is so on every and. I sometimes wonder if he was made for the job, or the
job was made r him. In any event it is a most happy union. He has the
unbounded co idence of that part of official Washington with which his
, and none but those of us whose association responsibilities
duties have to
afforded the in lunation, know how valuable were his services to the
American Banke , in connection with legislation considered and enacted
on of the Congress. My association with him has been a
by the special s
continuous delight unfailing has been his courtesy and I desire to publicly
thank him for the ry able assistance he has rendered me.
Resolution Adopted on Deposit Insurance Provisions
of Banking Act of 1933.
The following resolution presented by W. F. Augustine (Boston. Nlass.)
was unanimously adopted.
Whereas, The Banking Law of 1933, in its reference to the insurance of
deposits. Is a ra.dical departure from customary prccedure in American
banking. now therefore be it
Resolved, That the National Bank Division of the American Bankers
Association requests the Administration Committee of the American Bankers
Association to give proper consideration to this matter with the idea of
taking such remedial steps as in its judgment seems fitting and proper.
Report of Committee on Nominations
In behalf of the Nominating Committee S. E. Trimble presented the
following report, which was regularly adopted.
Mass.
For President: Irving W.Cook, Pres. First Nat. Bk., New Bedford. Wash.
For Vice-Preaident:('. J. Lord, Pres. Capital Nat. Bk., Olympia.
For Members of the Executive Committee for a term of three years each:
For the Second Federal Reserve District: W. J. Come. President
Asbury Park National Bank & Trust (7o., Asbury l'ark, N. J.
For the Fifth Federal Reserve District: Victor B. Deyber, President of
Second National Bank, Washington, D. C.
For the Seventh Federal Reserve District: J. De Forest Richards,
President National Boulevard Bank, Chicago, Ill.
For the Twelfth Federal Reserve District: Russell G. Smith, Cashier
Bank of American National Trust & Savings Association, San Francisco,(7al.
The members of the Nominating Committee were:
S. E. Trimble, Exec- V.-Pres. Union National Bank, Springfield, Mo.
Melvin Rouff, Vice-President Houston National Bank, Houston, Tex.
M.G. Shannon, Vice-President First National Bank , Wilkes-Barre, Pa.
__A
STATE BANK DIVISION.
Kansas a quarter of a century ago? Is he unaware of the
fact that events proved conclusively in Kansas that the
argument is not worth wasting breath on ?
One more point, the bankers, who are to be assessed to
establish a fund to guarantee the deposits of their customers,
do not have a single thing to say about what banks they
shall or shall not guarantee. There is no place, in sithe,r
the National or the State system, where the bankers themselves, as individuals, can have anything to say about
their business.
As Governor, I have to name the members of the Drug
Board from a list elected and submitted to me by the State
Association of Druggists. The same thing is true of the
Dental Board, the Undertakers and the Farmers, but nowhere do the bankers have any opportunity of expressing
themselves as to who shall pass on the man that they will
have to guarantee.
Is there anything in the Glass Bill that will utilize the
wide knowledge of the successful bankers DOW in the business,
iD order to keep dishonest and imprudent men forevEr out
of the banking business? Not a word; not a suggestion
is made therein which would give the bankers, whose stockholders have to pay the enormous losses that are bound to
come in the natural course of events; nor a word or a weapon
or a means or a method of protecting themselves.
I don't want to bore you gentlemen with statistics, but
I do want to give you two figures to remember. The total
capital, surplus and undivided profits of all of the banks
in the United States averaged for the year ended July 1 1929,
in a statement prepared by R. N. Sims, Secretary-Treasurer
of the National Association of Supervisors of State Banks,
is given at $5,573,901,340. During the depression years1929, 1930, 1931 and 1932—the deposits of failed banks
were $3,355,863,000. . In other words, the deposits in the
failed banks, which would have had to be paid off had a
guaranty plan been in effect, were 60% of the total capitalization of all of the banks in the United States at the height
of the boom. (The latter figures of deposits of failed banks
is from the 1932 ieport of the Comptroller of the Currency.)
The capitalization available for assessment to pay off these
depositors would have been reduced by the amount of
the capitalization of the banks that failed, as of course that
capital was wiped out. These figures are not immediately
available.
I am aware that the guaranty plan provided for in the
Glass Bill provides for a substantial capital for the corporation which is to guarantee the deposits, but I know i'rom
25 years of experience and from the dictates of common
sense that the capital of that corporation will not be a drop
in the bucket, and part of that capital comes out of the net
work of the banks that operate under the plan. I am aware
that it is planned for this corporation to borrow money with
which to pay losses; I am aware that there would be recoveries from the assets of the failed banks, but experience
in eight States that tried bank guaranty will convince any
reasonable person that it cannot work. These experiences
show convincingly that the operation of any guarantee plan
which gains its resources from a levy on the capital of the
good banks will wipe out that capital in a very, very few
years.
Bank failures have been numerous, and the State banks
of Kansas, as well as other surrounding States, have been
laboring to get out from under the burden of ill-fated guaranty
laws, passed following the panic of 1907. They have been
paying for the misdirected efforts and misguided judgment
of a small minority of their fellow bankers. Ask any
State banker of Kansas, Nebraska or Oklahoma what he
thinks of deposit guaranty and he will tell you in no uncertain terms. It is definitely the wrong way to approach
bank reforrn.
The future of the American people lies to a considerable
extent in the hands of the men in this room, insofar as you
represent the State Banking System. There is no question
in my mind but that the guaranty of bank deposits is a
greater blow to the ultimate welfare of the American people
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Federal Reserve Bank of St. Louis
51
than the wildest inflation of the currency could possibly be.
Certainly no currency inflation could be more completely
destructive and devastating to a people than it was in
Germany, but the German people and the German resources
are still there. After the holocaust of an incredible inflation, such as no one believes President Roosevelt even
contemplates, was over, the German people had a bank
structure to turn to as a keystone of the arch of such economic
stability as they have been able to rebuild.
In my judgment, the guaranty of bank deposits, if carried
out in this country to its logical conclusion, will completely
destroy the entire banking system of the nation. That
destruction must inevitably be accompanied or followed by
the most extreme inflation of the currency. When the
final day of reckoning comes there will be no financial
structure whatsoever to which to turn, or on which to rely,
as a fulcrum for whatever lever Statesmen may devise to
begin the great task of reconstruction.
Senator Carter Glass, who, in spite of his present advocacy of bank guaranty,is one of the most sincere opponents
of that policy that I know of anywhere in the world, said
in his speech delivered at the Democratic Convention in
Chicago, as quoted in the New York "Times" of June 30 1932:
cause
A guaranty plank in our platform would create anxiety, would
disturbances within our ranks and would raise up opposition to our party
of
guaranty
in November, which I regard as entirely unnecessary. The
inof bank deposits has been tried in a number of States and resulted
variably in confusion and disaster to the financial structuro of those
such
States, and if our party when returned to power should incorporate
a scheme in the Federal organization, we would drive the strongest member
should
banks
strong
banks from the Federal Reserve System. These
not be assessed to pay a premium for mismanagement.
Senator Glass was right when he said the guaranty of
bank deposits would create anxiety. It has done that
very thing. It has dried up what little credit there has been,
for both the National and State banker are preparing to
meet their changed situation when the law goes into operation. I have a letter from a banker in Louisiana, from
which I quote:
every
We have been running banks for 25 years and have always met
through tha
demand. No depositor has ever lost a cent. We went
dein
30%
around
National Holiday. Opened 100% and have gained
us totally
posits since, in spite of practically all the bigger banks around
found to be a
restricted and the press carrying everything that could be
run a bank right
detriment to a State Bank. This convinces us that If you
you need no
and let the people know it and keep their confidence that
doing more to
guaranty of deposits. We think this guaranty feature is
Take us,
keep the banks upset and retard recovery than anything else.
have, and
for instance. We have plenty of cash. Not borrowing. Never
but until
we could be making loans and functioning in a normal manner,
Government
it is decided what we have to do we aro holding cash and
by a run
close
to
be
forced
cannot
bonds and assuring ourselves that we
and leading the
precipitated by the press propaganda criticizing banks
the same
people to distrust banks in general. We know others are doing
thing.
The American people have had a difficult time trying to
develop a satisfactory banking system, and to-day, by
reason of unhappy events of the last few months, together
with the shocking revelations of manipulators of great
wealth, the banking system of this country has lost what
freedom, and to some extent at least, the confidence of the
public it heretofore possessed.
I would be out of place were I to advise you as to whether
or not you should withdraw from the Federal Reserve
System in order to protect the investment of capital entrusted to you by your shareholders and depositors to the
best of your ability.
Senator Carter Glass prophesied that the stronger banks
of the country would leave the Federal Reserve System if
bank guaranty were adopted. I wonder if the Senator
explored all the possibilities of the things that might occur
if an attempt were made to force bank guaranty, which in
its present form is nothing but a capital levy on the stockholders of well-managed banks to pay the losses of poorlymanaged banks.
I have wondered that if bank guaranty is forced on the
strong banks of the country, would they not reduce their
capital to the lowest possible amount in order to come out
from under the threat of a capital levy. Such a plan would
further endanger thd depositors, but as trustees for your
shareholders are you not bound to consider such a course,
•
52
•
BANKERS' CONVENTION.
and would you not be justified in doing so, with the depos- whenever they fail and adopt new ones. Because this is
itor given the protection of deposit guaranty for whatever true, and because the severities of this depression prove
it might be worth?
this to be an epoch when revisions of ideas and purposes
Until recent times I have felt rather sure that there should must be made, I have suggested a legislative program to
be a unified system of banking throughout the United Kansas that, if adopted will, in the opinion of the bankers
States, provided that such a system did not mean that it who have studied it, give Kansas the soundest and strongest
was economically impossible for a little bank to exist in State banking supervision in America.
the villages and near the farms, where so many millions
My thought is that if our banking ills are ever to be corof our people live and need intelligent bank service. But rected, we must get a new conception of banking, both on
now I believe the State banking systems may prove, after the part of bankers and public officials. Compared to the
all, tq be our greatest salvation.
central purpose, all other banking reforms are a waste of
One thing is certain, gentlemen—in this particular I can time. Do that one thing and the details of needed alteraspeak better for Kansas than for the nation as a whole. tions in our banking system will take care of themselves.
Great as has been the hardship resulting from the losses of
I cannot escape these conclusions. First, that this
bank failures in Kansas to-day, there would not be a Kansas country needs, paramount with anything else, a banking
worth speaking of had there never been a State system system that makes the earnings and savings of the people
of banking.
safe. We have not had the highest possible degree of safety.
I do not believe our country is old enough; I do not beSecond, it is financial suicide to have a unified system
lieve it is densely enough populated or highly enough de4 of banking until we can be absolutely certain that that
veloped that we can yet afford to crush out of existencIY system will be free from partisan political and selfish finanthe little bank. I do not believe we can afford to adopt V cial group or clique domination—a system set up on sound
system that will restrict bank development of the more banking principles without regard to the day-to-day, or
unsettled portions of the country that would result from
year-to-year exigencies of governmental finance.
the abolishment of our State banking system.
This country has not had the right kind of financial
I have no word of advice to give you as to what course leadership. The day of accounting for our financial stewardyou should pursue individually, except that I advise you ship has come. You men here to-day, representing our great
to do your duty, as you find it to be, just as precisely and American banking system, filled with a desire to reawaken
as honestly and as courageously as you possibly can. Per- public confidence in the trusteeship of the savings of Amerihaps the time has come when all the little banks should be can people, must face the challenge honestly and fearlessly.
crushed out of existence. Perhaps the time has come We all realize that the great bulk of bankers, from the
when unification of the American banking system should village cashier to the head of our largest institutions, are
be required, regardless of the cost. Perhaps I am all honest and conservative. The difficulty has been that a
wrong in all of my conclusions, and selfish and unwise political few strong men, unscrupulous and with a total absence of
influence will not hereafter, to any important degree, be the moral responsibility of a banker .toward his depositors,
given any consideration by a Comptroller of the Currency have gone promotion-crazy, seeking big profits by taking
and a Secretary of the Treasury, or a man who desires to the banking business into the speculative investment field.
get a job as a National Bank Examiner, through political The house has tumbled down on this practice, and because
friends. Perhaps I am totally in error in thinking that of our complicated economic situation the effect has been
Mr. Farley, the Postmaster-General and political manager to demoralize otherwise sound financial institutions.
of the Democratic party, has no other thought in his mind
For the first one-third of our National history this country
but to eliminate politics in every way, shape and form from was largely dominated by agriculturalists. For the second •
the administration of the banking system of this country. one-third it was largely dominated by industrialists—great
But I do want to tell y011 gentlemen this:
builders and developers of railroads. For the last one-third,
Some of the most conservative bankers in Kansas—heads to a large extent, by financiers. You, and all independent
of some of our largest National banks—have asked me if bankers in this country, are going to pay, and pay dearly,
they could get State charters quickly if they shovld decide for the unwise banking practices that have permitted the
they want them. I have been glad to assure them, and I Insulls and others free rein. The innocent will suffer with
am glad to have you, or anybody else interested, know what the guilty. These manipulators of gr
. eat wealth, elevated
my answer is: If their banks are good and clean and liquid to places of responsibility in our great financial •institutions,
they can get State charters very quickly.
have sponsored huge bond issues in our industrial and utilty
I do not make this offer in an effort to influence any fields; plucked out their paper profits of excessive bonds or
National bank to surrender its National charter and join stocks and financed the entire load by subsequent sales of
the State banking system. This is what I said to bankers securities to the public. The overloading by the greedy
whom I could nam9, who are the heads of same of our and unscrupulous lords of financial juggling has been too
best and largest National banks.
heavy for honest business to carry; dividends have stopped,
The responsibility of deciding what shall be done if the and our banking system is facing loss of confidence because
tragedy of bank guaranty should actually be re-enacted in too many cases bankers were involved in the profit-taking
on a National scale lies, thank God, with you and not manipulations.
with me.
Nor are the skirts of all country bankers clean. A country
The next significant chapter in American banking history banker who takes a commission from a promoter on stocks
will be written by the bankers of the country when they peddled to his depositors is a first cousin to the city banker
decide, in the light of their trusteeship to both stockholders who sells the bonds and keeps the stock.
and the public, what their course will be if Congress refuses
The present situation cannot be corrected by freak legisto repeal the section of the Glass Bill guaranteeing bank lation or false and unsound assurance to the people such as
deposits.
a gesture toward a guarantee of deposits. The real remedy
I am wond9ring if Senator Glass wa.s correct when he said lies in a quick return to honest, sound and conservative
"The adoption of this guaranty plan is going to drive the banking principles, entirely freed from unwise and selfish
strongest member banks from the Federal Reserve System." politi6a1 influence. You bankers must have the courage
Therefore, if the State banks organize to break this erroneous to fight the modern menace of security manipulation, even
principle of the bank guarantee, they will be doing a real if it means the temporary loss of vast accounts. When
service. The hands of the National bankers may be tied. bankers quit placing a premium on obtaining the accounts
The American people, as I have said, are not afraid of of modern Robin Hoods who seek to rake off millions of
experiments. -They dare to make radical changes in their unearned profits for stock by financing and as directing
ideas. They are not frightened when they make mistakes, heads of industrial promotion or utility operation, we will
but unhesitatingly drop erroneous policies and programs have traveled a long way on the road of regaining public
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Federal Reserve Bank of St. Louis
STATE BANK DIVISION.
1
s;k
confidence. Stocks acquired at a dollar a share or less in
return for service supposedly rendered draw as much dividend as similar stocks sold on the public market, and in the
end the result of the whole will be collapse, as every banker
knows. It is time for bankers to have the courage to warn
their depositors against such investments.
I believe it is a safe assertion to say that the American public cannot be swindled in a wholesale way if our bankers will
return to their old-fashioned responsibility of warning and
cautioning John and Jim against investments that are not
based on physical value as well as earning capacity. Physical
value without earning capacity offers no return. Earning
power without physical value is as trea,cherous as quicksand.
From bitter experience we have found that such earnings
too often have been based on intricate and complicated refinancing and an unnatural temporary business expansion.
I believe our American bankers are individually facing
this situation frankly. But it is difficult for one banker
to become the old-fashioned town financial advisor and have
another catering to groups offering higher returns on investments. It is necessary to face this problem collectively,
and the banker who deviates from his clear path of duty
should be ostracised from banking organizations. Place a
premium of respectability on old-fashioned honesty, and
American public confidence will be yours as it was of old.
As I see the situation, the Government's first part in
sound banking is to permit the building of a strong central
banking organization, Nationally or in the States, and to
free the banking system from shifting political conditions.
A change in our political Administration should not mean
a change in our banking system heads. Such men should
come from banking service and remain as bankers and not
as political guessers. This is a constructive change.
In line with these views, I have offered a banking bill
to the Kansas Legislature. With the detail of the bill I
will not bore you, and for those details I hold no particular
brief. I hope they jar the bankers of my State enough that
they will at least make some intelligent suggestions about
legislation. For make no mistake, the public is not going
to be satisfied with conditions as they are and have been.
The banker who is satisfied with the system as is will find
that if he does not help make a constructive and sound
program,one will be written for him. Guarantee of deposits
did not come on us all at once. It came in a response to
the dissatisfa,ction of the people with the present conduct
by the bankers of the banks of this country. It will not
be repealed in a hurry.
Slight as is my regard for this and some of the other
provisions of the Glass-Steagall bill, I must say in its defense
that it probably would not have been passed had the bankers
offered a sound and constructive legislative program in
an attempt to solve our unsatisfactory banking situation'.
As I have said, I will not go into detail with reference to
the proposed new Kansas banking bill except to say that it
creates a Banking Board with seven members, and the
(The Board
broadest possible powers are given the Board.
must name the bonds which banks may buy and the out-ofState correspondents which they may have. The Board
is to supervise personnel and policies, and determine capitalization, as well as conduct the auditing and evaluating of
assets, that has so stupidly been considered adequate
supervision in the past)
The first Board is appointed by the Governor, and the
majority nriust be bankers. Terms are for four years and
the Board nominates a number of persons from whom the
Governor must appoint their successors, thus giving us a
continuity of personnel and banking policy which, in time,
should have a very vital effect on the building up of a stronz
State banking system. The Board can remove any officer
or any director of any bank. Protection to the State
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Federal Reserve Bank of St. Louis
53
against abuses of the power given the Board lies in the fact
that any Legislature can amend or repeal the law. For
the details of this bill, let me repeat, I hold no particular
brief. For the principle that the supervision of banks in
Kansas must in the future be so managed that they will not
fail by the dozens, I will do battle.
In effect, in this country, we sing the praise of regulation
and then shrink from legislating the regulatory board all
the power and teeth necessary to do a good job. Either
the principle of regulation should be abandoned or the necessary power should be provided to do the job. The Legislature meets every two years, and is the answer, I repeat
to those who fear this power,for if it is unwisely or negligently
or selfishly handled with ulterior motive, the Legislature
can correct the abuses.
In my mind there will never come a time when existing
conditions will erase the necessity for independent country
banks, correctly operated. Any measure, whether it be
National or State, that attempts to stamp out State banks
and State banking systems is doing a direct injustice to
the people themselves. I do not view this as a fight involving the bankers alone. I believe that it is to the interests of the people to see that in Kansas, State banks
continue to exist and function properly, offering the credit
facilities and other services which they have been offering
since the pioneer days when Kansas was but a territory.
In the face of the Banking Act of 1933 the perpetuation
of State banking rests with the State bankers. Obviously,
the solution resolves itself down to the creation of sufficient
public confidence in State-supervised institutions so that
the Federal deposit guaranty, in competitive cases, will
cease to be a deciding factor.
At the present time it is a well known fact that National
banks, operating of necessity in line with the policy of the
Federal Reserve Board in Washington, can not possibly
take care of the many legitimate credit needs of our small
town business men, our wheat farmers and our cattle men.
The Federal Reserve Board frowns on cattle loans, loans on
farm machinery, loans on stocks of merchandise, loans on
personal integrity, loans of every character; in other words,
that are based on local security. This type of credit is a
type that must be maintained if Kansas and Kansas people
are going to continue to prosper and to progress as they
have in the past. Unquestionably, it is safe to assume
that the same principle applies to all of the country's great
agricultural States and rural areas.
The proper regulations, effectively enforced, for the
purpose of building up our State banking system, offer the
State banker an opportunity to take advantage of the mistake made through the guaranty feature of the Banking Act
of 1933. It will be necessary to first reform the Federal
Reserve before attempting to unify the banking systems
of the country. The law as it now stands is placing the
"cart before the horse."
Talk about guaranteeing bank deposits is but political
salve to a wound that needs a business caustic. The principle of guarantee is not the answer, because relaxing of
vigilance on the part of bank officers is the inevitable
psychological effect.
The guarantee of bank deposits is the start of a vicious
circle that is ruinous to depositor and stockholder alike.
When five sound banks must pay the loss of one rotten one,
the drain on the five necessarily impairs the strength of the
five. One of them breaks under the strain and the remaining
four are weakened by the added strain, and so on. In
Kansas and Nebraska many sound banks crumpled under
the strain of repeated assessments; if the losses of the guaranty
fund had been paid in full no one knows whether any bank
would have remained open. Even a fish cannot live indefinitely by nibbling at its own tail.
C9
54
BANKERS' CONVENTION.
Maintaining Earning Power with Liquidity
By JOHN J. DRISCOLL JR., President Driscoll, Millett & Co., Analysts in Bank Management, Philadelphia.
During the past year and a half, or longer, bankers have
found it necessary to keep their funds invested in a far more
liquid condition than had been the practice for the few years
immediately preceding this period. This in most instances
has resulted in materially decreasing the earning power of
these banks. Many bankers will say that if a highly liquid
statement must be retained then it is impossible to maintain
a reasonable earning power under such conditions. It is the
intent of this paper to discuss with you the plans and policies
of a number of banks that have remained highly liquid during the past two to three years, and at the same time have
maintained their earning power, occasionally have increased
it, even with some falling off in deposits.
If we are content to incur practically the same expenses,
pay substantially the same rates of interest for deposits, and
at the same time watch our income from funds invested constantly go downward, without at the same time adopting
means of replacing this lost income, then it will have to be
admitted that operating under these conditions, earning
power will constantly and materially decrease. This, however, is not what the banks we are to discuss did.
Fundamentally we have the choice of two plans to follow
in the operation of a bank.
The first plan is the one most widely adopted, but I feel
you will agree has many serious weaknessea. This plan consists of first determining what rates of interest are to be
paid for deposits, what services are to be rendared, and what
expenses are to be incurred ; and then to develap a plan for
the investment of our funds providing sufficient income to
permit the absorption of these costs and still leave,' margin
of profit. This plan invariably results in invest ent for
high yield with the resultant risk of increased capita losses
and places a bank in the position where they are afr d or
unable to adjust their basis of handling deposits when ch
a course is dictated by available facts and conditions. It s
the following of this plan that has brought about strain
statements and lack of earnings, plus inability to provide
reserves to care for capital losses which usually assume serious proportions under such a plan.
The second plan is not as widely adopted as I feel you will
agree it should be, and provides a sounder plan for successful bank operation with almost an assurance of a given earning power. This plan is followed by the banks we are about
to discuss. The plan provides that we first determine with
a given volume of funds available to invest, just how we
can invest them with at least a reasonable assurance of
soundness and safety and probably with a definite assurance
of this. With our funds invested in this desired manner, we
can then determine just what gross income can be earned.
With income as a determined factor we then develop just
what rates of interest we may pay on deposits, what expenses
we may incur, what services we may render without charge,
and what services must be charged for to leave a margin of
profit that we desire to earn. In substance, we have cut our
operations to meet our investment policy, rather than cut
our investment policy to meet our operating costs.
This second plan in substance provides a sound investment
policy, controlled interest payments and expenses, and the
application of charges to offset business that does not pay
its way under the plan. It means a more selective business
and less acquirement of every type of business just because it
increases our balance sheet totals. It means, further, less
worry and risk and a better earning power.
The story of two banks that have followed such a plan I
believe will be of interest. Bank No. 1 was fortunate in
that its deposits remained almost constant up to the end of
1932. This, however, was not an accident, as the deposits
of competing banks fell off. It was largely a result of the
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Federal Reserve Bank of St. Louis
realization by the public that the bank was soundly run and
that the conditions they insisted their depositors meet would
produce a sound bank.
This bank adjusted its interest rate on savings downward
from 4% to 3/
2% early in 1930, and from 3/
1
2% to 3% early
1
in 1931. These adjustments were made when conditions indicated they should be made. Early in 1931 their service
charge on small accounts was adjusted materially upward
to conform with their operating costs and conditions. The
plan previously used was a general plan adopted from general practice and not meeting their needs. Checking accounts have been analyzed consistently and balances or comPensating charges insisted upon. Certain general plans and
policies were also followed, and these we shall mention later.
Bank No. 2 suffered some falling off in deposits, but not
as much as competitors. This bank may be described as
one that established a reputation for soundness and good
management by insisting on the right to run a bank as they
deemed proper, irrespective of competition. AS its onPrittim,
conditions changed so did its costs and its plans and policies. This bank had over 65% of its deposits in the highest
type liquid investments in 1932, paid salaries considerably
greater than the average bank of similar size, and still increased its earnings from operations in 1932 over 1931.
Early in 1933, and before the moratorium, it had reduced
its interest paid on savings deposits to 2% against 3% and
31A% competition, and eliminated entirely interest payments on demand deposits. As income fell off and the public
demanded stronger and stronger bank statements, this bank
curtailed or eliminated non-income producing services, controlled and cut expenses and increased service charges where
warranted.
Both Bank No. 1 and Bank No. 2. have a definite plan the
beginning of each year setting forth the results to be attained
tor that year and then constantly check to see that that accomplistmeutkeeps pace with their plans. Briefly, this has
been done as follows:
1. A budget of their funds and a predetermination of plan for investing
A budget of their income combined'with a constant check to see tha
it w maintained and controlled.
3. budget of their expenses and interest paynke.nta and a constant check
of then to see that they were kept under control. -
Unde this plan they constantly adjust their rates of
yments, their basis of operations and their basis
interest
of service harges as rapidly as changing conditions indicate
they ghoul be changed.
do not hold to the favorite excuse for inacThese ban
tion, viz: "Now is not the time to make changes." This
excuse is offered as a reason for inaction in good Hines as
well as bad. Our experience in a great many banks has
conclusively proven that the time to make changes is when
the necessity of such changes is recognized, and the past
three years have proven this to be sound in bank after bank.
Is it possible to state just what margin of profit is necessary in banking to protect our position and permit sound
earnings? Out of our experience we have set up the following standards and offer them for your consideration. .1
well run bank should earn :
(A) 2% pf3r annum on their average demand deposits. plus
% per annum on their average time deposits, plus,
(B)
(C) 43.6% per anntun on their stockholders' investment (capital stock.
surplus and undivided profits.)
before considering any profits from the sale of securities,
recoveries on loans or losses from securities and loans. This
standard is IA% per annum higher on deposits than we suggested before the advent of the new Banking Act. This
additional profit is necessitated to care for possible and
highly probable contributions to the new guarantee fund.
j
TRUST
AlVIERICAN
DIVISION
BANKERS ASSOCIATION
23 1934
Thirty-Eighth Annual Meeting, Held at Washington, D. C., Oct.
INDEX TO TRUST DIVISION PROCEEDINGS.
Eugene M.
Federal Examinations of Trust Departments, by
Page 54
Stevens
President, by
Trust Department Policies as Seen by the Bank
56
Tom K. Smith
59
Address of President H. O. Edmonds
Remarks of Francis Marion Law, President of American
Page 60
Bankers Association
61
Report of Committee on Nominations—Electhin of Officers_ _ _
Meeting Continued a• Second Session of Constructive
61
Customer Relations Clinic
Federal Examinations of Trust Departments
Reserve Agent, Federal Reserve Bank of Chicago,
By EUGENE M. STEVENS, Chairman of Board and Federal
Chicago, Ill.
President H. O. Edmonds of the Trust Division introduced Mr Stevens with the followin.g remarks:
the examination
I have already referred to the development of planss for
of member banks.
by the Federal Reserve I3oard of trust department
for uniform and
We are all concerned with the development of these plans
everywhere of correct trust
efficient examination, and the dissemination
subject is well
this
on
principles. The gentleman who will address you
kept him constantly in
equipped to explain R. A lifetime of experience has
in this field of trust
touch with important trust problems, and therefore
those who carry on
department examinations he is able to guide and advise
and productive of
the work so that at all times it may be made effective
real good.
as his successor in the
AB an associate of the late John J. Mitchell and
of Chicago, many trust
Presidency of the Illinois Mercnants Trust Co.
his present office a proaffairs have been in his charge and he carried into
such 'affairs. I present
found knowledge of and capacity for dealing with
of the Federal Reserve
Board
to you Eugene M. Stevens, Chairman of the
subject of the examination
Bank of Chicago, who will address you on the
Federal Reserve Board.
of trust departments of member banks by the
Preliminary to his prepared address, Mr. Stevens said:
to some embarrassment
Mr. President. Ladies and Gentlemen: I confess
Your President asked me
at having this dignified by the term "address."
subject and since that time I
a while ago if I would speak to you on this
l character about which
have been trying to find something of an inspirationa
examinations. If anybody
bank
I could build an address on the question of
to interest people in bank excan find anything of a dramatic chara,cter
aminations, I wish they would tell me.
therefore, I determined that I would
After coming to that conclusion,
statement and leave to my old friend,
merely make a brief and very simple
address to you.
Tom Smith, the matter of making an
Mr. Stevens's address follows:
the last few
The events which have transpired during
in the unenviable
system
banking
the
pla,ced
have
years
microscope, with
position of the worm in the field of the
Unfortunately,
end.
observing
the
on
public
the
of
the eye
such position
in
placed
been
had
it
this was at a time when
ic eye was
microscop
the
and
side,
worst
its
showed
that it
It is high
merits.
its
on
than
focused on its defects rather
characthe
of
some
revealed
and
turned
worm
the
time that
do the
to
able
and
teristics which make it a good worm
created.
was
job for which it
that
This microscopic public scrutiny has shown enough
it
discerning
the
to
,
but
alteration
and
needed correction
banking
the
part
necessary
highly
the
revealed
also
has
structure plays in the whole economic a,ctivity. In each
community, the banks are the centers and clearing houses
of business activity. Their importance in community life
has been strikingly demonstrated, especially in these localities where banks have recently been eliminated.
As is always the case, bank failures have been played
up as news, while the large number of banks which have
continued open through these most difficult times have
received scant attention in the public press. It is small
wonder that a large part of the public found their eon-
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Federal Reserve Bank of St. Louis
fidence shaken in the banks under these extraordinary
circumstances. They did not always appreciate that the
unprecedented decline in all values, over which the banks
had no control, greatly affected the banks' assets, while
their deposit liabilities remained fixed. The public did not
always understand that a large proportion of the banks
that failed never had a real reason for their existence,
and that many of them were masquerading only under the
name of banks, or that very few failures were due to dishonesty.
It was not always understood that the strain on the
banking system as the center of all business was perhaps
greater than on any other one industry, and that when the
whole economic system temporarily got out of control, the
consequences would primarily be reflected in the banks.
Here, as everywhere else, the large majority were penalized
for the actions of the few.
The courage and persistence with which bankers stood
at their posts under these conditions is deserving of the
highest praise. The support given them in their local
communities by voluntary cash contributions to new capital
and by the deferring of claims by depositors was not excelled in any other industry. It is probable that much
more needed capital was raised by voluntary subscriptions
of stockholders and good citizens than by the assessment
route.
Not the least of the results of the survey and reorganization
of the banking structure has been the fuller realization of
their responsibilities by bank directors and officers. It has
been borne in on them through these events that they are
under heavy responsibilities to the communities which they
serve and to the public at large, and that any use of their
position for private gain would no longer be tolerated. They
are therefore more than ever entitled to the confidence of the
public.
It is a well-known fact that at least 90% of all business
transactions are cleared through credit instruments, which
are accepted on faith and confidence in the maker. The
whole basis of credit is confidence and therefore it is most
essential to the credit system under which we operate that
the banks, which are the agencies of credit, should have the
assured confidence of the people.
The present banking structure is basically sound. The
parasites of occasional incompetency and dishonesty, which
were disclosed, have not destroyed either its inherent position
or its fundamental principles. The almost complete regeneration of the banking structure during the last year-
STATE BANK DIVISION.
chasing directly approximately 25% of the offerings, whereas it is reported
that now the banking setructure of the United States has absorbed approximately 60% of Government issues.
Perhaps the most vital and serious problem confronting our banks to-day
is that of earnings. With deposits insured up to $5,000, funds which have
been hoarded are coming out of their hiding places ; refinancing by governmental agencies of mortgage loans is creating surplus funds in the hands of
small investors ; the return to work of workers in industries and the increased income of farmers are creating additional deposits from those who
are inclined to be thrifty. Practically all these classes of depositors place
their funds on interest. Even at the lower prevailing interest rates on savings and time deposits, it is practically impossible to hedge with suitable
investments on a break-even basis, to say nothing of overhead and operating
expenses. If commercial banks are to keep themselves liquid by refraining
from making slow or long-time loans, it will be necessary that further
reductions in interest be made until the investment situation improves. Furthermore, appropriate service charges should be made on accounts and for
various services heretofore rendered without charge.
The State Bank Division has a heavy program ahead which will afford its
membership many opportunities for active service. Among the more important objectives and the means for reaching them, it is recommended :
1. That we continue to fight aggressively for the preservation of the State Banking
System as against any form of bureaucratic centralization.
2. That we take such steps as may be neces.sary in order to bring about a further
amendment to the Banking Act of 1933, modifying it so a.s to not require non
member State banks to become members of the Federal Reserve System in order
to continue their deposit insurance: and, if possible, limit assessments to a fixed
maximum within the ability of banks to pay.
3. That we use our influence to bring about the co-ordination of examinations
by the several supervising authorities, with perhaps a revision of standards and
classifications.
4. That we continue to emphasize and develop better bank management through,
institutes and conferences and otherwise.
\
5. That we urge the putting into practice of rea.sonable stop-loss and service ,
charges and seek new sources for earnings, in order that banking operations may
show a reasonable profit.
6. That we encourage the appointment of competent State supervisors, with adequate pay, and that we advocate that banking departments be removed as far as
is possible from political influence.
7. That we insist on greater care being exercised in the granting of new charters,
with a closer co-operation between the State supervisors and the Comptroller of the
Currency with reference thereto.
8. That we continue our program of promoting more uniform State banking laws.
To these may be added a number of suggestions coming from our several
committee reports.
In conclusion, I want to say to you, fellow members of the State Bank
Division, that I have greatly appreciated the honor of having served as your
President during the year which closes with this convention. I have Endeavored, as opportunity has presented itself, to do what I could to adv4nce
the interests of our division. It is unnecessary, I am sure, to mentionliere
that our most a.ble and worthy Secretary, Frank IV. Simmonds, has r ally
at
furnished the leadership and has piloted us through the storms whi
times seemed dark and heavy. I have appreciated the loyal support and thelpful assistance of the home office staff and my associate officers, as well as
the work of our several committees. They have all worked diligen4 and
given me their unstinted help and co-operation. And as I retire to the
ranks, I shall hold myself in readiness to serve this division whenever and
wherever opportunity is offered.
Remarks of Francis Marion Law, President of A. B. A.—
Declares Belief in Soundness of American Banking
I shall take just a moment of your time. I would like to say Just a word
to you this morning about our banking system. In my opinion, the b'ankoccurring
ers of this country are fully cognizant of the changes that are
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Federal Reserve Bank of St. Louis
53
throughout the world. We are fully mindful that the banking system which
we have had and which we have been operating under is not perfect. Banking is a science, it will perhaps never reach a state of perfection. I believe
that not a man in this room doubts the fact that there are weaknesses, that
there are imperfections in our banking system that must have attention.
They must receive courageous attention, but I stand here to say to you
to-day that I believe that the foundation of American baiaking is sound.
I do not believe that we have to throw the American banking system into
the junk pile. I believe that we can maintain the foundations and that we
can rebuild the superstructure in such a way that we will have ultiinately
a banking system that will contribute to the changing needs of business,
a banking system that will be adequate for commerce and industry and
agriculture, and not only that, my friends, a banking system that will contribute to the general welfare of the people of this great country.
We are not idle about that thing, we are not giving it lip service only.
we are bard at work. A Committee appointed a year ago at the Chicago
convention has been working night and day. We are working harder than
ever. I3ob Fleming who sits here on the platform is the Chairman of that
Committee. I don't know how he has had time to run his bank. Rudolph'
Hecht has been working the greater part of his time along with the other
members of this Committee. I want to report to you because it is my
duty to report to you that this Committee is hard at work. We don't
expect to be able to evolve a perfect banking system in a period of a few
weelcs or a few months. but we are on the way.
Report of Committee on Nominations
Officers
Newly Elected
Plin Beebe presented the report of the Nominating Committee as follows.
The Nominating Committee of the State 13ank Division begs to report
the following nominations for the consideration of the Division.
For President, James C. Bolton, Vice-President of the Rapides Bank &
Trust Company, Alexandria, La.
For Vice-President, Fred B. Brady, Vice-President of the Commerce
ust Company of Kansas City, Mo.
s Members of the Executive Committee of the State Bank Division
for he term expiring with the New Orleans Convention, one year hence,
Ha
A. Brinkman, Cashier of the Harris Trust & Savings Bank, Chicago.
For he two three year terms. J. H. McCoy, President of the l'eoples
Bank
Trust Company, Marietta. Ohio. Joel Ferris, President of the
Spokane nd Eastern Trust Company, Spokane, Wash.
Respectfully submitted,
M. Plin Beebe, Chairman
Felix cWhirter
H. M. Malott.
officers installed.]
incoming
[The report as duly adopted and the
No esolutions Committee Named
Hendrix, of the State Bank Division at
President Cly
the start of the C vention of the Division, had the following to say:
I might explain here fOr the benefit of those who might possibly not
know it that we are not ilippointing a Resolutions Committee, that our
Division is represented on trip general Resolutions Committee by our VicePresident, and that at this meeting particularly we are co-ordinating, concentrating our resolutions through one channel. So we are not appointing a Committee on Resolutions from this Division. I think that course
is being pursued by the other Divisions. but as I say we will be represented
on the Resolutions Committee by Mr. Bolton, who is our Vice-President
/1
JIM
TRUST DIVISION.
and-a-half has cleansed it of its parasitical growth, and has
put it in the strongest position as to safety and good management in a generation. Furthermore, a judicious and courageous administration of the supervising powers under the
Banking Act of 1933 should continue it in this strong position.
It now remains that the banking structure reveals itself
to the public eye in its health and strength and in its capacity
for needed service to the public, so that, seeing, the people
may realize that their confidence in it may be justifiably
restored and increased. If governmental enterprise and
governmental capital is to be supplanted by private enterprise and private capital, the banks must be among the
leaders and regain in their ow-n business and restore to themselves the banking and credit function which Government
has temporarily assumed under emergency. The banks are
equipped as almost never before to supply a vast volume of
credit to commerce and industry as it may be required, and
only await the opportunity.
In addition to deposit and discount business, many banks
have undertaken trust functions entailing legal responsibilities and moral obligations too often little understood.
Such functions should not be lightly assumed. The relations
often run over a long period of time and require a thorough
understanding of the legal and moral obligations involved.
This highly specialized business varies greatly from commercial banking. The latter is concerned with short-term
credits for the movement of trade and industry; the fiduciary
business involves in many cases making investments in
long-term capital obligations; the one immediate conditions,
the other far-sighted judgment as to values and conditions.
Accepting so-called "corporate business" requires an exercise of judgment as to merit and a scrupulous carrying out
of the duties. Mistakes in acceptance of business no less than
errors of judgment in administration can create potential
liabilities as well as undesirable publicity. Beneficiaries
under personal trusts are in many cases dependent on the
income from the trust and purchasers of securities often rely
for merit on the trustees or transfer agent.
There is no relationship which exacts such an obligation
on the banks as does the acceptance of trusts. There is no
relationship which demands so much confidence on the part
of the customer when he entrusts the future welfare of his
dependents to the care of the bank in a fund Which he has
accumulated as the chief concern of his career for that distinctive purpose. The elements of risk and of discretion
which may properly be assumed in the commercial banking
departments where the depositors'funds are protected by the
stockholders' equity in the bank's assets cannot be justified
in the administration of trusts.
The right of examination and supervision of banks by
governmental authority has long been established and
recognized. The exercise of this right in an effective way has
not been altogether satisfactory by reason of the limited
powers in the statutes, and sometimes the authorities were
condemned by the public for conditions which were beyond
their control. Prior to the enactment of the Banking Act of
1933, supervising agencies had little or no power to correct
practices and policies in individual banks which were leading
them into ultimate disaster. The punitive powers could be
exercised only when actual insolvency had been reached or
when there had been some direct violation of the Banking
Act. Under the Banking Act of 1933, such agencies are
clothed with an authority which is designed to enable them
to check the evils of mismanagement by demanding change
in such management and in policies which are inimical to the
best interests of the bank,and thus be in a position to prevent
disaster rather than await the culmination of difficulties
w hich would later have to be cured by drastic action. The
kn owledge of the existence of this power should make its
app?ication unnecessary excepting in rare instances. If the
supervising authorities have the courage and the good judgment to exercise these new powers properly, a greater public
confidence in examination and supervision may therefore be
justified.
With the sense of the specialized character of fiduciary
administration, supervising authorities have come to realize
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Federal Reserve Bank of St. Louis
55
that the type of examination required can be properly
conducted only by men specially trained by education and
experience along these lines. To this end, the Comptroller
of the Currency, the Federal Reserve banks and State
authorities are assigning men to trust examination work who
are specialists in this field. Within the last year, the
Federal Reserve System has established in each of its banks
trust exainination and supervision departments, and the
Comptroller is doing the same. Heretofore trust department examinations have often been merely a check-up of
securities and reconcilement of balances. It is the purpose
in the future that trust examiners shall investigate and
review policies and practice and management. The
trust examiners should know theory and practice and have
an understanding of legal and moral reponsibility so that
they can intelligently and authoritatively discuss these
matters with the trust officers and directors and call attention to seeming improper practices and policies.
It may not be generally understood that while National
banks receive authority to commence business from the
Comptroller and thereafter he has direct supervision,
authority to exercise fiduciary powers is granted by the
Federal Reserve Board. The authority to grant such
powers carries with it the responsibility to see that they
are not given to banks not equipped to properly exercise
them; further, that after being granted they are properly
exercised. State banks are wholly creatures of the States,
but supervision of trust departments of State member
banks is likewise a responsibility of the Board. This is
recognized by both National and State supervising authorities and enatils their co-operation in examination and
supervision.
It is desirable that many banks located in mediumsized communities have fiduciary powers. Often the amount
of trust business is limited and does not warrant the employment of a trained trust executive. Not the least of the
duties of the trust examiner will therefore be educational
in character. His continued contact with trust departments in many banks will enable him to appraise the best
in policy and practice and to influence trust departments
to adopt such methods as have proven best. Through this
process it is hoped that there will be evolved a standardization in administration of trusts, in banks large and
small, and that those who may be engaging in improper
practices through ignorance will be enabled•to correct their
errors.
To the end that standardization may be developed there
has recently been held in Washington a conference of trust
examiners of all the Federal Reserve banks. This conference considered at length questions which were designed
to involve all phases of trust administration. Out of this
conference grew an understanding and adoption of prin. ciples to co-ordinate trust examination and supervision in the
several districts. Subsequent conferences should develop
this understanding further as supervising trust examiners
learn from each other and from experience in the field the
best practice prevailing in the various districts.
The report forms on trust department examinations have
been revised and are inclusive of matters of policy and
procedure as well as detail, and it is of interest to note that
the forms now used by the Comptroller, the Federal Reserve
banks, and the FDIC are practically identical.
It should be understood that the emphasis in this supervision is placed strongly on the constructive and helpful
side rather than that of the critical. The job of any bank
examiner is not merely a fault-finding one. It is, of course,
necessary to discover what may need correction, but that
is only a small part of his duty. He should thereafter devote
himself not only at the time of the examination but through
subsequent visits and review to be constructively helpful
in correction of incompetence or maladministration. Our
examiners are very definitely instructed to take this attitude
and it is noteworthy that the banks in increasing numbers
are coming to us seeking advice and counsel on their problems.
We have a full recognition of the difficult but very respectable and useful services which trust officers render to
56
BANKERS' CONVENTION.
their beneficiaries. We recognize that it is not in any
sense a field for great profit or exploitation, but that it
is rather in the nature of a professional service which requires
administration of high intelligence and sense of responsibility.
We are aware of the spendid efforts of the Trust Section
of the American Bankers Association as reflected in its
adoption of the Declaration of Principles of Trust Administration for the guidance of its members. In a sense,
this Declaration of Principles was used as a general guide
for exa.mination and supervision at the Trust Examiners'
Conference referred to. We also recognize the honest and
intelligent efforts which are being made by trust officers
and their deep sense of responsibility. It is our hope that
our practice in examination and supervision of trust administration may be fully co-operative with what you are trying
to do. To this end, we invite your help and your confidence.
By our united efforts and by our co-operation in attaining
and maintaining the highest standards of trust policy and
practice, we may confidently expect that the public will come
to recognize and renew a justified confidence in the trust
administration of our banking system.
Trust Department Policies as Seen by the Bank President
By Tom K. SMITH, President The Boatmen's National Bank of St. Louis, St. Louis, Mo.
Every President of a bank large enough to justify the maintenance of a tr t department is naturally interested in the
department's gro th and development. Many interesting
and challenging pro ems arise in a modern trust department. No bank Presid • .t could possibly be expected to keep
in touch with all the inti ate details of the department; it
would be unwise for him to attempt to do so. He does, however, wish to show an intelligent understanding of its problems and to bring to the department all the help that his
position as head of the bank can bring.
If the President is to be the effective force he desires, he
must first equip himself with a thorough knowledge of the
history of trusteeships and their gradual,unfolding into what
we to-day understand as trust service. r%
t us consider thia
history for a few moments. We have all r d of interesting
ancient wills, including that of the Egyptian Vah, tbe uncle
of Tutankhamen, which was written in 2548 B. . We know
that for centuries during the Middle Ages v I ' s trust
functions, such as acting as executors, guardians an trustees
were performed by priests, Knights Templars, sol i s and
individuals. Accounts of these services have co e do n to
us in legal and historical documents. There lat de velo
a drift toward the use of the servkes of pri te banki
institutions for trust functions. Charles Di ens, in his
novel "A Tale of Two Cities," accurately 'Vie ts this situation and portrays a banker faithful to his tru eeship over a
long term of years. You will recall the Fr eh physician,
Alexander Manette, had placed his financia affairs in the
hands of the old English banking firm of Tell n & Co., which
maintained a Paris branch. Later, abou 1758, he was
thrown into the Bastille, and the bank's offic r, Jarvis Lorry,
managed his property so that his wife and 'nfant daughter
were cared for. When the wife died, Lorry emoved the twoyear-old daughter to England, and, as her g ardian, saw that
she was properly reared and educated. A er many years in
the Bastille, during which time he became entally deranged,
the physician was released, and Lorry, h ring of this, went
with the now grown woman to Paris to nd him. There he
excellent care for
located her father and arranged for su
him that he later recovered his reason. should like to have
been present when Lorry, acting on b alf of Tellson & Co.,
made an accounting of their manag ment of the doctor's
affairs. So interesting is this "trus 'story that I quote a
few sentences that Dickens caused
rry to say in speaking
to the bank's young ward, Lucie Mannette. "I speak, Miss,
of 20 years ago. He married—an English lady—and I was
one of the trustees. His affairs, like the affairs of many
other French gentlemen and French families, were entirely
in Tellson's hands. In a similar way I am, or I have been,
trustee of one kind or other for scores of our customers." In
quoting this, I have a double purpose: First, to show that,
by the testimony of the historically accurate Charles Dickens, many banks were performing numerous trust functions
before the French Revolution, and, second, to point out that
Tellson & Co., when they undertook the trust, could not poasibly have anticipated the tremendous obligations they would
be called upon to assume. It is interesting to note that they
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were faithful to their trust. To them it must have been an
interesting and challenging problem.
The early history of the development of trust service in
England had its counterpart in the United States. It was not
until early in the nineteenth century that any move was made
in this country toward the use of the corporate trustee, and
this period was, of course, the period of development of the
corporate form of organization itself. These were the days
of transition in our country from agriculture to small but
thriving manufacturing industries, from shipping by sailing
vessel and wagon train to, transportation by steamboat and
railroad. Then followed street lighting, street railways, the
telephone, telegraph, mining, more ambitious manufacturing
ventures, and with them an increasing tendency toward corporate organization. I mention these developments because
they mark a change in the forms of wealth from lands and
buildings and livestock and similar tangible property to
stocks and bonds. Personal fortunes of considerable magnitude also came into being. Lanier's book, "A Century of
Banking in New York, 1822-1922," reveals that by 1840 there
were 23 millionaires in New York City, and that three or
four of them had fortunes in excess of 10 million dollars.
The small business with limited capital run by an individual
gave way to the great corporation with hundreds or thouands of employees and enormous resources. Commerce bee e complicated and far-flung. The financing of business
an individual needs was no longer a simple matter.
Bu the heart motives of nineteenth century Americans
were n affected by these economic changes. The desire to
provide r their loved ones in the most effective manner was
ever prese t. For many years they had naturally turned to
their solici rs. There were many firms of solicitors In
England and ther countries that had continued under the
same firm na f• • from 100 to 200 years, even though there
was no one left
the organization having the name that
appeared in the st e of the firm. The solicitors served their
clients honorably a.• well. But as property became more
complex, as commerce I eveloped, as means of communication
became swifter and op rtunities for purchase and sale multiplied, there grew up
dually an increasing request that
banks undertake various "torms of trust duties. Bankers
found themselves performing these duties as a matter of evolution. Recognizing this development, banks began asking
for special charters and statutes that would make it possible
for them to perform the services adequately and with full
protection to those for whom the services were rendered.
The first duties that corporate trustees were called upon t
perform took the shape of what we to-day call investme
trust service. This gradually led to other forms of fiducivtry
service. In 1841, 11 years after it was chartered, the New
York Life Insurance & Trust Co. undertook what appears to
be the first administratorship by a corporate trustee. There
was a period where corporate trustees were largely engaged
in trust service for corporations and gave very little service
to individuals. This was natural, in view of the tremendous
increase in the number of corporations and their demand for
a corporate trustee in the issuance of bonds and stocks.
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention-Nov. 17,
1934
TRUST DWISION.
tions he should be available to write a letter, make a telephone call, or, if the situation warrants, he should count it a
privileg,e to make a personal call. I welcome these opportunities in my own bank, as I like to know at first hand how
the public regards our bank ; and then I think it helps me to
understand better the character and qualifications of the
men who work in our new business department.
Let me say in connection with new business that I think
the President should consider from time to time, in conference with his trust officers and Trust Estates Committee, the
charges that are made for various trust duties performed, I
believe the department should receive adequate compensation for its services, and, if the custbmer is not willing to
pay this adequate compensation, the department should decline to perform the service, and the President should stand
squarely behind it in the decision. There should be no deviations from this policy, even if it affects a director or a large
depositor. To permit the development of a habit of reducing
prices on solicitation can only lead to
and disaster.
The President, of course, owes it to the bank's stockholders
to see that the department earns a reasonable profit, and he
will want to keep informed on this question. He must not,
however, make the mistake of permitting poor and inadequate trust service as a means of keeping expenses down.
The bank should hold to the high resolution of doing a good
Job, even at a loss, or it should retire from the field. Highgrade trust service gains public confidence, and confidence
brings increasing volume of business, and, along with it,
increasing profits to the stockholders.
An alert President always has in mind the bank's relations
to the public, and to groups within that public. I refer particularly to the members of the Bar Association, and to the
life insurance men. There are so many opportunities to
work together and to co-operate to mutual advantage, that
it seems foolish to talk about differences that separate us.
Yet there will always be situations arising that require sympathetic approach and tactful handling. I think the President, to a marked degree, can do much to develop a satisfactory working policy with these groups and continue to
hold their good-will and co-operation.
There are undoubtedly many representatives here who
come from institutions that are young in years or small in
volume of trust service. I want especially to point out to
them that age and volume are not of themselves guarantees
of good trust service. Quality trust service can be rendered
by a new and small trust department if it has the determination to render it. We all, large and small, should never lose
the determination to keep the quality up--quality up all
along the line, in our standards, personnel, methods, account-
59
ing and quarters. Only in this way will we be able to render
the best trust service possible.
I think it is significant that for more than 150 years trust
service has grown with banking service. I know of no demand on the part of the public to have it do otherwise. Of
the 3,328 trust institutions in the United States to-day, I
know of only seven not affiliated with banks. I know of no
business that is so logical an outcome of relations with customers as the trust services performed by banks. Had our
trust departments done a poor job in the past, were they
doing a poor job now, it might be otherwise. This confidence
of the public places a solemn obligation upon us to maintain
and continue the high standards in our trust departments.
There remains one important consideration. We all have
many wills and trusts in actual operation, some new and
some of years standing. These represent the loving thought
and interest of a donor for those dependent upon him, or
within the generosity of his bounty. Acting under authority
and instruction of these instruments, we provide means of
food and clothing, health and happiness, and perform hundreds of acts that affect the general well-being of these beneficiaries. We undertook these fiduciary obligations to these
beneficiaries with the assurance on our part that we could
carry them through. We are not responsible for changing
conditions of civilization nor for governmental policies that
seem to help or hinder. There are those in the United States
who seem to be disturbed and express the fear that business
will be throttled ; that excessive taxation and inflation will
come to such extent that not only will trust income cease,
but the corpus of the trust itself will be destroyed. This is
a policy of fear to whiOh, I am frank to say, I do not subscribe. I have the faith to believe that the inherent common
sense of our citizens will prevail and that the great constructive historical trust service, built as it is on solid rock,
will withstand for many years the passing storms of the
present day.
[In introducing Mr. Smith, President Edmonds had the following to say with regard to the speaker:
He who will address you on the subject of "Trust Department Policies As
Seen by the Bank President" is by nature and experience and position in the
banking world well able to expound' this subject. After more than 20 years
of wide and varied experience in the field of investment banking service he
was called in 1929 to the presidency of one of the oldest and best known
banks in the United States. In 1932 he was chosen First Citizen of the City
of St. Louis in recognition of his work with the Citizens' Committee of
Relief and Employment of St. Louis. In the fall of 1933 he was asked by the
Secretary of the United States Treasury, Henry Morgenthau, to come to
Washington and give advice, counsel and assistance in all matters affecting
banks and the United States Treasury Department. His bank loaned him to
the Government, and for more than six months he served, the Treasury Department in this way. I understand that it WIIS with great reluctance that
the Secretary and the President permitted him to return to his bank duties.1
COMMITTEE OFFICERS'REPORTS-TRUST DIVISION
Address of President H. O. Edmonds, Vice-President
The Northern Trust Co.-Bank, Chicago, Ill.
This is my final message to you as your President. I have tried to be
diligent in your service, to hold up the hands of the executive officers of
the Division and of the American I3ankers Association, to go where I was
needed and at the same time avoid unnecessary meddling. I have had the
friendship and sympathy of the Executive Manager, Mr. Shepherd, and
the loyal, devoted support of th Division's Secretary, Mr. Sargent, whose
tact and knowledge of our problem.s is beyond praise. Needless to say.
the officers of the American Bankers Association, President Law, and
Mesars. Hecht and Fleming, have aided and supported the Division by
their advice and friendly co-operation. To Messrs. Leon M. Little, our
Vice-President, and Merrel P. Callaway, the Chairman of our Executive
Committee. and all our past officers and the members of the Executive
Committee, I make grateful acknowledgments of their fine co operation and
the patient sacrifice of their time and leisure. The chain of friendship
formed in this service I feel sure will last while we live.
Looking back over four years of service on the Executive Committee
and as President, I have a great feeling of admiration for the men I have
worked with and for their steady devotion to the high principles underlying our duties and obligations. You will recall the efforts of past years
to put forth an adequate statement of trust principles, which my predecessor, Colonel SIMS, finally brought to conclusion nearly two years ago.
We have heard much of its since. It is now a vital force. No word or
phrase of It has had to be changed or modified and it is an important part
of the Bankers' Code. It has been a great privilege to be allowed to work
in this field during these important and fateful years.
In laying down my office it remains only to summarize the work of the
Division during the past year and to give you a few thoughts as to the trust
business as it stands to-day. During the past year the effort has been to
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conserve values where possible, to-assist the borrower in-saving his equitY
to save the income of those dependent forvsupport on trust investments
to lighten as far as possible the burdens of both borrower and lender, to
assist in peomoting the regular payment of taxes, and to patiently explain
to all that in the general collapse of business it is vain for any to hope for
complete exemption from loss. Distress among those dependent upon
trust funds to keep up normal family life has been great. I have been
struck many times by the patience and intelligence of beneficiaries and
others whom the trustee was endeavoring to serve and protect. Incidentally the trust officer has often cause to regret that his foresight could
not have been better. When one contemplates the results of over-development, whether it be of business or residence property. or of plant capacity,
or in any other line, certain facts not previously recognized are revealed
in their full importance. One has only to remember the effect of overbuilding in cities upon the earning power of improved real e.state to recognize this truth. Certain credits or investments secured by lien may be
intrinsically sound and worthy of confidence. Others may be less so-in other words, may be more speculative. or may be developed in advance
of real need due to a mistaken estimate of probable net income and ability
to earn taxes and operating expenses. Unfortunately, the increased volume
of the unsound development destroys a part of the value of the sound.
from whence results failure of earning power, tax defaults and loss of
market for improved real estate of all kinds, whether it be single homes
or apartments or hotels or office buildings.
The trust activities of the year past have been less in the direction of
business extension and more in the line of careful administration. It has
been costly, for infinitely greater effort and increased activity have been
necessary in order to cope with these difficult times. There is but one
way to deal with the existing situation, natnely, to put forth every effort
and expend whatever is necessary to perform the trustee's service adequately.
trusting that in the future some reasonable reward in the shape of new and
258
60
BANKERS' CONVENTION.
profitable business may be obtained in return for diligent and faithful trust
service.
Events in some localities have shaken confidence in certain corporate
trustees, but at the same time they have demonstrated the scrupulous
exactitude with which for the most part trust property has been held apart
and administered without becoming involved in the bank's own affairs.
One has only to point to the various reports of the Comptroller of the
Ctirrency, J. F. T. O'Connor, upon his experience with trust departments
during and since the bank holiday.
Our relations with the Bar have continued to improve and it must be
our constant effort to see that the limitations of trust business and professional semices are carefully observed. Again, the Statement of Trust
Princiiples is eloquent upon this subject and it must be our aim to see that
what we say with our lips we practice in our lives. M ist of us know
and all of us must learn that the problems of toast management, the care
of business affairs, are great enough for all our energies, and that these
are most successfully served under the direction of high minded, intelligent legal advisers. Large complicated situations call for the best efforts
of the trustee on the business side and of the independent professional man
upon the legal side. What both trust men and lawyers must constantly
seek is a steady tendency towards higher standards of business and professional ethics, and the careful and economical administration of small
trusts.
A conflict in California between the Bar on the one side and different
organizations, including banks and trust companies, on the other, has
been most happily disposed of during the year, and in the effort to bring
this about the American Bar Association and that of California vied with
our own representatives in seeking an adjustment of the difficulties on a
reasonable basis. Our country is too large, its problems too complex
and its need of our best services too great to permit the waste of ime in
internal stfife to the prejudice of the American people, whose interests are
paramount and entitled at all times to the first consideration. The settlement of strife of this kind reflects honor upon both the parties and brings
about cordiality and mutual respect instead of misunderstanding and
distrust. Our thanks are due in this affair to the Chairman of our Committee on Relations with the Bar, Mr. Robertson Griswold, to the corresponding committee of the American Bar Association, to the officers of the
California Bar Association, and to our own trust associates in California.
Occasionally in the past there has been a lack of perfect co-operation
between the Division and the parent organization. Subsequently in con
ference between representatives of both the difficulties have always yielded
readily to adjustment, and generally with expressions of mild surprise
from the conferees that the difficulties ever should have arisen. The
keen mind of the Chairman of our Executive Committee, Mr. Callaway,
finally pointed out a defect in our organization which is about to be removed. The Executive Council of the American Bankers Association
has and always will be composed of those occupied with different branches
of banking. Active trust men seldom appear in its membership. As an
example of what can occur, totally without design. a Code Committee of
25 was appointed without any active trust representative upon it. Subsequently this omission was corrected by putting Mr. Henry Theis of the
Guaranty Trust Co. of New York on the Committee. This appointment
laid upon him responsibility for difficult trust problems, with which he had
to deal without the assistance and co-operation of any trust colleagues.
The Trust Division should have had more representation upon this Committee. It should also have greater representation on the Executive Connell
of the American Bankers Association. To bring this about an amendment
has been proposed to the by-laws of the American Bankers Association
which will be presented for adoption at the present meeting for the purpose
of increasing the number of appointments by the President of the Asso
tion to the Executive Council from 5 to 12, in order to enable him to appoint
a nuznber of experienced, mature trust men to the Council. It is hoped
that if this plan carries, it will result in definitie advantages both to the
executive officers of the Association, the Executive Council, and the Trust
Division.
Probably the most outstanding new feature in corporate trhst work this
year is the plan for the examination by the Federal Reserve Board of the
trust departments of member banks. Trust departments of National
banks have already been under examination by the Comptroller of the Currency. The plans of the Federal Reserve I3oard in this respect must
necessarily progress slowly but are well under way, and chief examiners
have been appointed in each of the Federal Reserve districts. Your
President was instructed by the Executive Committee to tender our cooperation to make this plan as effective as possible, and also where possible
to assist in devising means for a uniformity of objectives and statistics
growing out of the examination. This work will be continued. It is
of the highest interest to every member of the Trust Division and will
tend to improve and make tunform the nomenclature of trust accounts,
the method of valuing trust property, the compiling of useful statistics
and the improvement of trust practice generally. For the purpose of
laying before you the plans as far as they have progressed and the methods
to be pursued in examination work. we have fortunately secured the consent
of Mr. Eugene M. Stevens, Chairman of the Board of the Federal Reserve
Bank of Chicago, to address us to-day on this subject.
During the year there has been steady co-operation with corporate fiduciary associations. wherever these are organized, with a view to working
out reasonable and uniform fee schedules applicable to all kinds of trust
business in their various localities, and the Secretary of the Division has
maintained contacts with corporate fiduciary associations and supplied
them with useful trust information at intervals during the year.
In this connection I have the pleasure of announcing that the Division
has just completed its first annual directory of capitalized trust institutions,
trust men and trust associations in the United States. This directory,
an 80-page book, is now being distributed to the membership from the
headquarters office in New York. It lists every trust association, trust
company and banks with trust powers, and names of trust officials in the
United States as far as we have been able to obtain the necessary information
to make this list complete. It is possible that this first directory of the
trust business may be incomplete in some respects, but it will be revised
yearly.
Trust practices are being standardized everywhere under the Statement
of Trust Principles. It is impossible to operate successfully in disregard
of these principles. and they will almost certainly enforce themselves, given
reasonable supervision by State and National authorities. Much of our
work in the past year has been in the direction of making these facts clearly
evident to all trust departments and securing their intelligent co-operation.
Undoubtedly there are many unsolved problems before us and it is not
my purpose to dwell upon them, for it is only by slow degrees and by
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patience that progress can be made, especially where legislation or govern
mental action is required. I will mention one problem which must be
carried forward until it can be solved. This is the method of holding and
securing cash fund.s of trust accounts, whether principal or interest, until
these are paid over or invested. The problem of making deposits safe for
small depositors is being worked out. In addition there is required a deposit of securities in the case of National banks to secure the safety of
trust cash. If the deposit insurance is sufficient, then the additional
security for trust cash is unnecessary. Furthermore, the additional security
for trust deposits is drawn from the capital or deposits in the banking
department. Assuming that insurance and good supervision make deposits
safe, then this additional security deposit is unnecessary. In a sound
banldng system all deposits should be safe and there should not be different
degrees of safety, even between a trust deposit and an ordinary deposit.
It would seem,therefore, that the deposit of securities with the governmental
authorities to protect trust cash should be abolished. In some States
trust cash is required to be carried in some other bank than that of the
corporate trustee. This imposes additional work, substitutes another
risk for that of the bank's own solvency and may easily lead to a series of
reciprocal accounts. In bad times a careful trustee will want to have his
cash trust funds nowhere except in his own control. If he has the right
to carry these funds in his own bank but has been required to deposit a
part of his assets in order to furnish additional and unnecessary secueity
for his trust cash, he has in so doing weakened the security of all of his
deposits. It would seem rather that deposits should be made secure, but
one deposit should not be made more secure than another, even though
it be cash belonging to a trust. There is so little demand by trust customers for protection in this respect that in all my experience I have never
encountered it in dealing with actual or prospective trust customers.
Either the cash is income and will be speedily disbursed, or it is principal
and will be invested. Governmental supervision will know how to deal
with improper delays in investing funds. Such acts can be penalized.
They seldom occur and would be easy to deal with if they did occur.
The effect of this double, and it seems unnecessary, protection might be
illustrated as follows: Suppose the death of two depositors in a bank having
a trust department, each depositor leaving a widow. In one case the entire
estate is given outright to the widow, and in the other it is given to the
trust company in trust for the widow. Assume that both estates must
have money on deposit in the bank from time to time. There would seem
to be no fairness in giving the trust estate widow a preference over the
other widow in the distribution of assets if the bank should fail.
The solution of this problem can only be worked out by National or
State legislation or both. The first step might be if the Federal regulations
affecting trust departments of National banks could be changed so that all
deposits were treated alike. The tendency of State enacttnents would be
to approximate those of the Federal Government, assuming this idea of
uniform treatment of deposits is sound.
The annual meeting of the Trust Division to-day is held in connection
with that of the Public Education Commission of the American Bankers
Association. It has been thought best to bring this about in furtherance
of the work of Mr. Puelicher and his associates of the Commission, in which
work we are so vitally interested. Corporations engaged in the service
of trusteeship have one great advantage to offer to customers. namely that
of perpetual and uninterrupted succession. This advantage, however, is
completely lost unless it is carefully provided for in advance. It cannot
be provided for except by the careful training of the young employee to
render him fit for the responsibilities which later on must be assumed.
In many lines of bu.siness this principle operates, but nowhere, unless it
be possibly in the learned professions, does it operate so completely as in
the tru.st business. The ethics of the business, its legal background, its
business responsibilities. its duties towards beneficiaries and remaindermen,
its duties towards the State which licenses the corporation, all of these
things must be taught by precept and example. For these reasons we
welcome the co-operation of the Public Education Commission here to-day,
and the messages of our speakers, Mr. Eugene M. Stevens and Mr. Toni K.
Smith, are addressed to them quite as much as to ourselves, because we
realize that in a certain sense the future of organized trust business is in
their hands.
I thank all of my friends in the Trust Division for the co-operation 1
have enjoyed during the past year and shall hope while life lasts to enjoy
Your friendship.
Remarks of Francis Marion Law, President of A. B. A.,
Before Trust Division—Way Out of Depression Is
to Fight Out
Gentlemen: I imposed upon you this morning for a rather extended period
and I have no thought at all of doing that again this afternoon, but as I
sat on this platform in the last fifteen monutes, one or two things have
occurred to me that I want to say to you. In the first place, I do not
know whether you fully realize it or not, but the record of the members of
the Trust Division of the American Bankers Association in my opinion
has been one of the brightest pages in the history of American banking
during this dark and dismal period of depression from which I hope we
are now emerging.
The fidelity and the capacity with which you have acquitted yourselves
has been admirable indeed. I do not know of any phase of banking to-day
that seems to hold more of promise for the future both in usefulness and in
profits than the trust business of banking. I do not know of any service
that is more necessary, that is more definitely indicated than the service
which you gentlemen perform.
Now, having said that, may I say one other thing and then I shall be
through? I am sure that every man in this room feels a tremendous sense
of responsibility at a time like this. Gentlemen, I do not think any of us
are fooling ourselves. I think every man in this room, I think every man
attending this convention, as well as those of us who are not able to attend
the convention, realize that the war on the depression is not over, that
there are many battles yet to be fought.
pity if we.
As I said this morning, it would seem to me to be a great
of undue or
as bankers, should be understood to be preaching a doctrine
The
way out
anywhere.
untempered optimism. That wouldn't get us
not out yet, but
of this depression is to dig out, to fight out, and .we are
intelligence that I possess.
I believe with all of the intelligence, the limited
problems, gentlethat we are definitely on the way out. There are many
bound to recognize
men, and as thoughtful men and farseeing men, we are
them.
with
cope
properly
them and realize them before we can
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention--Nov. 1935
22
BANKERS' CONVENTION.
here to mention. Always my own Assistant 13111 Costello. I just wanted
to publicly acknowledge my gratitude to these men for their loyalty and
support. and more--ior their affection. Not one of them ever failed to
work nights, Sundays, or holidays. The RFC is what they made it--they
and our field force.
And I want also to express appreciation to you bankers and business men
who served on our advisory committee6 in our agencies. And In our bank
repair work to the Comptroller of the Currency and his able assistants—the
State Banking Authorities throughout the country—the whole-hearted
support of the Secretary of the Treasury- -and more than all, the President
of the United States, who, after all, had the final say and the final responsibility.
Now, a little off-the-record word to you bankers. Some of you are
worried about where we are going. I don't know what's ahead of us any
more than I knew whether I would get to New Orleans yesterday when I
got in a plane at Atlanta and the pilot said he didn't know whether he
could beat the storm here or not. But he did by 10 minutes. I don't
know what's ahead of us, but I know what's behind us. I know whatever
is ahead of us that there is meat in the smoke house and flour in the barrel
and that whatever it is, we can lick it.
Banker and the Federal Deposit Insurance Corporation—Some of
Their Mutual Interests
--.'.
""
.13rSECI-Z_ CROWLEY, Chairman of Board of Directors of the Federal Deposit Insurance Corporation, Washington, D. C.
Mr. President, Distinguished Guests, Fellow Bankers, Ladies and Gentlemen:
It was good of your Association to invite me again to address your convention, and I am grateful for the courtesy and privilege, as it affords me
a change to discuss our mutual interests.
It also enables me to publicly acknowledge my personal thanks and appreciation to Virginia's distinguished statesman—Senator Carter Glass. His
sympathetic counsel and constant co-operation in the consideration and
passage of the Banking Act of 1935 were invaluable.
I wish to thank Mr. Hecht for his untiring assistance and guidance.
Serving as your President at a time when banking legislation of an extremely
important character was under consideration, he has discharged the duties
of his office with a zeal and diplomacy which greatly contributed toward
the satisfactory and harmonious agreement of conflicting ideas and viewpoints. I feel certain that the members of your Association recognize and
appreciate his accomplishments and the unselfish devotion of his two VicePresidents and other associates who rendered such effective help.
There is no need at this time to review the events of the past two years,
or to call attention to what has already been done to remedy conditions
and to restore order. The accomplishments of the various agencies in Washington charged with the responsibility of repairing the financial structure
of the country have all been recorded in reports which are well known
to you.
Mutual Aim Sounder Banking
In coming before you to-day I should like to appear not in the role of a
Government official, nor as an individual intent upon more and greater
power of supervision. Rather, I would like to speak to you as one who is
as much interested in the success of your own institutions as you are yourselves; as one who does not believe that the American banking system
can or should be changed overnight ; as one who has a sympathetic understanding of the problems confronting you; as one who realizes that your
difficulties are real and practical ; as one who appreciates that the future
success of the FDIC depends almost entirely upon the co-operation which
you and the public give to it. It requires no keen insight to see that your
loss is the Corporation's less. The future success and welfare of the
Corporation is inseparably tied up with the success or failure of the vast
majority of this country's banks. With over 95% of the banks and with
more than 99% of their accounts fully insured by the Corporation, it is
perfectly apparent that our interests and obligations are mutual. Whatever is conducive towards a sounder and more effective banking system
must have our united support, and whatever tends to interfere with that
objective must ha% e our common opposition. We can, therefore, examine
the means at our disposal by which we are to achieve our goal unhampered
by diversity of opinion and unfettered by a confusion of interests. In short,
we know where we ale going. We should lia‘e no trouble in agreeing upon
the right road.
There seems to be hardly any occasion- at least for us—to ask why the
United States has not had a sounder and more effective banking system
in the past. I think we all know the answer. There are, of course, many
reasons. I think it will be sufficient for present purposes if I were to
merely point out some of the outstanding causes. They are :
1. A surplus of banks, particularly banks which had no hope of surviving.
2. Insufficient capital.
3. Inefficient management.
4. Unsound practices.
5. Over-expansion of credit.
6. Disastrous competition.
7. Lack of discrimination on the part of the public.
8. Inadequate supervision.
9. Lack of understanding of the social, economic, and legislative trends affecting
the business of banking.
This is, of course, by no means a complete list of the factors which
brought about the failure of so many thousands of banks and the loss of
billions of dollars to depositors. Nevertheless, they do account in large
measure for the collapse and prostration of the American system of banking
a few years ago. The reduction in the number of licensed banks from 30,000
in 1920 to less than 13,000 in 193:3 was the culmination of most of those
evils which had been tolerated for a fatally long time.
Evils Not Wholly Eradicated by Emergency Measures
I think it must be conceded by persons who want to be fair and unbiased
that the help which the Federal Government gave to the banking structure
following the crisis of 1933 was necessary and saved the country from
further disaster and enabled the banks to survive. It must be frankly
admitted, however, that many of the fundamental weaknesses of our banking
Festem still exist. The factors which brought about the breakdown of
banking have not been entirely eradicated. The evils which were responsible
for the gross injustice of subjecting depositors in banks to the loss of their
funds must be stamped out. The good work which has already been done
by the Federal and State governments. and by your own voluntary actione
must not be wasted le cur failure to prosecute vigorously the constructive
programs which have been so well begun. The Banking Acts of 1933 and
1935 will help to strengthen America's system of banking, particularly if
their provisions are wisely administered and effectively supported. Despite
the beneficent legislation and whatever good-will it may arouse, we will
surely lapse into the errors of our old ways unless we face and solve our
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Federal Reserve Bank of St. Louis
mutual problems in a realistic and practical manner. American banking
must now stand upon its own feet and prepare itself for a better and safer
service to its depositors which will justify proper profits.
Critics Overlook Losses to Depositors
There are those who do not believe in the principle of deposit insurance.
If, would be foolish to say that there isn't any truth in some of their
criticisms. The chief weakness in their arguments appears to be in their
failure to give consideration to the suffering and hardships imposed upon
depositors by the excessive losses of the years gone by. What excuse can be
given to depositors for the losses which they have been obliged to assume?
It is clear that there is no valid excuse. If justification be needed for the
Government's effort to protect depositors, it can be found in the ending of
the waste and destruction which followed in the wake of the loss of
$3,500,000,000 of depositors' funds during the past 70 years. Who is
willing to defend a system of banking which periodically subjects depositors
to such losses? Who will say that such a system is just? Let us admit,
as I do willingly, that deposit insurance is no cure-all of these wrongs and
that perhaps there are sorne unsound features about it. Nevertheless, the
depositors of the nation will not permit us to discard it until they have
leen assured that they will receive the protection to which they are
entitled.
It is up to us to accept the plan which Congress has devised and male
it serve our purposes in connection with the problems with which we are
mutually concerned. I appeal to you to arouse yourselves to the possibilities
which the Corporation offers towards better banking. Its limited existence
and experience have sustained, in my judgment, the faith of its creators.
It is for us now to consider what we can do to prevent a repetition of the
mistakes and tragedies of the past. The pertinent inquiry, therefore, id
how can the FDIC help, and what can the bankers of the nation do towards
getting rid of the abuses that still plague us?
Having in mind that there are limitations imposed by circumstances,
over which we have no control, to what any of us can do, let me first point
out the ways that are open to the Corporation. The new powers given to
it under Title I, in my opinion, are sufficinetly ample to carry out the
purpose Congress had in mind in establishing the plan of deposit insurance
130 that additional legislation affecting the Corporation at the coming
session of Congress ought not to be nectaisary.
The capital rehabilitation program started by the Government more than
a year ago is now about complete. To-day there are more than 6,000
insured banks which have received over $870,000,000 from the Reconstruction
Finance Corporation in order to improve their capital set-up. Hundreds of
millions have been contributed by local depositors and stockholders aa their
share in the placing of their banks in sounder positions. The significance
and importance of this should not be overlooked. It means that the condition of most of the banks in this country to-day is vastly improved. This
aids in perfecting the soundness of the capital structure of the insured
banks and affords a firm basis for the development and perfection of deposit
insurance. To Jesse Jones must go most of the credit for the successful
completion of this vast program. It would not have been possible to carry
it through without his driving force. It is a performance of which he can
be 'ustly proud and for which we are all indebted to him.
No Uneconomic Bank to Be Insured
One of the best services the Corporation can render to banking is in
sternly refusing to insure banks which have no hope of surviving. You
will recall that under the old law any bank which was merely solvent
was entitled to the benefits of insurance. At that time it was very difficult
to determine solvency. Under the new law the following faetors must be
taken into consideration :
1 The financial history and condition of the bank.
2. The adequacy of its capital structure.
3. Its future earnings prospects.
4. The general character of its management.
5. The convenience and needs of the community to be served by the bank.
8. Whether or not its corporate powers are consistent with the purposes of the law.
A fair application and consideration of these elements will do justice
not only to applying banks, hut also to those which are already insured.
This new provision of the law recognizes the insurance principle that the
,icceptance of too many hazardous risks reduces the soundness and safety of
the insurance afforded the good risks. It should help to prevent a recurrence
of the evil which is to be greatly feared, namely, the return of the overbanked condition of the early twenties.
The danger of the uneconmic bank to the banking structure can scarcely
,
1
over-emphasized. The change brought about by our vast industrial
expansion and modern methods of doing business must imake us recognize
that it is false to suppose that every locality regerdless of size must have a
hank. This does not mean that there is no place for the small bank which
well manag•ed by individuals whose independence and interest in their
eenimunity have vontributed so much to the development of the economic and
business life of the country. The bank which has no economic justification
is the institution of small capital in those cominunities whose business is
so meager as to preclude the possibility of profitable operation. Such
banks cannot make enough money to warrant the payment of the kind of
salaries good management requires because the population and business do
PG2
GENERAL SESSION.
writing privilege seemed satisfied. I never saw a better feeling or better
humor anywhere than prevailed when the Conference Committee finally
came to a unanimous agreement on the Banking Bill.
I am sorry that you are denied the privilege of hearing Senator Glass at
this hour, anti he requested me to express his very great regret that his
doctors would not let him come. The Senator has had long experience in
government and has decided views on legislation, but the fact that he does
not always agree with legislation proposed by others is not resented by those
with whom he may disagree. And this includes the l'resident. They may
have their differences of opinion on specific measurvs, but coining between
them is a good deal like intruding in a family row. The intruder is apt to
get the worst of it. fhe Senator has genuine affeetion for the President,
whom he calls "Franklin," and his friendship is r iprocated. The President affectionately refers to the Senator as an ti reconstructed Rebel—
a reference which the Senator does not dislike.
The new bill clears up many troublesome iteme in the supervision of
banks, and gives greater latitude in rediscountable paper and in granting
as ten years. It also
loans on real estate and to industry running as lo
gives us deposit insurance at a fairly low rate. Sin e real estate is the basis
of all wealth, and industry the most essential fac r in employment, these
should have, to a reasonable and safe extent, fav ed tre,atinent by banks
in making loans. Many losses in real estate mor gage bonds would have
been avoided if mortgage money had been availabl upon reasonable terms.
And there is no more reason why income-bearing eal estate, or real estate
with prospective potential earnings, should not ca y a high credit rating.
I hope our bankers—and without offense I shoul say our super-bankers—
will change their attitude of frowning upon an condemning real estate
upon a perfectly sound
loans. They, and loans to industry, can be ma
basis, and banks of general deposit should not de any particular class of
legitimate borrower the right to borrow within fe and reasonable limits
under the law.
I come to you at this meeting in a rather hapiy state. Our bank job is
about finished, recovery has been achieved to the point where business is
relatively good, and prices of farm commodities have been raised to a
fairly satisfactory level. Our banks are stronger than they have ever been
in the history of our country, prepared to meet eny legitimate demand that
can be made upon them. So why should we not rejoice after the distress
of 1932 and 1933.
True, we still have the problem of unemployment, and 1 aru afraid we
will have that problem much too long. ThIs is not the fault of any particular class. Nor is it the fault of the Government. We simply are able
to produce more of everything than we consume, and our foreign markets
have become so reduced as to absorb very little of our surplus, both in
agriculture and in manufactured products. The. nemployment problem
can be solved only by the combined efforts of busin s, industry and (;overnment, and mutual confidence, as President Reese\ It so aptly stated in
ur problem, as it
his letter. Again I want to repeat, unemployment is
is the problem of every class of our citizenship. No one without responsibility in finding the answer. The Government cannot d it all.
There will always be different opinions as to methods, but he problem is
common one. Certainly in our land of plow y no one must be ermitted to
go hungry. We can continue to let the Government do it, b t let's not
he more
fool ourselves by thinking that we will escape the ultimate cost.
turn,
we lean upon the Government the more the Government mjust,
emeffort
provi
to
ever
greater
man
indite
lean upon us. Certainly no
isno
and
Roosevelt,
has
than
President
work
of
out
people
for
ployment
lative body ever co-operated more whole-heairtedly with a Chief Execu ve
in this effort than has the Congress of the United States. And don't fo
get that theirs is the tough Job. Every ma out of employment who can
possibly reach his Congressman appeals to im for help, and others want
people are entirely too prone
favors of one kind or another. We busin
to cuss and condemn Congress and the Adm istration, regardless of political faith.
Reconstruction Finance Corporation
The RFC started operations Feb. 2 1932. It did what it could to check
the downward trend in all branches of our ec nomic life, and in the morale
of our people. We probably would have h d an easier landing had our
leaders in business and politics been able to oresee the extent of the imPending disaster, but the stratosphere was So pleasing that we were not
willing to come down until there was no more gas.
The first big job confronting the RFC was to help banks and to try and
prevent their failure. Notwithstanding that several thousand closed and
were unable to reopen, we recapitalized more than 6,000 through the
purchase of preferred stock and capital debentures, and made loans to
pay depositors in 3,000 that could not continue. We invested $1,008.590,000 in bank capital and have authorized $127.000,000 in addition to
this amount, which is available to the applicants. $121,600.000 has been
retired. More than 91% of this investment is paying dividends and interest regularly. Many banks took advantage ot the opportunity to get new
capital that could have gotten along without it, anti some few took it purely
as a matter of co-operation in the program. Our smallest investment in
any one bank is $2,000 and the largest $.50,000,000. There are three for
approximately this amount.
The same care and consideration was exercised in every single investment, regardless of size, location or politics. Buying stock in tnore than
6,000 banks sounds rather simple in the telling, but it was not done, as
many of you know, in a casual manner. No purchase was ever made
without the most careful scrutiny of the bank, and of the general situation
surrounding it. We required stockholders and local communities to contribute when possible, and while some thought out requirements in this
respect were severe, more than $165,000,000 new capital was put into
these banks by private investors. This made more secure the Government's investment and insured better management in the future, because
when men dig down in their jeans, they usually follow up the investment.
7r. This we reduced,
/
Originally, our preferred stock dividend rate was 6(
voluntarily, to 5%, then to 4. and finally to ;1.; for five years and 4%
thereafter. Our loans to open banks, independent of investments in
their capital, amounted to $1,100,000,000. 85% of which has been repaid.
Loans authorized for distribution to depositors in closed banks amounted
to $1.180,000,000 —$860,000.000 of this has been disbursed and more
than two-thirds repaid. We have made available to agriculture, in one
form or another, more than $2,000,000.000. This includtA loans on
cotton, corn and other farm products, aS well as on livestock, to Joint
Stock banks, Farm Loan banks, &c. The greater part of this has been
repaid. Our loans on corn have all been repaid, and we are just now
preparing to make a 45-cent loan on the 1935 corn crop under seal in
the crib.
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Federal Reserve Bank of St. Louis
21
We have approximately $285,000,000 outstanding on the 1934 cotton
loan at 12 cents. This includes a tew notes still held by banks with a
call on the Commodity Credit Corporation. We are lending 10 cents on
the 1935 crop, but to date have disbursed only $115,000-47,600 of which
has been repaid. Our total authorization for railroad loans have beens
$625,000,000, a little over 8% of our total. $483,000,000 of these authorzations have been disbursed and $74,000,000 repaid.
RFC authorizations to date, including certain disbursements which we
were directed by Congress to make (including $1,450.000,000 for direct
relief) have been $10,300.000,000. The authorizations for which our
directors have had responsibility, have been $7,600,000.000. $5,700.000.000 of these authorizations have been disbursed. The balance, exclusive
of withdrawals and cancellations, is still available to those to whom the
loans were authorized, the sante as a line of credit in your bank.
Withdrawals and cancellations have amounted to $907,000,000, but
the loans were authorized anti the money was available to the applicants,
but they got along without it. Of the total of all loans disbursed, excluding bank capital investments-64% has been repaid. Our collections
from ail sources have been slightly more than $3,100,000,000— substantially
more than one-half of all disbursements for loans and investments in
banks and insurance companies.
We try to be a generous creditor, never having asked any borrower
to pay. So when it is considered that these loans were all made during
the depression, and on security that you gentlemen felt you could not
accept, the more remarkable is the fact that repayments have been so
rapid and so large. This could not have happened if our country were
not sound.
I offer this record in support of my statement that the depression, as
such, is over. Including bank capital investments, we have authorized
30,500 separate loans, and each loan, regardless of size or purpose, has
had the same careful and painstaking consideration. The largest amount
authorized to one borrower was $174,600,000 to the closed First National
Bank in Detroit. This enabled 540,000 separate depositors in this bank
to be paid in full—the larger depositors generously subordinating their
claims, and agreeing to wait final liquidation and take whatever loss there
might be.
Congress gave our directors rather broad powers in making loans, but we
have never forgotten that it is the taxpayers' money we are lending. We
have tried to be prudent as well as helpful. That we shall have some
losses got, without saying, but our operating profit from interest received—
although at the low average rate of approximately 4%—should cover our
operating expenses, our interest payable, and such individual losses as we
must inevitably take.
of 1 , which I am sure you will agree
Our expenses are approximately
compares favorably with private business. Our operating profit to date,
which is available to cover losses, is $113,000.000, after paying the Treasury
$125,000,000 interest on borrowed money. This profit will, in the opinion
of our directors, cover our losses, so that the RFC loans and investments
in banks and insurance companies will not cost the taxpayer anything.
I submit the following for your thoughtful consideration: Being able to
lend and invest approximately $6,000,000,000 during the depression—
much of it in emergencies to avert tragedies—borrowing the money and
putting it out at a spread of 1%; with no net loss, and no cost to the taxpayer, is proof that our country is sound. 1Ve have endeavored to operate
the RFC upon the same sound business principles that you operate your
business, making many loans however, that banks of deposit should not
make, and sometimes taking a greater risk than you should take, bearing
in mind that we were set up to relieve distressed business. We try also
to confine our loans to meet emergencies and are not lending to compete
with banks or other lenders. We sometimes have applicants who can get
their accommodations at home, and often assist them in getting them at
me.
ur objective, so far as the bank emergency is concerned, has been met,
an a great many institutions that came to us during the depression are
able eg go elsewhere now for their requirements, but at that, there is considerall1e yet to be done. For Instance, lending upon farm commodities
has becoure an accepted means of permitting orderly marketing, making
.trvest unnecessary, thereby better insuring more stable price
selling at lkt
levels. We will be called upon to make further railroad loans and to assist
in the reorgankzation and refinancing of some of the roads. 'We should be
a standby for thjs prupose, as we should be a standby, ready and prepared
to assist in the mortgage field—both business and residential.
We are co-operating with the Federal Bousing Administration to make
their operations more effective, through commitments for the purchase of
insured loans, thus enabling the banks to safely employ some of their funds
at fair rates. We have the responsibility of looking after our bank capital
investments and in liquItiating our loans in such a way as to be of the
greate3t possible assistance to our borrowers, keeping always in mind the
public interest that is invohved. In so far as our bank investments are
concerned, we want to be agreeable stockholders. We want to co-operate
with the other stockholders and local management and will do so as long
as treated fairly. We have no intention of dictating bank management,
but we do expect the best management in every bank that it is possible to
have, and bespeak for the customers of these banks the favorable consideration of their requirements.
One thing that we are especially proud of is that we enjoy the confidenc
of the President and of Congress. We have endeavored to merit this confidence, as we have the confidence of the people %tritest, money we are handling.
We have been able to do our job in great measure because of the voluntary
services rendered us by bankers and business men through the country.
And also because the RF(' organization is composed of as capable, as loyal,
and as patriotic a group of men and women as is to be found in any business
anywhere, private or public.
Many of you have come in contact with us and know otir men. Personally, I am proud of every one of them. Each has his gecd qualities.
While our directors naturally do not see eye to eye on every koposition,
we have no negative votes in board action. If any director dui offer a
good reason for not doing a thing, it is not done, and this applies in 0, lesser
degree to our executive force, which includes many men that would do credit
to any bank or business organization; that measure up with t he best executives of the banks which you reprecent. Men, like Stanley Reed, now
Solicitor General of the United States, who was with us during the crucial
period; Lynn Talley; John McKee,Chief of our Examining Division; Jim Alley, our General Counsel, and who was head of the preferred stock section of
our Legal Division; Sant Husbands, Bill Sheehan, Iloward Messner, Jimmie
Berson; Jim Wilson, Russell Snodgrass, Cliff Durr, Jim Dougherty, Matt
McGrath, Frank Sidney Congdon, and in the earlier days, L. R. Rounds of
New York, George Holmberg of 111inneapolis, and many others too numerous
or
GENERAL SESSION.
not permit a profjtable existence. The records of the Corporation have
proven this to be ail established fact in all too many cases.
For the 18 months' period from Jan. 1 1934 to June 30 1935, over 1,400
new banks were licensed by superdsory authorities. Ninety were in communities with a population of 250 or less ; 109 were in communities with a
population from 250 to 500, and in some instances there were already other
banks in these very towns. I do not wish to infer that the granting of
some of these licenses was not wholly justified. Vet these figures give a
graphic picture of one of the most serious problems confronting the Corporation, and one in which every one of you is vitally interested. Whether or
not the uneconomic unit is insured, its influence on the general banking
system cannot be anything but destructive. The power given the Corporation to protect itself against the risks of insuring banks which it knows
are bound to fail sooner or later only helps the Corporation. Unless State
supervising authorities, 3our Association, and the public discourage the
organization of banks doomed to failure, the over-banked conditions and
the consequent evils thereof are bound to return. If this be not a mutual
eoncern of the Corporation and of your Association, it is difficult to
imagine mhat problem can occupy our joint attention.
Now is the time to get rid of this danger. The public is friendly disposed
to the efforts the Corporation and your Association are making towards
bringing about an improved banking system. Once the public starts to
lose confidence in the Corporation, its faith in all banks will again diminish.
The public nmst be taught that a surplus of banks is no indication of
well-being.
Dismissal Tantamount to Liquidation
Closely allied with the powers given to the Corporation regarding the
admission of banks into the Fund is the right to dismiss insured institutions
which pursue policies or practices that are unsafe or unsound. While this
is a grant of power w loch should be exercised only after mature consideration, it is, nevertheless, one that should prove most helpful. With the
passage of time, and as the plan of deposit insurance becomes a more integral
part of the banking system, it is easy to see what a strong deterrent this
power will be to those institutions which are inclined to follow practices
which are condemned by good bankers. I can visualize the day when dismissal from the Insurance Fund will be tantamount to a bank's liquidation.
Here again we have the application of a well-established principle of insurance which permits the elimination of unsound risks.
A judicial policy respecting the right to purchase assets in the case of
mergers or consolidations in order to reduce the risk or avert a threatened
loss to the Corporation is another effective means afforded the Corporation
in the discharge of its duties. In this way potential pay-offs can be
avoided and consequent losses reduced. It should be borne in mind that
the Corporation has no right to make a donation of its funds to banks which
are about to combine. There seems to be a misapprehension among some
bankers that we Call make an outright contribution in order to bring
about a proposed merger. The law is clear that we can only make loans or
purchase assets when such action m ill reduce a risk or avert a loss.
Examinations on Rule of Reason
I think the right given to the Corporation to examine insured banks
offers a practical and useful field for assisting banks in a truly constructive
matiner. We have tried faithfully in the past to have our examiners adopt
.and follow a friendly and broad attitude in their relationships with insured
',banks. I want to assure all of you that this will continue to be our policy.
great deal of time and study is being given to ways and means by which
the standard of our examinations m.iy be improved. We are gradually
aising the caliber of our personnel so as to make our representatives in
e field better equipped to discharge their duties. I have no patience
with examiners whose criticisms are petty, destructive and intolerant, and
believe that they should be persons of good judgment and broad ,
Ision.
They should possess tact and a sense of the limitations of their authority.
What we are trying to accomplish in our examination work is a practical
, balance between supervision which ia fair to the bank, the public and the
,
,s
Corporation, and a spirit of co•operation which is sympathetic, constructive
and effective. III a word, we want our examiners to follow a rule of
reason.
If the Corporation is under hhe duty, as I think it is, of requiring its
, examiners to treat you and your management fairly, by the same token I
think the banks owe it to the Corporation and to the public not to use
, our examiners as an excuse for the liquidation of loans. It is unfair to
allege criticisms by our examiners as a reason for pressing collection when
the facts do not support the allegation.
We are giving consideration, and I trust your Association will do likewise, to the question of the desirability of making a bank examination
something of an audit. Our experience shows that unless a bank has its
own auditor, or comptroller, or is periodically audited by independent
accountants, the opportunity for fraudulent practices is eonaiderably
enlarged. It may be that the solution to the problem will be found in some
arrangement whereby the local clearing house associations will make
systematic checks of member institutions. The Corporation hopes to
discuss this matter with your members during the coming year.
, The Corporation is in a position to render practical assistance
to
,` operating banks through the facilities of its research
department and the
\, experience the Corporation will naturally accumulate in its
constant relations with the insured banks throughout the country. This should
afford a
reservoir of information which will enable all of tia to benefit by the
problems. difficulties an,1 experience of the entire banking organization.
Must Promote Harmonious Bank Laws
We hope to assist in a program of effecting, so far as niay
be possible,
more uniform banking legislation throughout the United States.
This will,
of course, take time, but if the inconsiatencies and shortcomings
of the 49
different systems of banking are to be corrected, such a program
appears
to be necessary. So long as the American system of banking is constituted
in its present form we must endeavor, within the political ancl practic
limitations, to bring about more unity and harmony in the application
and administration of the conglomerate laws under which the country's banks
do businesa. If a more uniform regulation and supervision
cannot be
brought about under the auspices of the FDIC, it is not too nmeh to say
that agitation for a single system of banking in the United States will find
favorable response with the American public.
The Corporation insures the deposits of over 14,000 licensed banks Of
the 51,000,000 accounts in these banks more than 99% are fully insured
by the $5,000 limit. Nine thousand and aeven hundred banks have an
V
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Federal Reserve Bank of St. Louis
23
ruerage coverage of 80% of their total deposit liability and 13,300 banks
are insured 70% or more. Since the creation of the Corporation over 7,700
banks have voluntarily applied for insurance. There are only about 1,000
licensed commercial banks which are not insured by the Corporation. ,,The
Corporation is now permitted to examine all insured banks and has access
to reports of their condition made to various agencies. It must be appointed
receiver for all insured National banks which close, and it is authorized to
act as receiver in the case of the closing of any insured State member or
non-member bank. Joint examinations with State supervising agencies are
authorized and are being presently conducted in a great many States. We
are allowed to exchange reports with various State authorities, and in quite
a number of instances State agencies are accepting our examinations. Many
of them are using our examination form. `,
FDIC Ideal Agency to Cope tvith Problem
It is apparent from these facts and figures that the FDIC not only has a
tremendous financial interest in the vast majority of the nation's banks,
but occupies a unique position in the blinking field on account of the
powers granted to it by Congress and the many contacts it has with the
banks themselves and the several State agencies which are charged by
the laws of their particular States with the supervision and regulation of
the banks under their jurisdiction. The Corporation, therefore, is able to
exert its power and influence and to lend its support in behalf of any
means or measures which will help to bring about a sounder and more
effective banking system.
If a person were to start upon all independent search and study for an
instrument to be used in improving the banking aituation as it exists
to-day, it is reasonable to suppose that he would finally decide upon an
agency such as the FDIC. It would be hard to conceive of any instrumentality which would be in a better position to handle the real and
practical problems that have to be faced and which takes into account the
fact that the banking business exists in a Tnatter-of-fact and a work-a-day
world.
There are, of course, other ways in which the Corporation can promote
the best interests of depositors and bankere, but I believe I have indicated
the principal means afforded by Title I. I now wish to draw your attention to the leading part you gentlemen can play.
Banker Voice in FDIC Management
In the final analysis whether we are all going to be successful in the
attainment of our purpose depends upon your co-operation and support.
Mere legislation in and of itself will not suffice. Unless you actively
participate in the problems of the Corporation and assist in the elimination
of those conditions which have caused so much grief, there can be no
lasting and healthy recovery of American banking. If the members of
your Association are going to condone abuses which logic and experience
indicate ought not to be tolerated, the task of Government and State
agencies will be an impossible one. The FDIC needs and wants your help.
I feel certain you will give it.
Although the FDIC is for most purposes a Government agency, it has
many eharacteristics of a private corporation. I ain thinking especially
of the financial interest which insured banks have in its management, and
its eventual success. In view of this situation I suggest that consideration
ought to be given to the creation of an adviaory committee or board which
would give the banks proper and fair representation. Such a group might
meet at stated intervals with the officials of the Corporation for the purpose
of consulting and advising upon problems and policies vitally affecting all
insured banks. If the insured banks were given a voice in the management
and policies of the Corporation, any tendency towards bureaucracy would
hs discouraged and checked. Regardless of the desire of its officials, there
is always the possibility of a department such as tbe FDIC becoming too
arbitrary and too much inclined to transcend prescribed authority. I am
prompted to make this suggestion upon my own personal experience and
that of others in the Corporation. I am happy to acknowledge the many
helpful suggestions that have been made from time to time by various
members of your Association. The Corporation has greatly benefited from
the personal conferences that have been held with bankers from all over
the country. As
result, we have been able to get the viewpoint of the
hankers in the rural communities as well as those in the large financial
and industrial centers.
Replace RFC tvith Local Capital
I want to say
word about the repayment of your RFC obligations.
Those of you who can, should retire them as soon as practical, as it was
never the intention of the Administration to have the Government take
the place of local investors. The needs of a community are best served
when its citizens have a real and financial interest in the management End
successful operation of its banks. Furthermore, it is only just that stockholders should first absorb any losses that may be incurred. The greater
the investment by local individuals, the greater will be their desire to
have the plan of deposit insurance more widely accepted. As economic
conditions impro‘e and your institutions reach a more profitable level,
efforts should be made to replaee the 'RFC investments with local capital.
The repeal of the Federal Double Liability law, tog,ether with the tendency
in many States to pass similar measures, will make such retirement
much easier.
All of this is not to say that every bank in which the RFC has an
investment should immediately make application to retire its preferred
stock or capital notes. I am sorry to say that far too many banks are in
no position to carry out such a program. The premature retirement of
these obligations in banks which have a low capital ratio would defeat
the very purpose for which the investment was mnde. Here, as in everyth'ng else, there must be a sensible discrimination shown.
Efficient Management the Need
Ay the greatest assistance the membera of your Association can
o the Corporation, the public, and to yourselves, lies in the efficient
m ingement of your daily business. By this I mean the placing of your
houses in order through the pursuit of practices recognized everywhere as
being sound and busineaslike. For exasnple, the writing off of losses currently and unfailingly, the avoidance of disastrous methods of competition
which lead to losses in the long run, the elimination of free services, and by
alert attention to and unbiased appreciation of the needs of depositors
and the social. ceonomic and legislative problems of your profession.
The Corporation is perhaps as anxious as you are to have your institutions
make money, provided. of course. that your earnings are the result of good
management. Profitable operations permit you to compensate adequately
24
BANKERS' CONVENTION.
interest, the same as any other group or organization:, This zeal must,
however, be shown at the right time. It does no good to protest after
public opinion has been crystalized and set, and after the facts and circumstances which have moulded the public opinion have been permitted to go by
unnoticed and unchallenged. That is why I say that it is important to
have an alert and unbiased appreciation of problems affecting your profession. You cannot hope to resist legislation aimed to correct evils which
you have permitted to exist. The complete and effective remedy for laws
which you regard as burdensome is in the elimination of the causes which
give rise to them. I do not think it is an exaggeration to say that there
is scarcely a piece of major social legislation upon the statute book to-day
which was not the result of the refusal of those affected to do something
about the abuses at which the legislation was aimed. In other words, the
surest way to avoid State interference is to avoid those things which cams
the State to intervene.
Substitute Prirvate for Government Credit
In your search for new sources of income I am impressed by the possibility of obtaini ig loans that are now going to different agencies of the
Government. The President has stated that the Administration is desirous
of havin,g the Government withdraw from the field of private financing just
as soon as private business is able to take its place. I feel that banks should
make more courageous efforts to substitute private for Government credit.
Just as the FDIC cannot take the place of goo 1 management, the Government will not be able to carry on indefinitely the functions of our banking
system. The end of Government encroachment upon your business is, therefore, up to you.
the efforts of your officers and employees and to attract and retain capable
executives. The matter of earnings is, therefore, a vital one to the
Corporation. Many banks can never hope to have the kind of management
they need because of their scant profits and the undue risks they must take.
This fact is overlthled by those who ialsely believe that every community
or locality must have a bank.
The necessary building of resetses for losses and contingencies is intimately tied up with the size of a bank's earnings. This is another reason
why the Corporation wants to encourage a fair return upon your capital.
The increased protection afforded depositors by adequate reserves for losses
and contingencies correspondingly increases the soundness of the risk of
the Corporation.
At the very root of all of our discussion involving improvement of our
banking structure is the matter of personnel. It is idle to talk about
deposit insurance, co-operation, and the goal we seek if unfit individuals
are allowed to take part in the management of our banks. The banking
profession nmst see to it that there is brought to the business of banking
competent administration. You have it within your power to do so, and I
am confident that you will. In this connection I regard the program
being carried on by your Institute of Banking, and the Graduate School of
Banking inaugurated last year as most praiseworthy and effective. It is
constructive work of the finest kind and should receive your enthusiastic
support.
Mere Good Bants—Snraller Premiums
The manner in which you conduct your affairs will very nearly determine
the amount of the assessment you will have to pay for deposit insurance.
The more good banks there are insured, the less the premium should be.
A lower assessment can only be justified after insured banks have proven
that they are furnishing the needs of their customers safely and wisely.
The recompente to the institutions which are now bearing a rather large
percentage of the total premium must, therefore, be in the efforts the
Corporation had made and will continue to make towards preventing a
multiplicity of banking facilities and in helping to improve the general
standards of existing banks.
To claim that large banks have no particular stake in the success or
failure of smaller banks is to overlook the fact that there are 9,700 banks
with deposits of $750,000, or lets, in which the average insurance coverage
is over 80%. These banks have 10,500,000 depositors. This is more than
20% of the depositors in all insured banks. If through our united eff s
we are able to improve the standards of these and the other banks in the
Fund, it is only reasonable to asstrme that future assessments will reflect
more accurately and fairly the risk involved.
If history is to repeat itself, we are likely to have a recurrence of periods
of financial stringency and general economic depression. It is at such a
time that the FDIC and American banking will have to prove that they
can meet the demands that will be made upon them. An intelligent administration of deposit insurance and a concerted and steadfast adherence to
right basic principles by you gentlemen, now and in the future, should
make banking holidays unnecessary in crises which may later arise.
Restrict Postal Savings to Bankleis Communities
e day is not far distant when the system of Postal Savings will
d to communities without ban'..s. Now that deposit insurance
ermanent basis, it seems fitting that the Gkwernment should
vidence
good faith in it by restricting the business of Postal Savings.
If this be do c, many banks will be able to increase their deposits, extend
more loans, and, consequently, be in a position to make more money.
ho
Public Must Participate
tally, the public must participate in the attainment of our mutual
ions. It is vitally necessary for us to obtain the support of the
mer an public if we are to put banking upon the plane we all desire.
It is
umbent upon the Corporation, and particularly your Association.
to acqualut the public by all legitimate means with the fundamentals of
sound banking. It should be possible through our combined efforts to
ettablish and form a public opinion which will reward the sound banker
and penalize the individual or institution which is inefficient. The Corporation hopes to make its insignia a symbol of scundness, safety and service.
It will be a hallmark of quality which should distinguish the genuine from
the imitation. It will he notice to the world that a bank which is insured
by the Corporation is efficiently managed, and that its depositors can hay(
confidence in its policies and practices. In the language of diplomacy—
the imposition by the public of business sanctions upon bankers who insist
upon violating the principles of good banking will serve to make them
reform or close their doors. The members of the public can do their part
lw advocating and supporting such laws as will raise the standards of our
financial business and by requiring the banks which they patronize to
live up to high ideals.
The FDIC and the bankers of the United States have large, mutual,
financial interesta in one another. Why, therefore, should not the FDIC,
m hose legislative, social and financial aim is the establishment of a sounder
and more effective banking,* system, co-operate with bankers, and why should
not banks, whose reason for existence is the safe and profitable service of
the financial needs of their communities, co-operate with the FDIC? I am
certain that the public for whose benefit the Corporation was created and
for whose busines.s the banks must compete will have only one answer.
Avoid Causes of State Intervention
I have said that you should hale an unbiased appreciation of the needs
of depositors and the social, economic and legislative problems of your profession. In my mind, this is extremely important. The members of your
Association, and bankers generally, performed a real service to the country
ar large in the testimony which they gave before the Banking and Currency
Committees during the pendency of the banking bill this year. I realize
that bankers cannot, in a certain sense, take an aggressive leadership in
advocating le;islation. Nevertheless. they have the duty, as they have the
right. of informing legislators and the public of their views upon bills
affecting their business. I sometimes think that bankers have been a. little
slow to realize the various trends in our economic, social and financial
thought. Bankers are entitled to bave a well-ordered zeal for their (
Banking Legslation
By CARTER GLASS, United States
enator front Virginia
am going to read you just one brief paragraph of his
ve y nice letter, and a paragraph of my reply, which I
ow you will concur in. The Senator said, in closing-
The inability of Senator Glass to attend he Convention,
(scheduled as a speaker at the first day's ssion of the
General Convention), was announced as follows b President
Hecht, at the beginning of the session:
"It is a source of the keenest possible disappoint ent to
me, as I know it will be to you, but I have to advise yo that
the gentleman whom we had wanted to honor by as ing
him to be our first speaker here this morning was unable to
come. I have a letter from him, as well as from two of h
physicians, to the effect that it is simply out of the questio
for the Senator to travel this distance in his present physical
condition.
'Please be good enough to assure your associates of the Bankers Associat on that I feel highly honored at the invitation to make the opening address
here, and I genuinely regret that I cannot be among their guests on this
ccasion.
"In my letter I said, among other things:
'My disappointment is all the greater because I know that no part of the
rogram had attrached more interest and helpted to swell the attendance
han the prospect of hearing you speak. On the other hand. of course I
inderstand that your health comes first, and we who are your friends cannot
find fault with you for being estremely careful. and for taking the necessar
precautions to store up a big reserve of energy for your fut ure activities
n Congress, which we hope will extend over many years.'"
Through the Bankers'Eyes
Address of the President of the A. B. A., R. S. HECIPT, Chat man of the Board, the Hibernia National Bank,
New Ort,eans,
For many years it has been the custom for the President of your Associa- \ A lar
part of the work of the Association is done by the various
tion to open the annual convention with a review of his stewardship and
divisions, ctions. commissions and committees, and the reports which will
a survey of the economic and financial situation as seen through the
b! rendere by them at their respective meetings will be of particular
bankers' eyes. It is with some misgivings that I follow this custom. So
interest. I urge you to attend as many of these sectional meetings as
far as concerns the past year's work, I should like to have the record speak
possible, incl ing the very much worth while sessions of the Constructive
for itself. As for the discussion of our various business and financial
Customer Bela 0118 Clinic. Other reports such as those of the Committee
problems, we have provided an all-star cast of speakers, all of whom are i on Banking St les, the Committee on Federal Legislation, the Eeonosnic
leaders in their respective fields, and their utterances will, I am sure, , Policy Commisst
the Commerce and Marine Commission', Arc., will be
be most interesting and enlightening*. In view of these circumstances I ; printed and forwa ed to you in due course. They are, I assure you, worthy
shall try to make my own report as brief as possible.
of your careftd rea ing and thoughtful consideration, constituting as they
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I
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention—Nov. 1935
TRUST DIVISION.
tions, many of its provisions are so far-reaching and will
prove of such great importarieti,in the life of our country
as to justify trust men in giving t Act thorough consideration. Attention may be called to Se on 904(a) of the Act,
Treasury of the
providing for the establishment in
United States of an "unemployment tru fund." Section
the Treasury
904(b) makes it the duty of the Secretary
to invest such portion of the fund as is no equired to
meet current withdrawals. Some suggestion was .ade that
the Act be amended so as to entrust the handling
these
funds to corporate fiduciaries, but the suggestion di not
meet with Washington approval. The suggestion was a o
made that if the Act had permitted, or if it should be subsequently amended to permit, private pension plans, such
plans might increase corporate trust business, the employer
using a corporate fiduciary as the trustee for the trust fund
securing such private plan.
Statements made in the Senate on Aug. 9 and in the
House on Aug. 8 indicate that this matter may be studied
during the recess of Congress, and at least further discussion may be anticipated in the second session of this
Congress.
Corporate fiduciaries having investments in mortgages
on farm lands are concerned with the provisions of the
Frazier-Lemke Farm Mortgage Bankruptcy Act. The former
Act on these general lines was held unconstitutional by the
United States Supreme Court. The general purpose of the
new law is to afford a moratorium on the enforcement of
mortgages on farm lands. The Federal District Court,
sitting in Peoria, Ill., on Oct. 21 of this year, held the new
Act unconstitutional. On the other hand, the United States
65
District Court for the Northern District of Texas held it
constitutional on Oct. 12.
There has been so much Federal legislation affecting
fiduciaries as owners of securities that volumes might be
written on the subject. The general trend of such legislation
is certainly important to corporate fiduciaries, and it may
be added that continued study will be given to this subject
by the Trust Section so that committees of the Association
dealing with this problem in Washington may have the
continuing advice and help of those so closely concerned with
this type of legislation. There have also been a number of
amendments to the bankruptcy and insolvency laws which
are likewise of interest to those handling the securities of
rust estates.
ending legislation was not killed by the adjournment of
Con ess. Such legislation will be before the next session
I retain the place it had reached at the time of
and
adjourn •nt. Congress will convene on Jan. 3 1936. While
reason to anticipate any proposals of major
there is
banking and to the trust departments of
importance
banks, it may evertheless be anticipated that there will
be new bills ad d to the pending legislation concerning
trust men and the tates which they are administering.
y that I hope my successor in the
In closing, let me
ur Federal Legislative Committee
office of Chairman of
and the members of the n w Committee may have the same
cordial and helpful co-ope tion from the Trust Section
which was extended to the ommittee during the first
or this co-operation and
session of the present Congress.
this help I wish to extend to yo the sincere thanks of
the Committee.
.4/0
COMMITTEE e OFFICERS'REPORTS—TRUST DIVISION
Address of President Leon M. Little, Vice-President
New England Trust Co., Boston, Mass.
The year of the Trust Division now ending has been one full of activity,
a kind of activity with numerous new and wholly unprecedented problems
which have brought to the officers suggestions, complaints, criticism ; but
always also help, constructive ideas, unselfish expenditure of time and effort,
and devotion to our common interest by all the membership, and particularly
by those who have been called upon from time to time to give their counsel
in immediately portentous matters.
For the century or so that Trust Departments have been operating, the
rrain objective has been to increase the business on our books. Our
remarkable growth in the last 25 years is the result of the epergy displayed
in this concentration of effort, which we now all know overran its bounds
in the five years previous to 1930. No Trust Department escaped the effects
of this growth, with which the growth in numbers of personnel and in
operating efficiency failed to keep pace.
In my talk at the midwinter conference, I spoke of the present importance
of the Operations Officer, and I do not intend now to add to that, but to
show that our present slower growth is accompanied by a more rounded
performance of our duties to our clients, part of which has been brought
to us from without, much of which has originated from within our own
organizations and this Division.
First consider what has come from without. Naturally our thoughts turn
to Washington, and of primary importance to us, at least of immediate
importance, has been the enlarged scope of examinations. These examinations wear well. Most of us have had two of them, and the second time,
when the examiners knew us and we knew what it was all about and what
they wanted, it was the kind of an experience this Division had hoped for
in its past campaigning for more adequate examination of Trust Departments. A State member bank may now be examined by the Federal
Reserve, the Federal Deposit Insurance Corporation and the State. Sensibly,
these are combined. It reduces the unavoidable confusion and extra work
and accomplishes everything that separate examinations would.
Only one deg•ree less intimately affecting us are the new tax laws and regulations and the new FDIC regulations. Certainly they have given us food
for thought. But where we have felt that they have been unduly restrictive
or inoperative, and we have taken our case to Washington, we have had,
without exception, a courteous and adequate hearing and reasonable success
in getting our justifiable requests granted. This shows co-operation by
the Government officials, but it also shows co-operation with the officials
by the Trust Division in going to Washin,gton only with requests for
clarification or with suggestions for changes based on knowledge of practical operating difficulties involved.
The Social Security Act and its further contemplated development may
have great importance to trust institutions. One of our committees is at
work and its report on trust administration of pension funds will go out
to the Division membership in the "Bulletin." Those who are studying
it are convinced that in this bill is a broad new field for trust work which
may soon—very soon—become one of major importance.
Also from without has come the pressing problem we all face of smaller
units of business. We cannot blind ourselves to the growing certainty that
for as long a time as any of us can see ahead—from social, economic and
legislative reasons, our business will tend toward the problem of caring
for many more small estates and fewer large ones.
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Federal Reserve Bank of St. Louis
I shall not rehearse here the day-to-day activities of the Division's year
to demonstrate to you the proof of what I have just sketched of the
pressure on us from without our own walls and of what I shall now say of a
few of the Division's activities which had inception this year or which
developed from beginnings made in earlier years, for you have a right to
expect an alert appreciation by your organization's officials of your problems
and a constant efficiency in meeting them. But rather I want to speak of
things which are not of routine and which may be new to you.
First, the Common Trust. This is hardly a new idea, but one in which
the pioneers have found many difficulties, mainly from a tax point of view.
Basically, there is nothing more logical. Sn,all funds, most of them vitally
important to their beneficiaries, invested as units, cannot get even an
approximation of proper diversification. Numbers of them invested together
or holding participations in a composite fund can receive the diversification
which is possible with large trusts and gain thereby the security that only
proper diversification can give. The practical application of this theory
has encountered disheartening complexities. Our Committee on Common
Trusts has done a tremendous amount of work in its study of the problem
and prepared a comprehensive report which you all should study. That its
labors are ultimately to be succes.sful is indicated by the fact that the
Committee on Uniform Laws of the American Bar Association, in their
work relating to trust statutes, has included a provision for such funds.
And the Federal Reserve Board's regulations provide for such funds although
their interpretation contemplates funds of such small size that the present
usefulness of the regulation amounts to very little.
If, then, we are to handle the future smaller units of business efficiently,
and by that I mean with the greatest benefit to those for whom the funds
were provided, it would seem that this year had put us a long way on our
road successfully to solve this theoretically perfect, practically difficult
trustee problem.
The unqualified success of the Gradtmte School of the A. I. B., held at
Rutgers College last summer, was a great reward to those who had been
working and carefully planning for it for a matter of four years. We were
particularly fortunate in the persons who conducted the trust courses and
made them so interesting and instructive for their first class. The enrollment was satisfactory, both as to numbers and as to the type of men
attending and the scholastic body turned homeward full of enthusiasm.
This course is no longer an experiment. The doubting Thomases need
have no further fears about it. Those whose institutions were not represented should begin to lay plans to send one or more carefully selected
officers to the next session of the, school. If we do our part carefully in
choosing a proper candidate we will be investing our bank's money in a
most remunerative venture.
From within our own organization came the Statement of Principles.
How far-reaching in constructive importance this document has been for
us you all know. Its importance to Corporate Trusteeship has exceeded
what any of its originators could have imagined for it. It is a fitting
monument in trusteeship to Maury Sims. Without his conception of the
idea, without his cheerfully persistent steering through subcommittee draft
on draft, through tense, sometimes bitter, Executive Committee criticism
to its final approval by the various authorities, it could never have become an
accomplished fact. Future generations of trust men will know of him
because of the Statement. We can also gratefully remember him as a wholly
.charming friend.
261_
-^
66
BANKERS' CONVENTION.
The Statement of Principles applies to trust institutions. Within this !tion of Trust Departments by the Federal Reserve banks. We were anxious
year some of the more thoughtful of our membership have been discussing Ito see to it that there too should be as much co-operation as possible and I
among themselves the formation of a Statement of Obligations for trust .think we have fairly succeeded in getting the Washington authorities and
men, not as opposed to, but supplementing the obligations of the banks they : your officials to see these problems in the same light.
Only recently I have again been in contact with the Governor of the
represent. A very earnest and well received paper on the subject was given
Federal ReservelBoard. Governor Eccles, and in discussing this matter
at the recent Pacific Coast conference, and the Executive Committee last
further with him he promised to write me a letter to give me a report of
Monday authorized the appointment of a committee to study the question
what had happened since we last talked about it and just yesterday I got a
.officially—to date it has had only informal and unofficial study—and if
letter which I think is brief and worth while reading:
be
subsatisfied that it should proceed that far, to draft a statement to
"Last February I wrote you briefly regarding the policies which had
mitted the Executive Committee for consideration at the spring meeting.
recently been inaugurated by the Federal Reserve System in connection
It is a logical forward step. We are all institutional men ; we understand
with the examination of Trust Departments of State member banks, with
the vital importance to our institution of the good-will of the community
partisular reference to the efforts taken to co-oordinate trust department
examination procedure.
in which we operate, which is primarily based on the good reputation our
"During the last year the Trust Examiners for the various Federal
institution enjoys. We are constantly training young men and women to
Reserve banks have been diligently engaged in the examination of the
carry out, first in routine, then in executive positions of greater or lesser
Trust departments of State member banks. In the course of their work
information has been developed and questions have arisen which not only
authority, the duties assigned to them, on the accurate accomplishment of
have had reference to the individual banks examined, but are of general
which successful operation depends and through which institutional reputainterest in the development of examination work. Consideration of such
tions are made. But trust work is not a mere mechanical investment of
matters should be helpful at the conference of Trust Examiners for the
Federal Reserve banks, similar to the one held in September 1934, which
funds and distribution of income. Its problems are in the last analysis
has been coiled for Nov. 18 1935, at which time the result of the year's
those of the individual beneficiary, and because of this the temperament of
experience will be reviewed in the continuing effort to co-ordinate and
our staff is of the greatest importance. As I sce it, it is toward training
improve the procedure of examinations of Trust Departments.
ourselves and our subordinates to a proper temperament for our work, to a
"In their examinations, the Examiners, of course, are primarily concerned with the policies and practices followed by the banks in the discharge
proper appreciation of the ethical standards as opposed to the standards of
of
their fiduciary responsibilities and the purpose of the examinations is
mechanical perfection that this proposal will develop. If such a statement
to be of constructive service in maintaining the high standards of fiduciary
of individual principles and obligations does result from this subcommittee's
ethics and practices which are recognized as essential by responsible trust
officers and the American Bankers Association, as well as by supervisory
studies it will be as capable of influence for good, though perhaps in a less
authorities.
obvious way, as has been the Principles for Trust Institutions of which
"While it is not possible at this time to make any definite statements
we are all so justifiably proud.
regarding the results so far obtained in the work, it may be said that the
experience during the past year has been most encouraging and a fine
' has made its initial appearance. It is attractive in form,
The "Bulletin,
spirit of co-operation has been evidenced by the institutions examined.
full of matters of great interest and satisfies a need of long standing. It
"As indicative of the fact that bankers have appreciated the purpose
will be issued as and when material is available, but at the outset of its
underlying these examinations, the following extracts from letters to the
Federal Reserve agents are offered.
career there seems to be such an abundance of things that are of immediate
"The first quotation is from a letter written by the President of a small
and pressing interest to us that I imagine we may expect it almost every
trust company, which is primarily engaged in the banking business:
month.
"'May I take this opportunity to express our appreciation of the very
During this year it has been quite evident that our public relations have
thorough report on our Trust Department which we believe to be most
helpful? As I explained to Mr. Blank, those operating our Trust Departbeen very definitely improving. I say this in spite of the annual crop of
ment have had little experience in that line and have acquired such knowsectional unpleasantnesses, to us a mild word, with which our officers and
ledge as they have through experience. It is for this reason that we find the
committees have had to deal as they arose. But there are certain clearly
report so valuable in setting us on the right track.'
"The following extract is taken from a letter from the President of a
discernible indications to support this position. For instance, trust work
large
bank with a Trust Department of substantial size:
is just beginning to receive newspaper publicity of the constructive and
"'I am taking the liberty of enclosing a copy of a letter which I received
educational type, which gives the public a real picture of what we do and
from the Chairman of our Directors Trust Committee and which I feel is
why we do it. In several of the leading cities of the country, newspapers
indicative of the opinion of the members of our Board. We welcome from
time to time such a thorough and constructive examination.'
are regularly publishing articles of this character and others are planning
"The letter from the Chairman of the Directors Trust Committee referred
t.) follow suit. The significance of the development is three-fold. First
to included the following comment:
the newspapers are discovering a reader interest. Second, the public is
"'In carefully reading the Examiner's report of our Trust Department
for the Federal Reserve Bank, I found it so unique in its thoroughness and
becoming better acquainted with the fundamentals of trust service. Third,
so constructive in its attack on the vital points in your Trust Department
this type of publicity is making friends for trust busines,s, whether they
methods and accounting, I feel I should express to you my great satisfaction
are or are not at the moment receiving the benefits of trust service.
as Chairman of the Trust Conunittee. The Trust Committee and the executives of the Department are gratified to hava such a complete ansd searching
In court decisions we see few' signs of the lack of understanding of our
report on our Trust Department and we are stimulated to try in every way
functions that was somewhat prevalent a few years back. The Supreme
to further improve all its methods and services.'"
Court of Pennsylvania recently said:
Then Governor Eccles goes on to say:
"The continuing interest in this work by the American Bankers Associa"Of the trustee's diligence, care and caution we are convinced; its sound contion is appreciated and any suggestions or ciriticsm which your organization
surcharge
impeached
and
a
imposed
because
temporary judgment can not now be
may have to offer and which will tend to improve the effectiveness of the
of lack of omnipotent vision and prophetic foresight."
examinations of the Trust Departments and increase the value of the
reports
of such examinations will receive most careful consideration."
This is so precisely and aptly put that I hope it receives the wide quotaI want to say that to us who have tried to cultivate just that sort of
tion in future decisions that it deserves.
spirit and co-operation in Washington with all of the departments, this
There are also other indications besides these which point to a clearer
cordial message to your Division, because it is intended, of course, for your
public understanding of the scope and responsibilities of trust service.
Division, is most graitfying and all I can say in conclusion is that I hope
A detailed report of the year will be given in the Division's report to the
you will continue during the coming year with Mr. Fleming who, I know,
Executive Council and will be printed so that those whe .wish to read it
has
the same desire I have, to keep in close contact with the authorities in
may do so. Here I have only touched on some of the present and future
Washington who, I am sure, will in turn be glad to co-operate with you.
thoughts of the Division.
In my work as President I have had the assistance of many trust men
Icnow personally,
from Maine to California. Some of them I have come to .
Report of Committee on Nominations
others only through the results, of their labors. It is a great satisfaction
H. O. Edmonds presented, as follows, the report:
to go out of office knowing that when final decisions were made they were
The Nominating Conunittee as appointed by you, Mr. President, last
the result of careful, honest study, and to have direct knowledge of the
spring, consisted of the late Col. R. M. Sims of San Francisco, Robertson
high character and sincerity of the men who have helped formulate the
Griswold of 13altimore, Gwilym Price of Pittsburgh, William J. Stevenson
policies and guide the destinies of this Division.
of Minneapolis and Raymond Trott of Providence. Due to Colonel Sims's
death, I was appointed Chairman to succeed him.
have corresponded with each other and have had six months to do
Remarks of President Hecht of A. B. A. Before Trust ourWe
work and we come before you sith the following unanimous nominations:
Division—Examination of Trust Departments by
President: Merrel P. Callaway, Vice-President, Guaranty Trust Co. of
Federal Reserve Banks
New York, New York, N. Y.
Vice-President: Blaine B. Coles, Vice-President, First National Bank of
very
purpose
Mr. President, Ladies and Gentlemen: I came up here for the
Portland, Portland, Ore.
which President Little has mentioned—to simply extend to you my heartiest
Members of the Executive Committee: W. J. Kieferdorf, Vice-President
greeting's on behalf of the Association and more particularly, however, to
and Senior Trust Officer, I3ank of America National Trust & Savings
also take the opportunity to again thank the Trust Division for the very
Association,
San Francisco, Calif.; Richard G. Stockton, Vice-President
fine co-operation which I have had during my administration in everything
and Associate Trust Officer, Wachovia Bank & Trust Co., Winston-Salem,
we tried to accomplish during the past year. It has been a source of a great
N. C.; Louis S. Headley, Vice-President, First Trust Co. of St. Paul, St.
deal of satisfaction to have such whole-hearted support from those who are
Paul, Minn.; Alfred Fairbank, Vice-President and Trust Officer, The
doing such excellent work in the various Divisions.
Boatmen's
National Bank, St. Louis, Mo.; Roland E. Clark, Vice-President,
At the dinner in New York some months ago, in talking to you, I menNational Bank of Commerce, Portland, Me.
tioned briefly something about the contacts we had established with the
IThe report was duly adopted and the officers installed.j
Federal Reserve Board in Washington in connection with the new examina-
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THE COMMERCIAL & FINANCIAL CHEONICLE--ABA Convention--Nov. 1935
BANKERS' CONVENTION.
72
entirely solve the unemployment problem nor stabilize
the business cycle. In the'future perhaps we shall require
a better regulated co-ordination of investment and expenditure activities than has been provided by the automatic simplicities of a laissez-faire economic system if
the affairs of our complex technological civilization are to
be kept on an even keel. Thrift may have to be pooled
as we are now trying to pool it to correct the vast social
insecurity involved in the economic insecurities 'cif technological employment. But whatever we do to orkanize a
steadier economic prosperity for our country's future, we
must do through thrift and not without it, by encouraging
and rewarding thrift, rather than by penalizing it, and
making its rewards available on equal terms to drones and
wasters.
Some day when the passions and en'husiams 9f our little
day for momentary economic theories have abatei the history
of this depression will be written in the ligh,t, of cold analysis.
work was "made"
It will be told, when this day comes, t
for thousands by programs of del' rate spending, but it
will also be told that millions w e kept on payrolls during
the very depth of our distre because some one had prepared for just such emer!'..cies by putting money in the
e corporation treasury against a
bank and surpluses in
rainy day. It will b old that planned public extravagance
n artificial purchasing power, out that
created its billio
the greater b. ns of true purcnasing power which preserved the asic nusiness structure in functioning order
the savings of those who laid by a portion of
came f
their wealth in prosperous times, that when tne pincn came
they might live without jobs and operate their enterprises
without profits.
It will be related that thousands kept themselves alive
iv temporary and makeshift labors created by a vast ex-
ploitation of the taxable wealth of the country, but that
millions went ba,ck to permanent employment when average
men and women recovered confidence in their ability to
acquire wealth and to keep within reason what they had
acquired. It will be admitted that millions lost their
morale temporarily, but it will also be insisted that tens
of millions were strengthened by adversity in their conviction that thrift and thrift alone saved them and their
families from tragedy and restored the prosperity of their
country while preserving its institutions.
Finally, it will be told how these men and women whose
thrift kept fires lighted, tables provided, children clothed,
offices open and fa,ctories running through our years of
darkness and of confusion of theories, paid the bill at last
r the great experiment in discarding thrift.
entlemen, I believe we may safely leave thrift to the
jud ent of history. With evidence now in hand, we may
say
confidence that thrift throughout this emergency
has bee our first line of defense against the forces which
have soug
to drag us down into economic chaos, and
that it is tothe line from which we are advancing toward
a more secure onomic order. Our experiences of the past
few years have
rely reaffirmed that our economic system
cannot function '
stnout it, tnat our civilization cannot
progress without it,',and that it is questionable if human
character can take therisk of dispensing with it.
So plainly are all taese things written to-day on the
tablets of our experience that if our future, coldly analytical
historian of this period should happen to have a gift for
satire, I suspect he may cl e his discussion with some
such sentence as this: The expe ences of America with the
"spend-ourselves-rich" economic heories of the 1930's
merely brought home to the nation e lesson that if thrift
could be abolished it would be necessar o re-invent it.
///
COMMITTEE OFFICERS'REPORTS-SAVINGS DIVISION
Address of President of Savings Division, by T. J. Cald
well,Vice-President Union National Bank, Houston/
Texas
Preliminary to his prepared address, President Caldwell
had the following to say in opening the proceedings of the
Savings Division:
Ladies and Gentlemen: It is particularly appropriate that. the Savings
Division should hold its annual meeting in New Orleans. Just 33 years
ago to-day, Nov. 11 1902, a group of savings bankers organized in the St.
Charles Hotel of this city, the Savings Bank Section of the American
I3ankers Association.
At that time savings deposits in banks amounted to $2,750,177,290, and
total deposits to $10,625,592,000. As of June 30 1935, savings deposits
in banks aggregated $22,652,489.000 and total net deposits, after throwing
out Federal, State and municipal deposrts and redeposits in other banks
aggregate $41,721,194,000. Savings deposits now have a volume more
than twice as great as all the deposits in banks in 1902.
We are honored with the presence of two of the men who were in that
organization meeting, who are now on the platform, Captain James Dinkins
of New Orleans, and Mr. Lucius Teter of Chicago. I am going to ask those
men to stand just for a minute.
President Caldwell's prepared address follows:
The savings business in the United States has been made difficult during
the past year by the necessarily low rate paid by banks on savings deposits.
Despite this low rate, savings in banks have increased as of June 29 1935
over a year ago by $899,979,000, or 4%, and stood on that date at a total
of $22,652,489,000. These figures include both funds deposited on savings
pass books and on time certificates of deposit. The number if depositors
increa,sed to 31,315,206.
In school savings, too, desposits and net savings increased. During the
past school year, children to the number of 2,826,388, enrolled in the
schools of the country, deposited $11.575,000 in school savings. At the
close of the year there remained net savings, an excess of deposits over withdrawals, of $2,337,000. The gain in school savings deposits over the preceding year amounted to almost 8%, and in net savings to about 70%.
Savings deposited on pass books alone are not a real measure of savings
in banks in the United States. In the middle West. the Northwest and
the Southwest savings departments developed late. In consequence, persons with reserve funds developed the havit of depositing on time certificates. With the greater development of savings departments in banks the
practices of a century continued so that much money which on the Atlantic
seaboard or the Pacific Coast would be deposited in savings accounts is, in
other areas, deposited on time certificates of deposit.
The increased depositing of savings money in banks in the United States,
reassuring though it may be, in many cases causes the banks' managers to
be hard-driven to find satisfactory use for it. Developments of the year
have brought a feeling on the part of bankers interested in the savings
business that savings will eventually be driven away from banks into other
types of financial institutions by lack of flexible interest regulations and
through competition by other institutions offering higher rates of interest.
The present tendency in the regulation of interest rates is to a disregard of
the type of assets held by banks.
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In the eastern part of the United States mutual savings banks aboun d
heirs are purely savings deposits. They represent 44% of all savings
eposits in banks in the country and, outside of Federal, State and municipal
deposits and redeposits of other banks, 24% of all the money deposited in
banks in the United States.
In some of the States in which mutual savings banks are most numerous.
the law under which they operate contemplates that from 50% to 70%
of their deposits shall be invested in mortgages. In some parts of tha
United States money deposited in savings is commingled with commercial
deposits and utilized in normal commercial banking business. Naturally,
the returns on this type of business are at a very low rate. It is only natural
to expect that, in order to guard against too great expendiure for interest
on the part of banks, the maximtun rates set by regulatory boards will have
regard for the banks with ability to pay only a low rate of interest.
In the long run. if banks having from 50% to 70% of their assets invested
in good mortgages at rates from 4% to 5%% or 6% are not permitted to
pay a commensurate rate for savings, competing agencies will drain them
of savings deposits. Regulations may prove effective in destroying competition among banks, but regulations will not serve to bring customers
into banks, and after all, the money deposited by bank's customers constitutes the life-blood of the institutions.
The subject is one of wide ramifications, requiring thought and study.
Its solution may well be the answer to many of our recent banking troubles,
growing out of the hybrid character of our banking system—a system under
which we have failed utterly to distinguish the different kinds of deposits
and to permit such deposits to perform the functions to which they are
adapted.
Commercial deposits are credits growing out of the activities of business,
and should be used exclusively in furnishing the short-term bank credit
necessary to the production and distribution of goods and services. On
the other hand, savings deposits are investment funds growing out of the
excess of income over expenditures on the part of the people. Their proper
function is to meet the capital needs of the community. They can be safely
invested in much longer term and slower assets than can commercial deposits, and they are entitled to a much higher return.
The talent and the equipment necessary to the proper handling and
investing of savings funds is entirely different from those needed in the
handling of commercial deposits. The effort to define a "thrift account"
under the I3anking Act of 1933 has proven a total failura, and the now banking legislation designed to encourage the commercial banker to go even
father than heretofore into the field of investment banking only promises
more confusion and greater losses. In the minds of many the only solution
to the whole problem is the complete institutional separation of savings
banking and commercial banking.
Many inquiries have been received at the headquarters office relative to
the difference in the character of "insurance" between accounts in savings
departments of banks and insurance of stock in building and loan or savings
and loan associations. In each case the law is explicit. but the man in the
street, the potential customer, both of the bank and of the savings and loan
association, does not know that a depositor in a bank, in the event of the
bank's failure, is to be paid within a few weeks in cash up to the limit of
his deposit if it does not exceed $5,000; whereas, the owner of stock in a
building and loan as.sociation, on the other hand,is to receive but 10% in
tif-j.7
SAVINGS DIVISION.
L
ties of character • through which civilization as we know it
has been sustained and nourished. To-day, for instance,
we are beginning to see the evidence of genuine economic
recovery on every hand. But deeper than all this pleasing
statistical evidence of trade and industrial and financial
revival runs a new insight that our difficulties have given us.
We are seeing recovery this time as something more impressive than the swing of a mystic cycle, or as a magic conjuring of prosperity out of empty air. We are beginning to see
not the recovery alone, gratifying as that is, but the indispensable factor behind recovery.
Why is industry, in spite of all the shocks it has gone
through and all the paralysis of hope and confidence it has
endured, able to expand and extend its operations at the
first evidence of new demand, the first intimations of reviving purchasing power? These things cannot be accomplished by sheer individual determination or even by the
simpler process of wishful thinking. Bankrupts cannot
revive extinct industries siniply by observing new trade opportunities. Beggars cannot become saddle-manufacturers
merely because society is taking up horseback riding. Business is able to revive and expand its operations to-day because somewhere in the corri'pany treasury, the bankers'
vaults, or the Government's credit balance, the capital is
available to finance revival and expansion. To put it in
plain terms, recovery is possible because millions of Americans saved their money in the past, protected their savings
throughp hardship and vicissitude against loss and against
the temptations of undue hazards, and consequently have
it yet. The indispensable factor in recovery is this stored-up
capital. The indispensable factor behind recovery is thrift.
I am. not one of those who believe that there are conservative panaceas for the econemic difficulties of our times any
more than there are radical panaceas. Nor do I believe
that all our problems can be settled by the election returns. ,#
What I do believe is that gradually but surely our peopl
are getting their bearings for a sounder solution of tho
problems. We know now, by the clear demonstration
this past decade, that thrift is as essential to the pro ss
and security of our technological civilization as it was t the
preservation of the pastoral and handicraft civilization that
preceded ours. We know now that because of the spe and
the magnified power with which economic forces wor in our
day of instant communications and vast productive paeity,
governthe penalties for the misuse of thrift—whether
mental extravagance or in inordinate private sp ulation—
are swifter and more terrible than they were in e days of
out ancestors. We know now that technologi 1 forces, no
matter how revolutionary their effects may Ape upon the
character of our interests and our daily lives/do not repeal
the virtues of the past nor abrogate the lavit of economics.
We cannot prostitute thrift either to theiget-rich-quick"
activities of individuals or to the "spe d-ourselves-rich"
activities of government. We have tr. d both and both
have been found wanting.
If it were not still possible to charge e bill for our(rrors
against the thrift of the past and the t ift of the future, our
civilization long before this would ha gone down before the
forces of revolution and destructive aos. Yet out of our
errors, I feel, is coming a clearer sight. Society, out of
the bitter experience .of these de ession years, is renewing
its faith in thrift as a personal rtue and as both a public
and a private necessity. Even ore important, it is coming
to appraise thrift once more in he light of its true economic
purpose. Men and women, nnd the children of the men
and women who have lived through the distresses of the
period from 1929 to 1935 will never again be able to regard
their thrift as a mere counter in the gamble for sudden wealth
—a chip in the poker game of speculative investment. American taxpayers of the 1940s and 19508 will find it increasingly
difficult to approve the use of their savings as collateral for
vast programis of goveriunental spending, no matter how
honestly conceived or plausibly recommended.
Slowly but surely our experience with the misuse of thrift
is forcing us ba,ck upon an older and sounder philosophy
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Federal Reserve Bank of St. Louis
71
and upon which the savings bank 1A-as founded. Through
the bewilderments of our technological economy, we are
becoming acquainted once more with the basic, simple fact
that the purpose of thrift is to provide the individual not with
a nest egg of speculative wealth nor with political leaders but
with personal economic security; and that by providing
enough individuals with this asic economic security, thrift
and thrift alone can preserv the security of society and of
civilization itself.
I think this profession
y face the future with confidence.
The nation is emerging rom its long ordeal of speculation
and experimentation
th what I like to call the savings
bank spirit. We will ave more old-fashioned thrift.in the
country because we ve learned in our passage tlirough the
jungle that we cann be without it. We shall put our thrift
again to old-fashio d uses, be once more primarily interested
in preserving our avings rather than in multiplying them,
because we hav learned anew the advantages of personal
security; becau both from what went before 1929 and from
what has com after we have been taught through new forms
of experience, the lesson of a very ancient wisdom, namely,
a lesson thatin the matter of economic progress whether for
individuals/or for nations there is no substitute for saving
what youlean and keeping what you save.
It is ply belief that the time has come for us to make this
assertign with a new pride and a new degree of certitude.
Thrift/has just undergone the most severe intelleotual attack
whic)i I suppose has been directed against it in the whole
course of human history. Since the beginning of the depression, a new school of economists has proclaimed, with the
u ost literary plausibility, that as an economic force, a
vernment policy and a private virtue, thrift is as outoded as the Victorian chaperon; and that the way to secure
the blessings of permanent prosperity to a • echnologioal
society is to balance production against the national income
by the simple process of spending the entire national income
annually. In a time of acute and bewildering distress, I
suppose it was inevitable that a great many of our fundamental economic ideas should have been challenged. Hence,
I do not propose to be outraged because the young men saw
fit to take issue with a favorite axiom of our grandfathers and
challenge thrift. I am not even particularly alarmed because for the time being some of them may have been suc'expericessful in engrafting certain "spend-ourselves-rich.
ments upon the recovery program of the Government. All
this, as I see it, was a necessary experience of our passage
through the jungle.
We are financing recovery with the capital saved up
from the past and, if we obey the President's latest injunctions in his Boulder' Dam speech, we shall finance
recovery more, rather than less, from this source in the
future. But we also, out of the stored-up capital of the
past as embodied in the taxable wealth of the nation, have
financed the government's contributions to the recovery
effort, including the cost and extravagances of the very
"spend-ourselves-rich" programs which aimed at enablin.g
us to dispense with thrift. In other words, in the last
analysis, the bright young men of the new economic dispensation had to look to thrift to bear the expenses of
destroying thrift. To get the money with which to "spendourselves rim" they had to take it from some one who
saved it to make himself secure.
Could any experience better testify to the wisdom of
our grandfathers in regarding thrift as an axiomatic necessity than this singular paradox which proves that without
thrift we could not even have dared be extravagant? The
demonstration is merely given additional force by the fact
that we are counting—and the strength of the government
credit is the measure of the count to-day—on the thrift of
future generations to pay the bills.
I have said that I believe our experiences have strengthened
us. Thrift was an axiomatic private virtue to our ancestors.
To ourselves it has become the tried and tested indispensable
factor of economic stability and progress. All things perhaps cannot be done by thrift. Thrift, for instance, cannot
•
THE COADRCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
STATE BANK DIVISION
ANIERICAN BANKERS ASSOCIATION
Nineteenth Annual Meeting, Held at New Orleans, La., Nov. 11 1935
INDEX TO STATE BANK DIVISION PROCEEDINGS.
Management and the New Supervision, by H. R. Wells
Page 50
Investment Problems of Banks, by J. Harvie Wilkinson Jr
53
Mortgages Insured Under Title II of the National Housing
Act as Investments for Banking Institutions, by Richard
R. Quay
56
Page 57
58
58
Address of the President, James C Bolton
Report of Committee on Federal Legislation
Report on Resolutions Committee
58
Report of Nominating Committee
Management and the New Supervision
By H. B. WELLS, Secretary Commission for Financial Institutions, State of Indiana, Indianapolis, Ind.
The primary function of bank management is to conduct
with the greatest changes in conditions surrounding his
the work of each institution in accordance with the best daily activity.
known standards of procedure. The banking business to-day, (Born of the collapse of our commercial banking system,
however, is in such a position that the performance of the
there has been erected over and above, round and about the
duties of management within the bank is not in itself suf- banking industry in this country one of the most complex
ficient to protect the well-being of the system. In a compli- regulatory systems ever imposed on any business of governcated society such as that in which we are now living, manment. The full extent of this new supervision is not yet
agement has certain group responsibilities, most of which
realized by either the public or the bankers. As a result of
grow out of the complex relationship between banks and elle passage of a multitude of State and Federal laws, numergovernmental agencies of supervision. Not unmindful, there- ous national and State authorities have the power of life
fore, of the fact that good management must begin at home. and death over commercial banks. Supervisory agencies
I wish to speak this afternoon of some of the relationships have been given regulatory power and have used it freely to
between management and the new type of supervision re- circumscribe the activity of management. These laws and
cently superimposed upon our banking business.
regulations have been passed with such rapidity that not
We are in an era of bewildering change. Leaders in every
even the research economist with the freedom born of release
sphere of human activity find that traditional principles from routine tasks. can keep informed of them all)
are no longer esteemed ; new and strange doctrines are acI do not wish to impart an incorrect impression by what
corded general approbation by large numbers of our people. I have just said. I am in favor of this new supervision. I
The educator is faced with widespread doubt concerning
played an obscure role in the creation of a part of it.CWhile
the efficacy of our once tenderly nourished institution of uni- it is true that banking skill cannot be created by the passing
versal public education. During past depressions the schools of laws, the most frequent mistakes of management can be
were protected in large part from unwise and intemperate prohibited and prevented by proper regulatory measures) I
retrenchment by a widespread and deeply-rooted conviction firmly believe that it is necessary to have governmental
that the American way of life and form of government are supervision of the banking business, and that a thorough
dependent upon universal free education. If the utterances overhauling of our supervisory machinery was due long
of some of our leaders and our actions of the past five years before it came. In my opinion the new system which we have
are properly indicative, this tenet may be near the scrap
devised can with minor modifications be conducive to great
heap to which other great ideals of the human race have in
good, helping to bring financial and economic stability and
times past been relegated.
prosperity.
The statesman is aware that many thoughtful citizens
On the other hand, I am just as firmly of the opinion that
challenge the effictiveness of the democratic form of govern- the new supervision has as great potentialities for evil as
ment in a machine age, and would sacrifice the ancient safe- for good. Unless this great supervisory colossus, containing,
as it does, provision for the insurance of deposits, is adminguards of our liberties—the ballot box, the right of free
speech in all of its forms, including assemblage and petition ; istered calmly and wisely, it can bring in its wake such
chaos that not only will our commercial banking structure
the right of trial by jury, and the writ of habeas corpus--in
be scuttled, but also the very foundations of capitalism will
order to secure the quick gains of a dictatorship. Liberty
be shaken. Some extreme partisans will ridicule this idea.
has been the goal of the race for more than a thousand years
—yet in these troubled times there are those who would re- They will point to the great progress made toward banking
since 1933 and justly give large credit to our new
nounce all of the gains we have made because the instru- stability.
mentalities which insure it seem to stand in the way of II
system.
Our experience since 1933,.however, is not truly indicamomentary objective.
The farmer, long the outstanding exponent of individutive of what may be the result in the future. Our progress
alistic action, made weary by seemingly never-ending years during the last two years was not due solely to new laws
of economic adversity, has taken refuge in a new type of and new machinery. It was brought about in large measure
mercantilism which most students of economic history had
by the co-operation of all agencies, Federal and State,
believed could never occur again in the world's history.
toward a common goal. During all of this period, moreThe merchant and manufacturer are aware that some
over, reckless banking leadership was strunned into passive
substantial citizens boldly challenge capitalism and would
acquiescence with the program, and our conservative and
substitute for it some of the various forms of socialism. forward-looking bankers joined with supervisory authorities
I3usiness activity, moreover, must be carried on in a social
in advocating' a thorough housecleaning of the banking
and economic setting vastly different from that in which
business.
inordinate profits were amassed during the so-called new
The union of these forces did not occur because of any
era of the '20s. But of all of these the banker is confronted
deep-seated affection that the parties had for one another.
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Federal Reserve Bank of St. Louis
257
I
I,
,
.s1
NATIONAL BANK DIVISION.
offered by the banks. Increases in deposits, ordinarily symbolizing a
healthier business tone, have not been accompanied by an increasing demand
for loans, due no doubt to the fact that the unprecedented increase in bank
deposits is the direct result of vast governmental operations. This ie true
in spite of the variety of methods banks have adopted to stimulate sound
credit extensions, but to little avail. There is not a single member of
this Division which would not vvelcome the opportunity to make further
advances for worthy purpos , and thus give that additional necessary
impetus to business.
This disconcerting outlook i chargeable in a considerable degree to the
into the field of money lending, and to
encroachment of our Governme
its efforts in directly contesting or banking business. To my mind this is
neither a direct nor an incidental function of Government. It owes no
duty to perform for citizens that which they can do for themselves, and it
should not be so engaged. Rather, its responsibility, generally speaking,
is to co-ordinate, to protect and to preserve the rights and liberties of its
people.
In enunciating this principle, however, I want to keep in mind a proper
conception of the desperateness of the period through which we have
passed. I want to avoid judging too harshly the steps taken to stem the
tide of the decline. I concede that emergencies arise, but such heroic measures as are taken to combat them should be pursued for the duration of the
crisis only. As its end approaches there should be a firm stand against
the regretful tendency to make permanent the devices created for temporary
use. All of us should acclaim freely the virtues of whatever agencies and
whatever means have contributed to our economic betterment. It cannot
be doubted that the key to complete recovery is encouragement to private
enterprise which, after all, is the acknowledged foundation of our country's
greatness.
Retarding Forces
Happily, in some quarters it is becoming understood gradually that much
of the credit for such improvements as we have enjoyed is due to the consistent and wholehearted and co-operative efforts put forth by banks. No
longer do we hear their stability questioned. Public confidence has been
completely re-established. Recognition of the value and the indispensability
of privately-conducted banking facilities in each locality is fully developed,
and it cannot be denied that there is offered to the public a banking service
never before excelled and entirely adequate to meet current and future
needs. In short, those features of banking with which the public is most
familiar, and by which it gauges its approval or disapproval, unquestionably
are all that could be asked. We have succeeded abundantly in meeting all
the requirements of those who deal with banks, but have not provided so
well for ourselves.
Banks still are confronted with drastically low earnings, and the future
offers no assurance of any appreciable early betterment. In contrast to the
rise in prices of commodities interest rates have continued to decline.
Borrowings and new securities issues are at low ebb, though we find that
general business has improved. Some lines may be considered as operating
on practically a normal basis. Others face the immediate future with an
apparently new-born confidence, but over all there still hangs a pall of
hesitation which obviously does not rest wholly upon whim or caprice.
It is fed by something more substantial and more threatening, and must
be corrected before entirely normal business conditions can he restored.
There is quite a general agreement that we are in the extraordinary
position of knowing what this retarding force is, but yet being unable to
uproot it. This wavering and uncertain trend, and the absence of greater
force in the upward movement, undoubtedly is the result of lack of full
confidence in the future. There is a pronounced fear of further exercise
of Federal control over private business, and a wholesome apprehension over
the effect of reckless extravagance in the expenditure of public. funds.
This fear, intensified by the addition of the heavier taxes levied by the
recent session of Congress, raises still higher the barrier to a normal business
volume, and retards proportionately the progress of the forward movement.
The cumulative effect of a series of such discouragements constitutes a
powerful retarding influence in a country where private initiative and
private capital are the bulwark of strength and prosperity.
In the light of these facts and the experiences they have unfolded, it
seems that a workable formula would not be impossible or even difficult to
produce. The simple assurance that these sinister conditions will not be
permitted to develop further, and that they will be corrected as rapidly
as possible, would erase all of the timidity and create a deg-ree of C011fidence which almost magically would regenerate the forces which are
clamoring for expression in the form of progress.
The Outlook
I have spoken of some things which appear to be clouding the horizon
and have expressed disapproval of them. But I have not permitted my hope
to be destroyed, and I do not despair. Fortunately, the set-back we
received was in the nature of a negative attack, rather than a positive one.
Its violence was visited upon the things growing out of the elements which
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49
make our country great, and not upon those elements themselves.
spark of business improvement, which sputtered and glowed and then almost
disappeared, has been rekindled, and despite its slow and irregular spread,
and in the face of obstacles which seem to exist without convincing excuse,
the outlook is moderately bright, and there is justification for an increasingly aggressive attitude.
The history of industry in Abietica shows a continuing growth which
never has been more than temporarily retarded by depressions. Never has
it failed to respond to the workings of the economic forces which should
stimulate recovery, and it is unthinkable that this latest experience has
destroyed the influence of these agenciee. I have faith that the virility and
the stamina of our people, with reasonable freedom of action, will re-assert
their independence and their individualism, and upon their own responsibility forge a business revival far more lasting than any governmental
agency could create.
The sustaining force of the American pattern of business and industrial
life has been the diffusion of the responsibility for its conduct. The drift
away from that principle in recent years may have diverted attention from
it temporarily, but I cannot believe that reliance on that philosophy has
been destroyed. My confidence in the force of American determination, and
my hope for a continued. broadening of the base of the current business
upturn give me courage tit least to believe in the possible approach of a
period so filled with compensations for individual enterprise that the
expanded weight of governmental control will be supplanted permanently
by the maximum of a wisely-conducted private management.
[Incidentally, Acting Chairman Allendoerfer had the following to say
following the submission of Mr. Lord's address:
Ladies and gentlemen, I don't know how many of you know that President
Lord has for some months been quite 111. I know you will rejoice in the fact that
he is with us to-day: that he was able to travel that long way from Olympia down
here to bring us his message, so clear-cut, so comforting and that his presence
with us adds so much to our meeting.]
Committee Report for Change in By-Laws
111.. Augustine: 3Ir. Chairman, I present for the action
of this meeting the following substitute for the first by-law:
"When a member of the American Bankers Association shall have become
an associate member of this Division under Section I of Article X of the
constitution of the American Bankers Association, its officers, directors
trustees, managers or partners shall have equal power to hold office or
committee membership with those of banks becoming regular members
under such Section, including the right to vote as officer or committemember."
I move the adoption.
Chairman Allendoerfer: That is in harmony with amended by-laws in
all of the Divisions in order that members who are interested in the functional
activities of other Divisions may fully participate in those, even to the
extent of holding office in those Divisions, even though their membership
is primarily in the State or National or whatever their form of charter
may be.
[ rile motion was duly seconded, put to a vote and carried.]
Report of Committee on Nominations
Wharton: Mr. Chairman, Ladies and Gentlemen:
The Committee begs to report the following names for
nomination:
For President of the Division—Carl W. Allendoerfer, Executive Vice
President First National Bank, Kansas City, Mo.
For Vice-President--William F. Augustine, Vic,e-President National
Shawmut Bank, Boston, Mass.
For member of Executive Committee, to serve three years—representing
the First Federal Reserve District, James W. Knox, President, First National Bank, Hartford, Conn.
Representing the Eight Federal Reserve District, Capt. William Nichol,
Vice-President, Sinunons National I3ank, Pine Bluff, Ark.
Representing the Ninth Federal Reserve District, William N. Johnson,
Vice-President, Northwestern National Bank & Trust Co., Minneapolis,
Minn.
Representing the Eleventh Federal Reserve District, Melvin Rouff,
Vice-President, IIouston National Bank, Houston, Tex.
Submitted by: Lang Wharton, Executive Vice-President, First National
T3ank, Dalla,s, Tex.. Chairman.
E. S. Coombs, Executive Vice-President, Telegraphers National Bank.
St. Louis, Mo.
Edwin W. Hunt, President, Home National Bank, Brockton, Mass.
[The report was duly adopted and the newly elected officers; installed.]
STATE BANK DIVISION.
It was a "shot-gun wedding." Already these comes some evi-,
dence that the honeymoon is over. Disturbing stories of!
jealousy between certain Federal and State authorities tend-'
ing to disrupt co-operative functioning are becoming common,
while here and there bankers, forgetful of the lessons of th
past and irritated by the antics of some supervisory official
"puffed up with power," begin to complain of the restrictive
influence of regulatory codes. The real test of the system;
wrought by the depression is still ahead.
An ideal system of supervision should provide for the maximum of safety and stability with the minimum of interference with private managerial initiative. Most students
of the problem are of the opinion that our new system is
short of the ideal, but only thne and experience will furnish
an accurate appraisal of its true worth. Regardless of any
imperfections now apparent or that may appear in the
future, both from the standpoint of the public and the banks,
experience has proved that some adequate form of supervision is necessary.
The banking business cannot afford to suffer again the
demoralization of those distressing years preceding and culminating with the bank holiday. Should the industry ever
drift into such a condition in the future, I believe it is safe
to predict that private possession of our institutions would
be supplanted by some form of State or Government ownership. There are those liberal thinkers who even now declare
that our President missed a great opportunity in not
socializing our financial system when such a step would
have been comparatively easy in those dark days following
March 4 1933.
The issue, therefore, is not one of regulation versus freedorn from regulation, but one of an imperfect regulatory
structure versus an ideal system. Our present supervision
and regulation must be made to approach as nearly as
possible an ideal conception of efficiency. The responsibility
for the achievement of such a goal rests as much upon
our banking leadership as it does upon our supervisory
officials.
The social control of any type of business cannot be
successful without the constructive co-operation of the persons or institutions supervised, and the field of banking.
is no exception to this general rule. Supervisory officials
holding posts of importance charged with policy-making
power need the advice and criticism of the men'most intimately acquainted with the problems of banking—the bankers themselves. Any supervisory official who will not listen
to constructive advice or criticism is not worthy of a position
of trust. Likewise, banking leadership that will not offer
advice and criticism in a constructive and thoughtful spirit
deserves little consideration from supervisory officials.
A few days ago I read the weekly letter of one of our
important economic services which told an inspiring story
of the automobile industry's co-operation with government.
You are well aware that new models have been launched
at an earlier date as a result of the suggestions of high
governmental officials seeking to alleviate seasonal unemployment. If successful, this change will circumvent proposals on the part of labor leaders for greater governmental
regulation of the automobile industry. This letter went
ahead to say: "It is a trait of the automobile industry to
handle its problems aggressively."
There are those who may believe that the banking industry
is incapable of aggressive action, and that co-operation
between bankers and governmental authorities is not possible. With that view I cannot agree. I azu reminded of
the successful experience of the banking business in my own
State when it attempted to handle its problems co-operatively
and aggressively. Since the beginning of the State, the
banking system in Indiana had been at the mercy of those
selfish and reckless individuals who valued an extreme
independence of action higher than the good name of the
industry. As a result the supervisory and regulatory machinery was hopelessly inadequate. A group of sincere and
forceful banking leaders determined in 1931 that the situation should be remedied. They were responsible for the
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51
creation by the Legislature of a State Commission to survey
and study our plight for the purpose of making recommendations to the next session of the General Assembly. This
Commission's personnel was composed of men representative
of the commercial, financial and business life of the State,
including experienced bankers, selected without regard to
their political affiliations. The Commission engaged a corps
of technicians to assemble needed data. The activity of the
group was financed in large part by the Indiana Bankers
Association, and that Association co-operated throughout, as
did the State Bank Division of the A. B. A. Eventually the
group devised a regulatory code and supervisory machinery
to enforce the code, and submitted them. to the careful
scrutiny of the Legislative Committee of the State Association. The measures proposed created consternation in some
quarters and open opposition in others, but the entire program was aired before the men most affected, the bankers
themselves, and its impracticabilities were burned away by
the white heat of free and generous discussion.
The code advocated was subsequently adopted by the General Assembly, and although forced immediately to function
during the extraordinary period of 1933, it withstood every
test satisfactorily and to-day it enJoys the approbation of
both the public and the bankers.
If the experience in Indiana is representative, aggressive
action on the part of the banking industry in the solution
of its problems is possible, thereby avoiding extreme measures untried by experience and resulting in a much more
satisfactory solution than if the change had been formulated
by less able though perhaps equally sincere men.
Social and governmental institutions are dynamic in
nature. They must change and grow as conditions change
and as experience tests their desirability. It is vital, therefore, that inevitable future changes in our banking supervision be directed and controlled by an informed, courageous
and wholesome banking leadership to the end that they be
evolutionary rather than revolutionary in nature.
Already certain problems have arisen as a result of recent
regulatory measures that challenge the thoughtful attention
not only of the best leadership in the banking business but
also of every bank officer.
One of these problems has to do with the shnplification
and standardization of our present system of call reports
and of earning and dividend statements. The situation which
has existed in the past resulting in the use of a different
form by the FDIC, the Federal Reserve, the National Department, and each of the 48 State Supervisory Agencies, can
and should no longer be tolerated. A movement has been
launched to remedy this situation, and I wish to describe
its work to you in some detail because I believe it merits
your very active support and interest.
On May 22 last, committees representing the American
Bankers Association, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Reserve
Board, the National Association of Bank Auditors and Comptrollers, the Reconstruction Finance Corporation, the Reserve
City Bankers .Association, the State Bank Commissioners,
and the Treasury, met in Washington for the purpose of
discussing the standardization of call and of earning and
dividend reports. The FDIC was generous enough to provide quarters for the work of this conference, and for two
days the men attending occupied themselves with a discussion of the desirability, possibility and feasibility of
a uniform set of reports to be used by all supervising
authorities.
In the beginning there was no unanimity of opinion. Discussion waxed full and free for many hours. As the views
of the bankers and of Federal and State authorities were
fully aired, it became apparent that they were not so irreconcilable as it seemed in the beginning. After a full two days,
this group came to the conclusion that our present types of
report forms do not fully meet the need for which they
were originally intended, and that standardization is possible
and desirable. Accordingly, a smaller standing committee,
consisting of one representative from each of the organiza-
52
BANK NRS' CONVENTION.
tions participating, was created by the action of the conference and was charged with the responsibility of devising
suggested forms. A subcommittee of this standing committee
has been at work now for many weeks preparing these forms,
which will be presented to the full committee and eventually
to the full conference for consideration. It is hoped and
believed that the conference will be able to agree and adopt
forms to be recommended to all agencies.
Once the conference is able to agree upon uniform report
forms, it will be necessary, if the banks are to benefit, to
have these forms adopted by each and every supervisory
agency. Supervisory officials--and I am one of them—are
only human beings. It is always easier to do a thing the old
way rather than in a new way. I have a suspicion that there
will not be universal adoption of these standard forms unless
the bankers themselves insist upon their adoption. It may
be necessary to bring to bear the collective influence of your
membership upon your State Supervisors through your State
Associations. I know most of the State officials, and I feel
confident that they will be happy to have your reactions,
and that once they understand your wishes they will be
more than willing to co-operate. Through the American
Bankers Association let an insistent demand for such standardization be felt in Washington to make certain that all
Federal agencies will act likewise. If the entire program
is universally adopted, it will effect substantial and important economies, for the bankers of the nation will no
longer be required to fill out different reports for each of
two or three agencies for every call made, but perhaps an
even more important result will be that the potentialities
of co-operative group action will have been strikingly
demonstrated.
A successful culmination of the work of this conference,
therefore, would logically suggest the feasibility of a program to eliminate duplications of time and effort in the making of examinations on the part of governmental agencies
with overlapping jurisdictions. There are many forms
which such a program of unification might take. But one
need not be unduly imaginative to be able to visualize the
beneficial results that might come from the consolidation
of all Federal activities pertaining to banks in one agency,
and the consolidation of all State activities relating; to banks
in a single State agency within each State. Such a program
would undoubtedly result in better supervision, with much
less cost and hindrance to the banking industry as a
whole.
A proposal in this direction would, I am well aware, meet
with vigorous opposition. That, however, unification is
feasible and highly beneficial, I can illustrate by again citing
the history of just such a program of unification in my own
State.
Two years ago, under the sponsorship of our militant and
vigorous Governor McNutt, a governmental reorganization
bill was passed, giving to the chief executive the authority
to consolidate and co-ordinate governmental units and functions in a manner designed to yield the greatest efficiency
of operation. As a result, the Department of Financial
Institutions, which is the department charged with the responsibility of supervising banks in Indiana, not only makes
those examinations required by the Indiana banking law, but
also makes such examinations of banks as are desired by
the State Tax Board and the State Securities Commission.
One set of examiners does what three sets of examiners
would have done under a different philosophy of government.
That which has been done can be done again, and co-ordination of this nature can be achieved elsewhere throughout
States and the nation if it is advocated with sufficient wisdom and vigor.
Another matter perhaps of more immediate concern,
although of no greater importance, is the elimination of that
provision of the Banking Act of 1935 which makes Federal
Reserve membership eventually compulsory if institutions
are to be able to secure Federal insurance of deposits. I
make this statement not because I am opposed to the Federal
Reserve System or to Federal Reserve membership. The little
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Federal Reserve Bank of St. Louis
bank with which my family has been associated for many
years has almost from the beginning of the System been a
voluntary State bank member, and its affiliation has been
happy and profitable.
Federal Reserve membership should be a privilege and not
a compulsory duty. In this spirit the System was founded,
and this philosophy dominated the original draft of the Act.
There needs to be some badge of distinction which a bank
may achieve because of the high quality of its management.
If all banks are to be insured and all are to be members of
the Federal Reserve System, they will all be of equal quality
in the eyes of the public. Much of the incentive for excellence and conservatism of policy will be removed, placing
an even greater strain upon supervisory machinery. Already
it is recognized that the System will have to change its
requirements in order to admit all banks. I do not know
whether or not present requirements are unduly restrictive.
But I do believe that the lowering of standards in order to
include everybody establishes a dangerous precedent. It
could help to create something of the group psychology which
led to ruin and disaster in the eight States which have
already unsuccessfully tried insurance of deposits.
A vigorous fight should be waged, therefore, to remove
this dangerous compulsory clause from the Banking Act of
1935. If that fight should be successful, there should be
just as much activity thereafter in promoting voluntary
membership in the System as there was in securing the
elimination of the cumpulsory provision of the Act. Had
there been a greater acceptance of Federal Reserve membership by the rank and file of the banks of our country, resulting in even a slightly larger percentage of membership than
was the case prior to 1933, the most convincing and compelling argument for compulsory membership in the System
would have been removed. Here, then, again is an illustration of the benefits of constructive co-operation.
There are many other 'natters of grave concern to the
management of our institutions other than those found in
the day-by-clay inside operations which need immediate and
thoughtful attention on the part of our bankers. Among
these are the unfair and unnecessary competition of the
Postal Savings System, discriminatory tax laws in certain
States, the attack upon the sanctity of property rights, and
many other matters with which you are all familiar.
There never was a time when individual bankers of the
country needed to give such loyalty of support to their State
and National Associations as at the present. They represent the only effective machinery for the mobilization and
dissemination- of the views of the banking fraternity.
Changes are coming very rapidly. The only thing certain
is that the conditions under which we operate to-morrow
will not be the same as those of to-clay. Swift and important
are the currents of moving events all about us. In the
words of General Jan Christian Smuts:
Civilization has struck its tents and the caravan of humanity is on
the march.
If social movements achieve proper objectives, they must
have wise leadership. Bankers cannot afford to fail to make
their contribution to this leadership, because the character
of our social and economic organization in the years to
come will have an important bearing upon the banking
business.
Some of you in the audience may be thinking :
What good does it do for the bankers to organize for the purpose of
expressing their opinions? The nation's law-makers and the public generally
have declared a vendetta upon the banking business. Anything we favor
the rest of the country is against.
It must be admitted that the public has had some such
attitude in the past few years, but the banking business
plays an important part in the economic organization of
society. In times past bankers have occupied a position of
prominence in the councils of the community and nation.
They will, in my opinion, be re-admitted to those councils
just as soon as they have demonstrated not only that they
are capable of running their individual units successfully,
STATE BANK DIVISION.
but also that they have a constructive and co-operative attitude toward the broad current of human affairs.
Many years ago our Association leaders were calling attention to weaknesses in the banking system. Notwithstanding
their exhortations, we failed to mobilize effectively for any
real reform, and permitted the unhealthy conditions to continue until a disgusted and frightened public dictated a reform program that is in some of its arts revolutionary and
contrary to fundamental principles established by long experience. IIad the bankers themselves stood solidly for such
reforms aS were generally known to be necessary in the
banking business following the World War, the collapse of
the banking system would have been averted, the force of
the depression would have been lessened, and the reform
legislation would not have taken such extreme forms. The
rebuilding of public confidence and trust in banking leadership is one of the great problems facing our industry.
Restoration of confidence and trust in banking leadership is
53
vitally needed, not only that it may benefit the banking
business itself, but also that society may have the benefit
of banking leadership. Viscount Morley has said:
Great economic and social forces flow with tidal sweep over communities
only half conscious of that which is befalling them. Wise statesmen are
those who foresee what time is thus bringing, and try to shape institutions
and to mould men's thought and purpose in accordance with the change that
i3 silently surrounding them.
A more familiar statement, similar in nature, is that of
John Stuart Mill:
The future of mankind will be gravely imperiled if gTeat questions are
left to be fought out between ignorant change and ignorant opposition to
change.
In the direction of the changes inevitable in our social and
economic life, every type of viewpoint is needed, liberal and
conservative. It is our paramount duty to put and keep our
own house in order so that we may again be adulated to the
council table around which the pattern of society's destiny
is being fashioned.
Investment Problems of Banks
By J. HARviE WILKINsoN JR.,
ViCe-PreSideRt
State-Planters Bank & Trust Co., Richmond, Va.
I cannot bring with me the majesty of age, but I am able are likewise very, very high. Now, I know there are some
who would like to cite world economic history in the last
to appear as a veteran of the Seven Years' War which began
in 1929. 1Ve have all been engaged in the major campaigns, part of the nineteenth and the first part of the twentieth
and I pres e it would be fair to say that our bonus consists centuries when British consols yielded less than 3% and
when, for the most part, our own Government obligations
of an opport ity to spend a few days in a city old in charm
though we are enjoying a breathing spell returned less than this same 3%. It is necesisary to rememand history.
ber, of course, that our total national debt prior to 1914 was
avy annonading at Washington and from the
from the
rope, our own war is still on, and the infinitesimal and, also, that the present situation is fraught
in
recent tensi
with artificialities. But the point which I should like to
problem of in 'estin, money never seems to be fought in
crystallize is this—that where banks are concerned, the
pitched battle, b t rat r in sniping, sniping, sniping, with
interest rates lower and wer and lower. And always there crossing of a 3% yield basis in Governments is a sufficiently
seems to be the need for s: ding out more and more funds important danger signal to cause great heed. Once Governments are yieldng less than 3%, a bank is beginning
if we are to capture a most IS est amount of income.
As regards the individual ins 'tution, each of us is force- to tread dangetously, and I feel a sound investment
fully familiar with the harassing roblem of investing our policy should eand on so simple and elementary a point
funds. Let me simply remind yo that in the aggregate as that.
I referr
a minute ago to the fact that from the standexcess reserves of reporting memb
banks were, as of
Oct. 23, at $2,930,000,000 and gold certi ates with the Fed- point of ound banking operations, alternative number two
oth figures con- of sho - and very moderate-term bonds would be the desired
eral Reserve System totaled $6,979,000,
with bonds as high as they are to-day If, then, this
poli
stituting a record high in the history of the tion.
e sound banking policy, it should be our anchor and
To solve the investment phase of a bank's oblem there is
of a sufviations from it should be fully recognized as deviations
are reasonably clear alternatives. The purcha
ture of And should be planned with full knowledge of the fact. It
ficient volume of long-term bonds, consisting of a
turn 1 is the relentless pressure of declining interest rates which
Governments, municipals and corporate issues, will
may drive us off this sound ground and, from the standpoint
at least a livable income. But even though we now e
of the banking system, that would be, in my opinion, a
the fat and richness of a high interest income relativ
is catastrophe.
prevailing interest rates, we may, unless the situati
Very well. you say, the alternatives are reasonably clear—
onds
most carefully gauged, find ourselves so loaded wit
that upon a revival in the demand for funds on t part of ei er long-term bonds with the possibility of being sandcommerce or upon the occasion of some eventful appening, bag, into death or short-term bonds with the possibility
of sta
tion. Without wishing to leave the stage of the
we shall be unable, except at great sacrifice, o liquidate
present
ancial drama by either route, I should infinitely
those bonds either to ward off the eventful appening or
prefer to b the Ghandi of the American banking system.
to satisfy the needs of commerce.
I am aware
at the bald statement of these choices preI mentioned an alternative, and it Is tOis: A bank can
sents no practi lly helpful suggestions to you, but I have
very short-term
invest its funds as fully as possible
wiShed to state
m as briefly and as clearly as I could,
bonds due in three or four years or leis, and such amount
as each institution feels the situation will allow in moderate- for, as we proceed, ey will be the two basic points which
will form the backgro d of our entire discussion.
term maturities of five to seven years. By carrying out
There are, of course, Nose wbo will disagree with rne and
this procedure, the income account will be drastically lessened
who will have different\
licies or different combinations
and the extent to which one is willing to adopt this second
alternative will vary among banks. But it is reasonably of policy. An institution wit virtually no demand for loans
clear, I think, that from the standpoint of sound banking and with a very stable depositstne or an institution with its
operations, alternative number two would, under the exist- capital'only nominally committect to real estate, or one carrying an extremely high percentage of savings deposits can
ing conditions, be the choice of everyone in the room. Please
do not misinterpret me. From the standpoint of sound invest- perhaps buy a larger proportion of long-term bonds with
ment policy, I should be glad to purchase a substantial per- greater equanimity than can other institutions having a
variable loan demand and a volatile deposit line. What is
centage of long-term Government bonds and prime corporate
one man's meat is another man's poison—what is one bank's
credits if money rates were high. Always, of course, I am
profit is another bank's loss. With differences In policy
referring to existing conditions.
there can be no objection, but this point I should like to drive
Long-term United States Government bonds have crossed
home above all others, namely, develop a policy suitable to
a 3% yield basis, and the corporate and municipal markets
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Federal Reserve Bank of St. Louis
54
BANK NM' CONVENTION.
the particular conditions of the individual bank and, once
having set that policy, follow it.
Another point of almost equal significance is the practical
operation of an inrWment portfolio once the policy for the
institution has been determined. It is my observation that
the wigwam method of consultation among many individuals
each with prejudices of a general nature is productive of
poor results. Some do not like municipals, some do not like
rails, some do not like industrials. When these likes and
dislikes have been allowed for, either the bonds it is desired
to buy have been sold or else the principle of unholy compromise has weakened the institutional policy determined upon
and profitable operations of the bond account are virtually
impossible. Place the responsibility for operating within
the framework of the policy on one individual—make doubly
sure that individual knows securities—and charge him with
the results. Do not measure the results by those obtained
in rising bond markets such as we have experienced in 1934
and 1935, nor by those produced in years such as 1931 and
1932. Take a complete cycle of bond prices and check your
returns against those which cotald have been obtained from
other outside investments.
To rue it is one of the sad conimentaries that so many of
our institutions are blown hither‘and yon by the wind of
bond salesmen and the pressure of 'monetary fright. Surely
the fact that our interest from bon‘ls has been declining is
no novelty. Why, then, should anyone all of a sudden, deciding that he needs more income, rush, into the market and
but a few 414%0 or 4IA% industrial bonds, two or three Government issues yielding 21A% or more, and then sit back?
In far the majority of cases, there is nd proper correlation
between the type of investment bought\ and the type of
deposit money which was used to buy it. Equally as evil
is the lack of knowledge concerning the ecurity bought.
Someone has defined character in its largest nse as a noble
impulse translated into action. I should like to define character of mind as a mental concept crystallized into action,
and the American banks, large and small, should bave and
must have character of mind. We do have it in other ways,
and I am at times mystified as to why it is lacking in our
investment operations.
A significant part of many institutions' inve,-tmel4 policy
is consultation with correspondent banks. The exchange of
do not feel
ideas and of facts uncovered is 'helpful, and
this phase has ever been adequately exploited: It is indispensable, however, that the full situation in the inquiring
bank be known—type of funds it is desired to invest, condition of portfolio, and the general policy being followed.
Without this knowledge, any inquiry saying, "We wish to
invest $50,000," is meaningless and can never result in a
sound and really worthwhile relationship. Moreover, once
a security had been bought because the correspondent had
it in its portfolio or thought well of it, the purchasing bank
should, it seems to me, every month or so obtain from the
correspondent a simple statement as to whether it still liked
the bond, and if it had sold its bonds, why? Such a program
would give a closer tie-in and would place the initiative
where it functionally belonged. I do not see how a satisfactory and enduring investment relationship can be otherwise developed.
To this point we have discussed the question of policy
and adhering to it, the necessity for centralization of responsibility, and a method of practical operation involving the
correspondent bank relationship. What, now, are some of
the situations with which we are faced to-day? Government bonds maturing up to December 1936 yield nothing.
Those maturing in 1937 and 1938 give an average return
of /
3
4 of 1%. Those due from 1939 through 1941 give an
average return of 1.40%. In spite of the fact that so many
people are indulging in the practice, and, hence, it is a
hazardous one, I still think the idea of purchasing a reasonable proportion of near-term Governments at a very slight
yield and very slight yield losses to maturity is sound, and
my reason is this: As a practical matter, I know that if
substantial amounts of money are uninvested, it has a great
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Federal Reserve Bank of St. Louis
tendency to eat on us, to set up pressure areas which cause
us to sweat and to break down our fibers of common sense-in short, idle money is the third degree for the banks.
Should the bonds offered in refunding the maturing
obligations not sell at a sufficient premium to give an
actually positive yield on one's money, I believe that the
loss which would be sustained would be the cheapest form
of insurance and well worth the price. In this manner it
should not be difficult to obtain interest at the rate of /
3
4%
to 11
/
4% per annum. There is no stupendous risk in such
operations, and if a set of conditions were to come about
which would make such operations as I have mentioned unprofitable, then it would probably be still more disadvantageous to hold a Christmas miiture of 10- and 20-year bonds.
To what extent one wished to buy the Governments due
beyond 1941 would be determined, as has been said, by the
condition of one's capital account, the status of one's loans,
and the nature of the deposits. This, I think, can be fairly
said of the average commercial bank, namely, that it will
be more advisable to put out large amounts of money due
in a short while rather than small amounts of money due
in 10 to 60 years, provided the short-term maturities are
spread so as to get an average maturity of three to four
years.
Everyone, of course, is concerned with the Government
bond market. At the present time it is a maze and a labyrinth of complexity. Let us try to dissect the situation
briefly and as clearly as possible. Whereas the business of
investing funds does not partake of a science in its exactness. nevertheless there is a law of physics to the effect that
what goes up must come down. Bond prices are very high,
and whereas it is more than difficult to predict the time
when they will be lower, yet each of us knows such a time
will come. It is a bold man wbo will try to time the situation
by expecting to sell at the exact hour, and it will be infinitely
better to be ahead of time than late, for each of us who is
tardy will certainly be a Cinderella looking for a fairy
godmother.
An additional consideration is the fact that our Government has been incurring large deficits since 1930. From
1931 through June 30 1935 we have spent $14,677,000,000
more than we have received. Our interest-bearing debt as
of Sept. 30 1935 stood at $28,432,000,000. No consideration
has been given either to the assets over against that debt
or to the contingent liability debt which may or may not
be a real liability. The Reconstruction Finance Corporation
is lending less and less money (it is being paid back some of
the money it has loaned), but in spite of this diminution of
its lending activity, our total deficit continues to be enormous, and those expenditures on which little, if any, repayment can be expected are increasing while those on which repayment can be expected have virtually ceased. The banks
of the country absorbed 91% of the increase in the Federal
debt between June 30 1934 and June 30 1935, and as of
June 30 1935 the banks held 53.44% of the total Government
debt of $28,700,000,000. In 1920 the banks held 15.34% of
the existing Government debt. To-day, to repeat, they bold
more than 53.44% of it. Between June 30 1934 and June 30
1985 bank deposits were estimated to have increased 8.22%.
Government security holdings increased in that period
10.75%. One can still stand the tar of Toryism and yet ask
the question: How long will this continue, or how long can
this continue? Taken together, the figures I have given you
are, it seems to me, the most alarming figures which any
American could hear. I am alarmed, not at the existing
debt, but at its growth, at the constancy and the nature of
the trend, and at the tendency of the banks to absorb more
and more of this increasing debt. The credit base which
our national deficits have in part helped to lay is gigantic.
I do not wish to cry wolf. I hope that the momentum
generated will not make too much headway, but I saw a
devastating momentum of deflation begin in 1929 and continue with all the killing force of a cataract until 1932 and
the early part of 1933. History likewise tells of nation after
nation whicb had miscalculated the terrific pressure and
THE COMMERCIPL & FINANCI1L CHRONICLE--ABA Convention--Nov. 1935
STATE SECRETARIES SECTION
AMERICAN BANKERS ASSOCIATION
•
Annual Meeting, Held at New Orleans, La., Nov. 12 1935
INDEX TO STATE SECRETARIES SECTION
Page 82
Address of President George A. Starring
82
Report of Committee on Legislation, by Ray O. Brundage_ _ _
84
Report of Committee on Bank Management, by H.B. Crandall
84
Education
Committee,
by
Public
David
M.
Auch
_
_
Report of
Report of Committee on Insurance and Protection, by
84
William Duncan, Jr
Resolution Adopted—Discount on Robbery Premiums Covering Cash and Securities Kept Under Time Lock
Page 85
Report of Committee on Nominations
85
Discussion on "Effective Methods Dealing with Legislatures"—
"Contact with Legislators,' by Eugene P. Gum
86
State Association Clinics, by Martin A. Graettinger
86
Address of President George A. Starring, Executive
Manager South Dakota Bankers Association,
Huron, S. D.
It is doubtful whether there has ever been closer co-operation between
With the changing conditions affecting banking. including much Government competition, resulting in reduced income, it will be increasingly iniportant for bankers' associations to continue and to enlarge their programs
pertaining to bank management. This subject is, of course, very close to
the Bank Management Committee of this Section. Association Secretaries
have been active in promoting distribution of bank management material
prepared by the American Bankers Association. Some State associations
conduct surveys to ascertain the banking practices in their States and the
information received therefrrom is valuable for coxnmittee reference. Other
associations have been successful with bank management clinics held in
connection with their group meetings. Early this year, the Secretary of
this Section wrote all association Secretaries asking their co-operation in
the distribution of a study of the Bank Management Commission under the
title, "Manual for Determining per Item Costs."
The matter of protection against burglary, robbery and other types of
bank crime we will continue to have with us. The cost of insurance is one
which vitally concerns a majority of the associations, some of which have
experimented with plans for reducting insurance costs in a'variety of ways.
Co-operation of the United States Department of Justice, of the protective
department of the American Bankers Association and the State departments of justice will continue to help minimize losses; but, as most Secretaries have come to understand it. the real problem is to convince bankers
that the first and most effective step in controlling crime against them is
to reduce their cash exposure and to provide adequate protection within
their own banks. Our Corrunittee on Insurance and Protection has had
this subject under scrutiny and its report and recommendations are anticipated with lively interest.
. The members of this Section have had a busy year, not only with their
local legislative problems, but also in co-operating with the American
Bankers Association during the last session of Congress. That the 13anking
Act of 1935 stayed so largely within the bounds of reason was due
in part to that fine co-operation which was gladly given. For the splendid
manner with which it handled its legislative program, the American Bankers Association has our appreciation and thanks. We are glad that some
of our State associations, singly or in groups, as in the Central States Conference, were able to have been of direct assistance in Washington. Each
State Secretary has the somewhat heavy task of watching and guiding
legislation in his own State, and the fact that legislatures have not taken
more advantage of their opportunity to the discomfiture of banking is a
tribute in part to the value of State association activity. The report of our
Committee on Legislation will cover this entire subject in detail and we
hope it will offer some suggestions far our guidance.
The State Secretaries Section desires to be of the greatest possible assistance in the whole forward-looking program of the American Bankers Association and we renew our pledge of co-operation with that in view.
I deeply appreciate the splendid co-operation which has been extended
by Secretary Simmonds and other members of the staff of the American
Bankers Association, by members of the Board of Control, by the Chairmen
of Committees, and by all other Secretaries who are members of this Section.
Respectfully submitted,
GEORGE A. STARRING, President.
the members of this Section and other Divisions and Sections of the American Bankers Association that during the current year, with special reference
to national legislation and public education. Since, for the most part.
the same banks are not only mersabers of the American Bankers Association
but also of our State associations, the interests of all are the same. The
past year has seen an excellent demonstration of effective co-ordination
of efforts in behalf of banking and in behalf of the general public.
The work of the State Secretaries Section has been performed mostly
through the following committees:
1. Banking Educatian—Theodore P. Cramer Jr., Chairman; Secretary
Oregon 13ankers Association.
2. Banking ManagemInt-11. B. Crandall, Chairman; Secretary Utah
Bankers Association.
3. Insurance and Protection—William Duncan Jr., Chairman; Secretary
Minnesota Bankers Association.
4. Legislation—Ray O. Brundage, Chairman; Executive Manager Michigan Bankers Association.
5. Public Education—David M. Auch, Chairman; Secretary Ohio Bankers Association.
The Chairmen of these committees will present their reports at this
meeting.
Last year,President J. W.Brislawn appointed a special committee known
as "Bankers Association Management," W. Gordon Brown, Executive
Manager New York State Baiakers Association, Chairman. This committee sent its report to all Secretaries a few weeks ago, in a 73-page outline of
a "Survey of State Bankers' Association Management." Chairman Brown,
Secretary Frank W. Simmonds and Miss Mary P. McLean, American
Bankers Association Librarian, deserve a vote of thanks for the valuable
information so clearly brought forth in that compilation which undoubtedly
has already become the Secretaries' bible. A revision would be in order
in about five more years.
During the fiscal year several new names have been added to the list of
State Association Secretaries. Donald W. Larson has become the first
permanent Secretary of the District of Columbia Bankers Association.
W. B. Machado, Assistant Vice-President Hibernia National Bank, New
Orleans, Louisiana, has succeeded F. W. Kerksieck as Secretary of the
Louisiana Bankers Association. John S. Gwin has succeeded Matthew
Cushing as Executive Secretary of the Massachusetts Bankers Association.
Elmer D. Nickerson, Assistant Sectetary Industrial Trust Co., Providence,
R. I., has succeeded Robert W. Upham as Secretary of the Rhode Island
Bankers Association. William E. Martin has succeeded J. C. Goodwin
as Secretary of the South Carolina Bankers Association. We welcome these
gentlemen and hope they will find their contacts with this group pleasant
and profitable.
In my report before this Section last spring,a query was expressed whether
there should not be a better and more clear-cut definition of the functions of
this Section's committees on Banking Education and on Public Education,
and the suggestion was made that this matter be considered at this fall
session.
There never was a time when it was more important that bankers, individually as well as collectively through their associations, carry on an
intelligent program of education within the banks and of public relations
with their customers, so that not only the public may be informed of the
true functions of banking, but that it may have the truth concerning the
valiant part which banks have played in the development of this country,
and also of the fact that, in spite of popular opinion to the contrary, the
record of the banks during the depression has been exceptionally good.
These subjects have been given due consideration during ghe past year by
the proper committees. Two circular letters were mailed by the Secretary's
office to all Association Secretaries urging their co-operation in the distribution of "Constructive Customer Relations" published by the Public Education Commission. A special half price of 50 cents was offered on group
orders taken through State Association offices. The records show that the
Secretaries of each of the following States have sent in orders for one hundred
or more copies: District of Columbia, Illinois, Indiana, Iowa, Kansas,
Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York,
Ohio, Pennsylvania, South Dakota, Virginia, Washington and Wisconsin.
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Federal Reserve Bank of St. Louis
Report of Committee on Legislation by Chairman
Ray O. Brundage, Executive Manager Michigan
Bankers Association, Lansing, Mich.
Your Committee on Legislation has arrived at the time when a report
of their activities is to 'be made to you. Surely, the members of this
Committee have been active in their own State as well as active in the field
of Federal bank legislation. This is also true of the Legislative Committee of the Central States Conference.
Your Committee did not submit a written report at the mid-year meeting
of the A. 13. A. at Augusta, Ga. It was thought best by Chairman
Starring, because we were right in the middle of the activities on Federal
bank legislation and because of the fact that nothing definite had been
arrived at at that time, no report was made. It may have appeared to
you that this Legislative Conunittee was just marking time and doing
nothing, but in December 1934 it was decided by President Starring and
the Chairman of this Committee that there are times it is better not to
make too much noise in a legislative way. We believe that the activitios
256
_
•
CONSTRUCTIVE CUSTOMER RELATIONS CLINIC
improve their service. Now as to the kicker who has a permanent chip on
his shoulder. Verily, like the poor, he is always with us. In any crowd
of human beings, whether they are bank depositors, or railroad travelers,
or post office patrons, or department store customers, a certain percentage
of them are bound to be cranks, and those public or semi-public servants
whose job it is to meet the public, must develop the patience of Job in
calmly and sweetly handling those folks who insist on being "snubbed" and
"abused."
For example, here comes a party from out of town who is an absolute
stranger, but who wants some money and has presented his personal check
on "Timbuctoo" to one of the tellers. The stranger is politely informed that
he will have to be indentified, and so he comes tearing up to the officers'
platform with the very definite complaint that he has been insulted, and
when the officer to whom be has appealed asks him if he knows anybody in
town who can properly establish his identity, his indignation increases.
Horrors! When he is told very cotirteously but firmly that before be can
obtain cash for his 8300 check on a distant city he must satisfy the bank
that be is actually the person that he claims to be, and that his check is
good, he roars out of the office with the air of one swearing eternal vengeance on so bonebeaded an institution.
It is Saturday. Time is 11:40. One hundred people, most of whom
just as well could have come in earlier in the day, are lined up at the tellers'
windows, and there are three emergency windows opened in addition to the
dozen normally on the job. Most of the people accept the situation
philosophically, but here and there an impatient crank raises a holler about
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Federal Reserve Bank of St. Louis
81
the "rotten service." He threatens to withdraw his account and take it to
some bank that can wait on him without "this interminable delay," although he doesn't realize that practically every bank in America has the
same jam just before closing time, simply because so many cf our mutual
friends of the human family put off their banking until the last minute.
Here's a man who wants a loan. He isn't entitled to it and when he is
turned down he kicks to high Heaven and declares that the banker is hardboiled. It would be well if the average bank customer who has had his
application for a loan declined could keep quiet about it, because, as a
general rule, he is merely advertising to the world the fact that his credit
is not so "hot "
"Why did you throw out my check ?" says a loud-voiced chap who
comes belligerently up to an officer's desk.
"Let's look into it," says the officer.
When the information is obtained it develops that the customer had failed
to make a certain deposit which he thought he had made. But does he
apologize? Well, not so often as to be embarrassing.
The bank makes mistakes, and Is genuinely sorry for them, for mistakes
cause the bank to lose business. Consequently, banks constantly are endeavoring to maintain perfect service. The customer also makes mistakes.
It is the permanent job of the banker to maintain the most cordial relations
with his customers by ironing out these differences, most of which, as we
well know, are caused by avoidable misunderstandings. It will be the purpose of this program to-night to rehearse tested methods which at least
will assist in developing this desirable condition.
,e4
STATE SECRETARIES SECTION
for or against the Federal Banking Act of 1935 could be better handled
through committees of the State Secretaries Section, the Central States
Conference and the A. B. A. rather than having each State Bankers Association turn the heat on in a pernicious sort of a way.
rhe writer of this report has been cautioned recently not to make this
report too long, that secretaries get uneasy, &c.—so your Committee
will briefly touch the high spots of interesting items in the various State
Associations and close with a short comment on the Federal Banking
Act of 1935.
We will take these in order as they have been presented to our office.
We call your attention first to the report of the Illinois Bankers Association—the following bills of interest to banks have been passed and
have become laws.
H. 13. 29. re-enacts the statute permitting the waiving of public funds.
H. B. 140, amends Section 1 of the Settlement of Small Estates Act
by extending throughout the State the privilege of payment of debts to
decedents estates without probate where the estate does not exceed $500.
H. B. 563, provides that warrants issued by school districts shall be
payable in the serial order in which tney are issued and permits issuing
sucn warrants for the payment of matured principal or interest due on bonds.
S. 13. 225, amends the State Securities Act by, among other things.
removing the requirements that banks be licensed as agents or brokers
in the purchase and sale of securities for customers.
S. B. 569, amends Act concerning investments by trustees; permits
trustees to exchange securities for refunding issues.
The Missauri Bankers Association reports: Bills passed and signed
as follows:
S. B. 47, permitting cities of the second class to accept bonds of the
State and United States as security for public deposits.
S. 13. 88, giving a county the right to accept its bonds as security for
its funds on deposit in banks.
S. 13. 122, providing procedure by which a trust company may become
a State bank.
S. 13. 154, providing for pro rata subrogation of rights to the FDIC
by depositors of closed banks. (This bill was not signed by the Governor
immediately, in order that the authorities might ascertain whether it will
conflict with the 1935 Banking Act.)
H.13. 81,authorizing banks to make loans under the Federal Housing Act.
H. B. 88, extending the time allowed restricted banks.
H. B. 143, requiring companies writing fidelity bonds for banks be
authorized to do business in Missouri.
H. B. 225, increasing salary of the Deputy Commissioner of Finance
from $3,000 to $4,000. (This looks like a good break for some good
fellow in Missouri.)
H. B. 227, exempting from security the first $5,000 of public funds
on deposit with any bank that is a member of the FDIC.
(41. B. 230-231, eliminating stodIolders examination if bank or trust
company be member of the FDIC.
II. B. 250, 251, 252. 253, incr se the surplus requirements of banks
and trust companies from 20% to 40% of capital.
H. B. 433-440, providing for loans in excess of legal limit to firms where
Government agency has agreed to purchase such loans.
According to the report received by the Committee there were many
bills presented to the Missouri Legislature that failed to pass.
Pennsylvania Bankers Association reports the passage of an Act which
1 establishes a Banking 13oard to act in an advisory capacity with the Secretary of I3anking, particularly with regard to the establishment of branches
anywhere in the State not extending beyond counties and contiguous
counties, and to the enforcement of statutory baking laws where the
executive officers of State-chartered banks decline to conform to the
instructions of the I3anking Department. (To your Committee this
legislation looks like a big step in the right direction.)
Iowa Bankers Association reports:
H. B. 106, which reduces the "legal" rate of interest from 6% to 4%
and the "contract" rate of interest from 8% to 7%. It likewise reduces
the "legal" rate of interest on judgments and decrees from 6% to 5% and
the "contract" rate from 8% to 7%.
H. 13. 472, provided whenever a bank operated within the State of
Iowa has been heretofore or shall hereafter be closed and placed in the
hands of a receiver, the Board of Supervisors shall remit all unpaid taxes
on the capital stock of said bank.
S. B. 321, sets up two additional police radio broadcasting stations.
(This is certainly a step forward and tne State of Iowa is to be congratulated.)
S. B.394. permits banks in Iowa to pay dividends on "preferred stock."
S. B. 396, permits banics to consider "preferred stock" as a part of their
rerirtd Vneh
,
trttu
em
nds
croitm
al.
r
March 1 1935 to March 1 1937 the redemption
period from the sale under foreclosure of real estate where deeds of conveyance have not already passed.
(Iowa had several other good banking measures introduced in one
House or the other. but because of the enormous amount of business they
were tabled and not given consideration by the State Legislature.)
83
\l
Section 220.04, the Banking Commission with the approval of the
atticing Review Board, may classify the several banks. savings banks
and trust company banks and may establish uniform rules for classification
fixing reasonable charges to be collected by each bank, saving bank or
trust company bank within such classification for banking services rendered.
Michigan Bankers Association reports:
That two of the proposed Acts were signed by the Governor permitting
full co-operation by Michigan banks in the Federal Housing Act in all
its forms.
An Act which extends the moratorium on the foreclosure or specific
performance of land contracts until March 1 1937.
An Act combining the Michigan Securities Commission and the Corporation Division of the office of the Secretary of the State.
An Act excluding from the provisions of the Land Contract Moratorium
Act any land contract executed after Feb. 14 1933.
An Act which adds five years to the time in which other real estate
may be held by banks.
An Act which provides•for the building of the surplus by each bank out
of the earnings until such surplus equals the capital of the bank.
An Act eliminating the necessity of securing public funds up to the
amount covered by FDIC.
Two Acts, one of which defines the status of Armistice Day as a legal
holiday, and the other making Columbus Day a public holiday and not
a legal holiday for banks in Michigan.
An Act exempting the capital stock of any corporation owned by the
'United States or any agency thereof from the annual corporation privilege
fee.
An Act eliminating the double liability on bank stock for State banks
as of July 1 1937.
An Act creating a commission for the codification of all laws regarding
the banks, trust companies. &c. This Act appropriates a fund to carry
on such a codification.
The Ohio Bankers Association reports:
The passage of a law permitting commercial and(or) saving banks to
engage in "special plan" or industrial banking.
Ohio Legislature extended the so-called "mortgage moratorium" to
April 1 1937. They also passed a bill permitting banks to pay interest
on deposits of municipal universities, also a bill permitting banks holding
relationship of affiliate to another bank on Jan. 1 1935 to convert it into
branch if located in contiguous county.
Your Committee is informed that the Ohio 13Emkers Association did
some good work in defeating certain bills, which would have been a detriment to the bank and trust people of their State.
North Dakota Bankers Association reports quite an improvement in their
tax program and in the extension of time for the redemption of tax sales.
Also the usual legislation authorizing banks to co-operate on Federal
housing.
Rhode Island Bankers Association reports they have a mortgage moratorium Act, also a bill permitting mutual savings banks to write life insurance. We understand a bill was presented by the Mutual Savings Banks
Association which would reduce interest rates on new mortgages to 5%,
and endeavor to reduce rates of interest on all existing mortgages to 5%.
We understand this bill was killed through the efforts of the Rhode Island
Bankers Association.
Massachusetts Bankers Association holds the medal, we think, due to
the fact there were 100 bills introduced in their Legislature pertaining to
banking and 150 bills pertaining to taxation; we are not informed as to
how many of them really passed.
Oregon Bankers As•Sociation reports:
S. B. 11, which provided for a Stato-owned and operated Bank of
Oregon. The bill received two votes when it came up for pssaage in the
Senate.
S. B. 136, increases loans against real estate from 50% to 60% of the
cash market value.
S. B. 28, providing for partial payment of taxes failed to pass. This
same item appeared in many State legislative programs.
S. B. 315, which increased fee for protesting bank checks to $1.00.
Indiana Bankers Association reports:
The passage of an Act, which corrected many of the items in the 1933
legislation and modernized their State supervisory law. This certainly
was a step in the right direction.
They defeated two bilis, which sought to prohibit banks and trust
companies from serving fiduciary clients in many ways.
They also succeeded in their attempt to amend the Administration's
bill to set up more strict control over the securities business in their State.
California Bankers Association must have been sea-sick when they looked
at the enormous amount of bills presented to their Legislature--3,665
bills, of which approximately 160 affected banking directly or indirectly.
They apparently passed the bills amending the Public Deposit Acts as
well as the usual moratorium measures seen in other reports. We would
like to hear from California relative to what happened to their bills relating to the practice of law. Michigan passed the intergated bar bill
which prohibits organizations from furnishing legal services to members
when those items do not concern the fraternity at large, also makes each
member of the legal fraternity register with the State Supreme Court.
Washington Bankers Association reports they passed the usual bills, in
order that the bankers of that State may co-operate with the Federal
Government in the Federal Housing Act and the FDIC. Also a bill
which permits the State Treasurer to deposit funds in branch banks not
to exceed the capital and. sutplus of the parent bank, and a bill which
Permits certain saviags banks to pension their super-annuated and disabled
employees. This State had many bills introduced—good, bad and indifferent—which failed to pass apparently on account of the good work done
by the State Association.
Kansas Bankers Association reports:
H. 13. 299, re-enacts the Act more familiarly known as the Moratorium
Act of 1934 (an emergency measure) extending the period of redemption
from judicial sales in foreclosure proceedings, however, in no case beyond
Jan. 15 1937.
S. B. 155, authorizes banks, trust companies, building and loan associations to take full advantage of items set forth under the National Housing
Act and to invest their funds in bonds or notes secured by mortgages
insured thereunder, and in the obligations of national mortgage associations or similar credit institutions.
H. B. 623, County Treasurers to refund any and all penalties, interests,
costs and expenses paid by any person, firm or corporation, who between
Jan. 1 1935 and Feb. 25 1935 redeemed land previously sold for taxes.
S. B. 446, the State of Kansas shall be liable to the banks for the safe
return of any securities placed in the State Treasury pursuant to this Act.
Arkansas Bankers Association reports:
H. B. 362, provides when a bank or trust company has been clos for
Passed a bill which provided for the setting up of State, county, and city
one year, that they shall resume business under the old charter ntil
boards, which shall have the authority to deposit public funds
depository
shall
have
application
been made therefor to the Bank Commissioner.
on an unsecured basis in all banks reported by the Banking Commissioner
S. B. 201, extends the time for four years beyond the original fiveas being solvent.
period in which a bank may hold other real estate.
Also an Act was passed to permit a bank to maintain a tellers' window
Wisconsin Bankers Association reports:
in towns• without banking facilitim until such time as banking facilities
/
are
supplied.
Section 221.01 provides the aggregate amount of the capital stock o
any bank hereafter organized shall not be less than $30,000 in towns,
South Dakota Bankers Association reports their State Legislature reduced
cities
villages or
having 5.000 inhabitants or less; and shall not be less than
the required examination of State banks to once each calendar year instead
375,000 in any city or village having more than 5,000 and less than 20,000
of twice. This State also permits banks to open offices in bankless towns.
inhabitants; and shall not be less than $100,000 in any city or village having
20,000 or more and less than 200.000 inhabitants; and shall not be less
but does not authorize branch banking. They changed their laws also
than $200,000 in any city having a population of 200,000 inhabitants or
to require fidelity bonds on bank officers instead ofsurety company bonds.
official
more, according to the last
census.
New Mexico Bankers Association reports their State permits State banks
Section 221.42 eliminates double liability on bank stock when said State
to have agencies and they are repealing the double liability on bank stock.
bank is insured in FDIC.
Every new bank director is required to own a minimum of $500 par
Georgia Bankers Association reports amendment to the banking laws
value of stock. They also provided after 20 years unclaimed bank deposits
reducing the zninimum capital requirements for a State bank in towns
and
the
Board of Deposits have power to make
shall escheat to the State,
under 2,000 from $25,000 to S15.000. but denying the establishing of a
and enforce rules and regulations neces.sary and proper to the full and
new or competitive bank in towns already sarved either by a private
complete performance of its functions; require any public depository, the
Banking Commission, or segregated trust to furnish information as it
or ineorporated bank.
may request; designate public depositories for deposit of State funds;
Alabama Bankers Association reports their State reduced the legal rate
prescribe rules and regulations fixing the requirements for qualification
of interest as being 6% instead of 8%, and they passed a bill permitting
of banks as public depositories; and fix the rate of payment into the State
branch banking in certain counties.
deposit fund.
.:111111ftiodirgE
•
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BANKERS' CONVENTION.
Nebraska Bankers Association reports the repeal of the so-called "frozen
surplus law," and says their State enacted another law lowering stockholders' requirements on directors of State banks. Also a law which
hold stockholders liable until the creditors are paid, and a law limiting
salaries banks may pay, also reducing capital requirements. A bill was
also passed allowing Superintendent of Banks to hold bank stock.
In a few instances we have been notified by bankers associations that
their States do not have a session of Legislature in 1935 and in one-half
dozen other instances we are informed the State Association had no Legislative program. Practically all States have covered the FDIC situation
and Federal Housing Act in their legislative programs. Most every State
had a taxation program, but it would be too much of a task to enumerate
the items in this report, which brings us down to the 1935 Banking Act.
I am sure this Committee wants to give each State Association credit for
being of more or less help to yotir Legislative Committee and to the Legislative Committee of the A. B. A. and the Central States Conference.
We want to go on record at this time in paying tribute to Mr. Martin A.
Graettinger and his Committee of the Central States Conference, that
Committee, perhaps, was as active as any in helping to produce the right
kind of information in the 1935 Banking Act. A meeting was held Jan. 19
1935 in Chicago of the officers of the 14 States coveted by this Central
States Conference, and again late in March at French Lick Springs, when
four representatives of the A. B. A. were present and met with this group
and discussed the benefits of the Act quite in detail. Your Committee
feels as though the various bankers associations, their Presidents and Secretaries did all they could to bring about the right conclusion of this Act.
We had at all times the support and advice of the National Association of
Supervisors of State Banks through the President, Mr. R. E. Reichert,
Banking Commissioner of Michigan. This Act has been discussed so
thoroughly by each Association to and with its membership that we are
not going into detail as to the results.
It has been a pleasure to have served this Secretaries Section of the
A. B. A. and we trust the report will be of some benefit to those attending
this meeting.
Respectfully submitted,
Ray O. Brundage, Chairman
Mrs. E. W. Walker
Joseph W. Brislawn
C. C. Wattam
Armitt H. Coate
Chas. F. Zimmerman
Thomas J. Groom
Report of Committee on Bank Management, by H. B.
Crandall, Vice-President First State Bank, Salina,
Utah
First, I want you to know that I do not like to hear long reports, and
second, I want to inform you that I am not going to give one here.
The subject of bank management takes in a lot of territory, and covers
practically everything pertaining to banking: therefore, any one could talk
on and on forever and never get through; that is why I am going to make
my report just as brief as possible, because I know that all committees of
our Association, even though they have some other name, are really
Bank Management committees.
The first half of our year throughout the country was devoted largely to
legislative matters, this being due to the fact that the State Legislatures
throughout the country were in session. To work with these Legislatures
seemed to be the proper thing to do in bank management.
After Congress adjourned, the NRA was discarded. One of the big
problems of the Bank Management Committee and the State Associations
throughout the country was to keep the codes which had been installed
under the NRA, and continue the service charges that had been installed.
This has been, in my opinion, the most profitable thing in bank management that has been done in many years.
Your Bank Management Committee has been very busy during all the
year.
LI am glad to report that practically every bank in the United
States is a
member of some regional clearing house association and is operating under
As a matter of fact, it was scarcely necessary to make inquiry as to the
progress being made, so plain was the evidence of enhanced interest in this
important phase of Association effort. On every hand are to be seen
indications of continuation and enlargement, of previously initiated programs
and of the starting of educational projects by Associations which had been
inactive in this respect.
Possibly the most significant development of the year has been the
generally reported realization by bankers of the vital importance of giving
the public at least the basic facts of the banking business. Having recovered in part from the shocks attendant upon depression years, bank
officers are recognizing the important part which public misunderstanding
played in their difficulties, and are co-operating to an increasing degree in
applying the remedy—education of the public in the fundamentals of banking. I believe that I bespeak the unanimous opinion of your Committee
when I say that under present conditions, few things seem more essential
to the future of our business than the work under discussion.
The progress being made is traceable to a very substantial extent to the
effective work done by the Public Education Commission of the American
Bankers Association. The fact that 22,000 of the customer relations
pamphlets offered by our national organization were sold to more than
5,000 banks in all sections of the country fur.iished ample proof of the
acceptance of the customer relations phase of the program in an enthusiastic
manner, while widespread use of suggested material for public addresses
aided most materially in the advancement of the general program of informing the public. Also, there can be no question but that the customer
Relations Clinic of year ago had the broadest kind of effect throughout the
country.
And lastly, full recognition must be givei. to the value of the advertising
work done by our parent organization. It does not seem possible that better
newspaper advertising material than that made available through the
advertising department of the Ametican Bankeis Association could be
obtained from any other source at many times the cost. Association
secretaries who have not familiarized themselves with this material and
mged its use among their members, are urged to do so immediately.
There is no indication of broad changes in State Association educational
programs during the year. Public addresses by bankers, customer relations
conferences of officers and employees of individual banks or groups of
banks, distribution of printed matter to the public and newspaper publicity
and advertising, continued to be the main features of the programs conducted in the various States.
Perhaps the most effective method of advancing the cause of public
education has been its introduction as a major subject of discussion and
consideration at State-wide, district and local meetings of bankers. At
least several States have featured various phases of educational work,
particularly customer relations, at numerous meetings. The success of
Customer Relations Clinics will be described in detail at a subsequent
point in this meeting.
One development of recent months should be of much importance during
the coming year. That is the greatly increased interest of members of the
Financial Advertisers Association in public education a,s conducted by State
bankers associations. At the rece_it convention of this organization of
bank men, a paper prepared by Mr. Avery G. Clinger, Chairman of the
Committee on Education and Public Relations of the Ohio Bankers Association, attracted much attention. Mr. Clinger's suggestion that these advertising men not only Intel est themselves in the dissemination of banking
information, but that they work with State associations in enlarging existing
programs or planning new ones, was extremely well received. Valuable aid
should be available from F. A. A. members in every State. It is felt that
these men who are well-trained in public relations, should be brought
actively into the public education work of every State association.
Due to the fact that members are so widely separated geographically,
it has been impossible to hold a meeting of the Committee during the
year, nor have we functioned as a unit to any degree. However, both the
Chairman and members of the Committee have answered numerous inquiries and have advised with others in regard to plans and methods of
procedure. The general program, no doubt, has been stimulated to some
extent by this work.
a schedule of service charges. 1
Your committee has been in constant communication with every State
Association in the country, and I take this opportunity to thank you for
the assistance given us. In addition, we have been in constant communication with many individual banks and clearing house associations.
The following are the projects of better bank management being undertaken by the different State Associations throughout the United States:
Establishment and continuance of regional clearing house associations.
Strict obeyance of opening and closing hours.
Observance of all holidays.
Keeping every bank a member of a regional clearing house association,
and having all rules observed.
Having all banks in regional clearing house association co-operate with
each other in the matter of credit information, service charges, SEC.
Keeping interest rates to a profitable base so that a bank may build up
its surplus to meet bad loans, or unfortunate investments.
Constructive customer relations.
Frequent bank management clinics.
Discussion of bank costs.
Classification of accounts, and audit of accounts to determine their value
to a banic.
Frequent officers' and employees' meetings.
Standardization of bank forms.
Reduction of interest on savings and time deposits to a profitable basis.
Elimination or curtailment of Postal Savings System.
Early retirement of all preferred stock and capital debentures issued by
banks to the Reconstruction Finance Corporation.
Curtailment of Government lending agencies in lines that can be handled
by banks.
Respectfully submitted,
Bank Management Committee,
State Secretaries Section, A B. A.
Warren K. Ayers,
George B. Power,
Coapman,
Wall G.
Harry G. Smith,
Theodore P. Cramer, Jr.,
H. B. Crandall, Chairman.
Martin A. Graettinger,
Report of Public Education Committee, by David M.
Auch, Secretary Ohio Bankers Association, Columbus, Ohio
Public education and customer relations work among State Bankers
Associations has increased to a gratifying extent during the past year.
This was indicated by a survey made last spring by the Public Education
Committee of the State Secretaries Section and confirmed by a more recent
check of the activities being conducted in the various States.
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Report of Committee on Insurance and Protection, by
Chairman William Duncan Jr., Secretary Minnesota Bankers Association, Minneapolis, Minn.
I feel, in view of the situation confronting us, pertaining to bank insur-
ance and protection, that there was very little that the Committee could
do this past year. So what I have briefly stated in this report are some
things that I have personally in mind that should be of particular interest
to you Secretaries who are thinking about the same things,
undoubtedlY.
that I am thinking about, and that is the matter of readjustment of insurance rates. The matter of Insurance and Protection is one of vital concern
to every bank in the country and for a number of years has been very
thoroughly discussed at the annual conventions of the A. B. A.and the conventions of the various States.
The Insurance Committee of the A. B. A., through the maintenance of
an Insurance Department, has given considerable thought and study to
the rate structure affecting btirglary, holdup and fidelity coverage, and to
a great extent has been responsible for standardizing various forms of
policies with the thought that banks should be
protectexl under approved
forms that would eliminate litigation in the event of loss.
This work has been very well done and the banking fraternity appreciates the efficient way in which it has been handled by Mr. Baum and his
associates. We are not unmindful of the fact that the Insurance Committee
of the Association has been of great assistance to Mr. Baem's
department
in this accomplishment.
There has been a diversity of opinion developed in recent years as to
whether or not the rates charged by companies are equitable and fair
and
whether they have been scientifically computed. This is a question that
is always open to discussion and one that requires a great deal of study and
thought in order that an unbiased opinion may be arrived at.
Rates have been based upon loss experiences and there is a question in
the minds of the bankers as to whether or not it is a fair basis on which to
formulate basic rates. It is quite apparent that no coesideration has been
given to any great extent to the class of risks and the various methods
under which protective devices are handled by the individual bank to the
extent that the prudent and cautious banker is penalized under the present
rating system for the negligence displayed by the banker who does not
take the necesaary precautions to properly protect the cash and securities
of his institution.
REPORT OF STUDY COMMISSION
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of which may be made at any time and in any amount. Shares are
generally withdrawable for the full amount of dues paid in and dividends
credited.
Under this plan shares may be assumed to be matured at all times
or the maturity of shares may always be postponed. By permitting
members to suit their own convenience in paying, it is possible to attract people with irregular\incomes as well as others. The practice of
any sum at any time upon their shares,
allowing members to pay
and of waiving the time noti,ce of withdrawal, places these sums invested in building and loan stoA. in much the same category as savings
deposits. In Ohio associations of this type are specifically granted the
right to accept deposits. The practice of accepting savings deposits as
such by associations places an additional responsibility upon shareholders when, as is the usual custom, depositors are guaranteed a fixed
rate of interest.
Indiana "domestic" building and loan associations are prohibited
by law at this time (1932) from taking deposits and therefore differ
in that one detail from the usual Dayton plan but in all other respects
they are very similar. They rimy have any type of payment that the
by-laws of such associations prescribe. The advantages to those operating the business as officers of the domestic building and loan association over the other three types has been the main factor in popularizing
it. The plan is used because it is convenient, because it provides for
permanent existence, and because it is best adapted to the quick accumulation of funds for the purpose of extending loans and thus increasing the total business of the association. Outstanding examples
of devices used to further this quick accumulation of capital are paid
up and prepaid stack.
THE PRESENT ATTITUDE TOWARD REGULATION AND SUPERVISION
The facts previously related in this chapter clearly indicate that
the laws governing the regulation and supervision of banks and building
and loans have passed through a long process of evolution, climaxing with
the reform efforts of the recent sessions of the legislature. By the end
of the 1931 session of the legislature, therefore, Indiana had evolved a
comparatively comprehensive regulatory code and a system of supervision
designed to enforce that code. Comprehensive though the code and supervisory- system might appear, the unusually trying conditions of the unsettled post-war period from 1920 to 1932 had brought in its wake such
a devastating nvmber of failures of banks and other financial institutions that the inade(pacies and deficiencies as well as the merits of the
system stood exposed to the view of the careful observer. .
At the end of this long evolutionary development the prevailing.
public opinion in regard to the social control of financial institutions as
evidenced by the statutes now i,r; force appears to have been considerably
altered since the period of the Ildoption of the present constitution in
1851. No longer is a state official required to grant to the organizers
of banks and building and loan atsocilItions a charter. While our present
philosophy recognizes the desirability a healthful competition and does
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32
not subscribe to the theory that the public is best served '114 monopoly
ownership of the banking and building and loan business, nevertheless
it does clearly subscribe to the theory that the public interest may not
be best served in certain instances by the addition of new units without
economic justification for their existence. It is recognized that such
units, necessarily unprofitable from the day of their organization, can
do little other than prove a serious embarrassment to their owners and
operators and jeopardize the funds of their depositors.
Moreover, the prevailing statutes clearly indicate that Indiana lawmakers believe that although banks and building and loan associations
are private enterprises and should be accorded the privileges and rights
ordinarily accorded to private business corporations in our capitalistic
society, the public welfare has become so dependent upon their successful
operation that these institutions have become to some degree public
callings. They should, therefore, be subject to such statutory restrictions as are necessary to safeguard the interests of the general public.
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
Page 7£
"Inadeauate Sunervision" as a Cause of B,Ink Failures
The smallest classification in TA)le XL is that of "Inadequate State Supervision and Control." In this classification seven situations are listed, in which the receivers
are of the opinion tht bank examiners were nealigent or
incompetent. The larger category in this group, th:lt of
"Improper Chartering or Banks," has reference to the
locating of banks in communities already Tell supplied rith
financial institutions, or in communities where business is
tnsufficient or too unstable to support a bank. It is the
opinion of the members of the Study Commission that this is
a very important and fumlamental cause. Many of the im,
proper 7ractices listed by the receivers as contributing to
the failure of banks were probably caused by competitive
conditions in communities containing too many banks. It is
natural that receivers should observe and mention only the
improper practices. If they were not familiar with the
banking business and with the history of the operation of
the particular institution of which they are in charge, it
is improbable that they would attempt or be able to analyze
the fundamental reason for the use of these practices.
Xeen competition in many Instances causes banks to take
such great risks that eventually the banking ethics and
banking practices of whole communities are degraded, destroying the initiators of these practices and their com,
petitors as well.
Page 78
General Conclusions
By rear.on of the analysis presented in the preceding
two chapters and because of their contacts with this
problem, the members of the Study Commission are of the
unanimous opinion thlt bank and building and loan failures
might in large measure be eliminated by a more adequate
system of state supervision and control. After months of
careful consideration, the Study Commission has evolved
such a system. If adopted tn its entirety, it is believed
that the financial institutions of the state will be
strengthened immeasurably, and that their failure will
cease to be a great social problem. The succeeding chapters
present the general 7rinciples of this system and the arguments therefor that proved convincing to the members of the
Study Commission.
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REPORT OF STUDY COMMISSION
FOR TNDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
_
CHAPTER IV
THE PROPOSED REORGANIZATION OF THE BANKING
DEPARTMENT
The statistical analysis of the causes of bank and building and loan
failures described in the preceding chapters presents convincing proof
that most of the practices that are responsible for a large majority of
these failures could be eradicated by supervision and regulation. Consequently, the Study Commission has made an effort to formulate legislative proposals designed to eliminate these improper practices.
The problem of preventing the failure of financial institutions by
legislative action is twofold. Regulatory laws must be enacted and
supervisory machinery created to administer those laws. The Study
Commission decided that modernized and flexible supervisory machinery
was the most important requisite for maintaining the solvency of financial institutions in Indiana. That problem, therefore, received first consideration.
In the planning of the proposed new department suggestions were
utilized from receivers of failed banks, from supervisory officials, from
leading financiers, from economists, and from many men of recognized
wisdom in practical statecraft including present and former officials in
Indiana and other commonwealths.
Many of these authorities are agreed generally upon the principal
trends in the reformation of the supervision of financial institutions in
the United States. These trends are as follows:
1. The removal of supervision from partisan political control.
2. Lengthened and more assured term of office for the chief executive of the supervisory department.
3. Enlarged authority for the department in the examination and
guidance of financial institutions.
4. Giving to the department wider discretionary powers in the
granting of charters to the types of financial institutions under its
control.
5. Placing the liquidation of failed financial institutions in the
hands of the supervisory department instead of in the hands of receivers.
6. Increased security of tenure for the personnel of the department
to attract those of greatest capabilities to the field.
7. Recognition of the fact that clearing house cooperation has
achieved remarkable results in promoting stability and adequate management of financial institutions, and that consequently the fullest cooperation between these associations and the state supervisory machinery
should be promoted.
8. Recognition of the fact that the best supervision for any class
of business is that supervision for which the responsibility is placed upon
the industry itself, subject to the direction of the state.
Critics viewing the contemporary scene, with its widespread failure
of banks and other types of financial institutions, have charged that
these objectives will not be realized. It is contended that, since we have
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had all of these types of financial institutions for a long period of time,
and since previous periods of economic stringency have not resulted in a
more adequate supervision of these institutions, the future is not likely
to bring any relief. Arguments of this nature are not founded upon
the facts of the situation, however. A study of financial history leads
to the realization that great strides have been made in state bank
supervision within the past seventy-five years. It also leads to the realization, however, that the present typical form of supervision is a very
recent development in the evolution of supervisory forms.
The organization of the present Indiana department is typical of departments supervising state chartered institutions in the United States.
It is customary among our states to segregate into a separate office the
duties attached to the examining and supervising of banks, building and
loan, small loan associations, and occasionally other types of institutions.'
The chief executive of these departments is known by various titles, but
the usual one is that of superintendent of banks. He is appointed by
the governor ordinarily for a period of years not to exceed the tenure
of office of the governor himself, and in many states for a period shorter
than that of the governor. Most states specify that he must have been
an experienced banker, very few of them recognizing the necessity for
experience with other types of business including those involved in such
other types of financial institutions as are to be supervised. This
omission is probably due to the fact that the supervision of new types
of financial institutions has been added from time to time to the duties
of already existing departments having to do with banks.
Governmental departments maintained solely for the purpose of
supervising such financial institutions as those above are nearly all of
relatively recent origin. Twenty-three states have departments which in
their present form date back no farther than 1909 and 1910. Only 14
states have departments established before 1900.2 The records up to
1910 in most of these departments are either not available or are hopelessly incomplete. In most instances bank supervision was first undertaken by state auditors, state examiners, state treasurers, or insurance
commissioners. It consisted of little more than the collection and publication of reports of condition sent in from time to time by the banks
in response to the call of the supervising officer. During this period there
was little real examination of banks, and practically no enforcement of
such regulatory laws as were on the statute books. These incomplete
supervising agencies expended little effort toward the educational phases
of increasing the regulatory powers of the state, although such activity
is today a generally recognized duty of a department.
Indiana's development in state supervision of its financial institutions
has been typical of these general lines of evolution. Supervision was
'In 90 states a single department supervises banks, building and loan, and small loan
association,
. In 12 states, a single department supervises banks and building and loans
only, and in 7 states the banking department has no other types of financial institutions
under its control. In 8 states, a single department supervises banks and small loan companies only, and in 1 state the department supervises insurance companies in addition
to banks and small loan companies.
2 The oldest banking department in the United States is that of Vermont, dating back
to 1831.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
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first definitely provided for by the act of 1873. It gave the Auditor of
State privilege of appointing, with approval of the Governor, a bank
examiner. In 1893 building and loan associations were placed under the
supervision of the Auditor of State. It was not until 1919, however,
that the present department of banking was created by the passage of
the Southworth-Symons Act. It is generally recognized that the banking department has been a stabilizing and helpful influence in connection with the supervision and regulation by the state of financial institutions. In view of the recentness of its origin and its statutory
limitations as to the number and recompense of its personnel, the remarkable fact is not that it has done so little, but that it has done so
much, toward the realization of the major objectives of modern bank
supervision. Using the experience gained by this department during
the past twelve years, the counsel of its executive officers and other
experts, and suggestions obtained from a comparative analysis of the
statutes of other states, and governing agencies, both in the United
States and abroad, the Study Commission has drafted a proposal for
modification of the structure and organization of the Indiana department to achieve as rapidly as possible the major objectives of modern
bank supervision in the United States.
THE DEPARTMENT FOR THE SUPERVISION OF FINANCIAL INSTITUTIONS
The proposed bills submitted for the consideration of the 1933
General Assembly by the Study Commission provide for important reorganization of the present department of banking. The purpose is to
enable this department to function flexibly and freely throughout the
years to come in the direction of modern trends of control by the public
of financial institutions, and to assign to the supervision of building and
loan associations and the small loan business a more adequate position in
the department. The bill vests the powers and duties of the department
in a non-salaried board' of four members.' One of these members is to
be appointed by the Governor from a list of four persons nominated by
the Indiana Bankers Association, one from a list of four persons
nominated by the Savings and Loan League of Indiana, and the other
two members are to be appointed, without recommendation from any
specific group, to represent the interest of the general public. The
term of office of these men is to be "staggered" so that one of the positions is open each year. Moreover, not more than two adherents of the
same political party are to hold membership in. the group at the same
time.
Decision to recommend a board of four was reached after prolonged
consideration by the Study Commission. In order to make the controlling
group in the new department non-partisan it was necessary to devise a
board composed of an even number of men. The provision that two of
I The name of this board is "Commission for Financial Institutions." Members of
this board are sometimes referred to as commissioners in this report.
2 This bill does not create a new governmental agency. Since the commissioners
serve without compensation, the paid executive p(rsonnel of the new departrnent will not
exceed that of the present department. Any increased expenditure by reason of increased
activity will not impose additional burden on general taxpayers of the state since the
entire expense of the department is paid by the institutions supervised in the form of
examination and license fees.
6-48149
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the controlling members be chosen from lists submitted by the Indiana
Bankers Association and the Savings and Loan League was included for
a three-fold purpose: to protect the department still further from the
influence of partisan politics; to insure that the commission always will
have at least one representative acquainted with the technical processes
of banking and one acquainted with building and loan operations; and
to place a larger degree of responsibility for the character of their supervision upon the state organization of each of the two major industries
concerned. Making these industries partially responsible for the quality
of their supervision, yet leaving the balance of power in the hands of the
representatives of the general public should prove desirable. The Study
Commission believes representation by the banks and building and loans
should promote cooperation between the supervisory authorities and the
institutions supervised, replacing the antagonism that frequently has
characterized these contacts.
To protect the Indiana public, however, from reprehensible practices or negligence on the part of any member of the commission, the
bill provides that "the Governor may remove any member of the commission at any time after hearing for inefficiency, incompetency, or
neglect of duty." Moreover, it is provided "that no member of the
commission shall vote upon any question which affects exclusively any
financial institution or proposed financial institution of which he is an
officer, director, or an employee, or in which he may be otherwise
interested."
Boards or commissions of various natures are a part of the bank
supervisory structure in 14 states.' The duties of these boards, however,
are limited largely to perfunctory reviews of petitions for issuance of
charters to new institutions, and to service as a general advisory council
to the superintendent of banks. ln some instances, appeals from the
rulings of the superintendents of banks may be taken to them.
The duties and powers granted to the commission in the proposed
Indiana statute,' however, are much different and much broader. The
proposed bill confers upon the non-partisan, non-salaried board of control of the department sole authority and responsibility for the supervision, regulation, examination, and liquidation of all financial institutions heretofore under the jurisdiction of the present banking department. The commission is given power to make its own rules and regulations: for the conduct of its meetings and for the work of the department; for regulating the methods and standards of examinations and
reports; for defining safe and unsafe conditions, and sound or unsound
practices for conducting business of those institutions under the jurisdiction of the department; for regulating the withdrawal of funds and
notice thereof in times of emergency; and for voluntary or involuntary
liquidation of financial institutions. The commission is not granted
power, however, to take action inconsistent with the financial code of the
North Dakota.
'Alabama, Connecticut, Iowa, Kansas, Michigan, Nevada, New York,
Oklahoma, Oregon, Rhode Island, South Dakota, Texas, North Carolina.
was passed
2 A form of Commission control somewhat similar to this Indiana proposal
state has long been one of the !cadets in
by the 1932 New York leigislature. New York
state bank supervision.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
83
state. The desire was to provide a flexibility of action that would prove
desirable in emergency situations, and allow solution of unforeseen problems that might arise in interims between legislative sessions.
A particular problem of this nature is specifically recognized by
granting to the commission the power to regulate the "withdrawal of
funds from any financial institution to which the act is applicable."
The problem of hysterical "runs" by bank depositors is one that received
the utmost consideration from the Study Commission. Early in 1932
waves of panic swept through certain sections of the United States.
They reached such proportions that solvent banks in 22 states were
forced to restrict their payment to depositors in order to keep from
closing their doors. In most instances, such action on the part of the
bank was without legalization. Notwithstanding this fact questionnaires
sent by the Study Commission to the various state bank departments
throughout the country revealed that not less than 658 banks had taken
this somewhat desperate chance to prevent closing. (See Table XLII.)
TABLE XLII
BANKS RESTRICTING PAYMENT OF DEPOSITS'
(To May, 1932)
NAME OF STATE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Alabama
Arkansas.
Colorado
Connecticut
Delaware
Georgia
Idaho
Illinoist
Indiana
Kansas
Kentucky
Louisiana
Maine
Michigan
Minnesota
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
Montana
Nebraska
New Hampshire.
New Mexico
New York
North Dakota
Oklahoma
Rhode Island
South Carolina.
South Dakota
Tennessee
Texas
Vermont
Virginia
Washington
West Virginia,
Wisconsin
Wyoming
16. Mississippi
17. Missouri
Total
Number of
Banks in
Each State
Number of Banks in each State with
Restricted Withdrawals
On all accounts
On sayings accounts
220
329
150
191
45
323
96
1,221
705
806
419
191
79
639
752
280
1,110
122
602
65
27
566
254
320
25
138
279
380
700
58
306
228
1
2
4
None
None
1
None
None
1
2
50
Usual Notice
None
None
200
None
20
1
None
50
50
Uncertain
None
20
12
7
None
None
None
None
None
8
None
None
5
None
50
1
11
None
None
2
40
None
None
None
3
None
4
None
None
None
56
5
None
None
None
None
6
781
58
19
None
19
None
448
210
2
None
iData compiled from questionnaires sent to the 48 state banking departments. No replies were received
from 13 states.
,The banking department of Illinois could give nn detailed information as to any restrictions but it is known
that ROMC banks in that state took this step. Examples are the institutions of Urbana and Aurora.
'No definite information aR tO actual number of banks on the restricted basis. Practically all the banks in the
northwestern part of West Virginia adopted the rule of restricted withdrawals. All banks in Martinsburg
adopted the rule. Also banks in Parkersburg and Whe,eling.
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84
Prior to June, 1932, legislation in at least four states' had taken
cognizance of the seriousness of such a situation. Legislation had been
proposed in at least two others.' All of the recently developed plans
used by these states were carefully studied as the basis for formulating
the proposal to give the Indiana Department flexible discretionary powers
needed to deal with these situations as they may arise in future years.
PERSONNEL OF PROPOSED DEPARTMENT
The chief executive and administrative officer of the new Indiana
department is designated by the proposed statute as director, and is appointed by the commission. He is to serve at its pleasure and is subject to removal only by it. He is required to have a knowledge of the
business of banks and building and loan associations, and to be familiar
with the nature and problems of the respective financial institutions to
which the act is applicable. He is to be chosen solely for fitness and
irrespective of political belief.
The activity of the department is to be carried on in three divisions ;
namely, (1) division of banks and trust companies, (2) division of building and loan associations, and (3) division of small loans. Each division
is to have charge of the administration of the laws governing the respective financial institutions with which it is concerned. Each division is
under the direction of a supervisor appointed by and acting under the
director of the department and the commission. The director of the
department, with the approval of the commission, and upon recommendation of the supervisors in charge of each division, is given the power to
appoint such examiners, assistants, and other employees as may be found
necessary to carry on the work of the department. Supervisors, examiners, and other employees of the department are to be chosen solely for
their fitness and irrespective of their political affiliations. The bill provides that the "technical or professional qualifications of any applicant
shall be determined by examination, professional rating, or otherwise,
as the commission, in its discretion, may determine." It is believed that
this gives the commission sufficient power to establish a type of civil
service procedure which will be effective in securing the best type of
employee but will afford no handicap by limiting selections solely to the
candidate's ability or lack of ability to pass examinations.
The department is further safeguarded from political domination
by the requirement that not more than one-half of the personnel including
the examining force may be adherents of the same political party.
Another section of the proposed statute provides that it is a misdemeanor
for any person to solicit from any official or employee of the department
any money or other thing of value for political assessments or contributions. The supervisors, examiners, and assistants are not appointed for
any specific period of time, but' serve at the pleasure of the director with
the approval of the commission. Salaries of the directors, supervisors,
and other employees are to be fixed by the commission, subject to the
approval of the state budget committee.
1 Florida, Massachusetts, Michigan, and Virginia.
Illinois and New York.
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
85
These flexible provisions should do much to solve the personnel
difficulties under which the present banking department has labored.'
The number of bank examiners in Indiana was limited to ten by
the statute of 1919 and has not been changed regardless of the fact
that until 1925 the number of financial institutions in Indiana increased
each year, and that after 1925 unprecedented economic stress made the
problems of the bank examiner much more difficult and time-consuming
than formerly. This situation has been only partially and inadequately
corrected at certain times by the action of the budget committee in
allowing the banking department a limited number of assistant bank
examiners.'
Q
As long ago as 1924 Mr. Peter G. Cameron, formerly secretary of banking of Pennsylvania, writing on "Securing Competency in Bank Examiners," in the Annals of the
American Academy of Social Science, May, 1924, made the assertion that the incompetency of bank examiners was due to inadequate compensation, the political consideration
in the appointments, and inadequate and indefinite standards used in the selection of
these men. Concerning the last point, Mr. Cameron said: "Inquiry of the forty-nine
state and federal agencies throughout the United States charged with the supervision of
banking institutions reveals the fact that but four of them have adopted what might
be termed standard requirements for appointment to the position of bank examiner.
The Currency Bureau at Washington and three of the states have prescribed certain
qualifications that must be met and require an applicant to pass an examination before
appointment can be secured. Ten of the states require applicants to pass examinations,
but have not adopted standard requirements in addition thereto. In four of the states
bank examiners are under civil service regulations. In twenty-five of the states practical
banking experience is required but no formal examination is necessary to secure an
appointment. Nearly all replies from agencies that have not adopted sta,ndard requirements state that the matter is under consideration, and express the hope that a satisfactory standard may be worked out and adopted in the near future. In a number of the
replies. deprecation is expressed of the fact that political considerations apply to a
greater or less degree in the selection of appointees for these positions, a fact which
militates against the policy of adopting standard requirements. Many of the replies relate
the difficulty experienced in retaining the services of competent men because of the
inadequacy of the salaries paid.")
Commissioner Luther F. Symons, in a report to the study commission dated February 27, 1932, discussed the personnel of the department as follows:
THE DEPARTMENT OF BANKING OF INDIANA
The Department of Banking of the State of Indiana consists of three divisions, all
under the direct power of the Bank Commissioner and the Deputy Bank Commissioner.
FIRST DIVISION, is that of BANKS, which includes State Banks, Trust Companies.
Private Banks, Savings Banks and Mortgage Guarantee Companies. These are under
the direct supervision of the Bank Commissioner and the Dpputy Bank Commissioner.
In addition to the two executives this division has ten examiners whose territories cover
the entire state. On June 30, 1931, there were 403 state banks, 123 trust companies, 94
private banks and 5 savings banks. An effort is made to examine these twice yearly.
SEcoND DIVISION, is that of BUILDING AND LOAN, which is under the direct supervision
of the building and loan clerk. In addition to the supervisory officer this division has
three examiners whose territories cover the entire state. Every building and loan association is examined once yearly. There are at the present time 384 building and loan
associations in Indiana.
THIRD DIVISION, is that of PETTY LOANS AND CREDIT UNIONS, under the direct supervision of the Supervisor. In addition to the Supervisor this division has one examiner
who covers the entire state. There are at present 380 small loan or personal finance
licenses in the state.
There are at the present time 65 credit unions most of which are in Indianapolis,
Indiana. These are examined once yearly, partially by the regular bank examiners and
partially by the small loan examiner.
There are at the present time 2'6 regular employees in the Department of Banking.
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The act of 1919 creating the department also limited the number
of building and loan examiners to three. Since there are nearly four
hundred building and loan associations now (1932) operating in Indiana
an examining force of three men is obviously very inadequate. The
smallest association in the state can not be examined effectively by one
man in less than a day. In this state are several very large associations.
To examine one of these larger associations effectively, the services of
several men working for a number of days undoubtedly are necessary. It
has been physically impossible for the present force to conduct comprehensive examinations of this sort.
For several years building and loan leaders have protested against
the inadequacy of their state supervision. They contend that the building and loan executives of the state wish thorough examinations and are
willing to pay a fair share of the department's expense in order to get
this service.
Although there are nearly three hundred and fifty institutions under
the jurisdiction of the small loan division of the present banking department, this division has been limited to one examiner. This one examiner has the entire state for his territory. Under no circumstances
could adequate examination of each of these institutions be made once
annually.
The loss of examiners by the Indiana Department to other more
remunerative fields has been increased also by the inadequacy of compensation. The salary of the bank commissioner is fixed by statute at
$5,000, that of the deputy bank commissioner at $4,000, and that of the
building and loan clerk and of the industrial loan supervisor at $3,600
each. The maximum paid to bank examiners is $250 a month, to the
building and loan examiners $200 a month, and to the industrial loan
examiner $125. Since salaries of federal bank examiners' and of executives of banks and building and loans, where tenure of office is reasonably
secure, are much higher, the Indiana state banking department has
always been faced with the intermittent loss of its more desirable and
competent examiners because of statutory and budgetary restrictions on
salaries of the personnel.
The revenues of the proposed department are to be provided by the
examination and license fees charged the various financial institutions
to which the act is applicable and not one cent of the cost of administering the department is to be paid by the public according to the plan
proposed by the Study Commission for Financial Institutions. To make
these revenues sufficiently susceptible to the changing needs of the department, it is provided that all fees for examinations shall be fixed
by the department annually after an audit of the comparative cost of
examining the several classes of institutions has been made. The amount
of revenue needed may vary from year to year. In times of financial
stress it is imperative for the public safety that the department be
allowed to increase its personnel. After these periods of strain have
passed, in fairness to the financial institutions under the jurisdiction
of the department, the personnel should be reduced.
1 Salaries of Chief Examiners for National banks, from $10,000 to $20,000 ; National
bank Examiners and assistants range from $2,500 to $9,500.
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
87
The proposed bill provides that all money derived from fees charged
by the department is to be paid into a special Financial Institutions
Fund and the expenses of operating the department are to be paid solely
out of this fund. It is provided that at the end of each year any excess
remaining in this fund over $25,000 shall revert to the general fund
of the state. A figure of $25,000 was fixed in this connection after considerable investigation of the operating expenses of the proposed department. It is believed that $25,000 will provide an adequate working
balance for the department following the ending of the fiscal year, and
consequently, any excess may safely be donated by the banks, building
and loans and other financial institutions to the state's general fund.
Under the proposed new law very stringent general restrictions are
placed on the director, the supervisors, and other employees of the
department. No other state, in the opinion of the Study Commission,
at this time so adequately safeguards against undesirable contacts between supervisory authorities and institutions under their control as
will Indiana under the proposed statute. It provides as follows: "While
exercising the powers and duties of his office,... neither the director,
nor any supervisor, examiner, or assistant, shall be an officer, director,
or shareholder of any financial institution to which this act is applicable
nor shall the director or any supervisor, examiner, assistant or other
employee be interested in or receive, either directly or indirectly, any
fees, perquisites, emoluments or other compensation therefrom. Neither
the director nor any supervisor, examiner or assistant shall be or
become indebted, directly or indirectly, either as borrower, endorser,
surety or guarantor to any financial institution under his supervision
or subject to his examination."
If the director or any supervisor, examiner or assistant shall be a
shareholder in any such financial institution at the time of his appointment, he must dispose of such shares of stock. The limitations, however, except a mortgage loan upon the employee's home from any building and loan association.
In addition to these safeguards, it is made unlawful "for any examiner or assistant to disclose to any person other than officials of
the department of financial institutions by the report made to it or in
compliance with the order and precept of the code, the names of depositors and shareholders in any financial institution, or the amount of
money on deposit therein at any time in favor of any depositor, or to
disclose any other information concerning the present accounts of such
depositors or shareholders."
THE RELATIONSHIP BETWEEN THE RATE OF CIIARTERING OF BANKS
AND THE RATE OF FAILURE
Authorities are unanimously agreed that the indiscriminate chartering of banks has been one of the major causes for the difficulties
through which we have recently passed. Receivers, liquidating agents,
and other persons familiar with the affairs of failed banks suggested,
in 41 instances, that bank failures in Indiana have been due to improper
chartering. (See Table XL.) Intimate knowledge of individual failures,
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Federal Reserve Bank of St. Louis
88
however, leads to the inescapable conclusion that many of
the practices
leading to bank failures, were directly caused by "cut-thr
oat" competition
which sprang up in various communities as a result
of too many banks
or of the chartering, often for direct or indirect
political reasons, of
"spite" banks.
Instances are known in Indiana of new bank charters
being sought
and obtained by church groups, lodge groups, or
political groups antagonistic to the church group, lodge group or
political group in control of the existing institutions. In numerous
instances from 1920 to
1932, villages of less than 500 people had two
or more banks operating.
Competition in such communities necessarily was
bitter because it was
nothing less than a death struggle between
the contending business
groups, and consequently desperate chances were
taken nearly always
making for bad banking practice. In some instance
s, bankers with long
records of successful management were driven by the
emergency in which
they found themselves to take "long" chances and to
indulge in practices not sanctioned by sound banking management.
Many of the new banks that were chartered between
1910 and 1924
were chartered by groups not in sympathy with the conserva
tive or
anti-inflationary policies of existing institutions. During
this period in
which the most rapid increase in banking units took place
in Indiana,
much "inflation-madness" was apparent throughout the
state. If certain groups were unable to satisfy their demands for banking
facilities
at one bank, they would threaten to take their business to competi
ng
banks where perhaps more agreeable treatment in the matter of borrowing awaited them. Many customers borrowed from several banks, but
allowed each banker to think that he alone was advancing them
credit.
If all the bankers in a community were "old-fashioned" and "unreasonable", the usual procedure was to start a new bank by way of protest, a
bank that would be unfettered by "old fogey ideas" as to the caution with
which banks should be operated.
As time went on and inflation increased, deposits in all institutions
mounted steadily. Funds accumulated faster than loan applications
were made, and consequently competition for loans was keen. Equities
seemed always to increase. As a result the new and oftentimes untried
and unsound bank executive appeared to succeed as well or even better
than the more experienced and conservative executive. It was not surprising, therefore, that many seasoned bankers were swept into this mad
maelstrom of reckless and "cut-throat" competition.
Whatever customers purchased, whether merchandise or land, they
were able to sell at extraordinary prices. The produce of the farm and
of the factory brought unusual returns. Since profits seemed always
to be made by expanding, large numbers of people in this state and
others did not reduce their indebtedness with the unusual returns that
they enjoyed from their business. Continuously rising prices, the widespread sales methods used by the Government in distributing Liberty
Bonds and other U. S. securities, and the general hysteria of the War
and post-War periods gave rise to a generally accepted philosophy that
debt was a blessing in disguise. Famed oracles of "progress" wrote
ponderous articles in the popular magazines urging young men to go
into debt, to take chances, else they would never succeed.
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Cepa.—
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
89
Even some of the most conservative bankers eventually succumbed
to this philosophy. Large sums were advanced to land speculators and
to expanding commercial and industrial operators. Excess credit lines
became commonplace instead of unusual. Many bankers even fell into
the practice of borrowing for the purpose of relending. The spirit of the
decade, and the sharply competitive struggle for profits and for existence,
made it nearly impossiblt for the average banker to go contrary to the
trend.
When deflation first began in 1921, banks found themselves with
distended loan portfolios that would not liquidate readily. Deposits,
however, dropped in most agricultural sections and to a lesser extent in
industrial centers. Competition for deposits, therefore, increased during
this period and high interest rates on time and savings deposits became
the rule in all parts of the state where rivalry was keen. Instances
are known of banks paying as high as six per cent for so-called time
deposits. Such utterly unsafe rates furnish a striking commentary upon
the desperateness of the competitive struggle with which the financial
institutions were confronted.
It is particularly significant that, in the states where the competitive
struggle for business has not been so keen and where the number of
institutions chartered has not been increasing beyond the normal supporting capacity of the population, the rate of failure of banks has
been small.' The number of banks increased in this period in some states
until there was a greater proportion than one bank for each thousand
persons. In practically all instances the most extreme examples of this
situation were in the newer agricultural states where the population
had little accumulated wealth. In 1920, Indiana's situation was approximately 1 bank for each 2,772 persons.' In every instance, states with a
low number of persons per bank have had a high rate of failure, and
Indiana with her "over-banked" condition fell into this category.
Of those states with more than 7,500 persons per bank in 1920
not a single one has since suffered bank failures at a rate comparable
with the country as a whole. In the majority of such states the rate
of failure has been quite negligible. On the other hand, states with a
low number of persons per bank have in every instance suffered a high
rate of failure. North Dakota with only 720 persons per bank in 1920
has lost 65.8 per cent of those institutions since that time. This
rate is exceeded by only one other state, Florida. Although Florida
It is significant that no state with a really small bank population has experienced a
small failure ratio. Those states with a less than 10 per cent ratio of bank suspensions
since 1920 to banks active in that year are Delaware, District of Columbia, Maine, Massa,
chusetts, New Hampshire, New York, Rhode Island and Vermont. (See Table XLIII.)
Six of these states have a bank population varying from 4,700 to 12,000. (See Table
XLIV.) Vermont had only 3,263 and New Hampshire 3,544 persons per bank in 1920.
They would appear to be exceptions to the rule that large bank populations are necessary for low rates of failure. Such is not the case, however. Although they have a
comparatively low population per bank this is not the result of the addition of many
new institutions injecting competitive feuds into the industry. They have added comparatively few banks since 1890.
,Banking institutions increased in number in Indiana until 1924. In that year there
were approximately 2,644 persons per bank.
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90
TABLE XLIIP
BANK SUSPENSIONS FROM JULY 1, 1920 TO JUNE 30, 1932,2 EXPRESSED AS
PERCENTAGES OF TOTAL BANKS ACTIVE IN 1920
STATE
Alabama
Arizona .
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia.
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine.
Maryland.
Massachusetts.
Michigan
Minnesota
Mississippi.
Missouri
Montana
Nebraska
Nevada.
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
()regon
Pennsylvania.
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont..
Virginia
Washington
West Virginia
Wisconsin
Wyoming
All States
Active
banks
in 1920
Total
bank
suspensions
Ratio of suspem
sions to banks
active in 1920
352
1(18
30.6%
87
487
723
403
220
46
298
82
121
52.8
61.1
11.3
30.0
47
or
...,
3
11.3
6.3
45
265
738
222
1,610
1,057
1,763
1,349
584
267
161
282
465
700
1,515
354
1,662
431
1,196
33
125
388
123
1,056
623
898
1,145
959
277
1,546
48
461
694
546
1,582
133
108
488
394
340
976
160
1
210
::s.-,
9:2
.)92
314
S-17
319
1;12
54
5
31
44
247
543
174
541
220
513
7
4
48
63
89
292
591
198
307
73
218
2
272
456
129
371
42
3
99
97
104
146
67
2.2
79.2
62.1
41.4
36.7
29.7
48.0
23.6
22.6
20.2
3.1
10.9
9.4
35.2
35.8
49.1
32.7
51.0
42.8
21.2
3.2
12.3
51.2
8.4
46.8
65.8
17.2
32.0
26.3
14.1
4.1
59.0
65.7
23.6
23.4
31.5
2.7
20.2
24.6
30.5
14.9
41.8
30,078
•
9,625
32.0%
'Suspension data from Report of Bank Management Commission of the American Bankers Association.
Operating Banks taken from 1927 Report of the Comptroller of tile Currency.
'Data for National Banks for 1920-1923 inclusive are for fiseal years ending October 31. Includes National
Banks, State (Commercial) Banks, Savings Banks, Private Bunks, and Trust Companies.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
91
had a higher number of persons per bank than did North Dakota in
1920, the rate of increase for her institutions has been extraordinarily
rapid and the banks have indulged in speculative operations to an extent
that is well known. (See Table XLIII, Table XLIV.)'
1 Dr. George W. Dowrie, Professor of Finance in the Graduate School of Business of
Stanford University and one of the foremost authorities on contemporary banking policies
in the United States, in his book, "American Monetary and Banking Policies" (Longmans.
Green and Co., 1930) says:
"Investigations of the conditions back of bank failure epidemics show that they occur
in overbanked states, and that the tendency of the banking departments of these states
has been to grant charters with too free a hand when times are good. Since one needs
only a small amount of capital to start a bank, a group of farmers and townspeople can
much more easily organize an enterprise of their own than be dependent upon some
existing institution. In most states they are entitled to a charter so long as they comply
with simple formalities.
"Writing insurance, selling land, operating a farmers' elevator or a general merchandise business, as side issues, seem to be essential to a small banker making a good
living, for a study of 206 small banks in a middle western state shows that the net
profit from the operations carried on in the bank itself averaged but $677 in a period
of relatively good times. Now that the state and national agricultural credit institutions have taken the cretan of the farm loan business, and th,_: par-collection system of
the Federal Reserve has deprived country bankers of a large part of the former imposing
volume of exchange charges, it is all the more difficult for a country banker to make his
enterprise pay ...
"With the elimination of excessive competition in banking, some of the practices
which have tended to weaken banks will disappear, for example, paying five or six per
cent to attract time deposits from older states ; carrying customers' checking accounts
regardless of how unprofitable they may be to the bank ; extending- credit without reference to the extent of the borrower's other obligations. A recent investigation in Minnesota showed that one borrower in the rural county in question had been obtaining loans
from five different banks, none of them knowing that he had borrowed from the others.
Large numbers were receiving credit accommodation from at least two institutions.
Unless machinery is maintained for the complete exchange of credit information, it will
be easy for a borrower to obtain from several sources the full amount permitted by his
financial condition and the limit imposed by the law."
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TABLE XLIV,
NUMBER OF PERSONS PER BANK IN EACH STATE BY DECADES
1890-1930
STATIC
Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida .
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire .
New Jersey
New Mexico
New York
North Carolina
North Dakota
()hio
()klahoma
()regon
Pennsylvania
Ithode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Average number of persons per bank for all states
1890
1900
1910
1920
1930
32,200
11,031
49,052
.5,231
4,862
3,948
7,659
17,723
12,626
19,971
8,049
9,888
10,490
4,026
2,763
9,111
39,949
4,623
11,330
4,975
7,784
6,300
21,857
5,617
5,498
1,679
9,472
2,874
9,382
13,357
9,001
27,895
3,238
9,490
51,731
6,484
10,372
3,140
23,022
2,454
16,069
11,067
8,783
4,104
15,334
4,203
19,559
6,719
2,978
38,097
6,471
26,766
5,157
6,747
4,706
7,390
13,936
13,553
12,245
7,034
9,220
8,445
3,033
3,020
6,839
17,713
4,629
9,505
5,995
7,496
5,339
13,729
4,679
5,794
2,079
7,056
3,374
9,915
13,951
9,863
16,050
2,085
8,073
6,478
8,616
9,187
4,984
24,820
1,958
18,204
12,195
6,919
3,862
13,735
7,970
7,549
5,998
2,803
9,763
4,088
5,810
3,451
2,736
5,519
4,130
10,680
4,561
5,470
1,627
5,038
3,201
1,634
1,604
3,635
7,330
4,526
5,536
7,811
5,110
2,269
7,218
2,619
2,686
1,330
2,729
3,529
7,666
4,092
10,195
5,382
859
4,637
1,822
2,990
5,842
10,049
5,190
974
5,735
3,466
3,972
3,436
5,498
3,649
4,331
3,795
1,718
6,671
3,841
3,597
4,740
2,331
6,276
4,745
9,724
3,654
3,424
1,945
4,028
2,772
1,363
1,311
4,139
6,736
4,770
5,141
8,285
5,241
1,575
5,059
2,060
1,273
1,083
2,345
3,544
8,134
2,929
9,835
4,108
720
5,030
2,115
2,828
5,640
12,592
3,653
917
4,282
2,947
3,378
3,263
4,732
3,444
4,306
2,697
1,215
8,244
9,680
4,684
12,992
3,837
6,352
3,908
12,172
7,093
7,308
3,428
4,533
3,540
1,957
1,789
4,737
9,467
6,087
7,220
9,465
6,330
2,528
6,381
2,938
2,095
1,783
2,601
3,845
7,217
7,988
11,220
8,109
1,860
6,721
6,021
4,183
6,250
19,643
10,051
1,852
5,463
4,504
4,978
3,491
5,231
4,695
5,963
3,140
2,718
7,688
7,323
3,988
3,514
5,113
'Includes National Banks, State (Commercial) Banks, Savings Banlcs, Private Banks, and Trust Companies.
Bank figures taken from 1927, and 1930 annual reports of the Comptroller of the Currency. The population
figures secured from 1930 census report on population.
A large majority of the banks that have failed in Indiana since 1925
had been operating a comparatively short time. (Tables XLV and
XLVI.) A large majority of them were chartered during the decade
and a half of expansion which followed 1910. This fact again supports the view that most of these institutions were never economically
justified.
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TABLE XLIT'
DATE OF INCORPORATION OF INDIANA BANKS THAT FAILED FRom 1925 TO 1931
Number of Number of Number of Number of Total
National number of
Private
Trust
State
of banks
banks
Companies banks
banks
YEAR OF INCORPORATION
1931
1930
1929
1928
1927
1926
1925
1924
1923
1922
1921
1920
1919
1918
1917
1916
1915
1914
1913
1912
1911
1910
1909
1908
1907
1906
1905
1904
1903
1902
1901
1900
1899
1895
1894
1893
1891
1890
1889
1887
1886
1885
1876
1867
Total
10
1
1
1
4
4
3
7
7
10
7
8
4
5
9
1
4
9
5
4
5
6
3
2
4
3
1
2
1
1
1
1
1
1
1
3
1
I
1
1
1
1
1
0
1
1
1
2
1
0
2
0
9
0
0
0
2
1
3
1
2
2
0
2
2
1
3
0
1
1
1
1
1
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2
0
1
0
0
0
0
0
0
1
0
0
0
0
1
1
0
0
1
4
2
1
3
0
2
1
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1
1
0
1
0
0
0
0
0
0
0
0
0
0
1
0
1
1
1
0
1
2
1
1
1
2
1
1
1
0
0
2
0
0
0
0
1
0
1
0
0
0
1
14
3
4
3
6
4
5
7
16
11
7
8
6
6
13
4
6
12
7
11
9
9
11
3
8
6
4
4
3
3
2
1
3
1
1
3
1
2
1
2
1
1
1
1
147
42
21
23
233
'Date of incorporation of National Banks failing from 1925 to June 30, 1931 secured from Comptroller's
annual reports. Date of incorporation of National Banks failing from June 30,1931 to December 31,1931 secured
from July
of Rand McNally's Bankers' Directory. Dates of incorporation for all other failing banks secured
f rom Indiana Bank Commissioner.
TABLE XLVP
AVERAGE LENGTH AND RANGE OF LIFE OF INDIANA BANKS THAT FAILED FROM
1925 To 1931
(Classified by Types)
TYPE OF BANK
State
Private
Trust Company
National
Average life
in years
Life range
in years
16.6
18.2
16.3
25.4
1 to 56
1 to 31
1 to 30
3 to 65
'Figures as to date of opening and closing of failed banks from special study made by Indiana Bank Commissioner and the Annual Reports of the Comptroller of the Currency.
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94
The new charter record in the building and loan field has been
unsatisfactory also. Nearly all building and loan leaders are unanimous
in their opinion that unwise expansion in certain localities has contributed to the unsettled condition in the building and loan business.
Since 1910 new charters have been granted in many localities already
well supplied with building and loan facilities. To this unwise expansion many building and loan leaders attribute much of the "cut-throat"
competition which they have had to face in Indiana. This type of competition has been charged with a large part of the responsibility for
the growth of practices in the building and loan business which are now
proving embarrassing.
The restrictions surrounding the granting of licenses to small loan
operators has been a subject recently widely discussed. As a result
of this discussion and of the experience of the small loan business, the
Russell Sage Foundation recommended in its 1932 model code much
stricter regulation of the licensing of new lenders.
THE NEW PROPOSAL FOR THE CHARTERING OF
FUTURE FINANCIAL INSTITUTIONS
One of the most important changes in the existing Indiana code is
made by that provision of the proposed new law which transfers the
powers and duties of the State Charter Board for Banks to the new
Department of Financial Institutions and provides specifically for much
more scientific control of the chartering or licensing of all financial institutions governed by the new department. The proposed new law requires
that applications for the organization and incorporation of all new financial institutions—banks, building and loans, mortgage guaranty companies, small loan associations, credit unions, etc., be filed with the department on forms prescribed by it. On receipt of the application for the
organization of the new financial institution, the department is required
to give notice thereof by publication in the community wherein the institution is to be located and by notifying directly all other persons interested. The bill also provides that upon the filing of the application, the
department shall make a careful investigation relative to the financial
standing and character of the applicants, the experience of the officers of
the proposed institution, and the public necessity for the organization of
the institution. A public hearing before the commission is provided, at
which time the applicants and other parties interested both for and
against the granting. of the charter will be heard. The commission is
given complete authority to grant or refuse the application as it may in
its judgment deem best for the public welfare.
The provision that the qualification and experience of the officers
of the proposed financial institution be made a matter for investigation
is a definite step forward. Men without desirable records in the operation of these types of institutions would thus be barred from starting
them. In many instances in the past, bank and building and loan
charters were granted quickly and with little formality upon the showing made by the promoters only. The executives of the financial institutions already in the field and the general public were not given
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REPORT OF STUDY COMMISSION
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No. 10
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opportunity to express their opinion of the necessity for the proposed
institution. This should not be the practice under the new plan here proposed. The provision requiring wide-spread publicity at least ten days
prior to the hearing on the application makes secrecy and undue political
pressure practically impossible. It should be remembered also, that the
proposed board which is to pass upon these applications will be nonpolitical in character.' Moreover, at least two of the board of control
of the new department will be experienced financiers chosen for membership on the board by reason of their desirable experience, training, and
high standing in their industries.
THE ANNUAL REPORTS OF THE DEPARTMENT
The bill provides that the new department shall report annually to
the Governor a detailed record of its activity. It is provided, moreover,
that the report "shall contain the recommendation of the department for
the amendment, repeal or passage of any law which the department may
deem necessary or desirable." This is a most important provision.
Recommendations for legislative change have long been an established
feature of the report of the Comptroller of the Currency. No division
of the state government is so well informed concerning necessities for
legislative consideration of laws regulating financial institutions as is
the department concerned with their supervision.
The department should maintain reasonable and modernized facilities
for continuing research and analysis. The events between the biennial
sessions of the legislature, interpreted in the light of the findings of the
research division, should provide scientific basis for legislative readjustments. No other agency in the state will be in a better position to know
what form these changes should take than the proposed new Department
of Financial Institutions. Because of the constant contact between the
department and the Indiana Bankers Association and the Indiana Savings
and Loan League through representation of these groups on the governing body of the department, the legislative proposals of all three of these
vitally interested agencies should, more often than in the past, be cooperatively prepared. They should contain not only the proper technical
viewpoint of the industry but also, more importantly perhaps, the viewpoint of the general public expressed through the two members of the
board of control appointed to represent the people's interest. Particularly
should this be true if the department maintains intimate contact with the
other forty-eight departments in the United States, as is contemplated by
the Study Commission in their recommendation of a complete statistical
and research facility in the new Department of Financial Institutions.
Another provision of the bill requires that the statistics concerning
the operations of banks published in the annual report of the department shall be comparable in form to the statistics published by the
Comptroller of the Currency in his report. One of the great difficulties
presented by the dual system of banking in the United States is the
At the present time, the charter board is composed of the Governor, Secretary of
State, and Bank Commissioner. As a consequence, at least the majority of the board
and often all three members are of the same political belief.
•
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96
difficulty of obtaining comparable data on the operations of the two existing systems. The Comptroller of the Currency supervises banks located
in all forty-eight states. It is more logical to have the Indiana department follow the form prescribed by him than to expect him to publish
statistics for Indiana comparable in form to those published by the
Indiana department of banking.
EXAMINATIONS MADE BY THE DEPARTMENT
The proposed new department is to be given the power of administering oaths and examining the records of any financial institutions under
its jurisdiction. The number of examinations required for each bank or
building and loan association per year is left to the judgment of the department. Many authorities are agreed that the statutory requirement
for a specified number of examinations for each institution per year may
prove more harmful than beneficial. Weak and tottering banks or
building and loan associations needing frequent examination and much
attention may of necessity be neglected by supervising authorities forced
to fulfill a statutory requirement of two or three annual examinations
of all financial institutions in the state, many of which perhaps need very
little attention at that particular time. The flexibility of this provision
concerning the number of examinations per year is in harmony with the
general philosophy of the entire proposal; namely, that statutory provisions be sufficiently elastic to allow adjustments to changing conditions.
Supervising authorities have long contended that they have insufficient disciplinary powers over going institutions.' This assertion has
been made repeatedly by the supervising authorities of Indiana and was
emphatically reiterated by Commissioner Symons in a personal statement before members of the Study Commission.' These authorities have
contended that practically their only disciplinary power was the drastic
and community-wrecking order to close the institution needing discipline.
Such an extreme measure naturally should be used only after the bank
or building and loan is definitely insolvent. There should be intermediate disciplinary steps so that unwise tendencies in a going institution may be checked as soon as they are ascertained by the examiners.
Considerable time therefore was spent in formulating those provisions of the bill designed to give disciplinary powers to the supervising
authorities to be used in the case of solvent and going banks. A general
example of how the Study Commission has proposed to set up such
powers is found in the provision that if, at any time, it appears to the
department that any financial institution is conducting its business contrary to law or in an unsafe or unauthorized manner, or that the capital,
surplus, or reserves are impaired, or that such financial institution has
failed to comply with any order or rule of the department, the delof The Proceedings of the 'Natio.nal Association of State Bank Supervisors and
Recent Reports of the Comptroller of the Currency.
2 Commissioner Symons presented recommendations and submitted to detailed questioning on the part of members of the Study Commission at a meeting held February 27,
1932, in Indianapolis. He enumerated many needs of the department, and these in great
part have been approved and adopted by the Study Commission in its proposed bills.
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REPORT OF STUDY COMMISSION
FOR rNDIkNA FINANCIAL INSTITUTIONS (1932)
97
partment may order the discontinuance of such illegal or unauthorized
practices, the restoration of impaired capital, or surplus, or strict compliance with its orders and rules. If any financial institution fails to
comply with the terms of such an order, the department is authorized
to bring action in the local court to compel it to do so. It is felt
that these provisions should be strong enough to allow the commission to
restrain any financial institution from indulging in practices likely to
result in insolvency—before the insolvency. On the other hand, to protect banks from arbitrary and unreasonable demands on the part of
the Department of Financial Institutions there is constantly provided
throughout the proposed law a recourse to the local court for the financial
institution which may wish to appeal from the discipline of the department.
RECEIVERSHIP COSTS
Another important change made in the financial code of Indiana by
the proposed bill relates to the liquidation of closed institutions. This
change provides for lowering the costs of and expediting liquidation.
Statistics on the cost of receiverships of failed banks have been extremely difficult to compile. The majority of recent failures have not
as yet been completely liquidated, and hence the total cost is not known.
The present state banking department has no jurisdiction over banks
being liquidated by receivers; consequently, it has little pertinent data.
Receivers and county -clerks did not reply readily to letters from the
Study Commission asking for information of this nature. Contact with
enough situations was developed by the Study Commission, however, to
lead to the conclusion that the cost of liquidating financial institutions
under the ancient Indiana receivership system averaged probably not
less than 12 per cent of the deposits involved. One instance was brought
to the attention of the Study Commission of a trust company in current
receivership where the costs were much higher. This institution had
total assets of $300,000, and deposits of approximately $200,000. In 18
months the receiver succeeded in collecting $76,000. The receiver's and
attorney's fees for this effort were $36,000.
On the other hand, many banks through agreement by the local court,
depositors, etc., have been liquidated in recent years by liquidating
agents working in close cooperation with the present department of
banking. Instances were brought to the attention of the Study Commission of liquidations conducted in this manner which have cost as little
as 21/2 per cent of the total assets involved. The experience in other
midwestern states, where the liquidation of all failed banks has been
assumed by the banking department, has shown conclusively that this
method is much less costly to the bank creditors, chief among whom
in each case are the depositors. The experience of these other states
also has been that liquidation through the state departments has been
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98
conducted more efficiently, resulting in a much higher ratio of recovery
by the creditors.'
Although fewe'r building and loan associations have liquidated in
Indiana than have banks, illustrations of long, expensive receiverships in
this field are numerous. Under the existing Indiana law, costs of receiverships for the failed building and loan associations were estimated by the
receivers themselves, replying to a Study Commission inquiry, as varying
from 2 to 100 per cent of the assets in the different institutions. (See
Table XII.) Institutions that have been in receivership for six or eight
years are still so far from final liquidation, according to the receivers,
that the length of the entire receivership cannot as yet be estimated.
(, Indiana is one of only seven states that retains the antiquated
method of liquidating closed banks by receivers appointed by the loc,al
court. (See Table XLVII.) In 38 states, the Bank Commissioner by
virtue of his office either acts as a receiver or performs the duties of a
receiver, or is formally appointed as receiver by the court, or appoints
a deputy to act in that capacity for closed financial institutions.
Some critics of the cost, inefficiency, and slowness of the present
system of liquidation of failed financial institutions have attacked the
honesty and intentions of receivers and attorneys in charge. Many
indictments of this nature are probably undeserved. Receivers and attorneys appointed by the courts in most instances have little or no
experience with bank matters, and consequently are required to devote
much more time to the liquidation of an institution than would be required of experienced persons. The routine matters connected with the
liquidation of closed financial institutions, such as the listing of assets,
the publication, filing, and approval of claims, the collection and compounding of debts, and the sale and disposal of property, can be handled
at much less cost by employees of the department who are paid regular
salaries and who under ordinary conditions should be able to supervise
the liquidation of several institutions at the same time.) The new proposal for Indiana will retain carefully all of the legal prerogatives of
Id
Proceedings of the 30th Annual Convention of the National Association of
Supervisors of State Banks, pp. 68ff.
The percentage estimated by the receivers and liquidating agents to be paid to depositors in all banks failing from 1925 to 1931, inclusive, is 73.2 (see Chapter III). Professor George W. Dowrie in his recent book, "American Monetary and Banking Policies,"
comments thus on the national situation:
"More banks have failed since 1920 than in the whole period from 1863 to 1920.
Whereas in the earlier period, much the greater part of the assets was salvaged and
paid to depositors, it is conservatively estimated that not more than one-half of the
amounts involved in the failures since 1920 will ever be paid ... Out of the banks which
failed between 1865 and 1925, receivers had been able to collect but 314 millions of the
total assets of 615 millions and out of this amount but 188 millions had gone to the
creditors. With a capital of 119 millions involved, but 31 millions had been collected
from stockholders under the double liability provision, although receivers had called on
them for 70 millions. The stockholders are &serving of sympathy, however. for they
recovered but 4 millions out of their investment of more than 119 millions in the capital
stock."
2 In those departments having charge of the liquidation of banks, it is customary for
them to have charge of the liquidation of the other institutions over which they have
jurisdiction.
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Federal Reserve Bank of St. Louis
TABLE XLVII
SUNINIARY OF PROVISIONS OF STATE LAWS RELATING TO THE METHODS OF LIQUIDATING BANKS
States wherein the commissioner by
virtue of his office acts as receiver. and
performs under court order the duties
of a receiver. (Statutory receiver).
States wherein the commissioner is
formally. appointed receiver by
the court.
States wherein the commissioner
appoints a receiver who thereafter acts under direction of the
commis.sioner and order of court.
States wherein the court may in
its discretion appoint as receiver
anyone it wishes.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
1. Iowa
2. Nebraska
3. Rhode Island (commissioner or
deputy, or both, may be
appointed receiver by the
court.)
4. Tennessee
5. Vermont (commissioner appointed receiver unless court
is satisfied it would be inadvisable for him to act in
that capacity.)
1.
2.
3.
4.
1.
2.
3.
4.
5.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
Alabama
Arizona
Arkansas
California
Colorado
Georgia
Idaho
Louisiana
Maryland
Massachusetts
Minnes.ota
Mississippi (commissioner filed petition which formally submits
liquidation to the jurisdiction of
the court.)
Missouri
Montana
Nevada
New Hampshire (commissioner petitions court: latter directs commissioner to take possession.)
New Jersey
New York
North ('arolina
Ohio
Oregon
Pennsylvania
South Carolina
South Dakota
Utah
Washington
Wisconsin
Wyoming
Oklahoma
For a ty-pical statute under this heading
see:
Gen. Laws of Cal. 1931, Vol. 1, Art.
652, Sec. 136
or
Cahill's Consol. Laws of N. Y.. 1930,
Ch. 3, Sec.57. 69.
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Federal Reserve Bank of St. Louis
Florida
Illinois
Kansas
West Virginia (commissioner
appoints an employee of the
department of banking to
act as receiver under direction of the commissioner and
order of court.)
Connecticut
Delaware
Indiana
Kentucky
Maine:(Commissioner may be
appointed).
6. New Mexico
7. Virginia (commissioner applies
to court for appointment of
a receiver.)
Miscellaneous
1. Michigan: On application for
receiver, court may appoint
either:
(a) the commissioner
(b) his deputy
(c) one of the examiners.
(d) some other competent and
disinterested person recommended by the commissioner.
2. North Dakota: One general
receiver of all closed state
banks. Appointed by Supreme Court.
3. Texas: Commissioner takes
posseesion, then makes report
of insolvency t,o attorney
general who institutes proceeding of receiver. Until a
receiver is appointed, the
commissioner administers the
affairs of the insolveat bank.
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For a typical statute under this
heading see:
Code of Iowa, 1931, Sec.
923942.
For a typical statute under this
heading see:
Cahill's III. Rev. Statutes
1931, Ch. 16a, Sec. 11.
For a typical statute under this
heading see:
Burns' Annot. Ind. Stat. Supp.
1929, 3965.
•
100
the local courts in receivership matters but will seek to reduce the final
cost of such action by giving the proposed Department of Financial
Institutions certain powers not now available.
TIIE PROPOSED METHOD FOR THE LIQUIDATION OF
FAILED FINANCIAL INSTITUTIONS
The proposed bill provides that in addition to any other remedies
conferred upon the Department of Financial Institutions it is authorized
and empowered to take possession of the business and property of any
financial institution to which the act is applicable, whenever it shall
appear that such financial institution:
1. Has violated its charter or any law or rule of the commission.
2. Is conducting business in an unauthorized or unsafe manner.
3. Is in an unsound or unsafe condition.
4. Cannot continue with safety.
5. Has impaired capital.
6. Has suspended payment.
7. Has neglected or refused to comply with orders of the commission.
8. Has refused to submit records for inspection.
9. Has refused to be examined under oath.
10. Is insolvent or in imminent danger of insolvency.
If the financial institution, upon demand of the department refuses
to surrender possession of its business or property, the department may
bring an action, in the Circuit or Superior Court of the county wherein
the financial institution has its place of business, to require such possession. The court, after notice and hearing, is given the power to compel
that possession be surrendered to the department.
After the department has taken possession of the business and property of any financial institution, it retains possession thereof until the
affairs have been finally liquidated unless the institution is permitted to
resume business or to undertake the voluntary liquidation of its affairs
under the direction of the department.
At any time within ten days after the department has taken possession of the business and property of any closed institution, however, the
institution may apply to the court for an order to enjoin the department
form continuing in possession, and after notice and hearing, the court is
authorized to continue possession in the department or to enjoin the
department to refrain from further proceedings and return possession
to the closed institution.
Upon taking possession of any financial institution, the department
is required to give notice by posting a copy thereof at the main entrance
of the place of business, by serving notice upon the chief executive
officer of the institution, and by filing a certified copy of the notice
with the clerk of the Circuit, Superior, or Probate Court of the county
in which the financial institution is conducting its business. Upon the
filing of this notice with the clerk, the matter is docketed as a civil
case upon the records of the court. Thereafter the court is given jurisdiction to hear and determine all issues and matters connected with the
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Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
101
liquidation of such financial institution. Moreover, all papers and pleadings pertaining to such liquidation, all entries, orders, judgments, and
decrees of court in connection therewith are required to be filed and
entered of record in said cause of action.
But the sole and exclusive right to liquidate the affairs of any closed
financial institution is vested in the department. The department is given
power to proceed with the liquidation and to collect all dues and demands. Upon order of the court it has the power to sell assets or
property, compound and compromise doubtful claims, prosecute and defend all suits and actions, execute all deeds, assignments and releases,
enforce the shareholders' double liability, if necessary, and distribute
the assets among the depositors or creditors. The bill goes into some
detail in requiring the department to file with the court an inventory of
the property, a statement of the liabilities and its recommendations
as to the allowances of claims.
The proposed bill also fixes a time for the filing, hearing, and allowance of claims by the court, for the filing of partial and final accounts
by the department, for the disposition of property held as bailee, and
for the enforcement of liability against any officers or directors of
the closed institution.
The department is given the right to delegate power to any of its
examiners or other employees or to special agents or representatives, to
take charge of the liquidation under direction of the department. It may
also retain any officers or employees of the closed financial institution
for that purpose. Bond is required of all persons appointed or employed
in connection with such liquidation.
The proposed bill further provides that all cost and expense incurred
by the department in liquidating the affairs of any financial institution,
including court costs and the compensation and necessary expense of
any special representative, assistant, or attorneys employed by the department, in such amounts as may be approved by the department and by
the court, shall be paid out of the assets and property of the institution
under liquidation. It is provided, however, that no compensation above
actual cost shall be allowed or be paid out of such assets and property to
any receiver or to the department or to the director or to any supervisor,
examiner, assistant or other person regularly employed by the department, for services rendered in connection with such liquidation proceedings.
The Study Commission has carefully attempted to avoid the vesting
of arbitrary power in the state department, and the bill provides that
any financial institution to which the act is applicable shall have the
right to appeal to the Circuit or Superior Court, of the county wherein
the financial institution transacts its business, from any order affecting
the rights of such institution and upon such appeal the court is given
the power to decide such questions de novo.
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COOPERATION BF.TWEEN THE DEPARTMENT OF FINANCIAL INSTITUTIONS
AND REGIONAL CLEARING HOUSE ASSOCIATIONS
Member banks of clearing house associations with examination departments have withstood the financial stress of the last decade better
than have any other groups of banking institutions. Failures in banks
of this type have been very rare.' In Indiana no member of the one
clearing house association with an examination department' has failed.
This is true notwithstanding the fact that many institutions in the same
community, meeting identical types of business situations, failed. No
unbiased observer can view the record made by clearing house member
banks in this and other states without being convinced that cooperation
of this sort promotes solvency and good management.'
The expense involved in duplicate examinations on the part of clearing house members has made the cost of the scheme prohibitive for rural
banks. Recently, however, the Bank Management Commission of the
American Bankers Association has evolved a different type of organization designed to bring the benefits of clearing house cooperation to the
rural bank. This new type of organization is known as the Regional
in
Clearing House Association. This plan has already been tried
Indiana
1 Glenn Griswold in an address before the 34th Annual Convention of the
House
Bankers Association, September, 1930, summarized the failure record of Clearing
member banks as follows:
idea of
"In 1906, when the Waish banks failed in Chicago, there was devised the
responsible for
banks forming an association to examine each other, and become morally
which implied a
the financial condition of each member of that association, in a sense
metropolitan area in
moral obligation to guarantee each other. Since that time every
since that time we
America has adopted the clearing house examination system, and
taking into account
our
in
history,
deflation
of
bank
period
worst
the
through
have gone
one bank in
the amount of capital and deposits which were destroyed. Since 1906 not
a member of a
America has ever failed, with a loss to depositors of a dollar, if it was
was a situation
clearing house district--not one--except out in Des Moines—and there
that bankers all over the country have blushed for.
department, and had been
"Des Moines had talked about organizing an examinations
out there that
promising itself one for years. But they were just such bad neighbors
to draw the papers and
they couldn't trust any single committee composed of three men,
finally banking conditions in
organize the thing. So it went on that way for years. and
Des Moines became so bad that the whole structure was threatcned. On the very eve of
a collapse they organized a clearing house district and took into it one bank that they
knew was insolvent when they took it in, and then, having organized their clearing
house association, they permitted that bank to fail without supporting it, and caused the
failure
depositors in that bank to lose money. And that is the only clearing house bank
in this country where there was a loss of a dollar to a depositor."
At the time Mr. Griswold delivered this address he was Editor of the Chicago Journal
of Commerce.
2 The Association is located in Indianapolis.
3 The Hoosier Banker of February, 1931, published by the Indiana Bankers AssocirtThe
tion, contained an article on page 12 relative to the activity of cltaring houses.
article quoted from a National City Bank letter (of New York) as follows:
"A period of bank failures always raises anew the question how the banking business may be more effectively supervised and regulated. Regulation by kw" has limitations
and a degree of inflexibility which make it inferior to another kind of regulation which
has been developing in this country over many years. It is a fact well attested by
experience that the beat regulation of banks is the regulation to which the banks voluntarily submit, and which they provide for themselves through their own organizations.
the clearing house associations."
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Nebraska, and is in the process of being organized in a number of other
localities. The members of the Study Commission for Financial Institutions have endorsed this movement.' To expedite it in Indiana, the proposed new law provides for complete cooperation between regional clearing house associations and the new Department of Financial Institutions.
The department is given the power to assign to regional clearing house
associations a regional examiner who "in addition to his other duties as
prescribed by law, shall cooperate with the officers of the clearing house
association in such manner and to such extent as the department shall
determine and direct."
It is hoped by the members of the Study Commission that all of the
bankers of the state at a very early date will group themselves into
these associations, and that the new department will assign to these
regional clearing house associations examiners to act as clearing house
examiners. If the proposed bill is enacted into law, the responsibility
will rest upon the banking leaders of the state and upon the new Department of Financial Institutions to effect this arrangement as speedily as
possible in order to promote the solvency and stability of banks in
Indiana.
The Comptroller of the Currency, J. W. Pole, and S. L. Cantley, until recently
State Bank Commissioner of Missouri, are both e,uoted in a publication of the American
Bankers Association as favoring this movement. Mr. Pole's statement is as follows:
"What constitutes good management can always be determined by the consensus of
banking opinion. In our larger cities clearing. houses have played an effective part in
the development of banking standards. The type of work done by these associations
should be extended to all banks. I know of no better instrumentality by which to build
up in this country banking traditions strong enough to effectively discourage all types
of bad banking."
Mr. Cantley's statement is as follows:
"Organized cooperation in banking is just as essential to success as is organization
in an army. A most important factor in banking is organization for assembling and
disseminating credit information by counties or groups of counties, preferably the latter,
and also, for self-imposed examinations. The clearing house idea appeals to me RS not
only one of the best corrective but also one of the most salutary agencies available for
stable competitive unit banking."
Both of these statements appeared on the back cover of a pamphlet issued by the
American Bankers Association titled "Regional Clearinghouse Associations."
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/
CHAPTER V
THE REGULATORY CODE FOR BANKS AND TRUST
COMPANIES
The prevention of bank failures in the future through social control by the state requires not only a modernized banking departm
ent
but also adequate and comprehensive regulatory laws to
be administered
by that department.
The present Indiana code regulating banks is an accumulation of
statutes passed at the various sessions of the legislature from
1869 to
1931.1 In many instances this body, faced with the necessit
y of meeting certain pressing situations, allowed expediency to dictate
the passage
of bill after bill without reference to the code as a whole.
As a consequence the bank laws contain many ambiguous, overlapping, and
obsolete
provisions. That these provisions are also inadequate is amply
demonstrated by the unfortunate record of bank failures of the past
decade.
To remedy these deficiencies the Study Commission has formula
ted
and is submitting to the General Assembly for its consider
ation a new
code regulating the conduct of the banking business in Indiana.
As a first step in the formulation of this new code a complet
e recodification was made of our existing banking law, eliminating
all overlapping and obsolete provisions. To this codification has
been added
such new provisions as have seemed desirable to the
members of the
Study Commission. These added provisions attempt to correct
the weaknesses that the trying economic experience of the past few years
has
shown to exist. Suggestions for these provisions were gathered
from
many sources. Many ideas were obtained from a comparative analysis
made by the Study Commission of the regulatory statutes of the other
states of the union, of the Federal Government and of foreign countrie
s.
In addition, suggestions were solicited and received from present
and
past supervisory officials in Indiana, the bank supervisors of other states,
the Comptroller of the Currency, the receivers of failed banks,
active
bankers, present and past legislators, bank depositors, and many other
citizens.
TIIE CAPITALIZATION OF BANKS2
The provisions of the present code dealing with the minimu
m capital
requirements of banks were early considered by the Study Commiss
ion.'
See Chapter I.
Throughout this chapter the word "bank" will be used to designate
banks of discount and deposit, private banks and loan, trust and
safe deposit companies. The
Provisions of the proposed statute are made applicable to
all of these types of institutions.
This is done because they now have identical powers. The
Loan, Trust and Safe Deposit
Company Act of 1893 gave trust companies all of the banking powers
possessed by banks
of discount and deposit. In 1915 the legislature granted
to banks of discount and deposit
and private banks the trust powers possessed by
loan, trust and safe deposit comPanies. [See Chapter I of this report for a further treatment of this subject.] Since
these institutions have the same powers and transact the same types
of business it is
logical that they all be regulated by the same laws.
3 As a general rule, this chapter discusses only the additions to or changes
in our
present regulatory laws. Little mention is made of those provisions
of our present
code which are reincorporated in the new proposal of the Study
Commission.
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The statistical study of failed banks having shown, however, that the
small banks in Indiana are relatively no greater source of trouble than
are the larger ones, it was not thought necessary to recommend a higher
minimum capitalization for future new institutions.'
Close scrutiny of the failure record of Indiana banks leads to the
s- conclusion, however, that very small institutions located in large communities are at a distinct disadvantage in the conduct of their business.
In order that small communities may still be served by small banks, yet
large communities may have the large institutions to which they are
entitled, the Study Commission recommends that "every bank or trust
company organized or re-organized under the provision of this act shall
have a capital stock in the amount hereinafter prescribed in this act:
(1) Where the principal office of the bank or trust company is
located in a city or town having a population of not to exceed three
thousand inhabitants, the capital stock shall not be less than twenty-five
thousand dollars;
(2) Where the principal office of the bank or trust company is
located in a city or town having a population of more than three thousand and not to exceed six thousand inhabitants, the capital stock shall
be not less than fifty thousand dollars;
(3) Where the principal office of the bank or trust company is
located in a city or town having a population of more than six thousand
and not to exceed fifty thousand inhabitants, the capital stock shall be
not less than one hundred thousand dollars; and
(4) Where the principal office of the bank or trust company is
located in a city or town having a population of more than fifty thousand, the capital stock shall be not less than two hundred thousand
dollars." This provision is the same as the federal provision governing
The federal
the capital stock requirements for new national banks.
schedule was followed because it has a higher capital stock requirement
for banks located in larger communities. These uniform requirements,
moreover, should serve to eliminate much of the competition between
y
• state and federal authorities in the granting of charters. Too frequentl
nts
stock
too
capital
requireme
federal
finding
in the past promoters,
high, turned to the state systems for permission to start small institutions in the larger communities and cities. State authorities in most
instances readly granted the requests of these men. Such action by
state officials was influential during some administrations in increasing
the willingness of the Comptroller's office to grant charters freely and
Comcompetitively with the state system. In the opinion of the Study
mission such competition is wholly undesirable. Should the federal provisions governing the capital stock requirements of national banks be
modified in the future, the Indiana statute should be modified likewise.
c
banks may be chartered with not less
1 The present Indiana law provides that state
than $25,000 capital.
requirements for trust companies is Rs
The present law governing the capital
follows:
$100,000.
In cities of over 50,000 inhabitants—not less than
than $50,000.
In cities of 25,000-50,000 inhabitants—not less
less than $25,000.
In cities of less than 25,000 inhabitants—not
To be divided into shares of $100 each.
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The new proposal further provides that no bank or trust company
organized or re-organized in the future shall be authorized to commence
or transact any business of an essential nature until the capital stock
of the institution has been fully paid for in cash. This provision was
copied from the present trust company law.
THE DOUBLE LIABILITY OF SHAREHOLDERS
As a protection for depositors the Indiana constitution provides that
all hoMers of bank stock shall be subject to double liability in case of
capital impairment. The protection afforded depositors by this provision has not been as great as was probably anticipated by its framers.
Of the double liability levied against the shareholders of Indiana banks
failing during the period 1925-1931 only 32.3 per cent has as yet been
collected.' To make the double liability feature of bank shares a real
protection for the depositor, the Study Commission proposes that the I
method of enforcement be changed radically. The proposed statute provides that each bank or trust company shall keep at all times a full and
correct list of the names and residences of its shareholders and the_
number of shares held by each. This list shall at all times be open /
to the inspection of the shareholders and creditors of the institution.
It shall be the duty of the institution, moreover, to send a sworn copy of
this list on the first Monday of July of each year to the Department
of Financial Institutions.
Upon liquidation, shareholders shall be individually responsible for
an amount, over and above their stock, equal to the par value of the
number of shares which they own. Shareholders that have transferred
their shares within sixty days before the date of the failure of any bank
or that have transferred their shares with a knowledge of the bank's
impending failure shall be liable to the same extent as if they had made
no transfer should the transferee fail to meet the liability levied upon
the shares of stock in question. The most important change, however,
is that the Department of Financial Institutions, upon taking charge
of the failed institutions, is given the right to assess shareholders for
the amount of their double liability. Under the present system a considerable period of time ordinarily elapses between the failure of a bank
and the enforcement of liability against the shareholders by the court.
As a result, shareholders are given time to divest themselves of property
and are by such action often able to avoid this obligation. The proposed
statute should make such evasion nearly impossible.
The present law makes shareholders of operating banks liable for
assessment when losses impair the capital of the institution. The statute
is so worded, however, that there has been great difficulty and uncer1 This data was compiled from questionnaires sent to the receivers of 210 state
chartered institutions that failed during the period 1925-1931. Since some of these banks
have been in liquidation only a short time, additional collections will probably be made.
but in view of the national experience it is not likely that they will be very large. Professor George W. Dowrie in his book, "American Monetary and Banking Policies," says,
"Out of the banks which failed between 1865 and 1925, receivers had been able to collect
but 314 millions of the total assets of 615 millions,...With a capital of 119 millions
involved but 31 millions had been collected from stockholders under the double liability
provision, although receivers had called upon them for 70 millions."
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tainty involved in the enforcement of its provisions. Great care was
exercised, therefore, by the Study Commission in drafting the provisions
in the new statute relative to this matter. The proposal provides that
the Department of Financial Institutions may, by written order, instruct the board of directors of any institution to restore impaired
capital or surplus or reserves. Within thirty days after receipt of such
an order the board of directors is required to assess shareholders pro
rata for the deficiency. If any shareholder should refuse or neglect to
pay the assessment it shall be the duty of the board to sell, at public
auction, a sufficient amount of the capital stock owned by such a shareholder in order to make good the impairment of the capital, surplus, and
reserves, including the cost and expenses of the assessment and/or the
sale.
SURPLUS AND DIVIDENDS
A part of the capital structure of a bank is made up of its surplus
and undivided profits. The capital structure serves as a buffer between
the depositor and the shrinkage of assets that may take place should an
institution liquidate. The capital accounts—capital, surplus, and undi.vided profits—represent the shareholders' claim—a claim, however, that
is not satisfied until all other creditors have been paid. These items represent the investment of shareholders either in the form of capital stock
purchased, or in the form of net profits which were not distributed in
dividends. The larger the contributions of the shareholders to the institution, therefore, the greater can be the shrinkage of assets at the time
of liquidation without impairing the value of the creditor claims upon
the business. A large amount of capital in proportion to deposits increases the safety of the institution for the depositor.
In addition to being a means of decreasing the probability of loss to
the depositors and other general creditors, a large surplus accrued out
t of earnings is a stabilizing influence making for longevity of life of the
financial institution itself. A study of the capital accounts of all institutions failing in Indiana between 1925 and 1931, discussed in Chapter
III, indicates that such institutions had less than half the amount of
surplus and undivided profits of the average maintained by all operating
i banks.' It would appear, therefore, that a lack of conservative dividend
and surplus policies has been typical of institutions which have failed in
Indiana. Financial experts agree that as a general rule the most successful business enterprises are those that retain in the business each
year a large proportion of the net earnings. Some authorities maintain that as much as fifty per cent of all net earnings should be reinvested.'
'See Table XXXVII. Two bundred and eight failed banks had surplus and undivided
profits of 42.6 per cent of their capital. The average for all operating banks in 1931
was 99.9 per cent.
'Craig B. Hazlewood, former president of the American Bankers Association, in his
book "The Bank and Its Directors" says: "A generally accepted dividend policy for a
bank whose affairs are in a satisfactory condition is to disburse not more than fifty per
cent of its net earnings as dividends until such time as the surplus and undivided profits
_equal capital. From then on it is permissible to disburse perhaps two-thirds of the
net earnings."
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Very comprehensive provisions governing dividend and reserve policies have been incorporated in the proposed statute for the purpose of
protecting the depositors and stabilizing the banking industry. It is believed that they are probably more comprehensive than are those of any
other state. Dividends of any amount are prohibited unless capital is
unimpaired and an unimpaired surplus fund has been accumulated equal
to twenty-five per cent of the capital. Thereafter maximum dividends
are restricted to six per cent of book value, payable semi-annually out
of the net profits until an unimpaired surplus fund has been accumulated
equal to the capital stock. Book value is made the basis for computation
so that dividend payments may be raised as the surplus fund is increased.
Obviously an institution with a majority of its one hundred per cent
surplus accumulated should be given the opportunity to declare larger
dividends than an institution just beginning to build its fund.
As a further protection the proposed statute also provides that no
portion of the capital shall be withdrawn in the form of dividends or
otherwise. No dividend, moreover, shall ever be paid by any bank or
trust company in any amount greater than its undivided profits then
on hand after deducting therefrom its losses, bad debts, all assets or
depreciation which the department may have required to be charged off,
and all other expenses. The statute defines bad debts as all debts due
to any bank or trust company on which interest is past due for a period
of six months unless such debts are well secured in the opinion of the
supervising department.
According to officials of the present banking department, failur
to depreciate questionable assets regularly is a common mistake of unsuccessful bankers. Past due loans are allowed to accumulate and probable losses arising from them are not deducted from current earnings.
Thus paper profits are increased for the fiscal period and cause dividends to be paid although no net profits are actually earned. The provisions of the proposed statute in regard to past due paper described
above should give the supervising authority all the power needed to
eliminate improper and deceptive charge-off policies.
TIIE RATIO OF CAPITAL TO DEPOSITS
A commonly accepted rule of sound bank management is that the
capital and surplus of a banking institution should be approximately
one-tenth of the deposits. A contribution of less proportion of the
operating funds of the bank on the part of the shareholders is not fair
in comparison with the contribution made by depositors. Instances are
known of banks in Indiana where deposits increased rapidly without a corresponding increase in capital structure. As a result the depositors supplied a disproportionate share of the earning assets. A particular instance can be cited of a bank that failed with deposits of more
than $7,000,000 and only $125,000 of capital and surplus. Obviously such
a relation between the capital and deposits afforded depositors very inadequate capital protection.
To prevent such unsatisfactory capital structures as this the proposal of the Study Commission provides that "if at any time it shall
'Tr "IF
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appear that the average daily deposits of any . . . bank or trust company are in excess of ten times the unimpaired capital and surplus
thereof, the department may, if it deems it necessary for the protection
of the depositors, require such bank or trust company to increase its
capital or surplus or either of them or to reduce the amount of its
deposits."
Many schemes designed to strengthen the capital protection afforded
depositors in banks were considered. The ones just described are those
finally endorsed by the Study Commission. They offer a maximum of
protection to depositors, yet they in no way interfere with the legitimate
property rights of shareholders. If adopted, it is believed that these
provisions will do much to protect the depositor and stabilize the banking
industry.
LOANS AND INVESTMENTS OF BANKS AND TRUST COMPANIES
Excess loans are a more potent cause for the failure of banks than
any other single improper practice' according to the testimony of the
officials of the present banking department. The statistical analysis of
the cause of bank failures made by the Study Commission reveal that
in the opinion of the receivers of failed banks, improper loan policies
were the greatest cause of failure in Indiana banks.' The statutory
regulation of the loaning practices of banks therefore becomes a matter
of greatest importance.
Leading financiers and economists are of the unanimous opinion
that the total amount of loans to any one individual should be limited
by law. A provision limiting the total accommodation granted to a
single borrower to a fixed percentage of the bank's capital and surplus
has long been a part of our national bank act and of the acts of practically every state. Unfortunately, Indiana did not have any statute of
this type until the 1931 session of the legislature. At that time officials of the banking department and other leaders advocated a measure
containing provisions similar to those of the federal statute including a
Craig B. Hazlewood, in his book "The Bank and Its Directors" in discussing the
causes of bank failures places excess loans as the first and foremost cause of failure.
His analysis of why banks fail is as follows:
1. "Excess loans (loans in an amount exceeding what the law sets as the maximum
to be loaned any customer—generally 10 per cent of the bank's capital and surplus), which indicated R total disregard for the legal limit to be loaned to any one
customer.
2. "Excessive loans to directors and officers, and to interests with which they were
connected. These varied in amount in different clostd banks. but many times
were the direct cause of the failure.
3. "Capital loans—that is, loans by a bank of its funds in the capital structure
(permanent fixed assets such RS buildings, factories, and land) of its customers'
businesses. We find micny banks have loaned from one-half to nine-tenths of the
capital employed in the business of certain customers, with a total disregard for
good banking practice, which permits loans only for short-time commercial purposes. They know and the customer knows these loans cannot be paid in a short
time. It is simply tying up the funds of the bank in strictly long-time frozen
assets.
4. "Real estate investment and real estate speculation by bank officers, directors and
relatives.
5. "Sheer incompetence and mismanagement."
= See Table XL in Chapter III.
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basic ten per cent limitation of the obligations of any one borrower.
Such a bill was introduced but certain powerful forces wishing to benefit
from large loans from banks were successful in so amending it that the
basic limitation was increased to twenty per cent and in that form the
bill was passed. In a recent personal appearance before the Study Commission, Bank Commissioner Symons reiterated his endorsement of a ten
per cent restriction similar to that of the federal statute and urged
that the 1931 statute be amended to include such a restriction. He
further stated that a provision of this 'nature would be more effective
in curbing improper loan practices in banks than any other which might
be enacted.
Diversification is one of the cardinal principles of a wise investment policy. All other things being equal, funds loaned to a large number of borrowers will be safer than funds loaned to a small number of
borrowers. Leading bankers agree that small loans cause them very
little trouble or anxiety. It has been stated that no bank was ever
forced to close its doors by reason of the non-payment of loans by small
borrowers. The Study Commission, therefore, strongly recommends that
the total obligations of any person, firm, or corporation to any bank or
trust company should at no time exceed ten per cent of the amount of
the capital stock of such bank or trust company actually paid in and
unimpaired, and ten per cent of its unimpaired surplus fund.'
The proposal of the Study Commission provides for certain exceptions to the general ten per cent limitation modeled after similar exceptions in the federal statute.'
1 A section of the proposed statute defines the term obligations as follows:
"The term 'obligations' as used in ... this act shall be construed to mean the direct
liability of the maker or acceptor of paper discounted with or sold to such bank or trust
company, and the liability of the endorser, drawer, or guarantor who obtains a loan from,
or discounts paper with, or sells paper under his guaranty to such bank or trust company, and, in the case of obligations of a co-partnership or association, shall include the
obligations of the several members thereof, and shall include in the case of obligations of
corporation all obligations of all subsidiaries thereof in which such corporation owns or
controls a majority interest."
By this definition borrowers are precluded from the use of other corporate names,
endorsements, etc., in order to secure loans in an amount in excess of that permitted by
the provisions of the act.
2 These exceptions are as follows:
Section 000. General Limitation Revoked. The following enumerated obligations shall
not be subject to any limitation based upon the capital and surplus of any bank or trust
company:
a. Obligations in the form of drafts or bills of exchange drawn in good faith against
actually existing values ;
b. Obligations arising out of the discount of commercial or business paper actually
owned by the person, firm or corporation negotiating such paper ;
c. Obligations drawn in good faith against actually existing values and sLcured by
goods or commodities in process of shipment ;
d. Obligations of this state or any of its political subdivisions or of any municipal
corporation of this state in the form of notes bastd on anticipated revenues from
taxation.
Section 000. Increase of General Limitation. The following enumerated obligations
shall be subject to a limitation of fifteen per cent of the capital and surplus of any such
bank or trust company in addition to the general limitation prescribed in section 000 of
this act:
(Note 2 continued on page 112)
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It is believed that these exceptions are of such a nature that they
will allow the legitimate financing of grain, livestock, and all necessary
transactions without exposing the loaning bank to undue risks. They
are, moreover, almost identical with the time-tested provisions of the
federal law.
REAL ESTATE LOANS AND INVESTMENTS
Not only is it necessary that the funds of banks be safely invested,
but it is necessary also that their liquidity be preserved. Too great a
proportion of funds invested in long-time non-liquidating securities may
upon occasion cause banks serious embarrassment when they are called
\ upon to repay depositors. Many receivers of failed banks in Indiana
stated in letters to the Study Commission that real estate loans were a
1 major source of difficulty in failed banks.' Loans of this nature are
likely to violate the fundamental principles of a sound investment policy
for commercial banks. It is generally recognized that the larger part
of the funds of a commercial bank should be invested in short-time selfliquidating loans. The experience of the last few years has proved that
times
the practice of making capital loans is very dangerous. In earlier
is unireal estate loans were highly prized by commercial banks. It
more
versally recognized, however, that the funds of depositors are much
if
few,
have
they
that
s
now
insist
Banker
were.
once
they
than
volatile
any, deposits that can really be classified as time money.
See Table XXXIX.
'
(Note 2 continued from page 111)
of notes, other than commercial or business
a. Obligations as indorser or guarantor
section 000 of this act, having a maturity
paper excepted under paragraph (b) of
owned by the person, firm or corporation
of not more than six months, and
;
indorsing and negotiating such obligations
corporation, in the form of notes or drafts
b. Obligations of any person, firm or
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c. Obligations of any person,
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on live stock, when the market value of the live
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ed in section 000 of this act.
to the general limitation prescrib
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The events of the past few years have proved that a refusal to pay
time depositors on demand creates fear in the minds of commercial
depositors and causes them to "run" the bank. Consequently, it is now
necessary to consider all deposits as demand deposits. Obviously the
investment of short-time funds in long-time loans is exceedingly dangerous. The Study Commission, therefore, has deemed it desirable in its
proposal to restrict very carefully the power of commercial banks to
make real estate loans.
The proposal definitely prohibits banks from investing in second
mortgages unless such investment is necessary for protecting money
previously loaned. First mortgage loans are to be made for a period
not to exceed five years. In the language of the act, "the amount of
any such loan shall not exceed fifty per cent of the cash value of the
real estate offered for security, and such cash value shall be determined
by two competent persons who shall report such valuation in writing to
the bank or trust company. The written report so made shall be verified" (sworn to before a notary) "and in the event that the bank or
trust company make such loan, shall be kept on file by it subject to
inspection by the department." The proposed statute further provides
that the amount of a first mortgage to any individual shall not exceed ten
per cent of the capital and surplus of the loaning bank and that the aggregate of all such loans shall not exceed twenty per cent of the total
deposits of the institution.
The circumstances under which an actual investment of bank funds
in real estate may be made are carefully prescribed by terms of the proposed act. A bank is given the power to purchase, hold or convey real estate for no purposes other than the following: "(a) Such as shall be
necessary for its accommodation in the transaction of its business. (b)
Such as shall be mortgaged to it in good faith by way of security for
debts previously contracted. (c) Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings. (d)
Such as it shall purchase at sales under judgments, decrees, or mortgages
held by the bank or trust company or shall purchase to secure debts due
it." In conformity with the federal statute dealing with this matter, all
real estate so acquired, except the bank premises, is to be disposed of in a
period of time not to exceed five years. Provisions such as these should
prevent banks from speculating in real estate and from engaging in real
estate ventures for their own account.
As a further limitation on the investment of bank funds in bank
premises, the act provides that the sum invested in real estate, build- '
ings, and banking fixtures shall not exceed twenty-five per cent of the
amount of the capital stock of such bank or trust company actually
paid in and unimpaired and twenty-five per cent of its unimpaired surplus fund. The department may, in its discretion, however, permit an
investment in excess of such twenty-five per cent. Such investment may
be made in the stock of a corporation organized to own and hold the real
estate, building and banking fixtures occupied and used wholly or in part
by such bank or trust company. It is realized that such restrictions are
very drastic but they seem to be justified by past experience. Too frequently an unnecessarily elaborate bank building erected as a monument
8-48149
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to the enterprise and success of a long established bank has turned out
to be a mausoleum, housing the financial wreckage of the institution
and the community which it served. Many instances are known in Indiana where too costly bank buildings and equipment were major causes
for the failure. The forced liquidation of an expensively housed bank
is nearly sure to result in loss to the depositors. The uses to which
a bank building can be put are ordinarily so limited that once it ceases
to serve as the home for a bank its value is largely gone.
LOANS TO OFFICERS AND DIRECTORS
One of the most drastic changes proposed by the Study Commission
in the present law regulating the loan policies of banks is a provision
absolutely prohibiting the loaning of the funds of a bank or trust company to any officer, agent, or employee of the institution. Loans to directors, however, are authorized but only under certain very carefully safeguarded conditions. In the language of the proposal, "No loan shall
be made, directly or indirectly, by any bank or trust company to any
officer, agent, or employee thereof. The board of directors may by resolution, duly entered in the records of the proceedings of the board, authorize loans to directors not holding any other office in such bank or trust
company and not being an agent or employee thereof, and it may likewise authorize loans to firms or corporations in which such directors may
be partners, members, or stockholders, but the total amaunt of the obligations of all of such directcrrs, or of the firms, or corporations in which
such directors may be partners, members, or stockholders, shall not at
any time exceed fifteen per cent of the total resources of the bank or
trust company. Loans permitted by this section shall be made only on
authorization by a majority of all the directors of such bank or trust
company and by the affirmative vote of all directors present at the meeting to which such proposed loan is presented. The department under
such general rules and regulations as it may prescribe which shall apply
to all banks and trust companies alike, may require full collateral security for all loans of the types permitted by this section and for the purpose of providing that such security may be adequate, may specify the
types and kinds thereof that may be pledged."
Such a provision as this adequately enforced by energetic supervisory officials should prevent the looting of a bank by a group of insiders. Too frequently in the past the reservoir of bank credit created
by the savings of an entire community has been used for the purpose
of advancing the reckless interests of a single group rather than for
the best interests of the community as a whole, resulting in the failure
' of the bank and in great loss and suffering to the community.
STATEMENTS REQUIRED FROM ALL BORROWERS
Many banking leaders have long maintained that no large unsecured
loan should be made without first securing a sworn financial statement
from the borrower as to his financial condition. That the majority of
banking departments urge the taking of these statements is indicated by
Table XLVIII.
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No. 10
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TABLE XLVIIP
THE POLICY OF STATE BANKING DEPARTMENTS REGARDING THE REQUIREMENT
OF FINANCIAL STATEMENTS ON UNSECURED LOANS
State
Alabama
Arizona
Arkansas
California
Colorado
Connecticu t
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland .
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska,
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North I)akota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Are statements required for all unsecured notes of
$500 or over'
No.
Yes.
$1,000 and over.
Small banks $500 and up—large banks 81,000 optional.
Attempt to do so—recommend.
Over $1,000.
No.
No fixed rule, but urge it.
No.
Not law, but rigid department policy.
$500 or more.
Yes.
Yes.
Yes.
No, but recommended.
No, but common practice.
No.
Yes, M000 and over.
General policy.
Yes.
No.
Yes.
Yes.
$1,000.
Not law, but recommended on loans over $500.
No.
Not law, but strongly advocated.
Yes.
.$2,509 or over in smaller communities.
$5,000 or over in larger cities.
Yes.
Yes.
Yes.
Yes.
Yes.
Loans in excess of I% of capital and surplus of
institution.
Not law, but strongly urged.
No.
Yes.
Not law, but urged.
Yes.
Not law, but urged.
Not required, but recommended.
No.
Yes.
No.
$590 minimum where deposit is under $500,000.
$1,000 minimum where deposit is over $500,000.
Yo.
1 This table was compiled by the American Bankers Association. The information
which it contains was gathered by the questionnaire method. By letter the bank commissioner of each state was asked the following question: "Do you require all unsecurcd
notes of $500 or over to have personal property statements attached ?"
The Indiana department has been requesting that this practice be
followed by Indiana banks. Many banks have not followed this suggestion, however, and the department has been powerless to force them to
do so since there is no statute dealing with the subject. To enable the
department to enforce its request, the proposal of the Study Commission provides that no bank shall make an unsecured loan of more than
$500 to any person without first receiving from him a sworn statement
of his financial condition. It is furthermore required that the state-
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ment is to be renewed annually or at such other times as the department
may prescribe. The bank is required to file all such statements received
from borrowers where they may be conveniently examined by the examiners or other representatives of the department.
Any bank that loans funds without an accurate knowledge of the
borrower's financial condition is taking a chance with depositors' money
that can not be justified under any circumstance. To furnish the bank
with a statement of condition works no hardship on the borrower and in
many instances such a statement may be of great assistance to him personally. In making such statements, borrowers are given a new insight
into their own financial condition.
OTHER LOAN REGULATIONS
Other limitations on the loaning of funds prevent any bank or trust
company from loaning on the security of or purchasing the shares of
its own capital stock except in such cases where security of this nature
or such purchase is necessary to prevent loss upon debts previously contracted in good faith. Stock so purchased or acquired must be disposed
of within six months from the time of its purchase by the institution.
As a final safeguard of the loaning policies of banks, officers, directors, employees, or attorneys of these institutions are specifically prohibited from taking commissions or gifts for the procuring of loans.
Many of these new regulations concerning the loaning of funds are
of such a nature that the necesEity for immediate compliance with them
by the banks would cause serious' loss and hardship. The proposed
act, therefore, gives institutions two years in which to change their
loans and investments in conformity with the new restrictions. It is
provided, moreover, that "the department may in its discretion extend
the time for such conformity in individual instances if the interests of
the depositors will be protected and served by such extension."
CASII RESERVES
The regulation of cash reserves by statute is a very difficult matter. Banks are located in many different types of communities and serve
varying types of customers. The cash requirements of all institutions
therefore are not the same. Trade and crop movements, moreover, are
responsible for a varying seasonal demand for cash. No satisfactory
cash reserve law has as yet been devised by any state. The customary
type of statute merely attempts to fix a minimum cash reserve below
which no bank in any community can safely go. The present Indiana
law is typical. It provides that every bank or trust company shall maintain cash reserves equal to not less than 12% per cent of its demand
deposits and 3 per cent of its time deposits. The reserve requirements
of other states for demand deposits range from 10 to 20 per cent.' The
'Federal Reserve member banks are required to maintain cash reserves for demand
deposits varyint.c in amount with the location of the bank. Country banks are required
to maintain 7 per cent, city banks 10 per cent, and central reserve city banks 13 per cent.
All banks are required to maintain a cash reserve equal in amount to 3 per cent of
their time deposits.
The Federal Reserve Bulletin for September, 1930, contains a detailed summary of
the provisions of the laws of every state relating to bank reserves.
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REPORT OF STUDY COMMISSION
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117
Study Commission was unable to formulate a provision for the regulation of cash reserves that appeared to be an improvement over our present law. Consequently, its provisions are reincorporated in the new
proposal.
Members of the Study Commission are of the opinion that it would
be very desirable to have uniform cash reserve requirements for both
national and state banks. The present federal requirements, however,
are not considered to be entirely satisfactory even for national banks. A
peculiarity of the basic grouping prescribed by the federal statute, moreover, would make it very difficult of adaptation to the state chartered
banks in this state. Aware of the limitations of the present federal provisions the Federal Reserve Board has recently had made a comprehensive study of statutory cash reserves. The committee making this study
has proposed a system for the determination of reserves based upon
the turnover velocity of the bank funds. Members of the Study Commission agree that some such reform measure is worthy of very careful
consideration and that in all probability the federal provision will soon
be modified in such a manner that it may be possible for Indiana to
have similar statutory requirements concerning cash reserves. Should
such action be taken by Congress the proposed statute gives the department the power to change by rule Indiana's reserve requirements
in such manner as is necessary to make them conform to the requirements of the new federal statute.
PUBLISIIED STATEMENTS OF CONDITION
The publication of statements of condition by banks is for the purpose of informing the public of the true condition of these institutions.
These published statements, in their traditional form, however, are
practically unintelligible to the general public. Their original and sole
purpose, therefore, is not accomplished. It is the belief of the members
of the Study Commission that the white light of publicity is a powerful corrective of bank mismanagement. A comprehensive search was
made therefore for a form of statement that would be understandable
and informative. The general public, prominent financiers, depositors,
and civic leaders were asked for their suggestions. The forms prescribed
by the various state laws and by the federal statutes were carefully
considered. Not content with the results of this survey, the forms prescribed by the Canadian statutes and those used by banks in various
foreign countries were carefully scrutinized. In recent years many energetic and well-managed banks have originated novel so-called "simplified
statements." Representative samples of these types were also carefully
studied. The proposal of the Study Commission combining the ideas
gathered from these many sources is of far-reaching significance. It
calls for a form of financial statement believed to be superior to that
required by any other state law.
The Department of Financial Institutions is given the power to require every bank and trust company to prepare, submit, and publish
annually as many statements of condition as may be deemed necessary
but not less than the number required of national banks by the Comptroller of the Currency. The department is also given ample power to
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require all needed information from banks and trust companies and, in
addition, under all circumstances, the following items are required to be
exhibited in detail and in the published statements of all such institutions: (1) The resources and liabilities of such bank or trust company.
(2) The uninvested funds held in any fiduciary capacity. Such uninvested funds shall be denominated "first lien trust funds." (3) All noncurrent assets. (4) All shares of affiliated companies which are carried
as assets. (5) All loans to affiliated companies which are carried as
assets. (6) All public funds on deposit with it, segregated by depositing
units.
"The items enumerated in subsections (2), (3), (4), (5), and (6)
of this section shall be segregated from the statement of resources and
liabilities of such bank or trust company under such appropriate title
as will clearly designate their character and amount to the public. The
department shall, in its published rules and regulations, prescribe and
define what shall constitute non-current assets."
It is apparent that in addition to the customary statement of resources and liabilities much other information of great interest to the
general public will be published if this proposal is adopted. One such
item of interest will be all uninvested trust funds. Elsewhere in the
statute, banks are prohibited from holding funds in excess of $1,000.00
uninvested for more than six months. The provision for publicity concerning the amount of these uninvested funds serves merely as an additional safeguard. The improper use of such funds in the general commercial business of the bank would soon become apparent to the reader
of the bank's statement. Under such circumstances it can hardly be
believed that banks would dare to violate this provision.
The segregation of all "non-current assets" in the public statement
was suggested to the Study Commission by the Canadian statutes.'
Since the definition of non-current is left to the judgment of the commission they should be able to modify the definition contained in the
Canadian statute' to meet Indiana conditions. With such a provision
in the law governing banks in Indiana it will no longer be possible for
such institutions to allow slow and doubtful paper to accumulate in their
portfolios. To do so would be equivalent to publishing to their customers
at least four times annually the fact that they were in an unsatisfactory
condition. An inevitable result would be that the public would not wait
to close the bank until its condition had become so serious that large
1 Section 113, subsection 5, revised Statutes of Canada, 1927.
2 The Canadian statute classifies as "non-current" any loan which: (a) The borrower
has not for a period of two years preceding the date of such return, statement or balance
sheet, paid the interest thereon ist the rate agreed, in cash, unassisted by the bank ; (b)
the bank has taken possession of the property or any part of the property covered by
any security given by the borrower with the intention of realizing thereon, or has
realized or taken any step or proceeding for the purpose of realizing upon any security
given by the borrower ; (c) the bank has commenced an action at law to recover from
the borrower the amount of the loan or any part thereof ; (d) the borrower has made
an abandonment of his estate for the benefit of his creditors or any of them ; or (e)
there is other cause, sufficient in the opinion of the manager of the branch of the bank
where such loan is domiciled, or in the opinion of any director or officer of the bank who
prepares, signs, approves or concurs in such return, statement or balance sheet, for deeming such loan not to be a current loan.
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losses would be suffered by depositors. Skeptics might contend that
banks in precarious condition would falsify their statements, and not
show the true amount of their non-current loans. Energetic and resourceful supervision such as is contemplated by the proposed new department
could easily control any such attempts to evade the law.
Provisions calling for the segregation of shares of and loans to affiliated companies carried as assets are ones which should prove of immense
value for the protection of the depositor. Bank accounting methods are
such that it would be nearly impossible for banks to evade these two
requirements. Consequently, the public would be informed at least four
times a year of the true extent of the relation existing between banks
and their affiliates.
The last requirement that all public funds be segregated should
make it impossible for public officials to subsidize weak banks and to
keep them open long past the time they should be closed.
/7
The penalty for violation or non-performance in connection with
these provisions governing published statements of condition is so severe
that no bank could afford to violate the statute. It is provided that
"any bank or trust company which shall fail to prepare and submit any
statement of condition required by the department and any bank or trust
company which shall violate any order of the department with respect
to such statement or statements shall be subject to a penalty of one
hundred dollars for each day that shall elapse after the date fixed by
the department for compliance with the terms of its notice concerning
statements of condition. The penalty herein prescribed may be recovered
in any court of competent jurisdiction, in an action by the State of
Indiana, on the relation of the Department of Financial Institutions, and
when so recovered, such penalty shall be paid into the general fund of
the state treasury."
Members of the Study Commission are of the opinion that these
provisions governing the form of the published statements of banks will
serve as a powerful influence for safe and conservative banking. Under
this system publicity will be directed toward practices which have hitherto
been weak spots in bank management. Informed public opinion is irresistible. When banks are forced to inform the public regularly as to the
amount of their questionable assets, their relations with their affiliates,
their trust accounts, and their public funds, no longer will they dare
abuse sound principles in connection with these accounts.
THE DUTIES OF DIRECTORS
fe
It has been frequently stated that bank directors do not fully realize
the responsibilities laid upon them when they accept directorships. Some
receivers of failed banks and other informed persons attribute a great
portion of our banking difficulties to neglect on the part of the board
of directors. This lack of interest or neglect is sometimes occasioned
by the predominance of other interests, residence at great distance from
the bank, or lack of sufficient investment in the institution to make attention to its affairs worth while. The proposal of the Study Commission
therefore provides that every director during his whole term of service
must be a citizen of the United States and that at least three-fourths of
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Federal Reserve Bank of St. Louis
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the directors must reside in the State of Indiana and in the city, town,
or village in which the principal office of the bank or trust company is
located. The present law requiring that directors own stock with an
aggregate par value of at least $500.00 is changed to require directors to
own shares with an aggregate par value of at least $1,000.00.
To insure that directors diligently attend board meetings, the proposed statute provides that banks "shall keep a record of the attendance of directors at meetings of the board and shall make a report,
showing the names of the directors, the number of meetings of the board,
regular and special, the number of meetings attended and the number
of meetings from which each director was absent, which report or copy
thereof shall be mailed to each stockholder annually at the time of the
notice of the annual meeting."
The Study Commission's investigation of insolvent banks has reri vealed the fact that in some instances officers failed to apprise the
members of the board of directors of the state department's criticism
of conditions within the bank. In some of these instances directors have
maintained that they could have corrected unsound conditions had they
known of their existence. To prevent such situations from arising and
to insure that the board will at all times be fully acquainted with the
recommendations of the Department of Fnancial Institutions the proposed statute provides that the directors shall require the secretary of
the board or some other duly designated agent to make official communications from the state department a matter of record in the minutes
of the meetings of the board. The enforcement of this provision will not
be difficult because it will be possible for the examiner to bring with him
at the time of the examination duplicate copies of all official communications from the department to the bank and check his copies with those
entered in the minute book of the board.
After the failure of a bank, its directors sometimes insist that they
were intentionally deceived by the officers and, as a result, did not know
the true condition of the bank. In many well-managed banks in order to
make such deceptions impossible it has long been the practice to have the
directors periodically audit and examine the books and affairs of the institution. In this manner it,is possible for the members of the board to
secure a personal knowledge of the bank's condition. Such examinations,
moreover, serve to place the responsibility for unsound practices and
conditions squarely upon the board.(Recognizing the desirability of this
practice of self-examination the proposal of the Study Commission provides that the board or a committee therefrom or a firm of certified accountants selected by the board shall examine every bank or trust company at least twice each year and shall submit to the Department of
Financial Institutions a compl te statement of the bank's condition as
L.-__Lletermined by the examination.
The members of the Study Commission are of the unanimous opinion
that these new proposals defining the responsibility and duties of directors represent a distinct advance over similar provisions of the present
statute. These new provisions should do much for the advancement of
sound management policies throughout the state and should increase the
safety of the depositors' money.
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (192)
1 21
POWERS OF BANKS AND TRUST COMPANIES
In the statute proposed by the Study Commission an attempt has
been made to define the powers of banks and trust companies in language
that is unmistakable and understandable to the layman as well as to
the lawyer. The Loan and Trust and Safe Deposit Company act of
1893 is the measure that at the present time defines the powers of trust
companies. Our state banks derive their banking powers from the Discount and Deposit Bank act of 1873. The definition of powers in the
proposed statute was achieved through merging the provisions of Section
10 of the 1893 act and provisions relating to powers in the 1873 act, as
amended, and rewriting them in a form understandable to the ordinary
layman as well as to a lawyer.
Although the agency powers of banks and trust companies in the
new statute have not been changed substantially the language employed
in describing these powers has been broadened and clarified. The intent
has been not to confer any new agency power upon these institutions
but merely to define that power in more understandable language.
The present code contains few provisions regulating the dealings of
banks in investment securities. Omission of this sort is not strange since
the investment security business of banks and trust companies was not
an important feature of their business at the time the 1873 and 1893
statutes were passed.' That such limitations are needed, however, is
clearly indicated by the unfortunate experiences of many banks with this
type of business during the late "new era". Consequently, the proposed
statute contains a section which attempts to limit the banking operations
of banks and trust companies to the commercial field and to force them
out of the investment banking business. These new provisions are modeled largely after the provisions of a similar nature contained in the
MacFadden Act of 1927 applying to national banks.
By the terms of the proposed statute, "the business of dealing in
investment securities by any bank or trust company shall be limited to
purchasing and selling such securities without recourse, solely upon the
order, and for the account, of customers, and in no event for its own
account, and no bank or trust company shall underwrite any issue of
securities. Any bank or trust company may'purchase for its own account
investment securities under such limitations and restrictions as the
department may by regulation prescribe, but in no event (1) shall the
total amount of any issue of investment securities of any one obligor
or maker purchased and held by the bank or trust company for its own
account exceed at any time ten per cent of the total amount of such
issue outstanding, but the limitation hereby imposed shall not apply to
any such issue the total amount of which does not exceed one hundred
thousand dollars and does not exceed fifty per cent of the capital of the
bank or trust company, nor (2) shall the total amount of the investment
securities of any one obligor or maker purchased and held by the bank
or trust company for its own account exceed at any time fifteen per
cent of the amount of the capital stock of such bank or trust company
actually paid in and unimpaired and fifteen per cent of its unimpaired
surplus fund. As used in this section the term 'investment securities'
2
See Chapter I.
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shall mean marketable obligations evidencing indebtedness of any person,
firm or corporation in the form of bonds, notes and/or debentures commonly known as investment securities and under such further definition
of the term 'investment securities' as may by regulation be prescribed
by the department, but this limitation as to the total amount shall not
apply to the obligations of the United States or to the obligations of any
territory or insular possessions of the United States."
Another omission in the existing code has been corrected by the
inclusion of a provision in the proposed statute which provides that a
bank or trust company may become a substitute trustee for an individual
in the event that such is the wish of the individual. Some authorities
have contended that this power is contained in our law, but there is no
unanimity of opinion about the matter. In the ordinary estate, the individual can file a waiver of his right to administer, and under the probate law normally another individual would be appointed in his stead.
He might waive in favor of a specified individual, or the court might be
given the authority to select some competent person. There is no provision in the probate law that specifically allows a trust company to be
appointed in such an instance, although the performance of a service of
this nature is a legitimate and desirable function of a trust company or
a bank with a trust department.
REGULATION OF THE FIDUCIARY FUNCTIONS OF BANKS AND TRUST COMPANIES
Under the present code, the fiduciary functions of banks and trust
companies have been largely unregulated. The power to act in such
capacity is defined and limited by section 10 of the trust company act
of 1893,1 but the regulation of the acts done pursuant to these powers is
almost entirely omitted. The fiduciary functions of banks and trust
companies have grown immensely since 1893. Not only have these services grown in volume but they have also increased in complexity and
variety. This is particularly true of the period from 1921-1929. The
financial wreckage left in the wake of the business crash of 1929 and the
depression years that have followed clearly demonstrate the need for
the regulation of these functions. This experience, moreover, has demonstrated the general type of regulation needed. The Study Commission
has included provisions in its proposal which, it is believed, are adequate
to furnish this regulation.
An illustration of the type of regulation that is proposed may be
found in a section of the new statute which provides for a separate
trust department in every bank or trust company exercising trust or any
j This section provides that these institutions shall
fiduciary powers.
provide for the establishment and maintenance of a trust department in
which all assets belonging to the trust department other than cash, shall
be kept separate from the banking assets and not co-mingled in any
way. The section further provides that all bonds, warrants, notes, mortgages, debts, and other securities of every nature belonging to such
departments shall be kept in separate receptacles labelled to indicate
An act passed in 191.5 gave state banks all of the trust powers conferred upon trust
companies by the 1893 act.
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the trust or estate to which such securities belong. These restrictions
serve a great need that has been revealed by the conditions in some
failed institutions.
In poorly managed banks which eventually fail, it frequently hap- ;
pens that trust securities are co-mingled with the general securities of
the bank and are sold from time to time as cash is needed. Prevailing
Indiana legal doctrine makes it necessary for the beneficiary to trace the
cash to establish his claim to such funds.
Realizing the injustice of loss by this practice of co-mingling securities and the practical impossibility of tracing the funds arising from
trust securities, some lower courts have recently abandoned in large
measure the doctrine of "tracing" and have substituted therefore the
doctrine of "augmentation of assets." By the use of this doctrine large
awards are made in the name and style of preferred claims. The final
result, therefore, is that these claims are paid at the expense of the
general creditors.
It is believed that this section providing for segregation will also
serve as a real safeguard against defalcation. Trust assets are infrequently disturbed and consequently they offer the greatest temptation to
any dishonest employee. When these assets, however, are managed as
prescribed by the proposed statutes, their appropriation by such an employee will be made much more difficult.
It is realized that these safeguards may not wholly prevent dishonesty and mismanagement. They should in large measure, however, prevent trust assets from being subjected to the many mistakes of judgment
that are often possible in commercial banking. The provision in the
statute requiring the filing of all trust securities in separate receptacles,
moreover, will make it comparatively easy for examiners to check trust
securities accurately and to learn whether the statute is being observed.'
To protect still further the funds of trusts from many of the niistakes of judgment possible in commercial banking, the proposal of the
Study Commission undertakes to prescribe definitely the classes of
securities in which banks or trust companies may invest all money held
in trust. Incredible as it may seem, the investment of trust funds by
banks and trust companies in this state has been governed only by the
common law. Trust companies have relied upon the advice of their
attorneys and these attorneys in many instances have rendered their
opinion, in so far as it was at all possible, in accordance with the trust
company's desires in the matter. As a consequence some trust companies have pursued a conservative policy and some have not.
In the proposed statute a group of investments legal for trust investment has been classified as follows: "(a) Bonds, notes, or certificates
which are the obligations of the United States or of any territory or
insular possession of the United States. (b) Bonds, notes, or certificates
which are the obligations of any state of the United States or of any
county, township, city, town, or other taxing district or municipality of
the State of Indiana which has not defaulted in the payment of either
principal or interest on any of its obligations within five years preceding the purchase of such securities. (c) Bonds, notes, or mortgage
1 Cf. the codes of New York, Oregon, and the federal banking statutes.
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certificates which shall mature in not less than five years from the date
of purchase or provide for an annual principal reduction of not less
than five per cent and which shall be secured by first mortgage on the
fee simple title of improved real estate in the State of Indiana which
has a value of not less than twice the total of the obligation or obligations
secured thereby as shown by an appraisal made by not less than two
competent disinterested appraisers within one year prior to the investment. (d) Bonds, notes, debentures, or certificates regularly listed on
the New York Stock Exchange or New York Curb Exchange which are
the obligations of a corporation whose average yearly net earnings, for
the five years immediately preceding the purchase, have been at least
two and one-half times the interest requirements of such obligations.
(e) Bonds issued under and by the authority of the Federal Farm Loan
Act. (f) Any other property, real or personal, which the fiduciary is
specifically authorized or directed to purchase by the terms of the will
or instrument creating the trust, or any security specifically ordered
by the court having jurisdiction of the estate or fund, after ten days'
notice by mail to all adult beneficiaries of the trust."
This classification was formulated after comparison with timetested codes that have proved satisfactory in other states' and after
consultation with reputable investment authorities.
In addition to the limitations just described the proposed act provides that "not more than one-third of any estate or trust fund exceeding $10,000 in amount shall be invested in" those types of securities
specified above excepting those issued by United States government and
its various political sub-divisions. This provision, therefore, makes certain that the cardinal principle of diversification will be followed in the
investment of trust funds.
The act provides further that all existing trust investments are to
be reinvested within six months' time to conform to these limitations
unless the beneficiaries concerned direct otherwise.
As a penalty for failure to observe the provisions governing trust
investments, institutions are made personally liable for all funds invested in securities not authorized by this statute.'
A further protection for the beneficiaries of trusts is found in the
provision of the proposed act that banks and trust companies are prohibited from buying securities from one trust and selling them to
another trust, thereby taking a profit on the transaction in either or
both instances. Under the principles of equity jurisprudence an individual cannot make a profit on his trust, and a bank or trust company
should not be placed in a different position. This provision adds nothing
to the common law, except that it provides a criminal penalty for its
violation. It is believed, therefore, that it will be much better observed
than the common law has been.
Prior to the 1931 session of the legislature there were no statutory
provisions regulating the handling of uninvested trust funds. During
Cf. New York and Oregon.
'Section 10 of the Loan, Trust and Safe Deposit Act of 1893 provided that trust
companies would be liable for all trust investments not made as therein authoriz,d. The
act, however, failed to describe any authorized investments.
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that session, however, a bill was passed which provided that not more
than $1,000 in any single trust could be held uninvested for more than
a year. The 1931 act furthermore carefully described the record that
was to be kept of such uninvested cash so that its true ownership would
always be apparent. The proposal of the Study Commission follows the
provisions of the 1931 act but lowers the period from twelve months to
six months during which uninvested trust funds in excess of $1,000 may
be held by the bank.
BANK AFFILIATES
The regulation of bank affiliates has occupied a prominent place in
nearly all recent discussions of bank reforms. To this subject the Study
Commission has likewise given much thoughtful attention. The experience and practises of certain failed banks whose affiliate relations were
notoriously bad were thoroughly analyzed. The record of successful
operating banks which have used affiliates in a manner above reproach
was also studied. From this consideration of the good and the bad the
Study Commission came to the conclusion that bank affiliates, when properly managed, are a desirable adjunct to the service offered by many successful banks. The Study Commission, however, also came to the unanimous conclusion that the holding company or other affiliate corporations
could be and have been, when improperly and dishonestly managed, an
aid to financial trickery and chicanery. The proposed act, therefore, very
carefully regulates all loan and management relationships between banks
and their affiliates.
The act divides all affiliates into two major types. The first of these
types is designated as "holding company affiliates." "Holding company
affiliates" are defined as any corporation, business, trust, association,
or similar organization—
"(a) Which owns or controls, directly or indirectly, either a majority of the shares of capital stock of a bank or trust company or
more than fifty per cent of the number of shares voted for the election
of directors of such bank or trust company at the preceding election,
or controls in any manner the election of a majority of the directors of
such bank or trust company, or
"(b) For the benefit of whose shareholders or members all or substantially all the capital stock of a bank or trust company is held by
trustees."
Bank stock held by such affiliates may not exercise voting rights
until The Department of Financial Institutions has granted a voting
permit to the affiliate. The Department of Financial Institutions may
or may not grant this permit as it deems the public interest to be best
served but it may not grant a permit unless the holding company in
making application for such permit shall have agreed: "(1) to receive,
on days identical with those fixed for the examination of the banks or
trust companies with which it is affiliated, examiners duly authorized
to examine such banks or trust companies, who shall make such examinations of such holding company affiliate as shall be necessary to disclose fully the relations between such banks or trust companies and
such holding company affiliate and the effect of such relations upon the
affairs of such banks or trust companies, such examinations to be at
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the expense of the holding. company affiliate so examined; (2) that the
reports of such examiners shall contain such information as shall be
necessary to disclose fully the relations between such affiliate and such
banks or trust companies and the effect of such relations upon the affairs
of such banks or trust companies; (3) that such examiners may examine
each bank or trust company then owned or controlled by the holding
company affiliate, both individually and in conjunction with other banks
or trust companies owned or controlled by such holding company affiliate; and (4) that publication of individual or consolidated statements
of condition may be required."
As a further condition precedent to the issuance of a voting permit
it is required that a holding company shall have readily marketable assets
other than bank stocks equal to 12 per cent of the aggregate par value
of all bank and trust company stock controlled by it. It is further
provided the holding company shall reinvest, in readily marketable assets
other than bank stocks, all net profits over and above 6 per cent per
annum on the book value of its own shares outstanding until such
assets amount to 100 per cent of the aggregate par value of all bank
and trust company stock controlled by it.
Any holding company affiliates not wishing to add to its 12 per
cent reserve fund in readily marketable assets is allowed to avoid such
action by having its shareholders voluntarily assume double liability.'
Consequently the proposed act of the Study Commission gives holding
company affiliates the choice between assuming double liability or maintaining an eventual 100 per cent reserve or guaranty fund for the purpose of satisfying bank share liability if and when levied. In the first
instance, therefore, bank shareholders are protected by a reserve fund
of 12 per cent and a double liability responsibility of holding company
shareholders and in the second instance they are protected by a reserve
fund of at least 12 per cent which eventually becomes a 100 per cent
of all possible liability. Although it is realized that these restrictions
are very drastic it is felt that public welfare justifies them. To the Study
Commission's knowledge, moreover, there are no holding company affiliates of this nature operating in Indiana at the present time so these
drastic restrictions will not serve to injure the business prospects of any
already existing active corporation.
There is another type of affiliate, however, which has been used
widely by banks in Indiana. By the terms of the proposed act this type
is designated as an "affiliate" and as defined includes any "holding company affiliate" and any corporation, business, trust, association, or other
similar organization—
"(a) Of which a bank or trust company, directly or indirectly, owns
or controls either a majority of the voting shares or more than fifty
per cent of the number of shares voted for the election of its directors,
trustees, or other persons exercising similar functions at the preceding
The corporation code of the state provides that shareholders in corporations formed
for profit shall be liable only to the extent of their investment in the shares. Ilowevtr,
under the acts of other states whereunder a corporation might be formed to do a busituss
in this state it would be possible for shareholders to voluntarily increase their liability by
provisions for such increase in the articles of incorporation.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR rNDIANA FINANCIAL INSTITUTIONS (1932)
CHAPTER VI
THE PROPOSED REGULATION OF BUILDING AND LOAN
ASSOCIATIONS
Satisfactory control of building and loan associations in Indiana
in the interests of the public welfare depends, not only upon a
modern and well-equipped state supervisory department such as that
described in Chapter IV, but also upon comprehensive and adequate
regulatory laws to be administered by the supervisory department.
The present laws regulating the conduct of the building and loan
business in the state are the result of a long evolution which began with
the passage of the first building and loan act in 1857.1 As the economic
life of the state changed and as the business and character of building
and loan associations changed, new building and loan codes were adopted
by the legislature to meet these changing conditions. The last of these
complete codes was passed during the 1911 session of the legislature.
Altho that code has been amended as to minor details, it still remains
essentially the same as it was in 1911 and in such form now governs the
building and loan associations of the state. Economic and financial life
in Indiana in 1932 differs considerably from that of 1911. It is not
strange, therefore, that there has been a widespread demand that a modernized code be adopted regulating building and loan associations.
State supervisory officials, receivers of failed building and loan associations, and the leaders of the building and loan industry were all
unanimous in their opinion expressed to the Study Commission that the
building and loan business in Indiana might be stabilized and strengthened by revised statutory regulation. This industry has always been
willing to have the legislative interpretation and limitation of its business change as conditions changed. Entirely new building and loan codes
were passed in 1857, 1873, 1885, 1893, 1897, and 1911. The changed conditions that the entire country has had to face have recently caused many
other states to feel the necessity of greatly revising or rewriting their
building and loan laws to conform to such conditions.'
After considerable study, the Study Commission reached the conclusion that Indiana would be best served by a new code. Such a code
has therefore been prepared by the Study Commission. In writing the
proposed new law an attempt was made to preserve all that was best
in the present code. In addition, an attempt was made to cover all
of the essential subjects in connection with the statutory regulation
of the building and loan association with provisions that are adequate
and clear, and protective of the best interests of the building and loan
shareholders and of the general public. In the drafting of the provisions, suggestions were utilized from building and loan leaders, from
See Chapter I.
Within the past two y(ars either new codes or important amendatory acts have
been passed in more than forty states. Completely new building and loan codes were
passed by the following states in 1931: Alabama, California, Missouri, Nevada, New
Mexico, North Dakota., Oregon, Rhode Island, West Virginia. Several other states have,
within the past three or four years, adopted entirely new codes. Louisiana has an entirely
new code, which became effective July 27, 1932.
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the supervisory officials of the state, from receivers of failed building
and loan associations, and from many persons in all walks of life. In
addition, extensive use was made of the new 1932 Louisiana code, the
Kansas code of 1931, the Oklahoma code, the New York code, the
widely-known and highly-praised California code of 1931, and the newly
enacted laws of many other states.
CAPITALIZATION OF BUILDING AND LOAN ASSOCIATIONS'
In its original form, the building and loan association grew out of
the banding together of small groups of neighbors and friends for the
purpose of pooling their savings until a sufficient sum had been accumulated to enable them to construct homes. It was thus a truly mutual
organization. As its structural form evolved, much of the mutuality of
its character was lost. In its earlier form, there was little or no overhead expense. Meetings ordinarily were held monthly in homes or places
of business of the members, and matters of policy were settled by the
entire group. In the interim between meetings, the books and affairs of
the association were cared for by a secretary elected from the group.
His duties occupied only a small part of his time; and for their performance, he was paid only a very nominal sum. The position of the secretary in the modern building and loan association is much different. He
is generally a full-time officer, deriving his living from the remuneration
he receives from the association. The larger associations of today usually
have other full-time officers such as presidents, vice-presidents, assistant
secretaries, etc. The interests of this official group in the association
are slightly different from the interests of the ordinary member of the
association. Their principal concern is with the problems of administrative technique and institutional growth, while that of the ordinary shareholder is with the problem of increasing his savings so that he may
eventually be able to erect a home or a shop, or embark in some other
necessary or desirable enterprise, or assist others in like enterprises.
As a result of the interest of professional building and loan
men in expanding the total amount of administrative functioning, there
has been a tendency on the part of certain unscrupulous promoters to
increase the number of building and loan associations merely for the
purpose of creating jobs for themselves. An increase in the number
of building and loan associations operating within a community that
is already adequately served by existing associations results only in
increasing the sum total of executive and administrative costs of such
associations in the community and in creasing the percentage of those
costs to the total of all building and loan assets. Since building and
loan associations are owned by small savers, this added administrative
cost must be borne by them in the form of average lower returns on their
stock. Obviously, such a situation is socially undesirable.
The provisions of the new code described in this chapter apply to all types of
associations now in operation in the state including guaranty associations. The reason
for this general application is that all associations now have identical powers. Guaranty
associations were originally granted powers additional to those of domestic associations
but the grant of such powers was repealed by the 1931 general assembly. The new code
herein described also prohibits the incorporation of new guaranty associations.
Since all building and loan associations now have identical powers it is logical that
they be uniform in structure and be governed by the same law.
•
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By the terms of the present building and loan law, it is very easy
for selfish executives of the type just described to start these new associations. The present law requires that no less than one hundred shares
of stock be subscribed for at the time the association is organized, but
it does not require a fixed amount of such subscriptions to be paid in
at the time of organization, nor does it limit the time in which the
balance of the subscriptions shall be paid.
The new provision governing this matter proposed by the Study
Commission requires that varying amounts of capital be subscribed and
actually paid in before the association be allowed to begin business. These
capital requirements, in the language of the act, are stated as follows:
"Where the principal office of the association is located in a city or
town having a population not exceeding ten thousand inhabitants, the
capital stock shall be not less than twenty-five thousand dollars.
"Where the principal office of the association is located in a city
or town having a population of more than ten thousand and less than
fifty thousand inhabitants, the capital stock shall be not less than fifty
thousand dollars.
"Where the principal office of the association is located in a city
or town having a population exceeding fifty thousand inhabitants, the
capital stock shall be not less than one hundred thousand dollars."
"Said capital stock shall be divided into shares of the par value of
one hundred dollars each.
"No such association shall begin or continue in business unless
all of the minimum capital stock mentioned in this section has been
subscribed for and unless one-half of such minimum capital stock has
been paid to the association at the time of its organization or reorganization. The remaining one-half of the minimum capital stock herein
mentioned shall be paid to the association within six months from the
date of its organization or reorganization."
These provisions should prevent the organization of small associations for the sole purpose of satisfying selfish interests. It should assist
in restricting the total of administrative costs of building and loan associations of the state and therefore result in the realization of larger net
returns by building and loan association shareholders.
SHARES AND SHAREHOLDERS
The provisions of the proposal of the Study Commission governing
issuance of shares state that "every building and loan association shall
have the right to issue shares of stock of such kinds and classes and in
such series and upon such terms, conditions, limitations, and restrictions
and with such relative rights as to each kind, class or series of stock
as may be stated in the by-laws of the association and approved by the
Department of Financial Institutions ..."
These provisions are essentially the same as those concerning the
same subject matter in the present building and loan code. There is one
important difference, however, and that is the provision in the new proposal which gives to the new department the right to supervise the
issuance of the various classes of stock. This supervision undoubtedly
will result in increasing the uniformity of the types and kinds of stock
a
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issued by associations. This uniformity should protect the interests of
the investor as well as those of the association itself. The establishment of standardized types of shares, issued only after departmental
approval, should make it less likely that shareholders would be offered
shares that had rights and priorities other than those which they expected.
Other stabilizing provisions are those contained in the section
regarding the payment for shares of stock and the liability of the
shareholder. This section contains essentially the same provisions as
those of the present act but in addition contains the provision that "the
consideration for all shares of stock shall be paid to the association in
cash and when the consideration therefor and all other just charges
thereon have been paid in full, such shares of stock shall be taken
to be fully paid and non-assessable and not subject to any further call
or assessment." The present law was not clear concerning the liability
of shareholders for assessments and such liability was, therefore, a much
debated question. This provision removes all question of doubt and
should therefore be a very desirable improvement over the present code.
Another feature of the proposed act designed to protect the investing shareholder requires that the certificate or other evidence of stock
ownership state the terms, conditions, limitations, or restrictions upon
which or under which shares of stock are issued and held and upon which
the withdrawal value thereof may be paid. The purpose of such provision is to advise investing building and loan association members fully
of the terms and conditions upon which the stock is issued. It is hoped
that such advice will prevent any misunderstanding on the part of the
shareholder as to the nature of the transaction or his rights concerning
the withdrawal of his funds.
During the depressed economic conditions of the past three years
many associations have been unable to pay promptly all requests made
for funds by shareholders. Many of these shareholders were seriously
embarrassed by their inability to withdraw their funds immediately
because they had been laboring under the misapprehension that such
funds were payable upon demand. They did not fully realize that they
were shareholders in the association rather than depositors in it, and
that the association was obligated to pay them their funds only if and
when such funds were availabLe. A confusion of this nature in the
minds of the shareholders is undesirable both from the standpoint of
the welfare of the public and from the standpoint of the building and
loan industry. It is hoped that a provision such as has been incorporated in the proposed act will in the future prevent wholesale misunderstandings on the part of the investing public.
The present act is ambiguous also concerning the status of one who
is purchasing property and taking over the stock of a member, said
member having pledged such stock as collateral for a loan made by the
association on the aforementioned property. The proposed statute clarifies this matter succinctly by stating that "no transfer of shares shall
be binding upon the association until such transfer has been made upon
its books and the transferee shall take the same charged with all liabilities to the association and all conditions attached thereto at the time
of the transfer."
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1
Another uncertainty which existed in the present law concerned the
preemptive right of a shareholder to subscribe for additional stock.
The proposed act states that "the shareholder shall have no preemptive
right to subscribe to any additional shares of capital stock of the association of any kind, class or series." It is essential that this prohibition
be included in the building and loan law since it would be impossible for
a building and loan association to operate on any extended scale should
subscribers have preemptive rights to any new stock issued.
The provisions of the proposed statute relative to the regulations
surrounding membership in associations are essentially the same as those
in our present act. It is provided that"(a) the members of every building and loan association shall be only those persons to whom its shares
of stock have been issued or transferred in accordance with the provisions
of its by-laws. Their membership shall continue until such shares have
been matured and paid, or withdrawn, retired, called, cancelled, or forfeited. The payments to any such association upon shares issued by it,
shall be paid in such sums and at such times as are provided in the
by-laws, until such shares reach their matured value or are withdrawn,
called, retired, cancelled, or forfeited.
"(b) The board of directors may from time to time, by resolution,
limit the total aggregate amount of stock that any investing shareholder may own or hold in his own name, and may at any time, upon
order, require any investing shareholder to withdraw and surrender to
the association for cancellation, any part or all of the stock owned by
him, together with his pass book, certificates of stock, and other evidences of membership issued to him. Any investing shareholder who
may be required by the board to surrender his stock to the association
for cancellation, shall be entitled to receive for the stock upon surrender,
the full amount paid thereon, together with the proportionate part of
any dividends accrued upon such stock since the last preceding dividend
date, after deducting any losses and other just charges." These provisions obviously substantiate the theory that building and loan associations are mutual institutions.
The present law contains no provisions protecting building and loan
associations in the issuance of shares of stock to trustees or guardians.
To correct the omission, the new statute provides that every association
"shall have the right to issue shares of its stock to one or more persons or corporations as trustee or guardian for any other person or
persons and the association shall not be liable to the beneficiary or to
any wards for any moneys paid to such trustees or guardians on account
of such shares. Whenever any person holding shares of stock as trustee
or guardian, dies and no notice of the terms, revocation, or termination
of the trust or guardianship shall have been given in writing to the
association, the withdrawing value of said shares of stock or any part
thereof may be paid by the association directly to such beneficiary or
ward; and if no such beneficiary or ward has been designated in writing
to the association, the withdrawal value, or any part thereof, may be
paid by the association to the executor or administrator of such trustee
or guardian. Any and all payments so made by any such association
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shall be a valid and sufficient release and discharge to such association
for such payment."
This provision follows the New York law which has been used
satisfactorily in that state.
As the provisions in the present law regulating the issuance of
shares to minors or to two or more persons jointly have proved to be
satisfactory, they have been reincorpoDated in the proposed code.
This whole group of provisions relating to shares and shareholders
which has just been described, if enacted into law, should not only
clarify many troublesome ambiguities in the present statute but should
serve to guard the legitimate interests of building and loan associations
and of the investing public.
THE GENERAL POWERS OF ASSOCIATIONS
The general corporation code of the state confers corporate powers
ons.
upon all business corporations of the state except financial corporati
gensame
the
on
Commissi
Study
Under the terms of the proposal of the
y,
eral powers, insofar as the exercise of such powers may be necessar
are conferred upon financial institutions as are conferred upon other
corporations by the general corporation code. In addition to the general
rights, privileges, and powers conferred in this manner, building and
loan associations are given the right to issue shares of capital stock, to
make loans to members or to invest receipts, to charge and collect fees,
etc. In other words, they are given the rights, privileges, and powers
necessary to transact the customary types of building and loan business.
These powers do not differ materially from those described by the present code.
The present act, however, is not clear as to the possible scope of
building and loan association's by-laws. In order to dispel the various
uncertainties in connection therewith, the new law definitely describes
the subjects that may be covered by the by-laws. The proposal provides
prothat "the by-laws of any building and loan association may contain
ation
of
incorpor
articles
the
or
act
this
with
ent
visions not inconsist
regarding: (a) The kinds and classes of stock to be issued and the
terms and conditions upon which said shares of stock may be issued,
withpaid for, transferred, matured, cancelled, retired, forfeited, or
drawn. (b) The fees which may be charged for membership in the
its
association and the transfer fees to be charged upon transfer of
The
(c)
d.
mentione
ter
hereinaf
are
as
amounts
such
in
stock,
of
shares
stock
sums of money or dues which shall be paid upon the shares of
ning,
apportio
of
manner
and
time
the
and
payment
their
of
and the time
makg
crediting, and paying dividends. (d) The manner of awardin and
the
on
and
associati
the
of
funds
the
g
investin
ing loans to members and
of interest
rates
or
rate
the
and
loans
such
for
taken
be
to
security
and the terms
and premiums or other expense to be charged thereon
(e) The fines
repaid.
be
may
loans
such
which
upon
and conditions
and collected
and additional rates of interest which may be imposed
premium
interest,
dues,
ly
punctual
pay
to
failing
from the members for
s with the
contract
the
in
stated
be
shall
same
the
but
charges,
or other
members."
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FOR INDIANA FINANCIAL INSTITUTIONS (1932)
147
DIVIDENDS, CONTINGENT FUND, AND RESER.VE FOR LOSSES
The proposal of the Study Commission contains many new provisions
designed to promote the economic well-being of associations and to prevent them from adopting unsafe dividend policies.' Dividends are to
be paid only out of net earnings actually collected during the period
for which the dividend is declared, after having deducted from such
earnings all expenses of operation for the period, or they are to be
paid out of the undivided profits account from earnings collected and
added to the undivided profits account during some previous period.
Due to very bitter competition in certain sections of the state, some
associations practice the very unsafe policy of paying dividends out of
paper profits rather than profits actually realized. Obviously such a
policy, if long pursued, could not help but weaken the financial strength
of an institution. The proposed act, moreover, provides that an association shall not pay dividends out of its fund for contingent losses or
shall not pay dividends until there has been deducted from profits the
statutory requirement for the contingent loss fund.
By the terms of the new proposal, associations are also prohibited
from entering into any agreement for the payment of any fixed rate
of dividends and from representing or advertising that any fixed rate
of dividends will be paid on stock. This provision should be most valuable for protecting the general public. Some associations, in communities where competition for the funds of the public has been very keen,
made a habit of advertising that dividends in fixed amounts were being
paid. Many of these advertisements went further and very definitely
gave the impression that such dividends would, without any possibility
of doubt, be paid. It is generally recognized that no corporation can
safely guarantee to its common shareholders a fixed rate of return,
because dividends should only be paid out of earnings, the amount and
the availability of which are generally dependent upon conditions beyond the control of the executives of the business.
To further safeguard the shareholders against unforeseen losses,
and against the unsound distribution of earnings of the association, the
proposal of the Study Commission requires that at least 3 per cent
of the gross profits of any association be set aside each year into a
sinking fund to provide for contingent losses. It is further provided
that any association "shall accumulate such fund unt'l the total amount
thereof shall equal 10 per cent of the total assets of the association.
Any losses incurred by such association shall be paid out of and charged
against said fund for contingent losses." This contingent fund may
also be increased by contributions or tra,nsfers from the undivided profits
account upon order of the board of directors.
The present statute similarly requires that 3 per cent of gross profits
shall be paid into a sinking fund to provide against losses, but it only
requires that this fund be accumulated until it equals 5 per cent of the
assets of the association. The present act, moreover, provides that it
is not necessary for an association to set aside this 3 per cent of its
earnings each year if such action would necessitate a reduction in diviThe receivers of the fifteen building and loan associations which have failed since
1915 in three instances ascribe the failure of the association to unwiso dividend policies.
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Federal Reserve Bank of St. Louis
No. 10
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dends below 6 per cent per annum. Obviously such an exception destroys
most of the value of the entire provision. The only purpose of a legal
restriction on the distribution of earnings is to make certain that under
all circumstances a satisfactory proportion of the earnings are diverted
each year to a fund that can serve as a "shock-absorber" in times of
economic distress when losses rapidly accumulate. Dividends should
represent a distribution of actual net profits to shareholders. All authorities agree that the allocation of an adequate amount of the gross profits
to reserve accounts prior to the ascertaining of net profits is legitimate
and necessary.
The new proposal makes another change in the present law designed to increase still further the financial stability of associations.
Each association is authorized to maintain an undivided profits account
and to accumulate funds in this account until they equal 10 per cent of
the total assets of the association. The present law makes provision
for an undivided profits account but limits it in amount to 3 per cent
of the assets of the association.
These provisions requiring the reinvestment in the business of a
portion of the association's earnings each year and similar provisions
applicable to banks as described in Chapter V are in keeping with the
general agreement on the part of reputable investment authorities that
it is sound business practice to reinvest in a business a considerable
portion of its earnings. It is realized that building and loan associations are mutual organizations and that a strict adherence to the fundamental philosophy of mutuality would dictate that all profits be divided
annually among members. A shareholder of a general corporation is
theoretically a partner in the corporation for an indefinite time while a
shareholder of a building and loan association ordinarily is in the association only until he has acquired a home or shop. It is recognized,
therefore, that the shareholder of the ordinary corporation has a greater
interest in the continued increase of the financial stability of the corporation than has the more or less transient shareholder in the building and
loan association. Nevertheless, stability on the part of the building and
loan association is necessary if the shareholder is to accomplish the purpose for which he joined the association. Should the association become insolvent, his plans for building a home or saving his funds would
be wrecked. A reasonable withholding of earnings from the shareholder and the accumulation of these earnings in stabilizing reserve accounts can, therefore, be justified.
FINES AND FEES
The proposed statute contains several sections designed to clarify
the provisions of the present act describing the powers of associations
to charge fines and fees. By the terms of this proposal associations
are permitted to charge a small fee to cover the cost of the pass book or
expense of opening or transferring an account. The investing public
generally realizes the fairness of charges of this type. If associations
were not allowed to reimburse themselves for the considerable expense
that the casual and transitory investors cause, there would inevitably
result a decrease in net earnings available for distribution to the
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
149
permanent shareholder who consistently invests his savings in his stock
and thereby makes the operation of building and loan associations
possible.
The present building and loan law contains a provision requiring
borrowing members to bid and pay premiums for the privilege of obtaining a loan. This type of statute has been a part of building and
loan codes since they were first written. into the law of the state.' In
recent years, however, this somewhat cumbersome procedure has largely
been abandoned by associations. In its place many associations, particularly tho§e associations operating on a very small margin between
the interest and dividend rates, now charge a small loan fee which is
regarded as a contribution by the borrowing shareholders toward the
payment of the operating expenses of the association. The new statute
takes cognizance of this modern procedure and legalizes it so that associations "may charge and collect premium or loan fees in an amount
not to exceed two per cent of the amount of any loan, upon all loans
made by the association, which such premiums and loan fees may be
paid at any one time or in such installments as the by-laws may provide and any contract or agreement with any borrowing member, for
the payment of such premium and loan fees, shall be valid and binding
and all contracts heretofore made between any such association and
its borrowing member for the payment of any premium or loan fees,
are hereby legalized and no premium or loan fees heretofore or hereafter contracted for shall be deemed usurious."
From the earliest days, the laws and practices of building and loan
associations have sanctioned the charging of fines to borrowing shareholders of associations. A provision legalizing this charge is incorporated in the present law. Its terms, however, are somewhat ambiguous
and they have been restated in language unmistakably providing for
the levying of fines against borrowing shareholders "if they fail, neglect,
or refuse to pay dues, interest, premiums, or loan fees when due, but
no such fines shall exceed 10 per cent of the amount of the delinquent
payments and such fines shall not be charged more than once for each
delinquency."
The proposed act, moreover, requires that fees and fines of all types
be paid to the association and added to its earnings. The bill further
provides that no part of any fee, premium, or fine "shall be directly
or indirectly paid to any person, firm, or corporation as a commission,
compensation or otherwise for procuring any subscription to, or transfer of shares of stock, or for procuring any loan or other consideration
from such association or for the collection of such fees." This provision is intended to correct a very harmful practice formerly used
by some associations in their efforts to procure new investing members.
It was the custom of such associations to employ solicitors or salesmen
to sell their stock. The salesmen were permitted to withhold a commission of 25 or 50 cents on each share sold. In some instances they
obtained a large number of subscriptions for shares with an initial
payment sufficient to cover the statutory amount required and then
pocketed the money, leaving the shareholder with nothing paid upon
his stock.
1
See Chapter I.
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Federal Reserve Bank of St. Louis
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150
proAnother type of unethical and undesirable practice which this
"inby
d
followe
been
has
vision should prevent is the practice that
for
ion
commiss
a
uals
g
individ
chargin
of
ions
institut
siders" in a few
them a loan.
acting as their personal representative in securing for
buildSuch practice is not only contrary to the cooperative spirit of the
of
quality
the
g
lowerin
in
result
to
apt
is
but
tion
associa
loan
and
ing
sharethe
to
loss
of
lity
probabi
loans made and thereby increasing the
holders.
LOANS ON REAL ESTATE
sion
The provisions contained in the proposal of the Study Commis
tions are
associa
of
funds
the
of
ng
investi
and
loaning
the
ing
concern
dealing with
radically different from the provisions in the present law
loans may
ge
mortga
l,
proposa
new
the
of
terms
the
the same subject. By
by first liens
be made to members, but all such loans must be secured
debts previously
upon real estate, unless taken as additional security for
within the
located
be
must
loans
such
g
securin
estate
Real
contracted.
the office
of
miles
fifty
within
state,
state of Indiana or if outside the
loan.'
the
making
of the association
ions
These restrictions are for the purpose of preventing institut
farin
or
state
the
outside
loans
making
that have excess funds from
are ordinarily
distant communities. Loans made on distant properties
ies. It is
propert
local
on
made
more difficult to collect than are those
ies to see
propert
such
watch
to
tion
associa
the
more difficult, also, for
jeopardize their
thereby
and
rate
deterio
to
allowed
not
are
they
that
value as security for loans.
secured
The new proposal prohibits associations from making loans
value
ed
apprais
the
of
cent
by real estate mortgages in excess of 60 per
by a
secured
is
cent
per
60
over
excess
the
of the real estate unless
the associaof
stock
paid-up
or
bonds,
ment
govern
or
state,
of
pledge
of money that may
tion. By the terms of the present law the amount
age of the value
percent
fixed
a
to
limited
not
is
estate
be loaned on real
practice
of the property. During the past decade it has been common
of the
cent
per
66%
to
up
loan
to
tions
associa
the
among the majority of
as high as
loan
to
tions
associa
some
among
and
estate,
real
of
value
are probably
75 per cent of the appraised value. While such loans
y prices
propert
ng
declini
of
times
in
prices,
rising
of
good in times
have suffered
such slender equities are quickly lost. Many associations
loans.
during the past two or three years because of such
be made upon
not
may
loans
that
s
provide
further
l
proposa
The
housing or
for
e
suitabl
g
real estate "upon which there is no buildin
security
nal
additio
as
d
include
is
estate
real
such
retail purposes unless
d thereon
borrowe
money
the
unless
or
ed,
improv
so
estate
real
other
to
or retail
is to be used for erecting a building suitable for housing
prowork
the
as
d
advance
be
to
is
money
the
and
s
business purpose
and
g
of
buildin
ity
possibil
gresses." Such limitation precludes the
similar
and
hotels,
plants,
ial
industr
for
loan associations making loans
and purpose of
enterprises. This is in keeping with the original spirit
proposed laws regulating the loaning
A very similar restriction is included in the
V.
of bank funds on real estate, described in Chapter
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
151
the building and loan association. With such a restriction, its funds
will be used for the purpose of assisting its members to build or purchase
homes or shops in which their businesses may be carried on. Moreover,
loans of this type are likely to be less speculative than are loans for
industrial purposes, apartment houses, hotel buildings, etc.
As an additional safeguard for the loans of associations, the amount
which may be loaned to any one borrower is limited to 1 per cent of
the total assets of the association, except that loans of $5,000 or less
are not affected by the limitation. An investigation made by the Study
Commission ascertained that many associations had loaned very large
amounts to single individuals or corporations. In many instances these
loans had been made to promote real estate developments in which the
officers or directors of the association were themselves directly or indirectly interested. It is expected that the provisions of this proposal
will prevent such practices in the future. It is generally recognized that
diversification is the first law of safe and successful investment.
The provisions of the new code proposed by the Study Commission
regarding a borrower misrepresenting his age and regarding foreclosure of loans are essentially the same as similar provisions in the
present act.
The provisions of the proposed law regarding the closing of loans
permits every building and loan association to require its borrowing
members to pay all expenses incurred in connection with the making
and closing of any loan. This provision is in keeping with the practice
of nearly all associations of the state at the present time. The proposed new act, moreover, includes provisions which regulate the repayment of loans and are essentially the same as the present law in
that connection.
A further very important restriction in the new law limits loans
to any officer, director, or employee to those secured by a mortgage
upon real estate used for his home or secured by paid up shares of the
association's stock. This restriction is to prevent the practice which
has grown up in some associations of lending to board members sums
of money which they used to promote large real estate developments
for their own personal profit.
3
INVESTMENT IN REAL ESTATE
In the proposed act are many new provisions relating to the investment of the funds of building and loan associations in real estate
and other property. The amount that may be invested in furniture
and fixtures is limited to five per cent of the contingent loss fund and
undivided profits account of the association. An amount in excess of
this may be invested only with the consent of the Department of
Financial Institutions. Moreover, it is provided that the amount invested in real estate used for the office of the association may not exceed five per cent of the total assets of the association and not to exceed
$100,000, unless the Department of Financial Institutions gives the
association special permission to exceed such limit. Instances are known
in the state where building and loan associations have invested a considerable amount of shareholders' funds in buildings of the association
and in elaborate and expensive fixtures. Such buildings ordinarily may
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Federal Reserve Bank of St. Louis
No. 10
152
be advantageously used only for the purpose for which they are erected.
Consequently, in the event of the association's liquidation, the value
of the building is largely destroyed and only a small part of the
original investment can be realized by the shareholders. It is hoped
that this provision will prevent such unwise investment in the future.
A limitation of a similar nature on the investment of bank funds in
buildings and equipment is described in the chapter regulating the conduct of the banking business.
In the past, some associations have followed the practice of purchasing real estate for the purpose of reselling it to their members.
Regulations concerning such transactions are not contained in the present law. Suitable restrictions, however, are included in the new proposal and associations "may purchase for the purpose of selling, or
improving and selling to its members upon contracts for the sale thereof
at the cost price of such real estate and improvements, where such
contracts of sale and improvements to be erected upon said real estate
are executed concurrently with or prior to such purchase or improvement.
The total cost, contract price, or value of such real estate as carried on
the books of the association shall not at any one time exceed 5 per
cent of the total assets of the association." The act further provides
that associations may take title to such real estate as may be conveyed
to them in satisfaction of debts previously contracted or in exchange
:or other real estate so acquired.
It is provided, however, that all real estate acquired by the association must be taken and held in its own name. Some associations have
followed the practice of taking title to real estate, acquired through
foreclosure or in satisfaction of mortgages, in the names of the officers
holdor directors in order to avoid the appearance of heavy real estate
uny
obviousl
is
ge
subterfu
Such
ts.
statemen
d
publishe
ings in their
ders
desirable since it is deliberately intended to deceive the sharehol
and the general public.
SECURITIES ELIGIBLE FOR INVESTMENT
The terms of the proposal drastically change the present law reguthat
lating the investing of the surplus funds of associations. It provides
and
tes
certifica
notes,
bonds,
in
(a)
"
invested
be
wrplus funds may
or
other valid obligations of the United States or the State of Indiana,
the
of
on
subdivisi
political
other
or
any county, township, city, town,
state, issued pursuant to authority of law;
ns of any
"(b) in bonds, notes, certificates or other valid obligatio
prior to
years
five
for
which
States
United
state or territory of the
and interest
principal
the
paid
promptly
has
nt
investme
such
of
date
the
of the United
on its bonds and other legal obligations in lawful money
States."
funds
The present law permits the association to invest surplus
apof
source
the
indicate
to
fails
but
s"
in "other approved securitie
free to inare
ons
associati
,
therefore
matter,
practical
a
As
proval.
s they
vest their surplus funds as the officers wish. In some instance
corporaprivate
of
bonds
and
stocks
the
in
have invested these funds
.
tions for the purpose of promoting selfish, personal interests
"in shares
funds
its
invest
to
right
the
Any association is also given
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Federal Reserve Bank of St. Louis
Oler
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
153
1
3
a
of the capital stock of a Federal Home Loan Bank of the district wherein
such association is located, or an adjoining district, or in bonds, debentures, or other securities or obligations issued by any Federal Home
Loan Bank of the United States."
Far reaching provisions relative to book entries and amortization
are included in the new proposal. They require real estate and securities owned by the association to be carried on its books at cost or market
value, whichever is lower. These provisions will insure that necessary
deductions are made from earnings when the value of assets depreciate.
Unfortunately in the past some associations have not deducted from their
current earnings adequate amounts for depreciation. Such a policy
is unsound and results in using too. large a proportion of the association's earnings for dividends. There are similar provisions, moreover,
in the law regulating banks, as described in Chapter V.
According to the receivers of the fifteeri building and loan associations that failed during the period 1915-1931, improper loan and investment policies were responsible for more of these failures than
any other type of cause.
The members of the Study Commission believe that the various
above-described restrictions, dealing with the loaning and investing of
funds of building and loan associations will, if enacted into law, prevent many mistakes on the part of associations in the future.
NOTICE OF WITHDRAWAL OF FUNDS
-
L
Lt,
Le
3t
Is
pn?.y
a-
es
For many years prior to the recent depression period it was the
practice of building and loan associations to allow shareholders to withdraw their funds upon short notice or demand. In some instances
shareholders were encouraged in the belief that it was possible for
building and loan associations to accept money payable on demand.
For this reason the general public gained the impression that building
and loan associations operated upon the same plan as commercial banks.
Even building and loan executives themselves sometimes refer to building and loan stock as deposits. Such a characterization is obviously a
misnomer.
Money placed by the public with building and loan associations is
loaned out on long time mortgage securities, zilch loans maturing in
twelve to fourteen years.' A majority of the members of the Study Com1"It is essential to remember that the amortized loans of the building and loan association belong to the slow-credit field and not to the commercial-credit field. That is to
say, 'self-liquidating credit' which is provided by the commercial banks is founded on the
expectation that the goods purchased with the proceeds of the loan will be sold before the
loan comes due ; the receipts from the sale of the goods will be used to pay back the
money borrowed. The slow-credit field on the other hand involves the idea that the
money received from the loan will be invested in 'fixed assets' or capital goods (including
homes), and these capital goods will be used over a term of years. The money to repay
the loan will come not from the sale of goods, but from the profits received from their
use. Building and loan association loans are of the latter type, and run for a period of
years." From Horace F. Clark and Frank A. Chase, "Elements of the Modern Building
and Loan Associations," published by The Macmillan Company, New York, I9Z5.
This voltune is one of the best known books describing the organization and operation
of building and loan associations. It was prepared as a textbook for the American Savings, Building and Loan League. At the time the volume was prepared Mr. Clark was
Associate Professor of Engineering Economics at Iowa State College and Mr. Chase was
Educational Director of the American Savings and Building and Loan League.
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-.1
Federal Reserve Bank of St. Louis
•
No. 10
154
mission are firmly convinced that associations, therefore, can not invest
their money in this manner and be able to pay withdrawals on short notice
or upon demand. Withdrawals can be paid only out of dues or other payments made by borrowing shareholders or from new money placed with
the association by investing shareholders. When funds from these
sources are less than the demands of withdrawing shareholders there
is no money available to pay withdrawals. Money received by the
association as interest on mortgage loans is required for the payment
of dividends, operating expenses, and additions to the contingent fund
and undivided profits account. In order to place the building and loan
and
association upon a basis of operation that is fundamentally sound,
buildand
banks
between
ce
differen
the
to
as
to correct any confusion
ing and loan associations which may exist in the mind of the public
Study
or in the minds of building and loan operators themselves, the
funds
of
awal
withdr
of
notice
a
definite
tlet
ed
convinc
is
Commission
ary features
should be required.' Provisions of this nature were custom
of building and loan laws until the passage of the present act.'
ng in a
In recent years, however, associations have been operati
public
the
and
patrons
their
educate
manner designed to encourage and
savers
small
many
ence
a
consequ
As
saving.
and
thrift
of
in the habits
ions. Many
have invested their funds with building and loan associat
that notice
ity
possibil
the
of
ng
rstandi
misunde
of these savers, due to a
in order
funds
such
ated
accumul
wal,
withdra
before
d
require
be
might
tions
associa
If
ncy.
emerge
of
times
in
to have them available for use
,
demand
upon
funds
their
type
this
of
s
member
ng
investi
desire to pay
they
that
sion
Commis
it is the opinion of some members of the Study
warrants
should be allowed to do so, at times when their cash position
, moredemand
on
s
amount
small
of
t
paymen
The
ts.
such paymen
The
ion.
associat
the
of
y
stabilit
over, is probably not dangerous to the
conflict
e
reconcil
to
seeks
re,
therefo
sion,
Commis
Study
proposal of the
lder
shareho
"any
that
s
ing views regarding the situation. It provide
lder whose stock is
or the legal representative of any deceased shareho
of stock from
shares
his
aw
withdr
to
g
desirin
loan,
a
for
unpledged
three (3)
upon
so
do
may
part,
in
the association either in whole or
board
The
.
.
.
s,
director
of
board
the
to
writing
months' notice in
waive
ion
resolut
by
time
of directors of any association may at any
of unpledged shares
notice of the withdrawal either in whole or in part,
amount in excess
any
of
awal
withdr
the
for
notice
that
except
of stock,
any one month
during
lder
of one hundred dollars by any one shareho
."
.
.
rs
directo
of
board
shall not be waived by the
a building and loan association to pay
1 "The question may be asked: Why not require
It is a sufficient answer to say that the
withdrawals on demand and without limitation?
no demand deposits. Requiring ...
association does not do a banking business and carries
effectually prevents 'runs' and consequent
notice before withdrawal can be demanded,
to ca.ry a large ca.sh reserve.... There have
forced liquidations, and malces it unnecessary
could not be readily met, and such
demands
when
money'
'tight
of
periods
been many
It is particularly rlicessary to
cycle.
business
the
of
swing
every
with
periods will recur
dating as are those of
self-liqui
not
are
nts
investme
its
because
grant an association time
to all its members
clear
matters
thme
makes
which
on
associati
a commercial bank. The
withdrawals." From Clark and Chase,
will have no difficulty in the matter of meeting
on."
"Elements of the Modern Building and Loan Associati
See Chapter I.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
155
3
It is realized, however, that some associations may maintain cash
reserves similar to those maintained by banks, which would enable
them somewhat more safely to pay shareholders on demand. Consequently, the proposal of the Study Commission provides that the
board of directors of any association may waive notice of the withdrawal of funds in excess of $100 per month for any shareholder if the
association "at the time of such withdrawal has on hand and unpledged,
a reserve balance equal to not less than three per centum of the total
liability of the association on its outstanding investment stock. Said
reserve balance shall consist of money on hand or on deposit with a
solvent and going bank or trust company or money invested in bonds,
notes, certificates, or other valid obligations of the United States."
As has already been discussed, a provision is included elsewhere
in the proposal that all stock certificates issued by associations must
state on their face that the right to withdraw funds is subject to the
provisions of the building and loan law regarding withdrawal. It is
confidently hoped by all members of the Study Commission that this
provision will operate hereafter to remove confusion from the public's
mind regarding the distinction between ownership of shares in a building and loan association and deposits in a bank.
PAYMENT OF TIIE CLAIMS OF WITHDRAWING SHAREHOLDERS
,s
is
rn
,)
re
3S
Ft y
ht,
..
nt
ve
ch
to
of
?xis
se,
One of the most troublesome problems which building and loan managers have to face is the problem of allocating the proper amount of
funds to be used each month in the payment of withdrawing shareholders and the proper amount to be used for other legitimate needs
of the association. The proposed act provides that one-half of the net
funds received by any association in any one month, exclusive of funds
borrowed by the association from any source, and after deducting the
required amount for the contingent fund dividends and operating expenses, including interest, taxes, assessments, insurance, and repairs
upon real estate owned by the association, shall be applicable to the
payment of withdrawing shareholders, unless otherwise directed by the
board of directors. The remaining portion of the funds so received
during any one month, and funds borrowed from any source, may be
used by such association for any of its corporate purposes. Since building and loan associations are mutual organizations operated for the
benefit of all members, it is entirely fair that a certain portion of the
funds received should be allocated for the purpose of carrying on the
orderly functioning of the association's business. If funds received were
not so allocated, a group of withdrawing shareholders might make such
demands upon an association thai for long periods of time all of its
usual and legitimate functioning would have to be suspended to the
detriment of the remainder of the rnembers.
During the past two or three years many associations have had
insufficient funds available with which to pay all shareholders desiring
to withdraw from the association. In such instances the present law
provides that not more than one-half of the funds received in any one
month are required to be applied to withdrawing demands and if the
funds so applicable are not sufficient, then the demands are to be paid
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Federal Reserve Bank of St. Louis
156
in the order in which the notices of withdrawal are filed with the association. This method of payment has worked a serious hardship on many
associations which have been obliged to go on notice basis. In some
instances their large shareholders were able to get their notices on file
very early and therefore could demand payment for their stock in full
before any payments were made to other shareholders. Many of these
larger shareholders did not need their money but were withdrawing it
merely because they had lost confidence in the association. On the other
hand many small shareholders who were badly in need of funds to meet
emergencies of all sorts were required to wait many months and some
may perhaps be forced to wait for years before they can obtain their
money. Our present law penalizes the faithful shareholder who is willing to leave his money with the association and favors the shareholder
who becomes alarmed and does not remain loyal to the institution.
As a result many associations are now in voluntary liquidation and
it may be years before they are able to resume their normal operations.
To remedy this .situation the proposal of the Study Commission provides that "when the funds applicable to the payment of withdrawing
shareholders are not sufficient to pay all such withdrawals in full, the
board of directors by resolution may authorize the applicable funds to
be paid in sums not exceeding $100 to any withdrawing shareholder
during any one month or may authorize the applicable funds to be distributed among the withdrawing shareholders in proportion to their
stock holdings to be withdrawn." This provision for a pro rata payment
of claims should prove to be a valuable protective feature for building
and loan associations themselves, for the shareholders of such associations, and for the general public. This provision will discourage the
withdrawal of funds by large shareholders in times of panic. It will
insure the small shareholder of an opportunity to secure a reasonable
amount of his funds when needed in emergency and should in large
measure assist in the stabilization of building and loan business and,
therefore, in the stabilization of other lines of business.
As a further protection for the building and loan association and
its shareholders, the proposed act provides that except upon final dissolution the shareholder who withdraws his stock shall not be entitled to
participate in or receive any portion of the undivided profits or fund
for contingent losses. By so withdrawing he forfeits all right to his
interest in these accumulated profits of the association. The unpaid
demands of withdrawing shareholders, moreover, "shall not constitute
an indebtedness against the association and the withdrawing shareholders
shall not be deemed creditors of the association for any withdrawals at
any time remaining unpaid." This. provision is in keeping with the
mutual nature of the association and is fair to all investors in such
associations.
The present law contains no provision regarding the withdrawal
of shares in cases where, after the death of the shareholder, no executor
or administrator of his estate has been appointed.
The proposed act, however, provides that the association may "pay
the withdrawal value of shares to the widow, widower, next of kin or
may apply the same to the payment of funeral expenses and the ex-
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDI4NA FINANCIAL INSTITUTIONS (1932)
No. 10
157
penses of the last sickness of the decedent." To protect itself the association is to "require proof by affidavit as to the parties in interest and
the filing of proper waivers or the execution of a bond or indemnity
with proper sureties and proper acquittance and receipt for such payment by the person to whom such payment is made shall fully release
the association and such association shall not thereafter be held liable
to the decedent's executor or administrator thereafter appointed or any
other person.'" This provision would legalize the custom now followed
by most of the building and loan associations of the state. It permits
payment directly to the heirs and avoids the costs of court administration. Where the amounts involved are small such costs are in some instances nearly prohibitive.
In formulating these various provisions regarding "withdrawals"
the Study Commission was guided by scores of suggestions from building
and loan operators, state officials, and the shareholders of associations.
In addition a very comprehensive background of research was utilized.
A detailed analysis regarding "withdrawals" was made of the building
and loan statutes of every state. The withdrawal requirements herein
suggested represent a selection of the ideas secured from all of these
many sources and their adaptation to the Indiana situation.
ADVERTISING, REPORTS AND PUBLISIIED STATEMENTS
One of the most important restrictions contained in the new proposal
of the Study Commission is the restriction placed upon the advertising
and business of the association. The proposed statute specifically provides that no association "shall engage in the banking or trust business
or operate a savings bank, commercial bank or trust company or advertise
or hold itself out to the public that it is a commercial bank, savings
bank or trust company or that it is doing or permitted to do a banking
or trust business or any other business which is prohibited by law to
such an association, nor shall misrepresent the nature of the shares of
stock issued by such association or the rights of investing members with
respect thereto. No such association shall advertise or hold itself out
to the public as accepting deposits of money payable on demand or without notice or agreeing to pay or guaranteeing the payment of any interest
or fixed amount in dividends upon deposits of money or upon any shares
of its stock. No such association shall issue, sell, negotiate or advertise
for sale any investment certificate or certificates of indebtedness." These
restrictions should prevent building and loan associations from carrying
on transactions of a nature that may safely be carried on only by commercial banks. They should also serve to protect the public from false
or misleading statements made by the officers of building and loan associations in their printed advertisements.
The proposed act follows the present law in requiring that each
association make an annual report to its shareholders. The new act,
however, permits the association to publish the report in a newspaper of
general circulation in the city or town where such association is located
in lieu of mailing or delivering it to each shareholder as is now required
by law. This mailing requirement of the present law imposes a nearly
1 This provision was adapted from the new California code.
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Federal Reserve Bank of St. Louis
158
prohibitive expense on associations that have thousands of shareholders.
Where the publication procedure permitted by the act is follov,,ed the
new act further provides that a printed copy of the statement shall be
furnished to each shareholder of the association upon request.
The act also provides for an annual report by the association to
of Financial Institutions.
Department
the
There is a provision in the proposed act, moreover, which requires
that each board of directors shall make an audit of the books and affairs
of its association at least once annually and send a report of such examination to the supervising department.
Should the members of the board desire to avoid making this examination personally the act provides that they may employ a certified
public accountant to perform this service for them. It is believed that
examinations of this nature will do much to keep the members of the
board acquainted with the problems of the institution, prevent defalcation
on the part of officers, and protect the shareholders from the consequences
of unwise or dishonest management.
STANDARDIZATION OF FORMS
As a further protection to the public against the issuance of deceptive types of stock or the use of other unfair competitive methods,
the proposal of the Study Commission contains provisions intended to
secure uniformity and standardization of methods of operation among
the associations throughout the state. The proposed bill provides that
all associations "before issuing any shares of stock or making any loans,
shall file in the office" of the Department of Financial Institutions "certified copies of their by-laws and any rules and regulations adopted by the
association, and certified copies of the forms of stock certificates, mortgages, notes, contracts and other agreements which the association
proposes to use."
RELATIONSHIP WITH TIIE FEDERAL IIOME LOAN SYSTEM
The action of the Congress of the United States in creating the
Federal Home Loan System has been widely hailed as being of great
service to the building and loan industry. It is generally agreed
that the laws of Indiana governing building and loan associations should
be of such character as to allow the building and loan associations of the
state to realize to the ultimate degree all possible benefits of the system.
Fortunately the 1932 special session of the General Assembly passed
legislation enabling the building and loan associations of Indiana to enter
the Federal Home Loan System. The provisions of the proposed statute
relating to this subject not only reincorporate the acts of the special
session but go further and attempt to clarify any ambiguities that have
appeared in those provisions as a result of the development of the
system during the past few months. In addition to conferring upon
the associations the right to purchase the stock of any home loan
bank, associations are given the right to borrow from the Federal Home
Loan, System. It is, however, provided that the aggregate sum that
an association may borrow at any one time from all sources including the federal home loan banks shall not exceed 20 per cent of
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
No. 10
159
the total assets of the association. It is further provided that the assoelation may pledge the notes or securities of the association with a
home loan bank as security for any loans received from such bank. In
case the association wishes to pledge its notes, mortgages, or other securities to any party other than a federal home loan bank it may do so
only with the consent of the Department of Financial Institutions. It is
hoped that this provision will serve to prevent associations from borrowing unwisely.
SUMMARY AND CONCLUSIONS
The members of the Study Commission believe that the proposed
new code governing the conduct of the business of building and loan
associations is adequate and modern. It incorporates the best provisions
of the codes of many states in the union. If adopted by the legislature it should prove a strong influence for the stabilization of the
building and loan industry and for the financial and economic life of
the state.'
The adoption of this code alone, however, would not be sufficient
and would not result in achieving its high potentialities. Its maximum
usefulness can be realized only when its enforcement is conducted by a
supervising body fully equipped to discharge such a duty. The members
of the Study Commission believe that the proposed new Department of
Financial Institutions as described in Chapter IV of this report and as
provided for by the provisions of the bill submitted to the General
Assembly is adequate to fulfill such a duty. Consequently, this proposed
code for the regulation of building and loan associations has been completely integrated with the new Department of Financial Institutions.
If the building and loan associations are to adequately serve their shareholders and the public of Indiana in the future, the provision creating
the Department of Financial Institutions and these proposed provisions
iDr. Robert Riegel and Dr. J. Russell Doubman, bqh of the Wharton School, University of Pennsylvania, are authors of a book titled "The Building,- and Loan Association,"
Published in 1927 by John Wiley and Sons, Inc., New York. One chapter of that book
is devoted to a discussion of the laws reg-ulating building and loan associations in every
state. In summarizing that chapter they have the following in part to say regarding
state regulation:
"From a survey of existing legislation it would appear in the first place that the
Present laws should be codified according to some system and each state's statutes so
arranged AS to bring together the laws by subjects. At present, not only do important
subjects frequently go without legislation, but where regulations exist they are so dispersed as to make mental grasp thereof difficult and oversight easy. In some instances
the law consists of individual statutes passed as much as thirty years apart, and early
statutes are difficult to interpret in the light of later ones.
"It would also be well for legislators to concentrate attention upon some of the pha.ses
of membership rights and privileges which are of great importance to investors and
borrowers, such as accounting, distribution of profits, withdiawals and fines. A careful
review of the statutes sometimes shows considerable space and minute detail with respect
to such matters as insolvency and consolidation, which members hope will never occur,
and little or no emphasis upon contingencies which are arising monthly."
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Federal Reserve Bank of St. Louis
160
for the regulation of building and loan associations should both be
enacted into law.'
1"To be properly effective, supervision must extend to all phases of an association's
activities, from organization to dissolution, and should encourage the use of efficient and
equitable practices and prevent fraud and injustice, while leaving to the officers the widest
possible latitude in the conduct of their business. It is best brought about by administrative rather than legislative control. That is, detailed laws for all phases of the business fail of their purpose. The state laws which lay down the broad principles or rules
which regulation is to follow, and then provide competent, well-paid supervisors to see
that the law is carried out, have been found most practicable. By framing a statute in
this way, it can be administered in the light of existing conditions, changing as conditions
change, without the necessity of waiting for another session of the legislature to alter
the law to meet each new situation, as is now so often necessary." From Clark and
Chase, "Elements of the Modern Building and Loan Association."
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR TNDIANA FINANCIAL INSTITUTIONS (1932)
CHAPTER VII
SMALL LOAN LAWS AND LAWS REGULATING OTHER TYPES
OF FINANCIAL INSTITUTIONS
By the terms of its resolution of creation, the Study Commission
was specifically charged with analyzing the supervision and regulation
of the banking and building and loan business in order that recommendations for the stabilizing of these industries might be made to the 1933
legislature. The Study Commission, however, was also charged with
the responsibility of studying "other related financial institutions" to •
such an extent as was deemed necessary. The Study Commission interpreted "other related financial institutions" to mean those types of financial institutions other than banks and building and loans which are now
supervised by the present banking department. This department supervises banks, building and loan associations, licensed petty money lenders,
credit unions and mortgage guarantee companies.
Revision and codification of the laws regulating credit unions, mortgage guarantee companies and the petty money licensees, is also included
therefore in the legislative recommendations of the Study Commission.
The laws relating to the first two types are included in the extensive general code which creates the new department and regulates banks and
building and loan associations. The laws regulating petty money licensees, however, are still retained in a separate code.
The only important modifications of the credit union law proposed,
are those which describe qualifications for membership,' and transfers
the supervision of these institutions
from the present department to the
new Department of Financial Institutions.
are 0Anci;ording to the officials of the present banking department there
four mortgage guarantee companies legally in existence in Indiana at the present time. Since none of these
are operating actively, it
would appear that there is no real economic need for institutions of this
tY.pe. The legislative proposal of the Study Commission, therefore, provides that the companies now in existence are to be supervised by the
.11ew. Department of Financial Institutions but that no more of these
institutions are to be granted charters by the department.
SMALL LOAN LAW
The law authorizing the licensing of petty money lenders and the
regulation of their business is popularly referred to as the Small Loan
'This change and a few other
minor technical ones were adapted from the comprehensive New York
Statute in regard to credit unions.
11-48149
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Federal Reserve Bank of St. Louis
(161)
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162
Law. Indiana is one of twenty-five states with laws somewhat similar.'
At the time of its passage in 1917, the Indiana law substantially embodied the recommendations of the Remedial Loan Division of the Russell
Sage Foundation.
More than twenty years ago the Russell Sage Foundation undertook
a thorough study of the problem of consumer credit and its relationship
to the menace of the loan shark. At this time the industrial population
was without any legal agency through which it might obtain loans on
personal security. There was an urgent demand on the part of the
population for funds obtainable with such security, and as a consequence
the loan shark with his rates of interest varying from 10 to 100 per cent
a month flourished.
After considerable research and study the Russell Sage Foundation
drafted a model small loan law which was designed to provide for personal lending agencies adequate to satisfy the legitimate needs for personal finance service in each community in a manner economically and
socially desirable. The maximum interest rate was set by the law at
such a figure that it was hoped sufficient commercial capital would be
attracted into the business to satisfy all legitimate needs and thereby
destroy the obnoxious business of the usurer. That these laws have
been only partially successful in accomplishing their desirable objective
is well known and is recognized even by their friends. Notwithstanding
this fact, however, impartial observers agree that such laws have improved situations tremenduously in those states using them, and have
to a large degree eliminated loan sharks.
The experience of Indiana and other states which have legalized this
type of money lender has served to indicate that the men operating under
the law are of three types. First, there are those who make a sincere
effort to discharge their obligations to society, extracting from their
business a reasonable profit; second, there are those who obey the naked
letter of the law but who violate its spirit and thus defeat its ultimate
purpose; and third, there are those who attempt to violate the letter of
the law.
From time to time since drafting its first loan law, the Russell Sage
Foundation has revised its model form in order to incorporate desirable
1 The names of these twenty-five states and the dates of the adoption of the Small
Loan Law are as follows:
1919
1911
Arizona
Massachusetts
. 1919
1914
Connecticut
New Jersey
1920
Georgia
1915
New York
1921
Iowa
1915
Pennsylvania
1921
Michigan
1915
Ohio
1923
Rhode Island
1916
Oregon
1925
Tennessee
1917
Illinois
1925
West Virginia
1917
Indiana
1925
Florida
1917
Maine
1927
Missouri
1917
New Hampshire
1927
Wisconsin
1917
Utah
1928
Louisiana
1918
Maryland
1918
Virginia
Although the laws of these states differ materially in their terms, they are unifom
in their basic intent.
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Federal Reserve Bank of St. Louis
t
1
5
5
5
7
8
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
163
1
new features suggested by the experience of the various states operating
under the code. As abuses or evasions of the law were discovered, or
provisions were proved ambiguous or ineffective, new provisions were
recommended by the Foundation to correct or amplify it. Moreover, as
changing industrial and social conditions introduced new problems, the
model code was revised accordingly. Through all these years, therefore,
the process of refining and strengthening this code proceeded steadily,
and from time to time entirely new codes were formulated.
The latest one of these model codes is known as the 1932 Revision
of the Uniform Small Loan Law.
This new model code is different in two important essentials from
the present Indiana law passed in 1917. First, it grants wide discretionary powers to the supervising department, and second, it adds many
specific prohibitions and regulations.
The first of these two general types of changes recommended by the
1932 model code has been adopted by the Study Commission in its proPosal by requiring that licensed petty money lenders be supervised by the
Proposed new flexible Department of Financial Institutions.
Members of the Study Commission are very favorably impressed with
the specific regulatory changes which the new model code also incorporates. The time available and the size of the research staff were not
sufficient, however, to permit the Commission to make a detailed study
of the small loan business in Indiana. As a consequence, the members
were unable to conclude with any certainty that the 1932 recommendations made by the Russell Sage Foundation from its broad national viewpoint were applicable to conditions in this state.' The appropriateness
ef this new code for Indiana was, therefore, discussed from time to time
with representatives of the small loan industry. As a result of these
conferences the small loan operators agreed that at least three important
anlendments suggested by the Russell Sage code constituted desirable
changes in the Indiana law. These changes are: first, that no license may
be granted to an applicant who proposes to use a sum less than $15,000
in conducting his business; second, the application for a permit to transact
business must be accompanied by such evidence of the good moral character of the applicant as the department may require and no license
shall be issued to any such applicant unless the department is satisfied
that he is of good moral character ; third, every licensee shall be required
to make an annual certified report to the department and the report so
made shall be in such form and contain such information as shall be
prescribed by the department.
All of these are similar in nature to new provisions in the 1932
model code.
The proposal submitted by the Study Commission relating to petty
money licensees, therefore, consists of the present law amended only in
such fashion as is necessary to place these lenders under the proposed
'There is a complete absence of data relating to the small loan business in Indiana.
The present department
supervising these institutions bas not been in a position to require
ath.quate reports from them and has had no facilities for analyzing or publishing such
data as it was able to collect.
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Federal Reserve Bank of St. Louis
No. 10
164
new Department of Financial Institutions and to incorporate the three
new provisions just described.
The first proposed regulatory change providing for a minimum
capital of $15,000 should tend to eliminate the "fly-by-night" operator
who has little sense of responsibility and little to lose in case proceedings
are brought against him for violation of the law.
The second proposed amendment which provides that an application
for permission to transact business must be accompanied by such evidence
of the applicant's good moral character as the department may require,
should insure that personal finance companies will be conducted by licensees who do not abuse their privileges. The present law mandates the
bank commissioner to grant a license to every applicant who files a
$1,000 bond with the bank commissioner and who pays his license fee
of $100. It is known that in the past certain men who made application
for and were granted charters were of such moral character that they
had no intention of complying with the law. Even though the bank
commissioner was aware of the character of such applicants he could
not refuse to issue them a license.
The last amendment recommended by the Study Commission requiring all operators to make such annual reports to the department as the
department may require will undoubtedly prove of great assistance in
the satisfactory regulation of this business. Such reports will soon provide important data necessary for the solution of the now troublesome
rate problem. It is widely known that there has been much agitation
during the past few years for a reduction of the maximum 3% per cent a
month rate allowed by our present law. The small loan operators contend that such a maximum rate is necessary in order to enable them to
make certain types of loans at a reasonable profit. On the other hand,
some representatives of the public have insisted that the maximum of
3% per cent a month rate enabled these operators to make exorbitant
profits.
Should the recommendations of the Study Commission be accepted
by the legislature, it will be possible for the new department to require
complete profit and loss statements annually from each licensee. As has
already been explained,' it is the hope of the Study Commission that the
new department will maintain a complete division of research and
analysis. Should such a division be maintained, it would be possible for
the department to analyze data received from small loan operators in
such a manner that this information would prove to be a valuable guide
to the legislature in the future in enacting satisfactory legislation in
this field.
SUMMARY
Although the Study Commission has not recommended very drastic
changes in the regulatory codes of the various financial institutions described in this chapter, these changes should all serve to increase the
satisfactory regulation of these institutions. As was described in Chapter IV, the Department of Financial Institutions is charged with much
'See Chapter IV.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIkNA FINANCIAL INSTITUTIONS (1932)
165
greater responsibility for their supervision and is given greater facility
for discharging that duty, than is the present banking department. If
the proposed legislation is adopted, all of the miscellaneous types of
financial institutions described in this chapter should be supervised much
more satisfactorily than they have been in the past.
From time to time, in addition to the types just described, variants
of these types arise. The new department is given the power to investigate these upstarts, and in light of the facts secured by the investigation
bring action to prevent them from violating the laws of the state.
The Study Commission believes that the probable fact-finding facility
of the new Department of Financial Institutions will enable that department to make an extensive and satisfactory study during the next two
years of needed reform in this hitherto largely unexplored field relating
to these miscellaneous types of institutions, other than banks and buildmg and loans. The Study Commission is convinced, however, that the
recommendations of the proposed bill will definitely strengthen the social
control of all of the elements in this situation.
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Federal Reserve Bank of St. Louis
No. 10
DUTIES AND RESPONSIBILITIES OF DIRECTORS OF
STATE BANKS AND TRUST COMPANIES
Provisions of Law Defining Duties of Directors and
Prescribing Penalties for Neglect of Such Duties
•
Compiled Under the Direction of the
COMMISSION FOR FINANCIAL INSTITUTIONS
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Federal Reserve Bank of St. Louis
STATE OF INDIANA
INDIANAPOLIS
1935
DUTIES AND RESPONSIBILITIES OF DIRECTORS OF
STATE BANKS AND TRUST COMPANIES
Provisions of Law Defining Duties of Directors and
Prescribing Penalties for Neglect of Such Duties
•
Compiled Under the Direction of the
COMMISSION FOR FINANCIAL INSTITUTIONS
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
STATE OF INDIANA
INDIANAPOLIS
1935
FOREWORD TO THE BANK DIRECTOR
utions has made a careful
The Department of Financial Instit
dge of bank directors
knowle
the
of
survey regarding the extent
ties. This survey disconcerning their duties and responsibili
tage of directors actually
closes that a surprisingly large percen
Oath of Office is taken.
the
when
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stration, and
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tion to stockprotec
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to
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s the legisholders, depositors, and other interested partie
obligations on
te
defini
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have
latures of various states
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upheld them.
strued these obligations to be valid and have
are being
Since these obligations have been imposed and
lves
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ors
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upheld, it is incumbent upon
relating to banks,
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olders and depositors
not only because of their duty to stockh
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but also because
tegrity.
mind that we commend to
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be
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summary, however, is in no way meant
t is a sincere attempt
Financial Institutions Act. This bookle
before you something that
place
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ment
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the
of
part
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to you.
should be of much interest and benefit
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Federal Reserve Bank of St. Louis
R. A. McKinley
Director
DUTIES AND RESPONSIBILITIES OF DIRECTORS
OF STATE BANKS AND TRUST COMPANIES
PART I
I
INDIANA FINANCIAL INSTITUTIONS ACT
General Requirements for Directors
Paragraph
1. Qualifications of Directors
2. Duties of Directors
3. By-laws
4. Bonds of Officers
5. Insolvency
II
General Powers of State Banks and Trust Companies
6.
7.
8.
III
Limitations on Loans
9.
10.
11.
12.
IV
Government Issues
Other Securities
Time Limit for Reduction of Investments to Conformity
Fiduciary Provisions
16.
17.
18.
19.
20.
21.
22.
23.
VI
Direct Loans
Indirect Loans
Real Estate Loans
Time Limit for Reduction of Loans to Conformity
Limitations on Investments
13.
14.
15.
V
General Rights and Privileges
Other Rights and Privileges
Incidental Rights and Privileges
Books and Records
Authorized Trust Investments
Limitation of Investment
Reinvestment
Uninvested Trust Funds
Profits on Sales or Purchases
Penalties
Use of the Word "Trust"
Miscellaneous Provisions
24.
25.
26.
27.
Illegal or Unsafe Practices
When the Department May Take Possession of a Bank
Restrictions Upon Officials and Employees of the
Department of Financial Institutions
Power of the Department to Examine Records and Remove
Officers and Directors
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Federal Reserve Bank of St. Louis
Paragraph
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
Disclosure of Information by Officials or Employees
of The Department of Financial Institutions
Necessity for rrocuring Financial Statemnts
Establishment of Reserve Balances
Payment of Dividends
Capital impairment
Ratio of Deposits to Cal,ital
Restrictions on Voting ut L)hareholders' ;:eetings
Powers of Department In iklaking An affiliate Ixamination
Remuneration for Procuring Loans Prohibited
Time Deposits
es
Statement of Condition of Banks and Trust Compani
Statement of Condition of Affiliates
d
Penalty Where Penalty Is Not Specifically Provide
PART II
OTHER STATUTORY PROVISIONS
VII Erbezzlement
41.
42.
43.
Embezzlement, Making False Entriel in Books, Reports, Etc.
Embezzlement - Criminal La*
Embezzlement - Public Offenses
VIII Miscellaneous Provisions
44.
45.
46.
47.
48.
49.
Making False Statements Concerning Financial Institutions
False Entrie.1 - Criminal Offenses
Penalty for False Publication of Deposit Insurance
Crime To Omit Aeporting a Felony
Overdrafts by Directors, Officers, or Employees
loans to Directors, Officers, or Employees
PART III
CIVIL LIADILITIES OF DIRECTORS
nce
IX Common Law Liability far Neglige
X Liability for LAatutory Violations
XI Conclusion
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Federal Reserve Bank of St. Louis
DUTIES AND RESPONSIBILITIES OF DIRECTORS
OF STATE BANKS AND TRUST COMPANIES
PART I
I.
INDIANA FINANCIAL INSTITUTIONS ACT
General Requirements for Directors
1.
Qualifications of Directors
"The business of every corporation shall be managed
by a board of directors, composed of not less than five
nor more than the maximum number fixed in the articles
of incorporation." (Section 97.)
"Every director shall, during his whole term of
service, be a citizen of the United States, and at least
three-fourths of the directors shall reside in the State
of Indiana or within a distance of not to exceed fifty
miles of the financial institution of which he is a
director." (Section 98, as amended.)
Each member of the board must be a shareholder of
the corporation and must be elected by the shareholders
for a term of one year unless otherwise provided in the
articles of incorporation or in the by-laws. In no case
shall any director be elected to office for a term longer
than three years. This latter requirement, however, does
not preclude a director from succeeding himself at the
expiration of his term. Vacancies appearing on the board
must be filled by a majority vote of the remaining members
of the board until the next annual meeting of the shareholders.
For the transaction of any business, except for the
filling of vacancies, a majority of the entire board is
necessary at any given meeting to constitute a quorum.
If provided for in the by-laws, an executive or a discount committee must be appointed consisting of two or
more members, which committee has all of the authority
vested in the full board between the regular board
meetings. The minutes of the discount or executive committee meetings must be read at the next succeeding
meeting of the board of directors. Directors' meetings
must be held not less than once each month.
On entering upon his duties as director each member
must subscribe to an oath that he will faithfully,
honestly, and diligently administer the affairs of the
institution, and that he will not knowingly violate or
willingly permit to be violated any of the laws applicable
to the institution.
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Federal Reserve Bank of St. Louis
-2Each director of a bank having an aggregate par value
in
of capital stock not to exceed $50,000.00 must own,
te par value
his own right, unpledged shares of an aggrega
te par
of at least five hundred dollars and if the aggrega
each
then
.00,
450,000
exceeds
stock
value of the capital
of
director must own in his own right, unpledged shares
.
dollars
d
thousan
one
least
at
of
value
par
te
an aggrega
or
stock,
his
cates
If at any time a director hypothe
be
becomes in any other manner disqualified, he ceases to
a director.
2.
Duties of Directors
directors shall keep a record
at meetings of the board,
rs
directo
of
of the attendance
the directors
and shall make a report, showing the names of
and special,
regular
board,
the
of
s
meeting
cf
the number
of meetings
the number of meetings attended and the number
report shall be
from which each director was absent, which
of the annual
read at and incorporated in the minutes
99.)
meeting of the shareholders." (Section
the minutes of
Directors are required to spread upon
received from
their meetings all official communications
each director
meeting
each
at
more,
further
the Department;
agenda, or a
should be provided individually with an
the meeting.
schedule of matters to be brought before
correct and complete
The board must cause to be kept
s and in addition,
busines
bank's
the
of
books and records
s of shareholders,
minutes of the proceedings of meeting
ve committees.
directors, and finance and/or executi
manner as proThe board of directors shall, in such
the
of
s
officer
institution
elect
,
by-laws
the
vided in
and/or cashier, and
consisting of a president, a secretary
bed by the by-laws.
such other officers as may be prescri
until his successor
office
hold
to
elected
Each officer is
may not be a direcis elected and has qualified and may or
who must be chosen
nt
preside
the
of
on
excepti
the
tor with
of the president must
from among the directors. The office
.
not be combined with that of secretary and/or cashier
ee therefrom, or
Once each year the board, or a committ
the affairs of
examine
must
ant,
account
public
ed
a certifi
on of
the
of
conditi
report
a
the institution and submit
the corporation to the Department.
examinaIn connection with the annual or semi-annual
upon
ants
by
account
or
ees
committ
ng
examini
by
made
tions
ng
followi
the
rs,
directo
of
board
the
the authorization of
that should
suggestions are made as to the general points
be covered'
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Federal Reserve Bank of St. Louis
-3-
(a) The cash should be counted and the total compared
with the books of the bank. Cash items should be carefully scrutinized, and any improper items, such as unposted checks held for the purpose of not showing overdrafts, and other items that cannot be readily converted
into cash, should be reported.
(b) The bonds and other securities of the bank should
be examined and those not on hand should be verified by
reference to the receipts of the parties with whom they
are deposited, and if the receipts are old they should be
verified by correspondence. The market value and the
amount at which carried on the books in the aggregate
should be shown, and any stocks held by the bank should
be listed, with a statement showing the reason the securities were taken by the bank.
(c) The notes should be carefully checked and their
total compared with the general ledger. The genuineness,
value, and security of each note, and of any collateral
thereto, should be carefully determined, and any loss
ascertained, or probable, in the judgment of the committee,
should be noted. The liabilities of each of the larger
borrowers and loans to affiliated interests should be
aggregated and carefully considered. The report should
also show the general character of the loans -- whether
well distributed; the general character of the collaterals;
whether corporations in which officers or directors are
interested borrow to an undue extent; also any large liabilities of the officers or directors. It should also be
shown whether all paper claimed by the bank as its own
property, including collaterals, is properly endorsed or
assigned to it, and all mortgages recorded. Any loans
exceeding ten per cent of the sound capital of the bank
should be reported. The signatures of all note makers and
endorsers should be carefully investigated and reported to
the full board. All overdue paper should be listed and
comment made as to its collectibility.
(d) The certificates of deposit and the cashier's
checks should be verified by totalling those outstanding
as shown by the register and comparing with the general
ledger, and also by comparing the cancelled certificates
and checks with the register and checking them against
the stubs.
(e) The copy retained by the bank of the report of
condition made to the Department at the last call should
be compared with the bank's books at that date.
(f) The bank's last reconcilement of account with each
correspondent bank should be compared with the bank's
books, and a transcript of the bank's account from the date
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Federal Reserve Bank of St. Louis
-4of the last reconcilement to the date of the examination
sent to the correspondent bank with a request for verification.
(g) Individual ledger balances should be verified
in such manner as the directors may deem advisable, by
calling in pass books, by sending out reconcilements of
certain accounts selected by the directors, or in some
other suitable way. A trial balance of the ledger should
be taken by some member of the committee, or at least by
some person other than the clerk engaged on the ledger.
(h) Overdrafts should be totalled and carefully considered, and the report should show any estimated losses.
(i) The committee should consider carefully the
with a view
"profit and loss" and the "expense" accounts,
those
accounts
against
charges
the
of determining whether
are proper, whether the earnings of the bank warrant the
expense charged, and whether the bank is making a legitimate profit.
(j) The examining committee should inquire carefully
into the arrangement of the working affairs of the bank
and ascertain whether any employee who keeps the individual ledger receives deposits or balances pass books;
and whether the employees are properly bonded, and in
whose custody the bonds are lodged.
(k) Any liability of the bank for borrowed money
should be listed, and the proper authority and the
necessity for such borrowing ascertained. The total
amount of the present liabilities of that nature should
be reported to the board, including money borrowed from
other banks on certificates of deposit.
(1) The report of the directors or the examining com,
mittee should show that these points have been covered
and should recite any deficiencies discovered.
(m) The report should also contain a complete statewith
ment of the total assets and liabilities of the bank,
the
t
of
the
in
judgmen
that
ons
deducti
or
any additions
gadirectors should be made as a result of their Investi
statement
tion. There should also be included a detailed
ss,
of the loans which the directors estimate as worthle
theredoubtful, or insufficiently secured, giving reasons
for, and as nearly as possible the real value.
(n) A statement should also be made of any matters
way
which in the opinion of the committee affect in any
the bank's solvency, stability or prosperity.
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Federal Reserve Bank of St. Louis
-5-
(o) An examination once a year, along the lines
indicated, by a committee of the directors who will
give sufficient time to the work to make it thorough
and complete, cannot fail to be of great benefit to
all concerned, and this the directors owe to the shareholders who have placed them in their position of trust.
(p) A complete report of each examination, forms
for which are furnished by the Department, should be
preserved in the files of the bank and be accessible
to the bank examiner when examining the bank.
(q) When the volume of trust business is of a substantial amount, the examination into the trust department is as important and should be as thorough as that
of the commercial business of the bank. Of particular
significance are the recent decisions of the courts
holding banks strictly liable for certain investments
and on which it was thought that only a contingent
liability attached. The examination should lay stress
upon the determination, if any, of the bank's liability
incurred in any connection.
(r) The committee should have before it the last
report of the state bank examiner of the trust department, and any letters from the Department of Financial
Institutions relating to that department, with the view
of verifying the correction of any exceptions which may
have been called to the attention of the bank. It
should be noted whether or not a trust officer has been
properly designated as required by the Department.
(s) The examining committee should make any observations necessary to come to a conclusion concerning the
supervision and general management of the trust department, and incorporate its recommendations in its report
to the board of directors.
(t) It is expected that the entire board will be
sufficiently familiar with all matters appearing in the
examining committee's report to answer intelligently any
questions the examiner from the Department may ask at
the time of his regular examination. This makes it
mandatory upon each director to digest thoroughly his
committee's report before affixing his signature thereto.
3.
By-laws
"Unless otherwise provided in the articles of incorporation, the power to make, alter, amend or repeal the
by-laws of a corporation is hereby vested in the board
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Federal Reserve Bank of St. Louis
-6may contain any
of directors. The by-laws so adopted
ment of the affairs
manage
and
tion
regula
the
for
ion
provis
with this act,
istent
incons
not
is
of the corporation which
the articles of
with
or
state
this
of
law
other
any
of
or
(Section 94.)
incorporation
ed by the
A model set of by-laws has been approv
Indiana
the
and
utions
Instit
Department of Financial
by addressing
Bankers' Association and may be obtained
the latter organization.
4.
Bonds of Officers
ation having
"All officers and employees of every corpor
such corof
ties
securi
or
moneys
to
access
or
of
control
, shall,
duties
their
of
rge
discha
r
poration in the regula
duties,
before entering upon the performance of their
te surety payable
execute their individual bonds with adequa
ation for any
corpor
the
to the corporation to indemnify
other personal
or
money
of
n
sustai
shall
it
loss
pecuniary
forgery,
esty,
dishon
fraud,
of
property by an act or acts
or willful misction
abstra
ul
wrongf
,
lement
embezz
theft,
bonds and the
application. The amount and form of such
be approved by
sufficiency of the sureties thereon shall
and by the departation
corpor
the
of
ors
direct
of
board
the
within such
ment
depart
the
with
filed
ment and shall be
dual bonds, a
time as it may prescribe. In lieu of indivi
ees may
employ
and
rs
office
such
all
ng
coveri
bond
blanket
bonds.
dual
as
indivi
al
approv
same
be used, subject to the
sign the
No officer or director of the corporation shall
If any bonds
bond of any other person as surety thereon.
duals as
required by this section are signed by indivi
vits as to
te
affida
separa
n
contai
must
bonds
the
sureties,
amended.)
as
101,
on
(Secti
."
surety
the net worth of each
found in
Individual and blanket bond schedules may be
bank has in its files.
Bank Regulation Number 9, which every
the force and effect
The requirements of this regulation have
ion. The
except
t
withou
with
ed
compli
of law and must be
personnel of
nececsity for adequate coverage of the entire
the bank cannot be stressed too much.
5.
Insolvency
ency or susIf a bank is in imminent danger of insolv
of the
charge
in
r
office
t
highes
the
ions
pends operat
ment.
Depart
the
to
ion
condit
such
institution must report
he may
ed
report
requir
the
make
to
fails
r
office
If such
$500.00, to
be fined not less than $100.00 nor more than
not exceeding
which may be added imprisonment for any period
ities made
liabil
or
assets
any
of
er
transf
Any
.
six months
bank's
a
of
ation
applic
with the view to preventing the
or with a
ities,
liabil
just
of
t
paymen
proper
the
assets to
after inr
anothe
to
or
credit
one
of
view to the preference
solvency has been established shall be null and void.
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Federal Reserve Bank of St. Louis
-7-
II
General Powers of State Banks and Trust Companies
6.
General Rights and Privileges
"(1) To continue as a corporation, under its corporate
name, for the period limited in its articles of incorporation, or, if the period is not so limited, then
perpetually;
"(2) To sue and be sued in its corporate name;
"(3) To have a corporate seal gnd to alter such seal
at its pleasure;
"(4) To acquire, own, hold, use, lease, mortgage, pledge,
sell, convey, or otherwise dispose of property, real and
personal, tangible or intangible, in the manner and to
the extent hereinafter provided;
"(5) To borrow money and to mortgage or pledge its
property to secure the payment thereof, in the manner
and to the extent hereinafter provided;
"(6) To conduct business in this state and elsewhere;
"(7) To appoint such officers and agents as the business
of the corporation may require, and to define their
duties and fix their compensation;
"(8) To make by-laws for the government and regulation
of its affairs;
"(9) To cease doing business and to dissolve and surrender its corporate franchise; and
"(10) To do all acts and things necessary, convenient
or expedient to carry out the purposes for which it is
formed." (Section 90.)
7.
Other Rights and Privileges
In addition to the general privileges enumerated
above a bank may exercise all the powers incidental and
proper, or which may be necessary and usual in carrying
on a general banking business, but it cannot issue bills
to circulate as money. A bank also may purchase, hold
and convey such real estate as may be necessary for the
transaction of its business; or such as may be taken for
debts previously contracted; or such as it may purchase
at sales under judgment, decrees or mortgages held by
the bank or may be purchased to secure debts to it. After
July 1, 1936, the Department may require that a bank reduce its investment in real estate, banking house, and
furniture and
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Federal Reserve Bank of St. Louis
-8five per cent
fixtures if such investment exceeds twentyin excess
of sound capital, and no bank with an investment
t the express
of this figure may increase the same withou
ment may
approval in writing of the Department. The invest
zed to
be in the form of the stock of a corporation organi
purEstate
Real
Other
ned.
mentio
items
the
hold
own and
held
be
not
must
osure
forecl
h
chased or acquired throug
1, 1933,
for a period of longer than five years after July
A bank
ment.
Depart
the
of
g
writin
in
t
without the consen
to do
obviously must possess adequate quarters in which
, funds in
business but to invest too much of stockholders
is not
type
this
of
assets
fixed
of
an elaborate display
considered sound banking practice.
8.
Incidental Rights and Privileges
comAny bank may act in the capacity of an agent,
adminmissioner, guardian, trustee, receiver, executor,
and
trustee
tute
substi
e,
truste
,
entary
testam
or,
istrat
may
bank
a
ties
capaci
these
of
any
In
property manager.
ing
act without bond or other security and for the render
receive
and
demand
may
tions,
connec
these
in
es
of servic
.
for its faithful performance reasonable compensation
eping and
safeke
of
s
busines
the
in
engage
also
may
Banks
l reserve
may purchase and hold capital stock of a federa
Reserve
bank to qualify it for membership in the Federal
Federal
the
of
a
member
become
time
any
at
may
and
System,
n.
icatio
qualif
proper
by
ation
Corpor
Deposit Insurance
purchase
Upon approval by the Department any bank may also
ures
and hold shares of capital stock, bonds, notes, debent
any time
or any other securities or obligations issued at
ment.
by any agency or municipality of the federal govern
III
Limitations On Loans
9.
Direct Loans
cent
(a) General limitation: Must not exceed ten per
of sound capital.
(b) Officers and directors of loaning bank: Total
of total
obligations must not exceed fifteen per cent
and also
Act,
of
d,
amende
as
200,
n
Sectio
(See
assets.
tion.)
paragraph 49 of this booklet for further limita
ive
(1) Officers: None permitted to active execut
officers. General limitation of ten per cent of
sound capital applies on loans to firms or corporations in which officers may be partners,
members, or stockholders.
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Federal Reserve Bank of St. Louis
-9-
(2) Directors: General limitation of ten per cent
of sound capital applies on individual loans and
on loans to firms, corporations in which directors
may be partners, members or stockholders.
(3) Employees: Individual loans to employees who
are not directors or active officers must not
exceed $500.00.
(c) Obligations secured by United States Government
bonds: Must not exceed fifteen per cent of sound capital
in addition to general limitation of ten per cent of sound
capital unless increased by Department regulation. (No
regulation issued to date.)
(d) Obligations secured by stock and bond collateral:
General limitation of ten per cent of sound capital applies
except that no bank shall make any loan or discount on the
security of its own capital stock unless necessary to prevent loss for debts previously contracted. Any such capital
stock acquired or purchased must be disposed of within six
months after acquisition after July 1, 1936, unless an extension of time is granted by the Department.
(e) Obligations of municipalities: There is no limit
on obligations of the State of Indiana or of any municipal
corporation or taxing district thereof when in form of
notes or warrants based on anticipated revenues from taxation. On others general limitation of ten per cent of
sound capital applies.
(f) Obligations secured by liens on shipping documents
on live stock: Fifteen per cent of sound capital in addition
to general limitation of ten per cent of sound capital
applies when market value of live stock is not less than
one hundred and fifteen per cent of face of note.
(g) Obligations secured by lien on or shipping documents
on non-perishable staples: Same as (f) when fully insured,
if insurance is customary. General limitation of ten per
cent of sound capital applies when obligations of any one
person, firm, or corporation arising from same transaction
and/or secured by identical staples runs for more than ten
months.
(h) Obligations of concerns affiliated one with the
other: General limitation of ten per cent of sound capital
applies.
(i) Obligations of concerns affiliated with loaning
bank: General limitation of ten per cent of sound capital
applies to individual loans when properly secured. (By
"proper security" is meant collateral in the form of stocks,
bonds and debentures, market value of which is at least
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Federal Reserve Bank of St. Louis
-10tions
one hundred and twenty per cent of the loan, obliga
pality, the
or
munici
ision
subdiv
cal
politi
or
state
any
of
d and ten
market value of which must be at least one hundre
States,
per cent of the loan, obligations of the United
Federal Land
Intermediate Credit Banks, Home Loan Banks,
notes, drafts
of
form
the
in
eral
collat
Banks and all such
are eligible
held in exchange or bankers' acceptances that
be equal to
must
which
of
value
market
the
for rediscount,
capital in
the amount of the loan.) Ten per cent of sound
s to
cent
applie
per
ten
of
tion
limita
l
genera
to
on
additi
d.
secure
ly
proper
when
loans
ate
affili
aggregate of all
ement as to
There is no limitation as to amount or requir
g bank
collateral on loans to affiliates engaged in holdin
ation,
corpor
credit
ltural
agricu
of
premises, or in business
live stock loan company or joint stock land bank.
of notes
(j) Obligations owned by endorser or guarantor
less
in
ng
maturi
paper
ss
busine
or
cial
commer
than
other
l
genera
to
on
additi
in
cent
per
n
Fiftee
than six months:
limitation of ten per cent of sound capital applies.
ge
(k) Obligations in form of drafts or bills of exchan
: There
values
ng
existi
ly
actual
t
agains
faith
good
in
drawn
is no limitation.
ly
(1) Obligations drawn in good faith against actual
ities in proexisting values and secured by goods or commod
cess of shipment: There is no limitation.
Indiana
(m) Obligations of national or state banks of
which
es
agenci
or
,
agents
,
vators
conser
ers,
or of receiv
when
bank
such
of
ty
proper
and
are in charge of business
is no
such loans are approved by the Department: There
limitation.
of other
(n) Obligations in form of banker's acceptances
to
on
additi
in
l
capita
sound
of
cent
banks: Ninety per
l applies
general limitation of ten per cent of sound capita
and if
when maturity is not more than six months i sight
nts or
docume
ed
attach
by
either
d
accepting bank is secure
by some other actual and adequate security.
10.
Indirect Loans
customers
(a) Paper discounted for benefit of a bank's
ciel or
or others; There is no limitation when commer
or corporbusiness paper is actually owned by person, firm,
paper.
ation negotiating such
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Federal Reserve Bank of St. Louis
-11-
11.
Real Estate Loans
(a)
General Limitation and Other Provisions
(1) General limitation of ten per cent of sound
capital applies on individual loans.
(2) Must be in form of obligation secured by
mortgage, trust deed, or other such instrument
on real estate.
(3) Except for mortgages taken for debts previously contracted, the aggregate of mortgage
loans must not exceed thirty-five per cent of
total deposits.
(4) Must be first lien except for tax and
special assessment liens.
(5) Real estate must be located within distance
of fifty miles of loaning bank.
(6) Loan may be made for no longer than term of
five years.
(7) Amount of loan must not exceed fifty per
cent of appraised value.
(8) Two competent persons must make appraisal
in writing to loaning bank.
(9) Appraisal must be made before loan is consummated.
12.
Time Limit for Reduction of Loans to Conformity
Unless otherwise provided, all of the obligations
held in violation of the statutory provisions must be
made to conform by July 1, 1936. If deemed necessary
the Department may extend the time for conformity.
IV Limitations on Investments
"Except as hereinafter otherwise provided, the business
of dealing in investment securities by any bank or trust
company shall be limited to purchasing and selling such
securities without recourse, solely upon the order, and for
the account of, customers, and in no event, for its own
account, and no bank or trust company shall underwrite or
guarantee all or any part of any issue of securities."
(Section 173, as amended.)
13.
Government Issues
(a) United States Government Issues: There is no
limitation.
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Federal Reserve Bank of St. Louis
-12(b) Issues guaranteed by United States Government:
There is no limitation.
14.
Other Securities
(a) Federal Land Bank issuea: General limitation of
ten per cent of sound capital applies on issues of
individual land banks and on aggregate of consolidated
issues.
(b) State issues: General limitation of ten per cent
of sound capital applies on all issues except for
direct obligations of State of Indiana on which there
is no limitation.
(c) Municipal
any municipal
of Indiana on
limitation of
all issues.
issues: Except for direct obligations of
corporation or taxing district of State
which there is no limitation, general
ten per cent of sound capital applies on
(d) Bonds of territories or insular possessions of
United States: There is no limitation.
(e) Other bonds: General limitation of ten per cent of
sound capital applies.
(f) Stocks: Purchase is prohibited.
15.
Time Limit for Reduction of Investments to Conformity
Unless otherwise provided, all of the obligations held
in violation of the statutory provisions must be made to
conform by July 1, 1936. If deemed necessary the Department may extend the time for conformity.
V
Fiduciary Provisions
16.
Books and Records
Any bank engaging in the capacity of fiduciary must
separate and apart from its other
maintain, "
business, separate books and accounts, and shall keep all
securities and property, other than money, which is held
by its trust department, at all times segregated from and
unmingled with its own or any other securities and property.
All bonds, warrants, notes, mortgages, debts and other
securities of every nature belonging to its trust department shall be kept in separate receptacles, labeled to
indicate the trust or estate of which such securities are
a part." (Section 185.).
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Federal Reserve Bank of St. Louis
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The Department has approved what is considered to be
a satisfactory set-up on books and records for a trust
department. This set-up may be varied to meet the needs
of individual banks as long as the system is adequate in
the opinion of the Department.
17.
Authorized Trust Investments
"(a) Bonds, notes or certificates which are the
direct or indirect obligations of the United States or
direct obligations of any territory or insular possession
of the United States.
"(b) Bonds, notes or certificates which are the obligations of any state of the United States or of any county,
township, city, town or other taxing district or municipality of the State of Indiana which is not then in default
in the payment of either principal or interest on any of
its obligations, and has not so defaulted within the five
years immediately preceding the purchase of such securities.
"(c) Bonds, notes or mortgage certificates which shall
mature in not more than five years from the date of purchase
or provide for an annual principal reduction of not less
than five per cent and which shall be secured by first
mortgage on the fee simple title of improved real estate
in the State of Indiana which has a value of not less than
twice the total of the obligation or obligations secured
thereby as shown by an appraisal made by not less than two
competent disinterested appraisers within one year prior
to the investment.
"(d) Bonds or notes rated in one of the first three
classifications established by one or more standard rating
services to be specified by the Department and which satisfy
such requirements of marketability as may be prescribed
from time to tim by the Department which are the obligations of a corporation whose average yearly net earnings
for the three years immediately preceding the purchase have
been at least two times the interest requirements on all
debts of the corporation after depreciation." (Section 186,
as amended.)
By "requirements of marketability" is meant "any such
security must have a broad market, and to insure this it
must be of an issue large enough in the aggregate to be
generally known to bond and investment houses throughout
the State of Indiana. An issue may be regarded as meeting
this requirement if (a) it is listed or traded in on either
the New york Stock Exchange or the New York Curb Exchange,
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Federal Reserve Bank of St. Louis
-14issue
(b) if it is not so listed it must be part of a total
outstanding of not less than $500,000.00 aggregate amount
and it must be quoted regularly by services or agencies
Indiana."
generally recognized by bond houses in the State of
(Regulation Number 7.)
ed
The standard rating services which have been prescrib
by the Regulation Number 7 are:
(a) Moody's Investors Service
(b) Standard Statistics Company
(c) Fitch Investors Service
"(e) Bonds or debentures issued under and by the
authority of the Federal Farm Loan Act, or of the Federal
1933
Home Loan Bank Act, or of the Home Owners' Loan Act of
or of any amendments to said Acts.
"(f) Any other property, real or personal, which the
fiduciary is authorized or directed to hold or purchase by
the terms of the instrument creating the trust.
"(g) Any other property, real or personal, which the
fiduciary is specifically authorized or directed to purchase by the written consent of each beneficiary of the
trust, where all such beneficiaries are competent, and such
authorization or direction is not contrary to the terms of
the instrument creating the trust.
"(h) Any other property, real or personal, which the
fiduciary is specifically authorized or directed to purchase
by the court having jurisdiction of the estate or fund after
a petition filed and notice of the time and place of the
hearing thereon given as in civil actions to each beneficiary
by
of the trust then in life; but such notice may be waived
any competent beneficiary." (Section 186, as amended.)
18.
Limitation of Investment
If authorized by above subsections (b), (c), !d), (e),
one(f), (g) or (h) not more than $5,000.00 nor more than
estate
given
a
of
is
r
greater,
whicheve
value,
tenth of cash
may be invested in the obligation of any one debtor.
19.
Reinvestment
Unless authorized by the beneficiaries or by the court
having jurisdiction over the trust all non-conforming items
must be disposed of on or before July 1, 1937, or within
is
one year after the receipt thereof. By "non-conforming"
by
meant those items which are not authorized specifically
Sections 186 and 187 of the Indiana Financial Institutions
Act. For any action contrary to these provisions the bank
may be held liable.
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Federal Reserve Bank of St. Louis
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20.
Uninvested Trust Funds
Unless authorized by the court having jurisdiction over
the trust or by the instrument creating the trust, and
unless needed for current taxes and/or claims, the bank may
not hold for longer than a six monthe period any amount of
cash in any one trust in excess of one thousand dollars.
Also, unless otherwise ordered by the court having jurisdiction over the trust or stipulated otherwise by the trust
instrument, interest at the rate of three per cent per
annum must be allowed on cash in excess of one hundred
dollars and held for any period in excess of six months in
any trust.
21.
Profits on Sales or Purchases
Unless authorized by the trust agreement or the court
having jurisdiction over the trust, no commission or profit
other than interest at legal rate may be taken or received
from any transaction with any trust. Penalty for violation
is that a bank must be charged double the amount of profit
gained in excess of 8 per cent and may be removed as fiduciary.
22.
Penalties
"Any bank or trust company which shall violate any of
the provisions of this Article (fiduciary provisions) shall
be deemed guilty of a misdemeanor and upon conviction thereof shall be fined in any sum not less than one hundred
dollars; and any officer of any bank or trust company who
shall violate any of the provisions of this Article (fiduciary provision) shall be deemed guilty of a misdemeanor
and upon conviction thereof shall be fined in any sum not
less than one hundred dollars, to which may be added imprisonment for any period not exceeding thirty days."
(Section 194.)
23.
Use of the Word "Trust"
No corporation, firm or person may use the term "trust"
as a part of its official title unless such corporation or
firm be a bank or trust company organized or reorganized
under the provisions of this Act. The penalty for a
violation is fifty dollars for every day such violation
continues.
VI
Miecellaneous Provisions
24.
Illegal or Unsafe Practices
Whenever it appears to the Department that any bank is
conducting its business inconsistent with sound banking
practice or in an illegal, unsafe, or unauthorized manner,
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Federal Reserve Bank of St. Louis
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practices.
the Department may order discontinuance of such
orders
the
with
comply
to
ts
neglec
If any bank refuses or
action
of the Department, the Department may bring an
it from conagainst such financial institution to enjoin
a bank's capital
tinuing such practices. Similar ly, if
ed by law,
is impaired or reduced below the amount requir
ment,
Depart
the
by
d
ordere
been
and if restoration has
ment may bring
and not made by the subject bank, the Depart
action to compel restoration.
25.
When the Department May Take Possession of a Bank
it
The Department may take possession of a bank when
bank:
the
that
appears
or
"(a) Has violated its articles of incorporation,
tion
or
regula
rule
any
or
state,
this
any law of
made and promulgated by the Department; or
(b) Is conducting its business in an unauthorized
or unsafe manner; or
(c) Is in an unsound or unsafe condition; or
(d) Cannot, with safety and expediency, continue
business; or
(e) Has an impairment of its capital; or
or
(f) Has suspended payment of its obligations;
thirty
(g) Has neglected or refused, for a period of
order
issued
a
duly
of
terms
the
with
days, to comply
cy
of the Department, essential to preserve the solven
or
ution;
ial
instit
financ
of such
(h) Has refused, upon proper demand, to submit its
records and affairs for inspection to the Department;
or
(i) Has refused to be examined upon oath regarding
its affairs; or
ency
(j) Is insolvent or in imminent danger of insolv
" (Section 41, as amended.)
action may
If possession is refused the Department, an
der possurren
to
bank
the
to
compel
court
be brought in
session of its business and property.
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Federal Reserve Bank of St. Louis
-1726.
Restrictions upon Officials and Employees of the
Department of Financial Institutions
An official or employee of the Department is not
permitted to be an officer, director, owner or shareholder or partner of any financial institution which
comes under the supervision of the Department. Furthermore, no officer or employee may receive any compensation
from or become indebted to any such financial institution;
however, an official or employee is permitted to obtain
and maintain a mortgage on his own home from any financial
institution.
27.
Power of the Department To Examine Records and
Remove Officers and Directors
If any officer or director of any bank refuses to
divulge information or to produce books, accounts, etc.,
ordered by the Director, Supervisor, Examiner, or a Member
of the Commission, the Department may petition the court
to compel obedience to the order. If any officer or
director then refuses or neglects to comply with the order
he may be punished for contempt of court. The Commission
may require that any such officer or director show cause
why he should not be removed from office for continued
violations or continuing unsafe and unsound banking practices. If the facts warrant, the Connission may order
that such officer or director be removed entirely from his
office in the institution. Failure to comply with this
latter order may subject an individual to a fine of not
more than five thousand dollars and imprisonment for not
more than five years, or both.
28.
Disclosure of Information by Officials or Employees
of The Department of Financial Institutions
Officials or employees are prohibited from divulging
the names of the'depositors or shareholders in
any financial institution, or the amount of money on
deposit therein at any time in favor of any depositor, or
to disclose any other information concerning the affairs
of any such financial institution . . . ." (Section 32).
The penalty for violation of this provision is a fine of
any amount not exceeding three hundred dollars, to which
may be added imprisonment not to exceed one year. Furthermore, the guilty party may be dismissed from the service
of the Department.
29.
Necessity for Procurins Financial Statements
Before making any unsecured loan, that is, a loan not
fully collateralized of $500 and over, a current financial
statement on the obligor must be procured. As long as the
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Federal Reserve Bank of St. Louis
-18be
obligation remains unpaid a current statement must
year.
each
once
least
at
taken
30.
Establishment of Reserve Balances
ts
Every bank must maintain in relation to its deposi
cent
a minimum cash reserve of twelve and one-half per
reserve
against demand deposits and three per cent cash
either
against time deposits, the reserve to be carried
The
banks.
t
ponden
corres
its
in
or
vaults
bank's
in the
the
of
nature
the
ine
determ
to
Department is permitted
If
deposits against which reserves must be maintained.
such
figure
stated
the
below
falls
reserve
the bank's
nds
bank shall not make any new loans or pay any divide
to the
unless and until the cash reserve is restored
member
legal requirement. Provision is also made for
requirebanks to maintain reserves in accordance with the
may, if
ment
Depart
The
Act.
Reserve
l
Federa
the
ments of
es,
reserv
ing
comput
for
method
the
it so desires, change
twelve
but in no case may the cash reserve be less than
three
and one-half per cent against demand deposits and
per cent against time deposits.
31.
Payment of Dividends
No dividends may be paid if the capital is impaired
at least
and if the unimpaired surplus fund does not equal
part of
a
If
stock.
l
capita
the
of
cent
per
-five
twenty
nds
bank's sound capital consists of debentures no divide
until
may be paid without the consent of the Department
surplus
all of the debentures have been retired. When the
l stock,
fund amounts to twenty-five per cent of the capita
annum
dividends may be paid not to exceed six per cent per
equals
s
surplu
the
until
shares
the
of
value
upon the book
ctions
the full amount of the capital. There are no restri
limitthe
g
and
bankin
vative
conser
of
es
dictat
the
except
s
ations described herein when a bank's unimpaired surplu
and
is equal to twenty-five per cent of sound capital,
when its sound capital is in excess of twenty per cent of
the average daily deposits computed on an annual basis.
32.
Capital Impairment
such
"No bank or trust company shall, during the time
withbank or trust company continues in business as such,
portion
any
awn,
withdr
be
to
permit
or
ize
author
or
draw,
nds or
of its capital stock, either in the form of divide
e or pay
otherwise. No bank or trust company shall declar
by the
any dividends to its shareholders, in any form, if,
bank
such
of
l
stock
capita
the
payment of such dividends,
nd
or trust company will be thereby impaired. No divide
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Federal Reserve Bank of St. Louis
-19-
shall ever be paid by any bank or trust company in any
amount greater than its undivided profits then on hand,
after deducting therefrom its losses, bad debts, or depreciation which the Department may have determined to
be such, and all other expenses. All debts due to any
bank or trust company on which interest is past due for
a period of six months are bad debts unless, in the
opinion of the Department, such debts are well secured."
(Section 216, as amended.)
Within thirty days after the Department has directed
that a restoration be made of impaired capital by an
assessment on shareholders, such restoration must be
made and it shall be the duty of the directors to notify
each and every shareholder of the details, surrounding
the order of the Department. If any shareholder refuses
or neglects to pay the assessment, the board must cause
a sufficient amount of the capital stock of such shareholder to be sold at public auction as will be necessary
to make good the impairment. Thirty-day notice of the
sale must be made in a newspaper as provided by the Act.
A bank must keep on file at all times a full and correct
list of the names and addresses of its shareholders and
the number of shares held by each.
33.
Ratio of Deposits to Capital
When the average daily deposits of any bank for the
preceding year continue to be greater than ten times a
bank's sound capital the Department may require, if it
deems necessary, the bank to increase its sound capital
or reduce the amount of its deposits. This situation
becomes effective after July 1, 1936.
34.
Restrictions on Voting at Shareholders' Meetings
Shares controlled by any holding company affiliate
of any bank cannot be voted without obtaining a voting
permit from the Department. No officer, clerk, teller,
or bookkeeper, of any bank, may vote a proxy, and no
shareholder whose liability as a shareholder or borrower
is past due and unpaid is entitled to vote.
35.
Powers of Department in MakinG an Affiliate Examination
The Department has the same power with respect to an
affiliate examination as it has in connection with the
examAnation of a bank. If the expenses incurred in
making the affiliate examination are not paid by the
affiliate, the Department may assess such expenses on
the bank with which the affiliate is connected. If an
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Federal Reserve Bank of St. Louis
-20affiliate or bank refuses to permit the Department to
make an examination of any of its affiliates, a fine
may be levied and the voting permit may be revoked.
When a voting permit is revoked no bank whose stock is
controlled by a holding company affiliate may receive
any deposits of public monies of the State of Indiana
or any political subdivision, and no bank shall pay any
further dividends to such holding company affiliate.
36.
Remuneration for Procuring Loans Prohibited
No officer, director, owner, partner, employee or
attorney of any bank is permitted to receive remuneration of any kind for procuring or endeavoring to procure
a loan for any person, firm or corporation from such
bank.
37.
Time Deposits
"Any bank or trust company which, in the conduct of
its business, shall accept time deposits, shall, subject to the provisions of any rule or regulation of the
Department establishing and/or extending a longer period
of time for payment, repay the sum so deposited to each
depositor, respectively, or to his legal or authorized
representatives, in case of savings accounts, not more
than 90 days, and, in case of certificates of deposit, not
more than 30 days, after he or they shall demand such payment, but at such hours, with such interest, in such amounts
and under such regulations, and such changes as may be made
therein as the board of directors, with the approval of the
Department, may prescribe, not inconsistent with the provisions of this act. Such regulations adopted by the board,
from time to time, may be printed in or endorsed upon the
pass book or other evidence of indebtedness issued to the
depositor. No auch regulation of the board of directors,
or change therein, shall be enforced unless ten days,
notice thereof shall have been given by posting notice of
such regulation, or change, in some conspicuous place in
the room where the savings deposit business of such bank
or trust company is transacted so that the public may have
notice of such regulations, or any changes." (Section 244.)
As set out in Bank Regulation Number 6 the maximum
rate of interest that may be paid by any bank on time
money and savings accounts is two and one-half per cent.
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Federal Reserve Bank of St. Louis
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38.
Statements of Condition of Banks and Trust Companies
The Department may require a bank to submit and publish
not less than two statements of condition and not more than
the number called for from national banks by the Comptroller
of the Currency during any one calendar year. Statements of
condition must be published in a newspaper as provided by
the Act and as required by the Department. All expenses of
publication must be borne by the bank. Proof of publication
must be furnished the Department if so required. Penalty
for violation of any of the above requirements is that subject bank may be assessed a penalty of $100 for each day
that elapses after the date fixed by the Department for
compliance.
39.
Statement of Condition of Affiliates
The Department may require from a bank as many statements of condition of its affiliates as is deemed necessary,
but in no case less than three per year. The Department
may also require that such statements of condition be published. Failure to comply with these requirements may
subject a bank to a fine of $100.00 for each day during
which non-compliance continues.
40.
Penalty Where Penalty Is Not Specifically Provided
"Any person who shall violate any of the provisions
of this act, for the violation of which a specific penalty
is not herein otherwise provided, shall be deemed guilty
of a misdemeanor and upon conviction thereof shall be fined
in any amount not less than one hundred dollars and not
more than five hundred dollars, to which may be added imprisonment for any determinate period of time not exceeding
six months." (Section 357.)
PART II
VII
OTHER STATUTORY PROVISIONS
Embezzlement
41.
Embezzlement, Making False Entries in Books, Reports,
Etc. (Applies to Insured Banks Only.T
Any officer, director, agent, or employee of any insured
bank '7ho embezzles, abstracts, or willfully misapplies any
of the monies, funds, or credits of such insured bank, or
who, without authority from the directors of such insured
bank issues or puts forth any certificate of deposit, draws
any order or bill of exchange, makes any false entry in the
book, report, or statement of such insured bank, with intent
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Federal Reserve Bank of St. Louis
-22in any case to injure or defraud such insured bank, or
any other company, body politic or corporate, or any
individual person, or to deceive any officer of such
insured bank, or any agent or examiner appointed to
examine the affairs of such insured bank, and every
person who aids or abets any officer, director, agent
or employee in any violation of this section shall be
deemed guilty of a misdemeanor, and shall upon conviction thereof in any district court of the United States,
be fined not more. than $5,000.00 or shall be imprisoned
for not more than five years, or both, in the discretion of the court. (Reference is made to Section 5209,
U. S. R. S.)
42.
Embezzlement - Criminal Law
"Every officer, agent, attorney, clerk, b,rvant or
employee of any person, firm, corporation, association,
bank, trust company, financial institution or broker,
who, having access to, control or possession of any
money, article or thing of value, to the possession of
which his employer is entitled, shall while in such
employment, take, purloin, secrete or in any way whatever appropriate to his own use, or to the use of others,
or whd shall knowingly permit any other person to take,
purloin, secrete or in any way appropriate to his own
use, or the use of others, any money, coin, bills, notes,
credits, choses in action or other property or article
of value belonging to or deposited with or held by such
person, firm, corporation, association, bank, trust
company, financial institution or broker in whose employment such officer, agent, attorney, clerk, servant or
employee may be, shall be deemed guilty of embezzlement,
and, on conviction, shall be imprisoned in the state
prison for any determinate period of not less than two
years nor more than twenty years and in addition to such
imprisonment he shall be fined not less than one dollar
nor more than one thousand dollars, and be disfranchised
and rendered incapable of holding any office of trust or
profit for any determinate period: Provided, That where
the money, coin, bills, notes, credits, choses in action
d,
or other property or article of value, taken, purloine
less
of
value
the
of
be
ated
shall
secreted or appropri
than one hundred dollars, the punishment may be imprison
not
period
a
for
farm
penal
or
jail
county
ment in the
exceeding one year and a fine not exceeding five hundred
dollars: and, Provided, further, That upon a second such
conviction for embezzlement the person convicted shall
of
suffer the punishment prescribed for those convicted
the
of
is
taken
property
or
money
embezzlement where the
value of one hundred dollars or over." (Acts 1935,
1229, as amended.)
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Federal Reserve Bank of St. Louis
JIM
-23-
43.
Embezzlement - Public Offenses
"If any banker, broker or person, or persons or firm,
or person or persons constituting such firm doing a
banking business, or any officer, agent or employe of any
banking company or incorporated bank doing a banking
business in this state shall fraudulently receive from
any person or persons, firm, company or corporation or
from any agent thereof, not indebted to such banker,
broker, person or persons, or firm, banking company or
incorporated bank any money, check, draft, bill of exchange, stocks, bonds or other valuable thing which is
transferable by delivery or indorsement when, at the
time of receiving such deposit, such banker, broker,
person or persons, firm, banking company or incorporated
bank is insolvent, whereby the deposit so made shall be
lost to the depositor, such banker, bmker, person, firm,
officer, agent or employe so receiving such deposit shall
be deemed guilty of embezzlement, and on conviction shall
be fined in a sum double the value of the money or other
valuable thing so received, embezzled and fraudulently
taken, and in addition thereto shall be imprisoned in
the state prison not less than two years nor more than
fourteen years, and be disfranchised and rendered incapable of holding any office of trust or profit for any
determinate period. The failure, suspension or involuntary liquidation of such banker, broker, person or persons,
firm, banking company or incorporated bank, within thirty
days after the time of receiving such deposit, shall be
prima facie evidence of an intent to defraud on the part
of such banker, broker, firm, person, banking company or
incorporated bank or officers, agent or employe of such
banking company, firm or incorporated bank." (Acts 1905,
p. 504 - as amended Acts 1907, p. 14.)
VIII
Miscellaneous Provisions
44.
Making False Statements Concerning Financial InstitutIons.
"That any person who shall willfully and maliciously
make, circulate or transmit to another or others, any
false statement, rumor or suggestion, written, printed
or by word of mouth, which is directly or by inference
derogatory to the financial condition or affects the
solvency or financial standing of any bank, savings bank,
banking institution, trust company, or building and loan
association doing business in this state, or who shall
counsel, aid, procure, or induce another to start, transmit or circulate any such statement or rumor, shall be
deemed guilty of a misdemeanor, and upon conviction thereof
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Federal Reserve Bank of St. Louis
-24-
shall be punished by a fine of not more than one thousand
dollars or by imprisonment for a term of not more than
one year, or both." (Acts 1921, Section 1, p. 699.)
45.
False Entries - Criminal Offenses
"That any person engaged in the business of banking,
or any officer, director, agent or employee of any person,
firm or corporation engaged in the banking business in
this state, who shall knowingly make, or cause to be made,
any false entry in any book or record kept in any such
bank or trust company, shall be deemed guilty of a felony,
and upon conviction thereof shall be fined in any sum not
to exceed one thousand dollars, or be imprisoned in the
state prison for any determinate period of not less than
one year or more l than five years, or both." (Acts 1933,
p. 689.)
46.
Penalty for False Publication of Deposit Insurance
(Applies to Insured Banks Only)
"No individual, association, partnership, or corporation shall use the words "Federal Deposit Insurance
Corporation," or a combination of any three or four words,
as the name or part thereof under which he or it shall do
business. No individual, association, partnership, or
corporation shall advertise or otherwise represent falsely
by any device whatsoever that his or its deposit liabilities are insured or in anywise guaranteed by the Federal
Deposit Insurance Corporation or by the United States or
any instrumentality thereof; and no insured bank shall
advertise or otherwise represent falsely by any device whatsoever the extent to which or the manner in which its
deposit liabilities are insured by the Federal Deposit
Insurance Corporation. Every individual, partnership,
association, or corporation violating this subsection shall
be punished by a fine of not exceeding $1,000.00, or by imprisonment not exceeding one year, or both." (Code of
U. S. 1935, Title 12, Section 264.)
47.
Crim
To Omit Reportin& A Felony
"Whoever, having knowledge of the actual commission of
the crime of murder or other felony cognizable by the
courts of the United States, conceals and does not as soon
as may be disclose and make known the same to some one of
the judges or other persons in civil or military authority
under the United States, shall be fined not more than
$500.00, or imprisoned not thore than three years or both."
(Criminal Code, Section 146; Code of U. S. 1935, Title 18,
Section 251.)
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Federal Reserve Bank of St. Louis
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48.
Overdrafts
lo"
Directors, Officers, or Employees
"Whoever being president, director, cashier, teller,
clerk, officer, or employe of any incorporated bank, of
any firm, corporation, person or association doing a
banking business shall knowingly overdraw his account
in such bank, or in such other institution doing a
banking business, or who shall knowingly draw and receive
payment on any check on such bank, firm, corporation,
person or banking association when he has no funds to'his
credit therein without first procuring the written consent thereto of the board of directors of any such incorporated bank, or the manager or managers of any such firm,
corporation, person or association doing a banking
business, indorsed on such check, shall be deemed guilty
of a felony, and on conviction shall be imprisoned in the
state prison not less than two years nor more than fourteen
years, and fined in double the sum so received." (Acts
1905, Section 402, P. 584.)
49.
Loans to Directors, Officers, or Employees
"Whoever being president, director, cashier, teller,
clerk, officer or employe of any incorporated bank or of
any firm, corporation, person or association doing a
banking business, or of any loan and trust and safe
deposit company, shall, in any way obtain as a borrower
any of the funds of such bank, firm, corporation, person
or association doing a banking business, or of such loan
and trust and safe deposit company, without first executing
his note or other evidence of debt therefor, bearing the
written consent thereto of the board of directors of any
such incorporated bank, or the manager or managers of any
other such firm, corporation, person or association doing
a banking business, or of the board of directors of any
such loan and trust and safe deposit company, indorsed on
such note or other evidence of debt, shall be deemed
guilty of a felony, and on conviction shall be imprisoned
in the state prison not less than two years nor more than
fourteen years, and be fined in double the amount so
received." (Acts 1905, p. 584, Section 403, as amended
Acts 1929, p. 52.)
Attention is directed to the fact that any loan made
to a director, officer, or employe must be so made as to
comply with the provisions of the Indiana Financial Institutions Act contained in Faragraph 9 of this booklet and
also with the above quoted section of the Acts of 1905,
as amended.
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Federal Reserve Bank of St. Louis
-26-
PART III
IX
CIVIL LIABILITIES OF DIRECTORS
Common Law Liability for Negligence
Directors of a bank are under a duty to use ordinary
of
care and prudence in the administration of the affairs
the bank; and if through failure to exercise ordinary
prudence and diligence in the control and supervision of
the bank's affairs, a loss to the bank results, they may
be held liable for such loss in a civil action for damages
(Briggs v. Spaulding, 141 U. S. 132; Rankin v. Cooper, et
al., 149 Fed. 1010; Gamble v. Brown, 29 Fed. (2) 366.). In
such an action each director is liable in his personal and
individual capacity and may be sued alone or jointly with
other directors, whether his liability is based upon failure to perform a statutory duty or a common-law auty
(Corsicana National Bank v. Johnson, 251 U. S. 68; Gamble
v. Brown, Supra.).
Directors are not required to devote their entire
time to the details of business management and may commit
such routine to their duly authorized officers (Rankin v.
Cooper, Supra.) provided they retain and exercise a general
supervision. This does not mean that the directors can discharge their duty by reposing the entire administration to
ion
officers selected by them, without supervision or examinat
Fed.
63
Hall,
v.
Robinson
345;
Fed.
80
,
(Gibbons v. Anderson
222.); and for a failure to exercise reasonable supervision
over the conduct of such officers and the affairs of the
bank the directors will be held liable for losses proximately
U.S.
resulting from such negligence (Bowerman v. Hamner, 250
reto
n
attentio
give
personal
should
504.). The directors
ports of examination and to letters from supervising
officials (Thomas v. Taylor, 224 U. S. 73; White v. Thomas,
37 Fed. (2) 452), and they should also give personal attend
tion to the contents of statements of condition furnishe
to supervising officials and published (Jones National
Bank v. Yates, 240 U. S. 541.).
Directors cannot discharge the duties incident to their
office by holding meetings at rare intervals and limiting
the business of such meetings to such perfunctory matters
as electing officers (Gibbons v. Anderson, suprn; White v.
Thomas, supra); and for a failure to attend meetings, even
though residing at a distance, the directors may be held
liable, and they cannot shield themselves from liability
by pleading ignorance of transactions in which they did not
participate, when their ignorance is a result of their
v.
negligent inattention (Bowerman v. Hamner, supra; Briggs
(Mass.)
Brown
v.
Co.
Trust
al
Prudenti
supra;
Spaulding,
171 N. E. 42.).
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Federal Reserve Bank of St. Louis
-27-
The following are some of the instances where the
directors may be held liable for losses due to their
negligencel The making of loans where the security taken
is insufficient; certifying or permitting checks to be
certified on insufficient or overdrawn accounts; failure
to appoint a discount and loan committee, or an examining
committee of the directors when required by the by-laws
and/or the volume of the bank's business, or failure to
see that such committees function if appointed; failure
to audit or examine the affairs and condition of the bank
periodically, or to cause same to be audited or examined;
failure to use reasonable efforts to collect slow or
doubtful assets; permitting improvident expenditures in
the conduct of the bank's business; authorizing improvident investments, failure to take appropriate action to
collect loans due to the bank. The directors may also be
liable for allowing improvident overdrafts (McCormick v.
King, 241 Fed. 737); for damages resulting from a failure
to charge off assets at the direction of the Director of
The Department of Financial Institutions, or representing
such assets to be good after such notice (Thomas v. Taylor,
supra); for losses resulting from failure to require proper
bond from officers and employees of the bank (Robinson v.
Hall, supra); for permitting control by incompetent official (Bates v. Dresser, 251 U. S. 524.).
X
Liability for Statutor
Violations
Section 97 (1) of the Indiana Financial Institutions
Act provides that the directors of a bank must take an
oath that they will not knowingly violate or permit to be
violated any provisions of law applicable to their institution. Furthermore, Section 357 of the Indiana Financial
Institutions Act stipulates a penalty of not less than
$100 and not more than $500 to which may be added imprisonment for any determinate period of time not exceeding six
months for violation of this provision and conviction
thereof.
XI
Conclusion
It is important for directors to understand that their
duties, responsibilities, and liabilities are not governed
alone by the statute, but also by common law. Briefly,
the common law principles applicable are: ORDINARY DILIGENCE,
REASONABLE CONTROL, and GENERAL KNOWLEDGE of the peculiar
problems of their bank.
If a director takes an active interest in his bank,
follows his statutory duties, and decides on questions with
intelligent reasoning and care, there need be no fear of
common law actions.
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Federal Reserve Bank of St. Louis
1933.]
HOUSE — No. 1184.
103
APPEN4X C-10.
An Act authorizing the Destription of Certain Books and
Records relating t6 Closed Banks.
Whereas, The deferred operation of this act would
1
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
1
2
3
4
5
6
7
8
9
Chapter one hundred and sildy-seven of the Gen,
eral Laws is hereby amended by,inserting after section
thirty-six the following new section: —
Section 36A. After the expiration of six years from
the order for final distribution, the commissioner may
with the approval of the supreme'judicial court cause
to be destroyed any or all of the kooks, records, correspondence and other papers concerning any such
bank and the liquidation thereof.
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Federal Reserve Bank of St. Louis
FILE
COUONWEALTH OF MASS.-Report of Special Com. on Revision
of Laws relating to_Trust Companies & Private Banks, and to
the Liquidation of banks—Dec. 1932
[Jan.
No. 1184.
HOUSE
104
APPENDIX C-11.
An Act establishing the Banking Advisory Board.
Whereas, The deferred operation of this act would
1
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
SECTION 1. Chapter twenty-six of the General
2 Laws,as appearing in the Tercentenary edition thereof,
3 is hereby amended by inserting after section five the
4 two following new sections:
5 Section 5A. There shall be a banking advisory
6 board serving in the division to consist of five mem7 bers, as follows: The commissioner, ex officio, who
8 shall be chairman of the board, and four members
9 appointed by the governor, with the advice and consent
10 of the council, in the following manner: one member
11 from three candidates nominated by the Massachu12 setts Trust Company Association; one member from
13 three candidates nominated by the Massachusetts
14 Co-operative Bank League; one member from three
15 candidates nominated by the Savings Banks Associa16 tion of Massachusetts; and one member from among
17 the citizens of the commonwealth at large. Upon the
18 expiration of the term of office of one of the members
19 required to be appointed from nominated candidates,
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Federal Reserve Bank of St. Louis
7
,
22
4
IP
•
•
1933.]
HOUSE — No. 1184.
105
20 his successor shall be appointed in the manner afore21 said for a term of three years, and upon the expiration
22 of the term of office of the other appointive member
23 his successor shall be appointed in the manner afore24 said for a term of two years. Any appointive member
25 may be removed for cause by the governor, with the
26 advice and consent of the council. Any vacancy in the
27 number of appointive members shall be filled for the
28 unexpired term in the same manner as in the case of
29 the original appointment. The board shall meet when
30 requested by the commissioner or by any three mem31 bers and each member shall receive
dollars
32 a day while attending meetings and his actual travel33 ing expenses incurred in the performance of his official
34 duties. With the approval of the commissioner, mem35 bers of the board may have access to the records of the
36 division and the reports of banks and examinations
37 thereof as provided by section two of chapter one
38 hundred and sixty-seven.
39 Section 5B. Upon request of the commissioner, the
40 board shall advise him with reference to: —
41 (1) Methods and standards to be used in making
42 examinations as provided in section two of chapter one
43 hundred and sixty-seven;
44 (2) The establishment of banking practices and
45 policies for the use and guidance of persons and cor46 porations subject to the supervision of the commis47 sioner;
48 (3) Measures for safeguarding the interests of
49 depositors and other creditors thereof;
50 (4) The valuation of the assets of any such person
51 or corporation ;
52 (5) Action to be taken by the commissioner under
53 section twenty-two of chapter one hundred and sixty54 seven; and
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[Jan.
55 (6) Any other matters which the commissioner may
56 submit to it.
57 The board shall exercise advisory powers only and
58 nothing contained herein shall be deemed to abridge
59 any power or authority conferred upon the commis60 sioner by any provision of law. No member of the
61 board shall be held civilly or criminally liable for any
62 action taken or for any failure to act hereunder in the
63 absence of bad faith.
SECTION 2. As soon as may be after the effective
2 date of this act the governor, with the advice and
3 consent of the council, shall appoint the three appoin4 tive members required by section one to be appointed
5 from nominated candidates, one for one year, one for
6 two years and one for three years from the following
7 June first and the other appointive member for two
8 years from the following June first, and thereafter shall
9 appoint such members in the manner provided in
10 section one.
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Federal Reserve Bank of St. Louis
a
!IIIIE COMIVIONWEALTH OF MASS.—Report of Special Com. on Revision
of Laws relating to Trust, Companies & "rivate Banks, and to
the Liquidation of Banks--Lec. 1932
1933.]
HOU4 — .No. 11-64i;
95
APPENDIX C— 6 .
An Act concerning Civil and Criminal Liability of the
Commissioner of Banks and his Assistants.
Whereas, The deferred operation of this act would
1
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
1 Section twenty-two of chapter one hundred and
2 sixty-seven of the General Laws, as appearing in the
3 Tercentenary edition thereof, is hereby amended by
4 adding at the end of the first paragraph the following
5 new sentence: — The powers and authority conferred
6 on the commissioner by this section shall be con7 sidered as discretionary and not as mandatory and so
8 long as there is good faith neither he nor his deputies,
9 advisors, assistants, attorneys, agents, examiners, or
10 employees shall be held liable civilly or criminally or
11 upon their official bonds for any action taken or for
12 any failure to act hereunder, — so that said paragraph
13 will read as follows: — Section 22. Whenever it shall
14 appear to the commissioner that any bank has violated
15 its charter or any law of the commonwealth, or is con16 ducting its business in an unsafe or unauthorized
17 manner, or that its capital is impaired, or if it shall
18 refuse to submit its books, papers and concerns to the
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Federal Reserve Bank of St. Louis
2.'";
96
HOUSE — No. 1184.
[Jan.
19 inspection of the commissioner or of his duly author20 ized agents, or if any officer of such bank shall refuse
21 to be examined on oath by the commissioner or his
22 duly authorized assistants touching its concerns, or if
23 it shall suspend payment of its obligations, or if from
24 an examination or from a report provided for by law
25 the commissioner shall have reason to conclude that
26 such bank is in an unsound or unsafe condition to
27 transact the business for which it is organized, or that
28 it is unsafe and inexpedient for it to continue business,
29 the commissioner may take possession forthwith of the
30 property and business of such bank and may retain
31 possession thereof until the bank shall resume business
32 or until its affairs shall finally be liquidated as herein
33 provided. The powers and authority conferred on the
34 commissioner by this section shall be considered as
35 discretionary and not as mandatory and so long as
36 there is good faith neither he nor his deputies, ad37 visors, assistants, attorneys, agents, examiners, or
38 employees shall be held liable civilly or criminally or
39 upon their official bonds for any action taken or for
40 any failure to act hereunder.
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Federal Reserve Bank of St. Louis
a
lit
COMMONWEALTH OF MASS.-Report of Special Com. on Revision
of Laws relating to Trust Companies & Private Banks, and to
the Liquidation of Banks—Dec. 1932
HOUSE — No. 1184.
1933.]
107
APPENDIX C— 12.
An Act to improve the Method of Examination of Banks
and creating the Office of Chief Examiner.
Whereas, The deferred operation of this act would
1
2 tend to defeat its purpose, therefore it is hereby de3 clared to be an emergency law, necessary for the im4 mediate preservation of the public convenience.
Be it enacted by the Senate and House of Representatives in General Court assembled, and by the
authority of the same, as follows:
SECTION 1. Section three of chapter twenty-six of
2 the General Laws, as appearing in the Tercentenary
3 edition thereof, is hereby amended by inserting after
4 the word "remove" in the third line the following: —
5 a chief examiner and, — so as to read as follows: —
6 Section 3. Subject to the approval of the governor
7 and council, the commissioner may appoint, remove
8 and fix the salary of a deputy commissioner. The com9 missioner may appoint and remove a chief examiner
10 and such clerical and other assistants as the work of the
11 division may require. He shall be allowed necessary
12 expenses, including those for the investigation of, and
13 prosecution for, violation of any provision of sections
14 ninety-six to one hundred and fourteen, inclusive, of
15 chapter one hundred and forty, and the actual expenses
16 incurred by him and his subordinates in traveling in
17 the performance of official duties. The clerical and
18 other assistants shall give bonds, with sureties to be
19 approved by the commissioner, for the faithful per20 formance of their duties.
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Federal Reserve Bank of St. Louis
F4".;
_
108
HOUSE — No. 1184.
[Jan. 1933
SECTION 2. Chapter one hundred and sixty-seven
2 of the General Laws is hereby amended by inserting
3 after section two the following new section: —
4 Section 2A. Whenever the commissioner deems it
5 expedient he may cause a meeting of the board of
6 directors of a trust company or co-operative bank or
7 the board of trustees of a savings bank to be held in
8 such manner and at such time and place as he may
9 direct. Any examination report or results thereof or
10 the commissioner's directions and recommendations
11 relative thereto and any other matters concerning the
12 operation or condition of the bank may be presented
13 to such board in person by the commissioner, the chief
14 examiner or such other assistant as the commissioner
15 may designate, and such directions and recommenda16 tions.shall be incorporated in and filed with the records
17 of such meeting. The officers and directors or trustees
18 present at such meeting shall sign forthwith a certifi19 cate or other acknowledgment in such form as may be
20 prescribed by the commissioner that they have heard
21 the matters discussed and reviewed at such meeting
22 and have heard or read the directions and recommenda23 tions of the commissioner. The person having custody
24 of the records of the bank shall within seven days after
25 the date af such meeting furnish the commissioner with
26 said certificate or other form of acknowledgment as
27 so signed and an attested copy of the records of such
28 meeting. He shall also mail by registered mail within
29 such period an attested copy of the records to each
30 absent director or trustee, and the commissioner may
31 make rules and regulations requiring the signing of a
32 like certificate or acknowledgment by each such
33 director or trustee, and its transmission to him.
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Federal Reserve Bank of St. Louis
1933.J
HOUSE — No. 1184.
61
RELATED MATTERS.
On or about Septernber 24, 1932, the Commissioner
sent a letter of query to his liquidating agents on matters
he believed of importance to the Commission in drafting
adequate legislation. Inquiry was made on the subject
of charging part of expenses of liquidation to the savings
department of closed banks. The recommendation of the
Commissioner (if the present system of liquidation is to
remain unchanged), that cost of liquidation be apportioned between the savings department and the commercial department, is just and equitable and meets
with my approval. This recommendation seems fair,
particularly since savings department depositors are protected by the laws which regulate the type of security
into which their money can be placed, while the depositors in the commercial department have no such protection.
The other inquiries made in that letter, except on the
subject of a central liquidating corporation, which I have
previously discussed, are relatively unimportant and
minor as compared with the real problem the Legislature has to perfect our banking laws for the permanent
protection of depositors in every bank in the Commonwealth.
The best discussion of the entire subject was given to
the Commissioner by J. H. Grier, liquidating agent for
the Arlington Trust Company of Lawrence, whom I incidentally have never met, but for whose opinions on
this subject I have a high regard. The freedom and ease
with which he discusses the matter of liquidation and
makes recommendations along the lines of general revision of thc trust company statutes are adequate proof
of his efficiency and ability.
I am aware that no act of the Legislature can legislate
honesty into bank officers and directors who have a
tendency to be dishonest. But if we cannot legislate
honesty into these men who commit traitorous and lar-
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•••
62
HOUSE — No. 1184.
[Jan.
cenous acts against innocent depositors, we can by legislation make it an easier task for our district attorneys
to convict them and send them to jail.
RECOMMENDATIONS.
following recom, In closing, I desire to submit the
l
mendations on the matter of genera revision of trust
company laws:
. (a) General Laws, chapter 167, section 2. Consider the desirability of having all banks examined twice
a year rather than once a year, unless a certified public
accountant, duly approved by the Commissioner of
Banks, audits and comments on the loans of the bank
he is examining, including all undermargined loans, loans 1
with unmarketable collateral, unsecured notes upon
which principal reductions have not been made periodically. Hold the certified public accountant criminally
liable for failure to report obvious irregularities in the
agement of the bank.)
(b) Consider the desirability of extending this section
so as to enable the Commissioner to employ expert assistance — either legal, real estate, construction work,
etc. — for the purpose of determining the sound value
of any loan or loans which are subject to question in
the course of an examination. i
2. General Laws, chapter 167, section 3. Consider the
advisability of extending the provisions of this section to
enable inspection of banking and brokerage house accounts of persons involved in transactions with the bank
under examination.
3. Consider the desirability of limiting or prohibiting
proceedings in the nature of trustee process or equity
proceedings Against a closed bank covering funds of a
depositor so as to prevent the bank's appearing and
answering in such cases. The plaintiff would seem to
be amply protected by obtaining injunctive relief against
the depositor from withdrawing the funds in question.
4. Suggest the desirability of a provision similar to
section 29, chapter 168, General Laws, being inserted in
Q
rir
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Federal Reserve Bank of St. Louis
1
1933.]
HOUSE — No. 1184.
63
the trust company laws, specifically prohibiting loans
to a director or the officers of funds in the savings department.
5. Consider a limitation on commercial department
loans based upon savings department pass books except
as additional collateral security to prevent the unfair
result of denying a set-off in the event of a bank's closing
on loans secured by savings department pass books.
Possibly this could be taken care of by extending the
set-off provision to allow such set-offs, although it brings
in the complication of interdepartmental transfers where
set-offs are involved.
6. Consider the advisability of requiring an experienced real estate man passing upon all mortgages in the
savings department as a member of the investment committee or otherwise. Such person to file a sworn statement or a statement under the penalty of perjury giving
full details of the property, approximate income, etc.,
having such a person make an appraisal every three
years in which he is to state what improvements, if any,
have been made to the property during that period, and
also bringing the previous statement up to date as to
general condition, income, marketability, etc.
7. Insert a provision preventing an additional mortgage being taken in the savings department, even though
both mortgages when combined appear to be less than a
60 per cent valuation; at the same time prohibit second
mortgages being taken as security directly or otherwise
where the first mortgage is in the savings department,
even though necessary to avert a loss on a construction
loan, etc. Such additional loans should only be made
with savings department funds, and should clearly
state that the loan was made to avert a loss upon the
prior mortgage or for the purpose of conserving the prior
mortgage as an asset.
JOHN P. HIGGINS.
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Federal Reserve Bank of St. Louis
111
11111
1iE COMMONWEALTH OF MASS.—Report of Lpecial Com. on hevision
f Laws relating to Trust Companies & Private Banks, and to
the Liquidation of Banks--Dec. 1952
[.Jan.
INTo. 1184.
HOITSE
64
APPENDIX A.
EXPENSES IN LIQUIDATION.
DECEMBER 20, 1932.
To the Special Commission on Revision of the Laws' Relating to Trust
Companies and to the Liquidation of Banks.
At the Commission's request, there is submitted herewith a
summary of the chief points concerning the subject of liquidation expenses discussed during the hearings, together with
supporting figures and information pertaining to the specific
banks now closed.
There are fifteen trust companies and two savings banks
now closed, Arlington Trust Company of Lawrence having
resumed business on October 20, 1932. •
Each bank presents a problem peculiar to itself. The expense of the liquidation, the number of employees required,
the organization of the force employed, the extent to which
legal counsel must be resorted to, are all bound to vary in
each bank. The policy of handling the expenses incident
thereto must be adjusted in accordance with the type and
quality of the assets, the community in which the bank is
located, together with the difficulties encountered in collecting
indebtedness owed to the bank. Uniformity in total cost, or
in the ratio of expense to recovery, cannot be expected.
For convenient consideration this subject is divided into
subsections, as follows:
ENTENSES OTHER THA.1sT FOR AGENTS AND ATTORNEYS.
For the purpose of pointing out what personnel the stockholders and directors of the several closed banks considered
was necessary in handling the specific assets and in administering the affairs of their respective institutions while conducting business, there is set forth below a compilation showing
the number of officers and employees employed by the seventeen specific banks now closed at the time of closing thereof,
L
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1933.]
HOUSE — No. 1184.
55
that would:aid in the protection of future depositors and
thus strengthen the banking laws of the Commonwealth.
The present liquidation statute was enacted in 1910
and received its first test in 1920 and 1921, when the
Bank Commissioner closed five trust companies. The
cost of liquidating these banks totaled $328,502, or an
average of $65,700 for each bank. The excessive cost at
that time was justified, it is said, by the fact that many
knotty legal problems on the law of liquidation were
carried to the Supreme Court, and as a result we have
today a body of liquidation laws, the principles of which
have been fully interpreted and which are understood
and accepted.
If the cost of legal services justifies the excessive cost
of liquidation in 1920 and 1921, then what reason can
support and justify the excessive cost of liquidating our
closed banks today? The data on fees and other expenses of liquidation submitted on the majority report
is somewhat misleading, since many of the recently closed
banks are only about 20 to 30 per cent liquidated. The
cost of liquidation is upon the returns of October 10,
1932, and it will be interesting to the members of the
committee on banks and banking, who will review this
report, to obtain the cost to date and the estimated
(entire) cost of doing this work, even in this day when
we are supposed to have a well-established and defined
law on liquidation. The Commissioner admitted to me
during a hearing early in October, 1932, that he had
authorized, in the liquidation of the Industrial Bank
and Trust Company, the payment of about $15,000 in
fees to the liquidator, notwithstanding the fact that the
bank was then only 40 per cent liquidated. It will be
of interest to note the cost in the case of the closed
Medford Trust Coxnpany, where special counsel has been
employed in an unsuccessful attempt to reach and apply
the funds of the arch conspirator of bankdw, Edwin T.
McKnight.
The duty of liquidating closed banks should not be
placed on the Bank Commissioner, no matter how capa-
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Federal Reserve Bank of St. Louis
111
56
HOUSE — No. 1184.
[Jan.
ble he may be. His job primarily is to properly supervise
"going" institutions and not permit them, through poor
investments or unwise or reckless management, to even
approach a time they would be compelled to close their
doors.
The present Bank Commissioner has done a fairly
good job, considering the problems that have confronted
him during the past eighteen months. In place of vesting him with broad powers in connection with liquidation, @lore attention should be directed toward giving/
him an increased number of competent examiners, so
that he can devote his efforts to detailed and periodic
audits, not examinations, by his agents of every trust
company and savings bank in the Commonwealth. If
audits in place of examinations had been made of an
institution such as the Medford Trust Company, and
the type of investments inquired into by competent
agents of the Commissioner's office, McKnight and the
gang that looted that institution would have been stopped
years ago. The same terms apply to the management
of the Industrial Bank and Trust Company of Boston)
In brief, the Commissioner of Banks has enough to do to
properly supervise, by audit, every banking institution
in the State without adding the burden of supervising
liquidations. I recommend that the matter of liquidation of closed banks be vested in a central liquidating
corporation, the details of which I will discuss hereafter.
I do not desire to convey the idea of fanaticism in my
discussion of this subject, but it must be evident that a
Commonwealth that has about twenty bank failures, and
almost as many more on the brink of failure, cannot
have laws sufficiently rigid to protect 294,100 depositors
as represented in our closed banks.
The efforts of the Bank Commissioner's office to expedite dividend payments in closed institutions are commendable, an‘l the approval by the Commissioner of the
application of the so-called Spokane Plan on the purchase of the assets of the Charlestown Trust Company
and other banks by a national bank is equally laudable,
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Federal Reserve Bank of St. Louis
A
19331
HOUSE — No. 1184.
41
It is true that legislation now pending in Congress
(Senate, No. 4412) provides for the creation of a Federal
Liquidating Corporation to undertake the liquidation of
any Federal Reserve member bank which hereafter may
be closed; and it iA also true that well-qualified judges
anticipate that this 'provision very likely will gain apent session of the Seventy-second
proval either in the prh;
Congress or in the first ession of the Seventy-third Congress. It must be obseked, however, that a large part
of the capital funds requAed for such a Federal corporation can be raised — and t is proposed that they shall
. be raised — in a manner n t applicable to any similar
enterprise which might be unched by the Commonwealth of Massachusetts for t e use of state banks. The
pending national legislation, 1 demanding that each of
the twelve Federal Reserve Ba ks should contribute to
the capital of a Federal Liquidating Corporation, at the
same time would give to the Reserve Banks liberal financial compensation by repealing certain taxes formerly
levied upon them, which many authorities contend never
should have been taken from them by the Federal government in the past. No similar compensation appears
readily within the gift of the Commonwealth in return
for subscriptions which state banks might be compelled
to make to a central liquidating corporation.
Moreover, the pending national legislation proposes
that a large contribution should be made to the Federal
Liquidating Corporation directly by the Treasury of the
United States. Legal though such a use of public funds
may be under the Federal Constitution, the employment
of public funds and credit for a central liquidating corporation would meet in this State a practically insuperable constitutional objection.
For all these reasons the Commission has reluctantly
concluded that it is not worth while to pursue this matter
further at the present time.
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Federal Reserve Bank of St. Louis
111
IF.
COMMONWEALTH OF MASS.-Report of Special Com. on Revision
f Laws relating to Trust Companies & Private Banks, and tc
the Liquidation of Banks--Lec. 1952
khul.
HOUSE — No. 1184.
42
Part II.
LAWS RELATING TO THE OPERATIO
PANIES AND PRIVATE-
T
KS.
ST COM—
KEEPING THE PRESENT STRUCTURE SOUND.
recent
It will not do to limit our consideration of the
ds
metho
e
emergency to a discussion of means to improv
of liquidation. To do so would be to deal only with
water that has already gone over the dam, whereas we
should take all steps which are presently possible to keep
more water from going over the dam, that is, to give
still further protection to the money of depositors in
open banks.
No act of the Legislature can prevent bank failures.
The essential requirement of sound banking is good management. Proper methods of administration cannot be
legislated into bank officers and directors. Another fact
deserves clear recognition just now. Banks which have
weathered the recent storm have passed a strong test
of their stability. Their management has successfully
withstood heavy strain, and has demonstrated its good
capacity. But this is not to say that economic conditions in general justify any relaxation of vigilance, or,
indeed, that conservation of the soundness of our banking
system does not require more than ever the close supervision of officials whose sole concern is in the public
interest; and to this end legislation can strengthen the
hands of the Bank Commissioner and make more effective
his regulation of banking management within the Commonwealth.
We therefore earnestly recommend the enactment of
legislation (1) to create a banking advisory board, and
(2) to improve the present system of examination.
A Proposed Banking Advisory Board.
The recent collapse of values and the attendant economic conditions affecting the banking structure have
added enormously to the responsibilities of the Commis-
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Federal Reserve Bank of St. Louis
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tA
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1933.]
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HOUSE — No. 1184.
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sioner of Banks. He is charged with the supervision of
800 institutions, having resources aggregating 1.4,000,000,000, and in addition he is now charged with the
direct operation and management of closed banks having assets amounting to approximately $100,000,000.
The evidence presented before the Commission shows
that the present Bank Commissioner and his assistants
have gone through the most trying period in the banking
history of our Commonwealth. For more than a year
the Commissioner and his central staff have been confronted with the necessity of working far beyond the
ordinary business hours and late into the night, attempting to stem disaster and shifting aid and assistance to
quarters which required support, in order to avert bank
closings wherever possible. In the face of every difficulty, the Commissioner has held unswervingly to the
line of duty; he has shown himself able in judgment and
energetic and conscientious in action. But no matter
what his merits, the Bank Commissioner, during such
periods of emergency and crisis as we have been passing
through, is subjected to an Inordinate strain not only
by the burden of the work itself, but also by the sharp
conflict of interests which always work for and against
any decision to close a bank, no matter what the conditions may be. Yet in all this confusion and overwork
the Massachusetts Commissioner has thus far been left
without any opportunity of official consultation with
persons capable of providing competent and disinterested
advice.
In this relation, still other rnatters must be considered.
It is not to be doubted that our economic system has
undergone extensive changes within the past four years,
and that other adjustments accordingly will be inevitable. The basis of values has changed considerably.
Subnormal values necessarily create a pressing demand
for expert opinion in the conduct of banks. In accepting
the responsibility for momentous decisions the Bank
Commissioner is entitled, this Commission believes, to
an official opportunity of consultation with a group of
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HOUSE — No. 1184.
[Jan.
men, subject to his call, who can give him the benefit of
their varied experience and co-ordinate their judgment
with his.
The Commission therefore recommends the appOintment of a board to be known as the banking advisory
board. The Commission does not propose that there
should be conferred upon this board the direct powers
which the Bank Commissioner now possesses. For the
sake of efficiency, economy and concise administration it
remains desirable that one man be the responsible head
of the Banking Department. The Commission's view is
that the proposed board should be so constituted that
the Commissioner may seek its advice in all important
matters which he may refer to it. - The members of the
board would not be expected to devote their entire time
to the work or to act upon all matters affecting the
Banking Department, but to devote only such time as
may be necessary to consider the questions laid before
it by the Bank Commissioner.
The proposed method of appointment and a statement of the specific powers which would be given the
board are set forth in a draft of legislation accompanying this report: As in the case of the Bank Commissioner, members of the advisory board also should be
granted immunity from civil and criminal liability in
connection with their acts, or failure to act, so long as
done in good faith.
The usefulness of such a board would not be limited,
it should be clearly understood, to times of emergency.
Even under normal economic conditions, perplexing
problems of policy constantly arise for decision in the
Banking Department. In some cases these involve
material interests, both public and private, of such
weight that the broadest possible basis of counsel and
experienced judgment should be sought regarding them
before a determination is reached. On every problem of
special perplexity the advisory board would be in a position to supply useful guidance. Moreover, it would permit the Commissioner to gain from time to time the
\
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Federal Reserve Bank of St. Louis
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pP
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HOUSE — No. 1184.
45
advantages of a deliberative review of any or all of the
major policies and practices regularly maintained by the
Banking Department.
The values which might so be won are substantial.
Important, urgently necessary, though it is to administer
well the affairs of banks which have closed, still more
important it is for the future that matters be so administered in Massachusetts that, to the limit of human
capacity, bank failures may be averted. With this end
in view the Commission believes that the creation of a
banking advisory board would be one of the most constructive steps that could be taken to strengthen the
state banking system. (For proposed legislation see
Appendix C-11.)
Examinations.
Another step that can be taken to protect further the
depositors in the going trust companies is in the matter
of examinations. Under the law as it stands, the Commissioner is required to direct in writing the discontinuance of any unsafe or unauthorized practice disclosed by
an examination, and, in case a trust company fails to
comply, he may make a report to the shareholders, or,
with the consent of the State Treasurer, Attorney Genral and Commissioner of Corporations, publish the facts.
n the effective administration of the law, however, the
omrnissioner is hampered in several respects. With
- 800 institutions under the Bank Commissioner's supervision, it is difficult for the Banking Department, even
ith the addition of eighteen temporary examiners by
uthority of the last Legislature, to make more than
arely enough examinations to cornply with the law's
requirement of an examination "once each year."
Examinations are handled by the Director of each
namely, the Trust Company, Savings Bank,
division,
I
Co-operative Bank and Credit Union divisions. These
directors are also charged with many matters of routine
in supervision and control, and accordingly are unable
to devote their concentrated efforts to examinations.
The necessity of the presence of these directors in the
\
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Federal Reserve Bank of St. Louis
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HOUSE — No. 1184.
[Jan.
rs of their
central office to conduct efficiently the affai
m to go
the
for
le
respective divisions makes it impossib
meetof
ose
to banks throughout the State for the purp
tive measures
ing officers and directors and taking effec
.
ions
inat
exam
to correct situations disclosed by
it
constituWe do not think it necessary, even were
case with a
tionally possible, to provide, as is now the
a bank officer
savings bank, a method for the removal of
we believe a
e
on petition to the Supreme Court, sinc
going so far.
reat improvement can be effected without
chief examie recommend the creation of the office of
ide that,
prov
to
' ner, and an amendment of the law
ssary, such
whenever the Commissioner deems it nece
of directors in
chief examiner shall present to a board
and shall fol,
oner
person the criticisms of the Commissi
sure that praclow up the examination report to make
tices complained of are corrected.)
d serve to
The appointment of a chief examiner woul
d neceswoul
co-ordinate the work of examinations, and
eto. This man
sarily accelerate all mdtters incident ther
ut the State
would be available to go to banks througho
, appear
oner
issi
as the direct representative of the Comm
emphasize and
before officers and boards of directors,
aled by examinafollow up defects or irregularities reve
efficient results.
tions, and thus obtain more speedy and
the Commissioner
He would be directly responsible to
would relieve the
and work under his direction. This
onally attending
pers
Commissioner of the necessity of
his time to that
to many of such matters, and thus free
of major importance.
extent for attention to other subjects
a position as chief
such
The man to be appointed to
ned in the methexaminer should be one thoroughly trai
various types of
ods of bank examinations, including the
s, co-operative
banks, — trust companies, savings bank
of making impresbanks and credit unions,—and capable
tion he holds
sive and effective the importance of the posi
for depositors.
in order to obtain the best results possible
ions do
The Commission is not unaware that examinat
s. But
not necessarily prevent irregularities or bad loan
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Federal Reserve Bank of St. Louis
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1933.]
HOUSE — No. 1184.
47
a thorough examination, actively and diligently followed
up, undoubtedly acts as a deterrent and frequently discloses irregularities in their early stages so that corrective
measures may be taken before wholesale wrong develops
or general disaster occurs.
With examination so administered under the direction
of the Commissioner, with the assistance of the chief
examiner, the policies and procedure could be amended
and improved as the banking advisory board advocated
by this Commission may from time to time recommend,
all with the paramount purposes of instilling strength into
the banking structure, preventing dissipation of assets,
and affording the utmost protection to the funds of depositors.
Independently of our own conclusions in this respect, it
has been called to our attention that the Commissioner,
in his budget requests for the coming year, has asked
for the creation of this new position. The Commission
expresses the hope that a sum sufficient to employ a
competent man to fill this position will be provided in
the executive budget and authorized by the Legislature.
(For proposed legislation see Appendix C-12.)
PROBLEMS OF THE FUTURE.
Both in the proposal of a banking advisory boar& and
in the plan to better the system of examinations, the
Commission has had in mind, as the foregoing discussion
has shown, not alone that part of its instructions from
the General Court which looks toward improvement of
the laws relating to liquidation, but also the larger field
of duty which the Legislature imposed upon the Commission, namely, to examine all the laws relating to
trust companies and to recommend such changes as will
assist their safe and successful operation.
The Corrunission was also instructed to consider the
laws relating to private banks, so called. In this matter
the task assigned was found to be very simple. Thanks
to the wisdom and foresight of the Legislature in adopting section 8 of chapter 182 of the Acts of 1929, every
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Federal Reserve Bank of St. Louis
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HOUSE — No. 1184.
[Jan.
monfinancial house then still operating in this Com
ve
recei
to
rity
autho
wealth as a private bank under the
the
of
169
ter
money for safe-keeping prescribed by chap
tion
General Laws was ordered to discontinue such opera
date,
on or before July 1, 1932. Accordingly, on that
n in
know
erly
the business of private banking as form
ed
limit
a
Massachusetts became extinct, save only for
on to
continuing right to receive money for transmissi
has
on
issi
Comm
foreign countries. On this account the
t
emen
stat
thought it needless to make any extended
nt
prese
concerning private banks in the body of the
tial
essen
the
of
w
revie
report, but offers in Appendix B a
facts.
of
Concerning the laws which regulate the operation
many
trust companies, the Commission has considered
Rel.
detai
of
suggestions, some of substance and some
duty
ary
garding bank management, the State has a prim
only to
ted
gran
are
ers
to see that new bank chart
osed
prop
The
competent applicants of high character.
deto
upon
banking advisory board may well be called
ase this asvise and recommend measures that will incre
er has
chart
bank
a
surance in Massachusetts. After
ent
ovem
impr
)been granted, many feel that subsequent
n, and that
in banking standards must come from withi
developed
and
lated
such an impetus can best be stimu
in groups
n
iatio
by further extending the principle of assoc
through volunlike the clearing house associations which,
s and methods
tary co-operation, develop higher standard
1 .
t Company
s
Trus
, in banking. Recently the Massachusett
ing the orAssociation has been very actively encourag
ers in each of
ganization of such groups among its memb
. Meanwhile,
alth
, the various sections of the Commonwe
nning in the
' the State of Wisconsin has made a begi
h divides all
same direction by adopting legislation whic
and stimuicts,
distr
e
of its territory into clearing hous
clearing house
lates membership by all state banks in the
y work under' associations thus formed. The voluntar
Association
any
Comp
taken by the Massachusetts Trust
cter.
might be assisted by legislation of similar chara
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Federal Reserve Bank of St. Louis
1
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
No. 10
5
DISEIURSEMENTS
Personal Service (salaries)
Contractual Service:
General Repairs
Traveling
Transportation
Communication
Printing
Other
$118,233 83
$7 57
40,462 36
33 26
5,615 74
2,979 67
2,938 06
$52,036 66
Supplies:
Office
Motor Vehicles
$970 98
353 72
$1,324 70
Equipment:
Office
Motor Vehicles
$1,821 81
896 81
$2,718 62
Fixed Charges and Contributions:
Insurance
Association dues
Security bond premituns
$97 40
50 00
486 54
$633 94
8174,947 75
Balance on hand June 30, 1935 (Carried over to fiscal year 1935-1936)
89,249 49
DIVISION OF BANKS AND TRUST COMPANIES
The rehabilitation of unrestricted banks has virtually been completed; the "restricted bank" period that followed the moratorium of
1933 is practically at an end in Indiana, and the liquidation of closed
banks is being carried on in an efficient manner as the second year of
operation of the Department of Financial Institutions comes to a close.
Five hundred ninety-two state-chartered banks and trust companies
were under the jurisdiction of the Department on June 29, 1935. Of
this number 427 were unrestricted, one bank was operating under a
restricted license and 40 were in voluntary liquidation. The remaining
124 banks were under the direct charge of the Department for liquidation.
UNRESTRICTED BANKS AND TRUST COMPANIES
The total of 427 unrestricted state-chartered banks and trust companies operating in Indiana at the end of the fiscal period represents
an increase of 27 over the same date the previous year.
These banking institutions are in better general condition than they
have been for many years. The consolidated balance sheets given in the
appendix show their assets to be remarkably liquid, and departmental
examination and supervision has been responsible for elimination of a
great proportion of the questionable assets from their investment and
loan portfolios. The Department has insisted that banks eliminate assets
revealed as losses in examiner's reports, and for this reason published
reports of condition of the banks come nearer showing the actual condition of assets.
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Federal Reserve Bank of St. Louis
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6
A year ago the Department was being criticized in some quarters
for being too drastic in its program of capital rehabilitation and asset
strengthening. Events have proved that this program was wholly justified. For the first time in more than ten years Indiana was practically
free of bank failures during the year ending June 29, 1935.
Only one unrestricted bank closed its doors during the fiscal period.
The Florence Deposit Bank of Florence, Indiana, was closed because of
defalcation by its cashier. All of the depositors were paid off immediately by the Federal Deposit Insurance Corporation, and since the time
of closing of the bank, the Corporation has been reimbursed fully from
the proceeds of liquidation. In a period of years when bank failures
have been prevalent, reaching a total of 82 in 1931, such a record is
deeply interesting to the people of Indiana.
The Commission for Financial Institutions, in which rests the power
of chartering new banks, is trying by a selective chartering policy to
keep the state from becoming'overbanked as it was during the twenties
when too many institutions were serving each community.
The Department during the year just closed has taken full cognizance of the overlapping and duplication which has developed in the
supervisory field since various Federal agencies have been created or
expanded in the emergency period since the moratorium. Banks are
the objects of demands for voluminous reports from these Federal agencies and State authorities. The increase in work required by the multiplication of called reports and examination from supervisory, tax, Reconstruction Finance Corporation, Federal Deposit Insurance Corporation, Federal Reserve and many other authorities is enormous and has
become such a burden on the average bank personnel that Federal and
State authorities throughout the country have taken official notice of
the necessity of remedying the condition.
At a conference in Washington during the summer of 1935 representatives of all Federal agencies concerned and of the National Association of Bank Supervisors, this problem of simplification of examining
and reporting requirements for banks was canvassed and a special committee to co-ordinate efforts toward relief for the financial institutions
was appointed. Because the Indiana Department had been a leader in
publicizing the need for such simplification to the nation, Herman B.
Wells was named chairman of this permanent committee. The group
now is endeavoring to solve in detail the problem of necessary co-operation between the various supervisory agencies involved. Banks throughout the nation probably will find some relief from the situation during
ensuing months.
Several of the Indiana Department's new policies adopted during
the year just closed were designed in part to reme4y the state's overlapping with Federal agencies in the matter of duplication of examining
and reporting of condition. The flexibility given the Department in the
matter of determining fees for bank examinations by the 1935 amendments to the Financial Institutions Act will allow greater leeway in
eliminating unnecessary routing examinations of the banks.( The Department already has inaugurated a plan whereunder examiner's reports
of each bank are reviewed thoroughly and many of the corrections
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
7
hitherto accomplished by examination only are completed by correspondence. This enables the Department to dispense with time-consuming
routine examinations, and to concentrate more of its effort on "problem"
banks. The resultant saving of time for bank executives by the elimination of unnecessary examinations is important as the pressure from
newer phases of bank management becomes greater with the increasing
problems brought on by changing financial conditions.)
The bankers of the state already are expressing appreciation of
these new co-operative efforts by the state's supervising authority. The
policies are based on the belief that the people of the state will best
be served by strong banks, efficiently managed, and critically but helpfully supervised with modern procedure.
In the matter of called reports the Department also is undertaking
to eliminate some of the complexities which overlapping authority of
Federal agencies and the cry for more stringent supervision by all authorities have caused. Steps have been taken with the Federal agencies
to modify the lack of uniformity in called reports. The special committee referred to above is working also to solve such problems.
A helpful step toward permanent strengthening of the banking
structure in the state is being undertaken. Under the amendments to
the 1933 Act, adopted by the 1935 legislature, "sound capital" was defined to include the proceeds from debentures. Two types of these debentures are now used widely by banks of the state for the purpose
of reconstructing their capital protection for deposits. One, the "A"
debentures, in general are those sold by banks to the Reconstruction
Finance Corporation and the other, "B" debentures, are sold to shareholders, depositors or others in local communities.
It has been the policy of the Department to encourage the use of
these debentures. Gradually the banks may develop capital structures
somewhat comparable to private industrial financing. The bank's common stock will compare with industrial common stock, having the controlling interest, and the proceeds of debentures will compare with the
bonds and preferred stock of industrial firms. This use of debentures
will permit elasticity of the capital structures, and will allow banks to
increase or decrease their capital structure (sound capital) in ratio to
deposit fluctuations.
Approximately ten million dollars was injected into Indiana bank
capital structures by the use of "A" and "B" debentures during the
fiscal period from July 1, 1933, to June 30, 1934. In addition, capital
structures were strengthened during this period by means of purchase
of undesirable assets by stockholders and directors and through voluntary contributions. During the past fiscal period additional debentures
in the amount of approximately five hundred thousand dollars were
used to rehabilitate the capital structure of restricted banks changing
to unrestricted licenses. The result of this use of debentures has been
so good that the "sound capital" amendment was projected and study
has been given to the permanent benefits which will accrue to the banking system from using debentures as a permanent factor in their capital
structures.
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Federal Reserve Bank of St. Louis
No. 10
8
The Federal government, stockholders, depositors and directors in
the banks and the communities at large all have participated heavily in
the reconstruction of the banks. The debentures constituted a large part
of the rehabilitation program, and it.was partly by means of purchasing "B" debentures that directors and depositors participated. Stockholders and directors also have purchased personally real estate and
other underirable assets. Various Federal agencies have taken the brunt
of real estate financing off the banks during the period.
The bank director, long a rather passive factor in bank management, has been made during the past year to realize more fully than
ever before his active duties and responsibilities. He has been a heavy
contributor to the rehabilitation program. Records of directors' attendance at meetings in banks over the state show vast improvement over
previous years. The number of directors has been reduced in many institutions and includes more nearly only those directors who are actually
effective in the management of the bank. Legislation can set up safeguards and can define the scope of the activities of banks but it remains
for the directors and active officers to determine the policies and make
decisions upon which banks stand or fall. Unless the trend towards
better management continues, the recent rehabilitation of banking institutions will not achieve the best possible results.
RESTRICTED BANKS
Only one restricted state bank remained in Indiana on June 29,
1935, in spite of the fact that during the past two years 132 banks
have been operating at one time or another under restrictions as to
withdrawal of deposits. (At present writing the one bank is operating without restrictions, having been granted an unrestricted license in
July, 1935.)
The rapid clearing up of the "restricted bank" situation has come
as a result of co-operation between the Department, which supervised
the rehabilitation, and stockholders, depositors and directors in the banks
and the Federal agencies. In spite of this close co-operation, only seventy of the banks were opened; sixty-one were unable to effect a suitable rehabilitation program and were forced to close.
Of the thirty-six banks that were operating under restricted licenses on July 1, 1934, and one which was restricted after that date,
twenty have been reopened, fifteen have been closed, and one remained
in the restricted classification at the end of the period.
Over one-half of the deposits in the restricted banks that were
opened during the year have been released. Of the total of more than
eight million dollars once frozen in these banks, approximately three
million dollars of the remaining deposit liability was used to purchase
inadmissible assets of reorganized institutions, which assets were trusteed
for the benefit of the depositors who received from the trustees participation certificates in lieu of their impounded deposits. In addition approximately eight hundred thousand dollars was used to rehabilitate
the capital structures of banks.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
137
SCHEDULE 0 (Continued)
Fort Wayne-Jacob Sunshine, D/B/A Leo's Loan Office, 1410 Calhoun St.
Gary—
Gary Loan & Mercantile Company, Inc., 1550 Broadway.
Gary Loan & Mercantile Company, Inc., 1004-6 Broadway.
Sam's Loan Shop, 1604 Broadway.
Star Jewelers, Inc., 704 Broadway.
Hammond—
Hammond Loan Company, 125 State St.
Charles J. Lessor, 453 State St.
Indiana Harbor—
M. W. Tepper, 3528 Main St.
Indianapolis—
Bloom's Money Loan Office, 229 E. Washington St.
Isaac Bremen, 304 W. Washington St.
Chicago Jewelry Company, Inc., 146 E. Washington St. (S).
City Loan Company, Inc., 364 Indiana Ave.
Eagle Loan Office, 326 Indiana Ave.
Estates Loan Company, 505 Majestic Bldg. (S).
Louis Fogel, D/B/A Lew's Loan Offim 504 Indiana Ave.
Indianapolis Public Welfare Loan Association, 330 Occidental Bldg. (S).
Edith I. Werner, D/B/A Jack's Loan Office, 234 Indiana Ave.
M. Olshcwitz, D/B/A Joseph's Loan Office, 200 Indiana Ave.
Liberal Loan Company. 152 N. Delaware St. (S).
Lincoln Jewelry & Loan Compasy, 201 W. Washington St.
Wm. & Theodore Medias, 506-508 Indiana Ave. (S).
Oscar Tavel, D/B/A Oscar's Loan Company, 356 Indiana Ave.
Sacks Bros. Loan Office, 308 Indiana Ave. (S).
Sussman's State Loan Office, 239 W. Washington St. (S).
Lafayette-Earl M. Nieewa.nder, 301 Columbia St.
F. M. Wood, 22 N. Fourth St. (S).
Marion-Marion Loan Company, 206-Z07 Iroquois Bldg. (S).
Muncie-Davis Jewelry Company, 509 S. Walnut St.
The Indiana Loan Company, 357 Johnson Block (S).
New Albany—
Alex Palmer, 141 E. Main St.
Terre Haute-Ben Becker, D/B/A Peoples Jewelry & Loan Company, 322 Wabash Ave.
Sam H. Sterchi, D/B/A Sam's Personal Loans, 307 Wabash Ave.
Morris's Pawn Shop, 304 Wabash Ave.
NoTE: (S) indicates Small Loan License as well as Pawnbroking.
REGULATIONS AND GENERAL ORDERS OF THE COMMISSION
FOR FINANCIAL INSTITUTIONS
BANK REGULATION NUMBER 5
PUBLICATION OF FINANCIAL STATEMENTS
Whereas, Chanter 40 of the Acts of t'ne General Assembly of the
State of Indiana for 1933, entitled "An Act Concerning Financial Institutions," approved February 24, 1933, became effective in its entirety on
July 1, 1933, and is now in full force and effect, and
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Federal Reserve Bank of St. Louis
No. 10
138
Whereas, Section 10 of said Indiana Financial Institutions Act provides as follows, to wit:
"The department is hereby authorized, by a majority vote of the
members of the commission, to make, promulgate, alter, amend or repeal
rules and regulations for any or all of the following enumerated purposes:
"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any financial institution to which this act is applicable.
"(d) For the establishment of safe and sound methods for the
transaction of business by such financial institutions and for safeguarding the interests of depositors, creditors and shareholders respecting the
withdrawal of funds in time of emergency. * * *"
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority conferred upon it by law, and by unanimous
vote of the members of the Commission for Financial Institutions, does
hereby make, promulgate and publish the following regulation with
respect to publication of information relative to condition of state banks
and/or trust companies.
1. No financial institution of the State of Indiana, required to publish a statement of assets and liabilities upon notice from the Department, shall publish or circulate any other or different statement unless
the total of resources of such financial institution and the capital account thereof as given by such other published statement shall be the
same as that given in such official published notice required by said
Department.
2. This regulation shall be in full force and effect from and after
the 1st day of September, 1934, and shall remain in effect until modified, rescinded or repealed by subsequent regulation.
Witness, my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 24th
day of August, 1934.
BANK REGULATION NUMBER 6
PAYMENT OF INTEREST ON DEPOSITS
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana, 1933, became effective July 1st, 1933,
and is now in full force and effect, and
Whereas, Section 10 (c) of said The Indiana Financial Institutions
Act is as follows, to wit:
Sec. 10. Rules and Regulations. The department is hereby authorized, by a three-fourths vote of the members of the commission, to make,
promulgate, alter, amend or repeal rules and regulations, for any or all
of the following enumerated purposes:
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
1 :3!)
"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any financial institution to which this act is applicable," and
Whereas, the Federal Banking Act of 1933 (Glass-Steagall Act)
is now in full force and effect, and under the provisions of said act the
Federal Reserve Board has issued regulations pertaining to the payment of deposits and interest thereon by member banks of the Federal
Reserve System, and under an amendment to Regulation Q of the Federal Reserve Board, the effective date of which is February 1, 1935, on
the subject of payment of deposits and interest thereon by member
banks, it is provided that the rate of interest to be paid by such member
bank shall not in any case exceed either the maximum rate prescribed
in such amendment to Regulation Q or the maximum rate authorized
by law to be paid upon deposits by state banks or trust companies
organized under the laws of the state in which such member bank is
located, whichever may be less,
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority conferred upon it by law, and by unanimous
vote of the members of the Commission for Financial Institutions, does
hereby make and promulgate the following regulation with respect to
the payment of deposits and interest thereon by any state bank and/or
trust company; such regulations being made, and promulgated to define
a safe manner and safe condition of transacting business by all state
banks and/or trust companies of the State of Indiana, and any violation
hereof shall be and constitute an unsafe manner and unsafe condition
of transacting the business of such state banks and/or trust companies.
(SECTION 1. DEPOSITS PAYABLE ON DEMAND.)
(a) Interest Prohibited. Except as hereinafter stated, no state
bank and/or trust company shall, directly or indirectly, by any device
whatsoever, pay any interest on any deposit which is payable on demand.
(b) Exceptions. This prohibition does not apply to:
(1) Any deposit made by a mutual savings bank.
(2) Any deposit of public funds made by or on behalf of any
state, county, school district, or other subdivision or municipality, with
respect to which payment of interest is required under state law.
(3) Payment of interest in accordance with the terms of any certificate of deposit or other contract which was lawfully entered into in
good faith before December 22, 1934, and in force on that date and
which may not be terminated or modified by such bank at its option or
without liability; but no such certificate of deposit or other contract
may be renewed or extended unless it be modified to eliminate any provision for the payment of interest on deposits payable on demand; and
every state bank and/or trust company shall take such action as may
be necessary, as soon as possible consistently with it contractual obligations, to eliminate from any such certificate of deposit or other contract
any provision for the payment of interest on deposits payable on demand.
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(SECTION II. INTEREST ON TIME DEPOSITS)
(a) Time Deposits. The term "time deposits," for the
purposes
of this section, includes "time certificates of deposit," "time
deposits,
open accounts," and "postal savings deposits," as defined below.
(1) Time Certificates of Deposit. The term "time certificat
e of
deposit" means an instrument evidencing the deposit with a bank
of a
certain sum specified on the face of the instrument payable to
bearer
or to any specified person or to his order.
(I) On a certain date, specified in the instrument, not less
than
30 days after the date of the deposit, or
(II) At the expiration of a certain specified time subsequent to
the
date of the instrument, in no case less than 30 days, or
(III) Upon notice in writing which is actually required to
be
given a certain specified number of days, not less than 30 days,
before
the date of repayment, and
(IV) In all cases only upon presentation and surrender of the
instrument.
(2) Time Deposits, Open Accounts. The term "time deposits, open
accounts" means deposits, other than "time certificates of deposit,"
"postal savings deposits," and "savings deposits," in respect to which
a written contract has been entered into with the depositor at the time
the deposit is made that neither the whole nor any part of such deposit
may be withdrawn, by check or otherwise, prior to the date of maturity,
which shall be not less than 30 days after the date of the deposit, or
on written notice which must be given by the depositor a certain specified number of days in advance, in no case less than 30 days.
(3) Postal Savings Deposits. The term "postal savings deposits"
means deposits in banks which consist of postal savings funds deposited
under the terms of the Postal Savings Act, approved June 25, 1910, as
amended by the Banking Act of 1933, and which comply with the requirements of paragraph 1 or 2 of this subsection.
(b) Payment of Interest. Except in accordance with the provisions of this section, no state bank and/or trust company shall pay
interest on any time deposit in any manner, directly or indirectly, or
by any method, practice or device whatsoever.
(c) Maximum Rate of Interest.
(1) No state bank and/or trust company shall pay interest, accruing after February 1, 1935, on any time deposit or any part thereof
at
a rate in excess of 21
/
2 per cent per annum, compounded quarterly, regardless of the basis upon which such interest may be computed,
except
as otherwise provided in paragraph (2) hereof.
(2) A state bank and/or trust company may pay interest
on
time deposits in accordance with the terms of any certificate of
deposit or other contract which was lawfully entered into in good faith
prior to December 22, 1934, and in force on that date and which may not
legally be terminated or modified by such bank at its option or 'without
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liability; but no such certificate of deposit or other contract shall be
renewed or extended unless it be modified to conform to the provisions
of this regulation, and every state bank and/or trust company shall
take such action as may be necessary as soon as possible consistently
with its contractual obligations, to bring all such certificates of deposit
or other contracts into conformity with the provisions of this regulation.
(3) A state bank and/or trust company may pay interest on a
time deposit received during the first five days of any calendar month
at the maximum rate prescribed in paragraph 1 of this subsection
calculated from the first day of such calendar month until such deposit
is withdrawn or ceases to constitute a time deposit under the provisions
of this regulation, whichever shall first occur.
(d) Deposits Payable Within Thirty Days. Interest at a rate not
exceeding that prescribed in subsection (c) of this section may be paid
until maturity upon deposits which were bona fide time deposits at the
time of deposit, although they have since become payable within 30
days. On time deposits with respect to which notice of withdrawal shall
have been given to the bank interest may be paid until the expiration of
the period of such notice at a rate not exceeding that prescribed in subsection (c) of this section. No interest shall be paid by a state bank
and/or trust company on any amount which, by the terms of any
certificate or other contract or agreement or otherwise, the bank may
be required to pay within 30 days from the date on which such amount
is deposited in such bank.
(e) No Interest After Maturity or Expiration of Notice. After
the date of maturity of any time deposit, such deposit is a deposit
payable on demand, and no interest may be paid on such deposit for
any period subsequent to such date. After the expiration of the period
of notice given with respect to the repayment of any time deposit, such
deposit is a deposit payable on demand and no interest may be paid on
such deposit for any period subsequent to the expiration of such notice.
(SECTION III. PAYMENT OF TIME DEPOSITS BEFORE
MATURITY)
(a) No state bank and/or trust company shall pay any time deposit except in accordance with the provisions of this section, even
though no interest is paid on such deposit.
(b) No state bank and/or trust company shall pay any time deposit, which is payable on a specified date, before such specified date.
(c) No state bank and/or trust company shall pay any time deposit, which is payable at the expiration of a certain specified period,
before such specified period has expired.
(d) No state bank and/or trust company shall pay any time deposit, with respect to which notice is required to be given a certain
specified period before any withdrawal is made, until such required notice
has been given and the specified period thereafter has expired.
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(SECTION IV. INTEREST ON SAVINGS DEPOSITS)
(a) Definition.—The term "savings deposit" means a deposit
which
consists of funds accumulated for bona fide thrift purposes and in
respect
to which—
(1) The pass book or other form of receipt, evidencing such
deposit, must be presented to the bank whenever a withdrawal
is made.
(2) The depositor is required, or may at any time be
required,
by the bank to give notice in writing of an intended withdraw
al not less
than 90 days before a withdrawal is made, and
(3) The above requirements are included in the bank's
printed
regulations accepted by the depositor or in some other written
contract
with the depositor.
(b) Payment of Interest.—Except in accordance with the
provisions of this section, no state bank and/or trust company shall pay
interest on any savings deposit in any manner, directly or indirectly
, or
by any method, practice, or device whatsoever.
(c) Maximum Rate of Interest.
(1) No state bank and/or trust company shall pay
interest,
accruing after February 1, 1935, on any savings deposit
or on any part
thereof at a rate in excess of 2% per cent per annum,
compounded
quarterly, regardless of the basis upon which such interest
may be computed, except as otherwise provided in paragraph (2) hereof.
(2) A state bank and/or trust company may pay interest on
savings deposits in accordance with the terms of any contract, which
was lawfully entered into in good faith prior to December 22, 1934, and
in force on that date and which may not legally be terminated or modified by such bank at its option or without liability; but no such contract
shall be renewed or extended unless it be modified to conform to the
provisions of this regulation, and every state bank and/or trust company shall take such action as shall be necessary, as soon as possible
consistently with its contractual obligations, to bring all such contracts
into conformity with the provisions of this regulation.
(3) A state bank and/or trust company may pay interest on a
savings deposit received during the first five days of any calendar month
at the maximum rate prescribed in paragraph 1 of this subsection
calculated from the first day of such calendar month until such deposit
is withdrawn or ceases to constitute a savings deposit under the provisions of this regulation, whichever shall first occur.
(d) Deposits Upon Which Notice of Withdrawal Is Not Given.—
Interest at a rate not exceeding that prescribed in subsection (c) of
this section may be paid upon savings deposits as defined above with
respect to which notice of intended withdrawal has not actually been
required or given.
(e) Deposits Upon Which Notice of Withdrawal Ha,s Been Given.
—Interest at a rate not exceeding that prescribed in subsection (c) of
this section may be paid upon savings deposits, with respect to which
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Institutions of the State of Indiana (1935)
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notice of intended withdrawal may have been given to the bank, until
the expiration of the period of such notice.
(f) No Interest After Expiration of Period of Notice.—After the
expiration of the period of notice given with respect to the intended
withdrawal of any savings deposit, such deposit is a deposit payable on
demand and no interest may be paid on such deposit for any period
subsequent to the expiration of such notice, unless the owner of such
deposit advise the bank in writing that the deposit will not be withdrawn pursuant to such notice or that the deposit will thereafter again
be subject to the requirements applicable to savings deposits, in which
event the deposit again constitutes a savings deposit after the date
upon which such advice is received by the bank.
(SECTION V.
NOTICE OF WITHDRAWAL OF SAVINGS
DEPOSITS.)
(a) A state bank and/or trust company must observe the requirements set forth below in requiring notice of intended withdrawal of
any savings deposit, or in waiving such notice, or in repaying any savings deposit, or part thereof, without requiring such notice, whether
such notice of intended withdrawal is required to be given in each case
by the terms of the bank's contract with the depositor or may, under
such contract, or by the terms of the Indiana Financial Institutions
Act, be required by the bank at any time at its option.
(1) If a state bank and/or trust company waive such notice of
intended withdrawal as to any portion or percentage of the savings
deposits of any depositor, it shall waive such notice as to the same portion or percentage of the savings deposits of every other depositor which
are subject to the same requirement.
(2) If a state bank and/or trust company pay any portion or
percentage of the savings deposits of any depositor, without requiring
such notice, it shall, upon request and without requiring such notice,
pay the same portion of percentage of the savings deposits of every
other depositor which are subject to the same requirement.
(3) If a state bank and/or trust company require such notice before the payment of any portion or percentage of the savings deposits
of any depositor, it shall require such notice before the payment of
the same portion or percentage of the savings deposits of any other
depositor which are subject to the same requirement.
(b) No state bank and/or trust company shall change its practice
with respect to the requiring or waiving of notice of intended withdrawal of savings deposits except after duly recorded action of its board
of directors or of its executive committee properly authorized, unless so
ordered by the Department of Financial Institutions of the State of
Indiana, and no practice in this respect shall be adopted which does not
conform to the requirements of paragraphs 1, 2 or 3 of subsection (a)
of this section.
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(c) No change in the practice of a state bank and/or trust company with respect to the requiring or waiving of notice of intended
withdrawal of savings deposits subject to the same requirements shall be
made unless ten days' notice thereof shall have been given by posting
of such regulation, or change in some conspicuous place in the room
where the savings de,posit business of such state bank and/or trust company is transacted unless such change or regulation shall be upon an
order of the Department of Financial Institutions of the State of
Indiana.
(d) A state bank and/or trust company must observe the requirements of this section with respect to savings deposits even though no
interest be paid on such deposits.
This regulation shall be in full force and effect from and after the
close of business on January 31st, 1935, and shall remain in effect until
modified, rescinded or repealed by subsequent regulation.
Bank Regulation No. 3 of the Department of Financial Institutions
of the State of Indiana issued under date of October 26, 1933, is hereby
rescinded and repealed effective January 31st, 1935, and upon the taking
effect of this regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 19th
day of December, 1934.
ADDENA
The following interpretations of Regulation No. 6 are hereby furnished to all state banks and/or trust companies organized and doing
business under the statutes of the State of Indiana, to aid them in their
practice and operation of their banks under said regulation:
Ruling 1. Payment of Deposits' Tax
The Department of Financial Institutions does not regard and will
not construe the payment of the tax on bank deposits under Chapter
83 of the Acts of the General Assembly of the State of Indiana, 1933,
approved February 28, 1933, as a violation of any section of said Regulation No. 6; The department being of the opinion that such payment of
tax is a legitimate operating expense and is paid in lieu of a property
tax heretofore imposed upon such bank and/or trust company. It is
not regarded as a subterfuge, method, or device for the payment of
interest, all depositors being treated in exactly the same manner.
Ruling 2. Payment of Interest on Public Funds
Deposits of money paid in to state court by private parties pending
the outcome of litigation are not deposits of "public funds" made by or
on behalf of any state, county, school district or other subdivision or
municipality within the meaning of the provision of Section 1 (b) (3).
This ruling also applies to the deposits of the so-called "Clerk's Trust
Funds" by the various clerks of state courts in the State of Indiana.
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Ruling 3. Computation of Reserves
A certificate of deposit with respect to which the bank merely reserves the right to require written notice of not less than 31 days,
may be classified as a time deposit for the purpose of computing reserves; but interest may not be paid on such a certificate of deposit,
because it is in fact payable on demand unless prior to such payment
the notice of not less than 30 days is actually required, and because
the prohibition in Regulation No. 6 upon the payment by a state bank
and/or trust company of any time deposit before its maturity clearly
contemplates that time deposits (other than savings deposits), upon
which interest is payable, must have a definite maturity for at least 30
days prior to payment.
Where any state bank and/or trust company has made a deposit
with a correspondent bank, such deposit being payable on a certain date
not less than 30 days after the date of the deposit, or being payable upon
notice in writing which is actually required to be given a certain specified number of days, not less than 30 days, before the date of repayment,
such deposit may be used in computing the cash means of such state
bank and/or trust company but shall not be considered or used in the
computation of the cash reserve of such state bank and/or trust company under Sections 207 and 210 of the Indiana Financial Institutions
Act.
A deposit, with respect to which the bank merely reserves the right
to require notice of not less than 31 days before any withdrawal is made
is not a "time deposit, open account," within the meaning of the definition of such time deposit, open account.
Ruling 4. Payment of Time Deposits Before Maturity
The making of a loan to the owner of a time deposit in a state bank
and/or trust company by such bank or trust company, or by any other
bank, person, partnerships or corporation in accordance with any agreement, arrangement or understanding with such bank or trust company,
for the purpose of evading any prohibition of Section III of Regulation
No. 6, will, to the extent of such loan, be deemed to be a payment of
such deposits in violation of such prohibition; and, in any case in
which a loan is made to the owner of a time deposit in any state bank
and/or trust company by such bank and/or trust company, or in accordance with any agreement, arrangement or understanding with such bank
and/or trust company, the said state bank and/or trust company must
be prepared to show clearly that it was made in good faith and not
for the purpose of evading any such prohibition.
Ruling 5. Computation of Interest
The words "compounded quarterly" appearing in Section II, (3)
(c) (1) and Section IV, (c) (1) of Regulation No. 6 is not to be interpreted as preventing the compounding of interest at other than
quarterly intervals provided that the aggregate amount of such interest
so compounded does not exceed the aggregate amount of interest at the
rate prescribed in said sections when compounded quarterly.
10-60089
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Ruling 6. Interpretation of Savings Deposits
Where under Section IV of Regulation No. 6, by reason of the
amount of the deposit, the business of the depositor or otherwise, a
question arises whether a deposit is properly classified by a bank and/or
trust company as a savings deposit, the said bank and/or trust company
must be prepared to show clearly that it is a deposit consisting of funds
accumulated for bona fide thrift purposes and that it otherwise complies with the definition as set out in clause (a) of Section IV of said
Regulation No. 6.
Ruling 7. Loans on Savings Deposits
The making of a loan to the owner of a savings deposit in any
state bank and/or trust company by such bank and/or trust company,
or by any other bank, person, partnership or corporation, in accordance with any agreement, arrangement or understanding with such bank
and/or trust company, for the purpose of evading any requirement of
Section V of Regulation No. 6 will, to the extent of such loan, be
deemed to be a payment of such deposit or waiver of notice with respect
thereto in violation of the requirements of such Section V; and, in any
case in which a loan is made to the owner of a savings deposit in any
state bank and/or trust company by such bank and/or trust company
or in accordance with any agreement, arrangement or understanding
with such bank and/or trust company, said state bank and/or trust
company must be prepared to show clearly that such loan was made in
good faith and not for the purpose of evading any requirement of
said Section V.
Ruling $. Dividends by Mutual Savings Banks
Your attention is called to the fact that this regulation applies to
any "savings bank organized under any statute of the State of Indiana."
Section 10 of the "Indiana Financial Institutions Act" applies to
mutual savings banks as well as all other financial institutions of the
State of Indiana as defined in Section 3 (a) of such act.
The Department of Financial Institutions of the State of Indiana
will regard the payment of dividends by such mutual savings banks as
the payment of interest on time deposits and any dividend allowed or
paid in excess of the maximum interest rate established in Regulation
No. 6 will be regarded as a violation of such regulation.
BANK REGULATION NUMBER 7
REQUIREMENTS UNDER SUBSECTION (D) OF SECTION
186
AS ANIENDED
Whereas, The Indiana Financial Institutions Act approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana of 1933, became effective July 1, 1933,
and is now in full force and effect, and
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Whereas, Section 186 of the said Act was amended by the Act of
the General Assembly of the State of Indiana approved January 28,
1935, which amendatory act is now in full force and effect, and
Whereas, the said Section 186 as amended now reads in part as follows, to wit:
"Sec. 186. Every bank or trust company shall invest any and all
money now held or hereafter received by it in any fiduciary capacity
in the following classes of property, but no other:
"(d) Bonds or notes rated in one of the first three classifications
established by one or more standard rating services to be specified
by the department and which satisfy such requirements of marketability
as may be prescribed from time to time by the department which are the
obligations of a corporation whose average yearly net earnings for the
three years immediately preceding the purchase have been at least two
times the interest requirements on all debts of the corporation after
depreciation."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
acts and by unanimous vote of the members of the Commission for Financial Institutions does hereby make and promulgate the following
regulation with respect to Subsection (d) of Section 186 of the Indiana
Financial Institutions Act as so amended as follows, to wit:
Section 1. The following standard rating services are hereby specified by the department for use under and pursuant to the terms of the
provision of Subsection (d) of said Section 186:
(a) Moody's Investors Service.
(b) Standard Statistics Company.
(c) Fitch Investors Service.
Sec. 2. The following requirements of marketability are hereby
prescribed by the department as applying to investments made pursuant
to the authority given in Subsection (d) of said Section 186, to wit:
Any such security must have a broad market, and to insure this it
must be of an issue large enough in the aggregate to be generally known
to bond and investment houses throughout the State of Indiana. An
issue may be regarded as meeting this requirement if
(a) It is listed or traded in on either the New York Stock Exchange or the New York Curb Exchange.
(b) If it is not so listed it must be part of a total issue outstanding of not less than $500,000.00 aggregate amount and it must be
quoted regularly by services or agencies generally recognized by bond
houses in the State of Indiana.
The department will regard such services or agencies as including
among others the following: "Bond and Quotation Record" issued
monthly as a special section of the "Commercial and Financial Chronicle." This is a service which may be subscribed to by the public
generally. Other such services recognized by the department and which
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are available to dealers only are "National Quotation Bureau" and
"Standard Satistics, Inc.," each of which publish a monthly hound
volume of listings and quotations.
This regulation shall be in full force and effect from and after the
close of business on the 25th day of Niarch, 1935, and remain in effect
until modified, rescinded or repealed by subsequent regulation.
Witness my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 25th
day of March, 1935.
BANK REGULATION NUMBER 8
REQUIREMENTS FOR AND RESTRICTIONS UPON THE MAKING OF MORTGAGE
LOANS BY BANK AND TRUST COMPANIES UNDER TITLE II, OF THE
NATIONAL HOUSING ACT
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana of 1933, became effective July 1, 1933,
and is now in full force and effect, and
Whereas, Section 172 of the said Act was amended by the Act of the
General Assembly of the State of Indiana, approved January 28, 1935,
which amendatory act is now in full force and effect, and
Whereas, the said Section 172, as amended, now reads in part as
follows, to wit:
"(b) Subject to such regulations as may be prescribed by the
Federal Housing Administrator acting pursuant to the Act of Congress
entitled 'National Housing Act,' approved June 27, 1934, and to such
regulations as the department finds to be necessary and proper, any
bank or trust company shall have the following powers:
(1) To make such loans and advances of credit and purchases of
obligations representing loans and advances of credit as are eligible for
insurance pursuant to Title I, Section 2 of such National Housing Act
and to obtain such insurance.
(2) To make such loans secured by mortgages on real property or
lease-hold, as the Federal Housing Administrator insures or makes a
commitment to insure pursuarrt to Title II of such National Housing
Act and to obtain such insurance.
(3) To purchase, invest in and dispose of securities issued by the
administrator under Title II, Section 204, of such National Housing
Act, or by other similar federal credit institutions now or hereafter
organized."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
acts and by unanimous vote of the members of the Commission for
Financial Institutions does hereby make and promulgate the following
regulation with respect to loans secured by mortgages on real property
made by banks and trust companies under Title II of the National
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Housing Act, pursuant to the authority granted in said Subsection (b)
of Section 172 of the Indiana Financial Institutions Act as so amended,
as follows, to wit:
Section 1. The making of loans, secured by mortgages on real
property, by banks and trust companies in the State of Indiana, pursuant
to the authority granted in Subsection (2) of Subsection (b) of Section
172 of the Indiana Financial Institutions Act, as amended, except as
hereinafter provided, shall be subject to the following restrictions, to wit:
(a) Any such loan shall not exceed fifty per cent (50%) of the
cash value of the real estate offered for security, as determined pursuant
to Section 201 of the Indiana Financial Institutions Act, unless it shall
clearly appear to,the board of directors of the bank or trust company,
and the board of directors shall so find and insert in the minutes of
the meeting at which such loan is granted, that the proposed borrower
is otherwise entitled to the amount of the excess credit requested over
and above the said fifty per cent (50%) of the value of the mortgage
security offered aside from the security itself. All such loans shall
be subject to the general limitations prescribed in Section 196 of the
Indiana Financial Institutions Act as amended by the Act of January
28, 1935.
(b) The total aggregate amount of loans secured by mortgages on
real property, made pursuant to Subsection (2) of Subsection (b) of
Section 172 of the Indiana Financial Institutions Act, as amended,
and/or of securities purcfiased or invested in pursuant to Subsection (3)
of Subsection (b) of said Section 172, held by any bank or trust company at any one time, shall not exceed five per cent (5%) of its deposits of all kinds.
(c) The foregoing limitations (a) and (b) shall not apply to the
renewal or refinancing through the Federal Housing Administration,
of any loan now existing and owned by any state bank or trust company if such loan is not increased and is renewed or refinanced with
the same mortgagee which now owns the same; nor shall it apply to
mortgages taken in good faith to secure debts previously contracted.
This regulation shall be in full force and effect from and after the
close of business on the 31st day of March, 1935, and remain in effect
until modified, rescinded or repealed by subsequent regulation.
Witness my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 12th
day of April, 1935.
SPECIAL REGIONAL BANK REGULATION NUMBER 1
REGIONAL REGULATION APPLYING TO GRANT COUNTY AND VICINITY
Scope of Regulation.
This regulation relates to the establishment of a system of metered
service charges and shall apply to all banks and/or trust companies,
banks of discount and deposit, private banks, loan and trust and safe
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deposit companies, trust companies, or savings banks organized under
any statute of the State of Indiana (all hereinafter referred to as "any
state bank and/or trust company") which said state banks and/or trust
companies are located in Grant County, State of Indiana, and the following incorporated towns in the State of Indiana, to wit: Warren, Huntington County; LaFontaine, Wabash County; Converse and Amboy,
Miami County; and Greentown, Howard County, and/or such state
banks and/or trust companies located in additional adjacent areas and/or
incorporated towns such as may be hereafter designated by the Commission for Financial Institutions.
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana, 1933, became effectiVe July 1st, 1933,
and is now in full force and effect, and
Whereas, Section 10 (c) of said The Indiana Financial Institutions Act is as follows, to wit:
"Sec. 10. Rules and Regulations. The department is hereby authorized, by a three-fourths vote of the members of the commission, to make,
promulgate, alter, amend or repeal rules and regulations, for any or
all of the following enumerated purposes:
"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any
financial institution to which this act is applicable," and
Whereas, all of the state banks and/or trust companies located in
the said county of Grant, State of Indiana, as well as all of the national banks located in said county and the national bank located at
Converse in Miami County have heretofore entered into a mutual agreement to put into effect as of December 1, 1934, the schedule of metered
service charges hereinafter set out, and whereas it appears to the
Commission for Financial Institutions that the other areas included in
the scope of this regulation are competitive areas with such state banks
and/or trust companies and national banks which have heretofore entered into such mutual agreement,
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority conferred upon it by law and by unanimous
vote of the members of the Commission for Financial Institutions, does
hereby make and promulgate the following regulation with reference
to the establishment of a system of metered service charges by any state
bank and/or trust company within the prescribed area; such regulation
being made and promulgated to define a safe manner and safe condition
of transacting business by such state banks and/or trust companies,
and any violation hereof shall be and constitute an unsafe manner and
unsafe condition of transacting the business of such state banks and/or
trust companies.
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SECTION ONE
PART 1
The following schedule of metered service charges for various services rendered or to be rendered by the said state banks and/or trust
companies located in the above described area within the scope of this
regulation is hereby prescribed, to wit:
Par. 1. CHECKING ACCOUNTS.
For
(a) all such state banks and/or trust companies located in said
area the following scale of minimum charges shall apply:
Short Analysis (See Appendix)
Checks or Debits
Average Balance
Basic Charge Permitted Each Mo.
Less than $50
500
5
$50 to $99.99
None
5
$100.00 to $199.00
None
10
None
15
$200.00 to $299.00
None
20
$300.00 to $399.99
None
25
$400.00 to $499.00
Additional checks or debits at 30 each.
(No charge if no checks or debits are paid by bank during the
month, except as provided in Dormant Maintenance Charge Regulations
in Paragraph 4 following.)
Long Analysis (See Appendix)
(Accounts $500.00 and over, or depositing or cashing many checks.)
Average daily ledger balance.
Less 25% Cash Reserves.
Less Float (average daily uncollected).
Accountancy allowance on available balance at 6% per annum.
LESS EXPENSES
10 for each local clearing house check or P. O. money order deposited
or cashed.
21
/
20 for each out-of-town check deposited or cashed.
30 for each customer's own check, receipt, debit or payroll order
paid by or "thru" the bank.
30 for each deposit in excess of 50 during month.
Not less than actual cost of check imprinting, if any.
Exchange charges for drafts, etc., purchased.
Bond and Coupon collection charges, if any.
The excess of account-expenses over accountancy allowances shall
be assessed as a monthly service charge. Each checking account shall
be analyzed and charged individually.
Note: The service charge shall be whichever is the greater, whether
figured on the "short analysis" or "long analysis" basis.
(b) For banks or groups of banks classified as "city Banks" in
sub-paragraph "e" hereof, the following scale of MINIMUM charges
shall apply:
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Short Analysis (See Appendix)
Checks or Debits
Average Balance
Basic Charge Permitted Each Mo.
Less than $100.00
$1.00
10
$100.00 to $199.99
.50
10
$200.00 to $299.99
None
10
$300.00 to $399.99
None
15
$400.00 to $499.99
None
20
Additional checks or debits at 5¢ each.
(No charge if no checks or debits are paid by bank during the month,
except as provided in Dormant Maintenance Charge Regulation in Paragraph 4 following.)
Long Analysis (See Appendix)
(Accounts $500 and over, or depositing or cashing many checks.)
Average daily ledger balance.
Less 25% cash reserves.
Less Float (average daily uncollected).
Accountancy allowance on available balance at 6% per annum.
LESS EXPENSES
1¢ for each local clearing house check or P. O. money order deposited or cashed.
3¢ for each out-of-town check deposited or cashed.
4¢ for each customer's own check, receipt, debit or payroll order
paid by or "thru" the bank.
4¢ for each deposit in excess of 50 during month.
Not less than actual cost of check imprinting, if any.
Exchange charges for drafts, etc., purchased.
Bond and Coupon collection charges, if any.
The excess of account-expenses over accountancy allowances shall
be assessed as a monthly service charge. Each checking account shall
be analyzed and charged individually.
Note: The service charge shall be whichever is the greater, whether
figured on the "short anlysis" or "long analysis" basis.
(c) It is expressly provided that no bank shall absorb the Federal
check tax but shall assess the same in full against every checking account. It is further provided that service charges shall be computed and
collected monthly, and that no carry-over credit shall be allowed from
any month showing a hypothetical profit, against any other month
showing an analysis loss resulting in service charge. It is further provided that no exceptions or exemptions of any kind shall be allowed
to any depositor or any class of depositors whatsoever, but that each
checking account shall be analyzed and treated individually, without regard to affiliated accounts or the business of the depositor with any
other department of the bank.
(d) Cream and other "Orders": Where so-called cream or farm
produce orders are handled by the bank of final payment, said orders
being drawn by the drawer or against itself (or himself) as drawee, such
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items shall be charged for, on the "long analysis" basis, at the established rate for handling local clearing house checks: provided, that all
of the following conditions and provisions exist or are immediately
established.
1. The drawers shall furnish the instruments themselves without
cost to or allowance from the bank.
2. Legal stop-payment on all such items shall be waived by the
drawer.
3. The paying bank shall not be held responsible for signatures,
endorsements, forgeries or other irregularities in any such item.
4. The items shall not be charged against the drawer's account,
nor shall any statement form be furnished the drawer by the bank other
than a plain adding machine listing daily.
5. All such items accumulated by the bank shall be taken up and
paid for by the drawer every business day.
6. A clear majority of such items shall be distributed over a wide
geographic area, and shall not actually be paid in cash in the paying
bank, which might increase the bank's expense in taking care of peak
customer loads, or necessitate the importation or use of unusual amounts
of cash.
7. The average amounts (in dollars) of such items shall be small,
to obviate the necessity of importing or using unusual amounts of cash.
8. The average number of such items handled per month shall be
not less than 500 in "country banks" and 1,000 in "city banks," both
designations within the meaning of sub-paragraph (e) hereof.
9. It is recognized that the handling of certain other items (orders)
may comply with some of the stipulations of sub-paragraph 1 to 8, inclusive, hereof. It is further recognized that probably no class of items
other than said cream orders will comply with all such stipulations.
Therefore:
A. No bank shall grant the rate specified in (d) hereof except to
cream orders as stipulated, and then only by express permission of its
city clearing house association, county organization and or organized
group of counties.
B. No bank or group of banks shall allow any other reductions in
the standard rate for paid items (namely 30 for "country banks" and 50
for "city banks").
(e) Each City Clearing House Association, County Bankers Association or organized groups of counties shall classify all banks and/or
groups of banks within its respective jurisdiction as either "city banks"
or "country banks," due consideration being given to the following:
1. The operating costs and conditions of the banks or groups.
2. The character and size of the communities served.
3. The judgment of the banks or groups concerned.
4. Competitive conditions as regards neighboring banks or groups.
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(f) Nothing herein contained shall be construed as affecting the
method of handling public money, deposited and held pursuant to the
statutes governing the same: provided, that accounts of public officials,
not expressly required by law, shall be subject to all the provisions of
these Regulations.
(Note: MAXIMUM service charge provisions are contained in
Part 4 of this Section of these Regulations.)
Par. 2. OVER-PRINTING CHECKS. Not less than the cost of
over-printing and numbering of all checks in all banks shall be collected
when delivered:
(a) By cash, or
(b) By debiting the customer's deposit account, or
(c) By charging to the depositor's analysis of account.
Par. 3. CHARGES FOR NSF CHECKS. All banks shall make a
MINIMUM charge of 250 per item on all dishonored NSF checks, said
charge to be debited to the drawer's deposit account at each time so
dishonored.
Par. 4. DORMANT MAINTENANCE CHARGE.
(a) All banks, on deposit accounts with balances of less than
$25.00 that have not been active for one year or more, shall make a
minimum maintenance charge of $1.00 per year; where the balance is
less than $1.00 the amount of the balance shall be the amount of the
maintenance charge.
Par. 5. CASHING OUT-OF-TOWN CHECKS.
(a) For all banks, the following schedule of minimum charges shall
he made to all non-depositors and shall be made to savings account and
time deposit customers with inadequate balances:
100 per check
Up to $25.00
150 per check
$25.01 to $50.00
200 per check
$50.01 to $100.00
250 per check
$100.01 to $250.00
1/10 of 1% on each check
Over $250.00
(b) The above schedule of charges shall be made to savings and
time deposit customers with inadequate balances, and shall be made in
all cases where such customers appear to be evading charges for checking service.
(c) Checking account customers are entitled to cash or deposit
out-of-town checks without the above deduction of exchange charges, but
such items, whether deposited or cashed, must be entered against said
customer's analysis of checking account.
(d) Customers issuing payroll checks on out-of-town banks may
arrange to have such checks cashed by their employees at par. in any
community by authorizing their depository banks in such communities
to make the charge for such service against the customer's analysis of
account, instead of collecting from the employees; the schedule of such
analysis charges to be the same as adopted for cashing out-of-town items
for non-customers.
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(e) Exchange charges shall not be mandatory on out-of-town
checks given to banks in payment of notes, interest, safety vault rentals,
insurance premiums, bonds, travelers checks, or any service of a profitable nature to the bank.
Par. 6. CHARGES FOR BANK DRAFTS, CERTIFIED CHECKS,
CASHIER'S OR SECRETARY'S CHECKS, BANK MONEY ORDERS,
OR DEMAND CERTIFICATES OF DEPOSIT issued in lieu of same.
(a) The following schedule of minimum charges shall be made by
all banks to all non-depositors, and to all depositors in any department
with inadequate balances:
Up to $25.00
100 per draft, etc.
$25.01 to $50.00
150 per draft, etc.
$50.01 to $100.00
204. per draft, etc.
$100.01 to $250.00
250 per draft, etc.
Over $250.00
1/10 of 1% on each draft, etc.
With an optional maximum of $1.00 each per draft on items over
$1,000.00.
When items are given in payment of drafts, etc., an activity charge
shall be added, as follows:
One cent for each local Clearing House check or P. O. money ordel
so tendered.
30 for each Out-of-Town check so tendered.
(b) The above charges may be waived by any bank officer in the
exceptional cases when it would be to the bank's own interest to issue
exchange in lieu of paying out currency.
(c) Proper analysis charge at the above rates shall be made
against checking customers maintaining average balances of $500.00
or more.
(d) Cash charges at the above rates shall be made to savings and
time deposit customers with inadequate balances and in all cases where
such customers appear to be evading charges for checking service.
(e) Banks shall have the option of absorbing the Federal check
tax on the items covered by this paragraph, or they may add 20 to each
rate specified above.
(f) In cases where a draft or other exchange item is given by a
bank in payment of savings or time deposit withdrawals, banks may
waive exchange charges to the extent that a savings in interest to the
bank was realized sufficient to offset such exchange charges.
SAVINGS ACCOUNTS
Par. 7. In cases where, because of the nature and frequency of
items deposited in savings accounts, or because of excessive withdrawals
made, customers appear to be attempting to evade charges for checking
service or for the cashing of out-of-town checks, appropriate charges
shall be levied on such customers; or they shall be required to change
such practices; or they shall be required to close such savings accounts.
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Par. 8. COLLECTION CHARGES.
A—INCOMING COLLECTIONS
On all items received, minimum collection charges shall be deducted
from the remittance or credit as follows:
(a) One-tenth of one per cent (1/10%) on each item for the first
$2,500.00 thereof plus one-twentieth of one per cent (1/20%) for the
amount thereof in excess of $2,500.00.
(b) In addition to any collection charges imposed, a service charge
of One Dollar ($1.00) shall be made for the execution and recording of a
mortgage, plus cost of said recording.
(c) A minimum charge of twenty-five cents (250) per item shall
be made, except that a minimum charge of fifteen cents (150) per item
may be made on group collections, except further than a minimum charge
of ten cents (100) may be made for each entry or partial payment
collected and credited (if remitted, 250 minimum charge applies).
(d) Collection charges may be waived to correspondent banks with
which reciprocal collection arrangements have been made by banks.
(e) These collection rules shall not apply to items paid by or
through Trust Departments of Banks.
B—OUTGOING COLLECTIONS
Same rates and provisions as prescribed in sub-paragraph A hereof,
except that a bank's own charges may be made analysis charges to "long
analysis" checking customers.
Par. 9. CREDIT REPORTS. A minimum charge of 250 per report
shall be made, provided:
(a) That this charge may be waived to correspondent banks with
which reciprocal arrangements exist.
(b) This charge may be waived when the credit report would
benefit a reporting bank's customer.
(c) This charge may be waived when no information can be or is
given.
(d) Not less than the cost shall be charged to bank customers for
securing special credit reports.
Par. 10. MINIMUM CHARGE ON LOANS.
(a) A minimum fee of 500 shall be made on each note or loan
made by all banks, the amount in excess of the earned interest or discount to be collected as a service charge.
PART 2
OTHER REGULATIONS
Par. 1. No bank shall accept for deposit accounts that are preferred by their terms, either express or implied, over the deposits of
other customers. The acceptance ancUor execution by the depositing bank
of any form in which is embodied the agreement that such deposits
1
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preserves a separate identity or is received in trust, including the use of
transfer drafts or withdrawal receipts covering the same in which such
terms are used, is expressly forbidden. (This shall not be construed as
interferring with the acceptance of bona fide Trust Deposits by the Trust
Departments of any Bank or Trust Company.)
Par. 2. No bank shall give or credit premiums in the form of either
cash or merchandise for new or additional business.
Par. 3. Christmas Club accounts shall not entitle the customer to
exemption of charges for any other service of the bank.
Par. 4. The fee charged on the sale of travelers' checks shall be
not less than 750 per hundred with a minimum charge of 400 per sale,
plus 20 per check for Federal check tax.
Par. 5. Travelers' checks shall be cashed at par, without exchange
deduction, when presented by the person to whom issued.
Par. 6. No check or cash item shall be cleared or forwarded as
cash more than twice by any bank.
Par. 7. Local clearing house checks may be cashed free to the payee
thereof or local clearing houses may establish uniform charges therefor.
Par. 8. Correspondent Banks. The accounts of Correspondent
Banks may be exempted from the service charges hereinbefore established, but it is expressly provided that all banks shall maintain interest-free, net collected balances with their correspondents at an
average level sufficient to compensate for the expenses of all services
received.
PART 3
LOCAL REGULATIONS—GENERAL STATEMENT
(a) Local organized groups, in formulating their minimum local
rates and provisions pursuant hereto, shall see that the same are not
prescribed or set below costs involved in each case. (See Appendix A
for suggested minimum rates and provisions.)
(b) City clearing houses and/or county or group associations, shall
formulate minimum charges and/or provisions covering the following
services:
Par. 1. Minimum safety vault rentals (plus Federal revenue tax,
and plus insurance where contents are insured). (Said insurance shall
not, however, cover currency or coin kept in safety vault boxes.)
Par. 2. Minimum charges for the safe-keeping of securities. (Note:
It shall be the policy of all banks to discourage safe-keeping business.)
Par. 3. Charges for handling purchase or sale of stocks.
Par. 4. Charges for handling purchase or sale of bonds.
Par. 5. Charges for registering United States Government bonds.
Par. 6. Charges for exchange of United States Government bonds.
Par. 7. Charges for the collection of maturing bonds and coupons.
Par. 8. Charges to cover insurance, postage, registration fee, and
handling, in the mailing of securities for customers.
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Par. 9.
Par. 10.
Par. 11.
Par. 12.
Clubs.
Par. 13.
Charges for after-hour depository service.
Charges for handling escrow agreements.
Uniform stop payment regulations.
Uniform regulations governing Christmas and other
Charges for mailing statements to customers upon request.
PART 4
MAXIMUM SERVICE CHARGES
Any bank or group of banks assessing service charges in any particular that appear to be excessively higher than those outlined in these
regulations shall be prepared to substantiate that such charges are
warranted and reasonably justified by the operating conditions and costs
of the bank or group.
PART 5
TRUST SERVICES
Par. 1. Trust Departments shall be operated in accordance with
the provisions of the Statement of Principles of Trust Institutions,
adopted by the Trust Division of, and approved by the Executive Council
of the American Bankers Association, on April 6, 1933; said statement
appearing in the Appendix of the ABA Code as Schedule A.
Par. 2. Because many trust services are already governed by
statute, banking regulations or the courts, and because of the widely
varying conditions under which trust services in different localities
are rendered, city clearing house associations, county associations,
and/or organized groups of counties shall formulate whatever additional
regulations are deemed advisable or necessary to effectuate the purposes
and provisions of said Statement of Principles for Trust Institutions.
The suggested minimum fees and provisions for trust services are
being formulated by a Special Sub-committee, and will be supplied later
to all banks in the form of a supplement, marked Appendix B, to these
Regulations.
PART 6
GENERAL STATEMENT
It is the purpose of these regulations to promote sound practices,
and it shall be the policy of all banks to operate soundly and to perform no services at less than cost. Appropriate service charges may
be made in any case not specifically provided for herein, with due regard
to the operating costs and conditions of the bank or group of banks
and of the value of the service to the customer.
SECTION TWO
SAFETY VAULT RENTALS
Minimum Rental per year $1.00, depending upon the facilities and
service offered.
Insurance and Federal Tax extra.
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Minimum charge (to absorb expenses of changing locks and records) ; one year's rental.
Rebates for unexpired rental period, in the second or succeeding
years, to be made down to a minimum charge of $1.00 for current year.
Optional admittance charge-one entry per month. Additional
entries at 1/10 per annual rate per entry.
SAFE-KEEPING OF SECURITIES
On bonds and securities payable to bearer, a charge of 500 per
annum per $1,000.00 up to $10,000.00; 300 per annum per $1,000.00 in
excess of $10,000.00, minimum charge of 500.
On securities registered, or otherwise not transferable, annual charge
of 500 for each receipt. Banks shall limit their liability to the exercise of due diligence and reasonable care.
HANDLING THE PURCHASE OR SALE OF STOCKS
(Per 100 shares)
Price of Stock
$ 0.00 to $ 10.00
25.00
10.00 to
25.00 to 50.00
50.00 to 75.00
75.00 to 100.00
100.00 to 200.00
$5.00 minimum charge.
Broker's Charge
$7.50
12.50
15.00
17.50
20.00
25.00
Total Bank Charge
$10.00
15.00
20.00
22.50
25.00
30.00
HANDLING PURCHASE OR SALE OF BONDS
of 1%
* On all bond orders charge customer the actual cost plus
commission; $1.00 Minimum Charge.
* NOTE: Except in Governmental Bonds when the amount exceeds
$5,000.00, then the commission is 1/8 of 1% on said amounts exceeding
$5,000.00.
REGISTERING U. S. GOVERNMENT BONDS
$0.25 per $100.00 up to $1,000.00.
$1,050.00-$2.50 plus five cents for each additional $100.00.
Minimum charge 250, plus expenses.
EXCHANGE OF U. S. GOVERNMENT BONDS
Charge five cents per $100.00 up to $5,000.00.
Minimum charge 250 plus expenses.
Twenty-five cents per $1,000.00 for any additional.
COLLECTION OF MATURING
BONDS AND COUPONS
United States Bonds and Coupons
Coupons-five cents per $100.00 or fraction thereof.
Bonds-250 per $1,000.00 (minimum charge 250) plus expenses.
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Other Bonds and Coupons
Coupons-100 per $100.00, with a minimum charge of 100 on each
issue.
Bonds-500 per $1,000.00 up to $10,000.00 on each issue. Minimum: 500.
Bonds-300 per $1,000.00 in excess of $10,000.00 on each issue.
All bonds and coupons payable locally—charges optional.
All bonds and coupons payable at other points also subject to exchange charges of collecting bank and other expenses.
MAILING SECURITIES FOR CUSTOMERS
(Charges to cover insurance, postage, registry fee, etc.)
$400.00
$500.00
$600.00
$700.00
$800.00
$900.00
$1,000.00
.35
.45
.55
.60
.65
.70
.75
$0.35 minimum charge.
$0.25 for each $1,000.00 additional.
AFTER HOUR DEPOSITORY SERVICE
Rental per year (payable in advance) $6.00.
Less than one year: 500 per month, plus $1.00 service fee.
Deposits for equipment:
Sacks at $1.00 each.
Sack-locks and keys at 650 each.
Chute keys at 350 each.
All deposits for equipment refunded when same is surrendered in
serviceable condition, ordinary wear excepted.
ESCROW AGREEMENTS
(a) A charge of one-tenth of one per cent (1/10%) shall be made
on the value involved, subject to a minimum charge of two dollars ($2.00).
(b) The above charges shall be reimposed each year that the instrument remains in effect and in the bank's custody.
(c) Banks shall limit their liability to the exercise of due diligence
and reasonable care.
STOP PAYMENT REGULATIONS
(a) No stop-payment request shall be binding upon banks unless
delivered or served in writing, said written request to set forth all the
provisions of this rule and to be agreed to as evidenced by authorized
signature of the person, firm, corporation, or organization requesting
the stop payment.
(b) No stop-payment request shall be released or revoked (before
sixty days from date thereof) except by written, signed notice delivered
or served upon the bank.
(c) All stop-payment requests shall automatically expire, and be
null and void not more than sixty days from date thereof (unless revoked or released theretofore in accordance with paragraph (b) hereof),
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except that stop-payment request may be renewed for additional periods
of not more than sixty days each by compliance with paragraph (a)
hereof.
DONATIONS AND CONTRIBUTIONS
No donation or contribution shall be made by or in the name of any
individual banking institution, to any cause, fund, individual or individuals, firm, association, society, club, organization or corporation for
any purpose whatsoever.
APPENDIX B
(Explanation of Checking Account Measured Service Charrges)
"SHORT ANALYSIS" ACCOUNTS OPEN FOR LESS
THAN ONE MONTH
Practice to be followed on bona fide opened and closed accounts; not
to apply to recurring cases, or evaders; not to apply to full months on
any accounts, but only to those accounts opened or closed during the
month, receiving only a part of a month's service.
No basic service charge where the check or receipt that closes the
account is the only item paid during the month.
No basic service charge:
(a) When the account is opened AFTER the twentieth of the
month, or
(b) When the account is closed ON OR BEFORE the tenth of the
month: Provided, in both (a) and (b), that
(c) Less than three checks or receipts are paid during that partmonth (not including the item that closes the account).
Basic service charge WILL be made:
(a) When three or more checks or receipts are paid during the
part-month that the account is opened or closed (not including the item
that closes the account), or
(b) When the account is opened ON OR BEFORE the twentieth
of the month, if one or more checks or receipts are paid, or
(c) When the account is closed AFTER the tenth of the month,
if one or more checks or receipts are paid.
"LONG ANALYSIS" ACCOUNTS OPEN FOR LESS
THAN ONE MONTH
Figure average daily ledger balance by accumulating daily balances
for actual number of days account is on books, and dividing the total by
that number. (Cents may be omitted.)
Figure float (uncollected) by multiplying by actual days' delay, and
dividing by number of business days in entire month. (Cents may be
omitted.)
Allow accountancy allowance for actual number of days account
is on books.
Figure reserves, and compute expenses, as you would for a full
month.
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"LONG ANALYSIS" ACCOUNTS FOR FULL MONTH
Average daily ledger balances are obtained by accumulating the
ledger balances for every day in the month, including Sundays and holidays, and dividing the aggregate sum so obtained by the number of
days in the calendar month. Cents may be omitted from this calculation.
Reserves are figures against ledger balance before the deduction of
float. Actual cash reserves, estimated at 25%, should be deducted rather
than legal reserves. Six per cent per annum is considered to be a
generous allowance on any bank's actual earning assets.
The Federal Reserve schedule of transit time, plus the day (or days)
required for mail to travel from your community to your district Federal
Reserve Bank or branch should be the basis for computation of float.
Cents may be omitted from this calculation. Float must be recorded
daily, before deposits are broken up or checks leave tellers' cages. This
is a simple job. As a matter of expediency, all items up to $50.00 or
$100.00 may be counted as averaging three days delay. Sundays and
holidays (which impose additional days delay) may be ignored, if the
number of business days in the month (that is, the number of calendar
days, less Sundays and holidays) is used as the divisor in reducing the
aggregate float to a daily average figure.
Example: September, four Sundays and one holiday, the divisor
(float) for float is 25.
Balances: September has 30 days; the divisor is 30 for average
daily ledger (balances).
Wherever any payroll, cream or other "orders" (not posted to the
customer's account, but "sold" to customers daily) are held overnight,
the amount so held over should be treated and calculated as one day float.
The reason for this is that customers are given analysis credit for
average daily ledger balances, and banks should protect themselves
against such hold-over items.
Wherever an analysis of an account shows a net collected overdraft,
this should be charged for at 6% (not 5%, as in such cases you are
lending the customer money), the charge being added to the expenses
of the account to determine the monthly service charge.
Banks, may, or may not, at their option, mail notices of service
charges ("long" or "short") made on checking accounts. Probably
"city" banks would mail such notices, figuring analyses on a calendar
month basis and taking approximately ten days for computation and
billing. However, some banks may close their accounting periods somewhere between the twentieth and twenty-fifth of the month, and could
put the service charge slips in customers' statements for delivery at
the end of the month.
No analysis charge should be made for Federal check tax or service
charge debits to the account.
The formulas and charges specified in these Regulations represent
the cost experiences of several different size banks, said cost analyses
having been made by competent bank analysts. They are fair and
equitable in every instance.
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163
The item charges in all schedules are based on competent, average
cost analyses of average banks, and the mistake should not be made of
considering any of these charges out of line unless you have had for
your own bank, an actual survey made to determine your costs.
DRAFT CHARGES
Some companies request banks to accept and hold cash and items
from various representatives and agents of such companies, the bank to
accumulate such various sums and items into one draft for remittance
to the company at the end of a day, or periodically. Each such separate transaction should be charged for separately at the same rates as
though the drafts or remittances were made and forwarded separately
for the receipts of each representative or agent.
Draft charges preferably should include the two cents Federal check
tax in the rates quoted, for the reason that standard draft registers
usually do not carry extra columns for the recording of check tax; this
being the case, it would be necessary to handle every two cents tax
item at the time of each issue of exchange. In that respect this differs
from the tax on customers' checks, which is only required to be accounted
for monthly by the Government. The advisability of having a simple
schedule, with no odd cents to handle, is obvious when one considers
that thousands of bank tellers and clerks throughout the State will try
to memorize it.
OUT-OF-TOWN CHECKS
Here, again, the advisability of a simple schedule, adapted to memorizing, is seen. If this schedule is the same for exchange on drafts, it
is doubly desirable.
The rates set, moreover, should be sufficient to charge the nondepositor more for the service than the depositor who supports your
bank and leaves a balance with you as a protection against checks
deposited that may be returned NSF. The schedule set does that.
SAVINGS ACCOUNT AND OTHER CUSTOMERS
Out-of-town checks may be deposited at par and without exchange
charge in savings accounts or for credit into time Certificate of Deposit.
"Depositing" is defined as:
1. Depositing $10.00 or more of out-of-town checks that have a
face amount of $20.00 or more; said deposit not to be withdrawn from
savings accounts in less than three times the number of days required
to collect the item.
2. Depositing at least one-half of out-of-town checks that have a
face amount of less than $20.00, said deposit not to be withdrawn from
savings account in less than three times the number of days required to
collect the item.
In enforcing these Regulations, the aim should be to see that customers in one department are not allowed to evade provisions and
charges imposed in other departments for similar services received.
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GENERAL
In response to suggestions made to the Committee, allowance has
been made for a reasonable difference in the charges in the checking
account schedules, between so-called "city" banks and so-called "country"
banks, because of alleged differences in operating costs and conditions.
It is the conviction of the Committee, however, that no appreciable
differences in reserve deduction percentages of accountancy allowance on
available balances exist, or should exist, between banks or classes of
banks, since all soundly operated banks are subject to the same general
conditions in these respects.
The Committee holds a similar conviction on the advisability of
maintaining the uniform, state-wide minimum measured service charges
provided for other classes of business. The value of such services to
customers is identical, whatever bank renders them; and the alleged
differences in bank costs, where they actually exist, are slight.
OVER-PRINTING CHECKS
Wherever a customer requests a bank to pay for or absorb the cost
of special checks, banks may make an appropriate allowance to such
customers, but in no case exceeding the cost to the bank of its standard
checks which are furnished to other customers. (Example: If your
standard checks cost you $1.00 per thousand, your allowance in such
requests would not exceed $1.00 per thousand.)
PAYROLL ORDERS
The handling of payroll orders usually entails:
(a) The use of unusual amounts of currency, because of the dollaramount of most payroll orders. This frequently requires the periodic
importation of extra cash into banks, always a hazardous job.
(b) The creation of expensive periodic peak loads in banks, to
take care of the extraordinary demands imposed, necessitating extra
tellers and costly extra lobby space.
Peak loads are very expensive factors in any business, and the
banking business is no exception. Probably nothing creates and aggravates peak loads in banks more than payroll accounts. It is doubtful
if any payroll order case, carefully examined, would justify any reduction in standard paid-check rates. Even though no bookkeeping record of the items is made, and they may be made payable to bearer,
yet the fact that they must be routed away from a fully equipped and
manned bookkeeping department, geared for machine production, into a
separate and diverse routine channel, means a rise in handling cost that
probably offsets any bookkeeping economy effected.
Any modern manufacturer understands this kind of language.
Volume of items handled probably means less in the operating economy of banks than in any other comparable business. After all, every
item (with the exception of those cream orders described in section one,
part 1, sub-paragraph (d) of these Regulations) presents an individual
job of examination for signature, date, comparison of written and figure
amounts, fraudulent alteration, endorsements, stop-payment records, etc.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
165
That examination, properly done, takes just about ten times as long for
100 items as it does for ten items. If those items stream into banks in
periodic bursts, slight volume advantages are reversed.
Nevertheless, it is conceivable that in rare instances banks may feel
that they have a payroll customer whose case merits special consideration.
MINIMUMS AND MAXIMUMS
The term minimum, applied to service charge rates, is clear in all
cases except perhaps for the formulas prescribed for checking account
analyses. Using MINIMUM balances, instead of AVERAGE DAILY
ledger balances, would be permissible (under short analysis ONLY),
since the MINIMUM balance of an account would always be less than
the AVERAGE DAILY balance, resulting in INCREASING any service
charge.
Long Analysis: Average daily ledger balances here are considered
advisable, 20% deductions for cash reserves mean that 18% is NOT permissible, since that would have the effect of REDUCING any service
charge. Twenty-five per cent deducted for cash reserves, on the other
hand, WOULD be permissible, since that would have the effect of
INCREASING any service charge.
Under the provision allowing 50 free deposits per month, NOT
MORE THAN 50 can be allowed free.
Only 25 free deposits allowed per month WOULD be permissible,
or even ALL deposits might be charged for . . . although the latter
is considered inadvisable.
(The maximum figures above are used only as examples.)
This regulation shall be in full force and effect from and after
the close of business on November 30, 1934, and shall remain in effect
until modified, rescinded, or repealed by subsequent regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 28th
day of November, 1934.
BUILDING AND LOAN REGULATION No. 5-A
REQUIREMENTS FOR AND RESTRICTIONS UPON THE MAKING
OF MORTGAGE LOANS BY BUILDING AND LOAN
ASSOCIATIONS UNDER TITLES I AND II OF
THE NATIONAL HOUSING ACT
FebruWhereas, The Indiana Financial Institutions Act, approved
ary 24, 1933, the same being Chapter 40 of the Acts of the General
1933,
Assembly of the State of Indiana of 1933, became effective July 1,
and
effect,
and
and is now in full force
of the
Whereas, Section 273 of the said Act was amended by the Act
1935,
28,
January
approved
Indiana
of
General Assembly of the State
which amendatory act is now in full force and effect, and
as
Whereas, The said Section 273, as amended, now reads in part
follows, to wit:
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"Subject to such regulations as may be prescribed by the Federal Housing Administrator pursuant to the National Housing Act,
approved June 27, 1934, and subject also to such regulations and
conditions as may be prescribed by the department, which regulations and conditions may apply to one or more associations and/or
to one or more localities in the State of Indiana as the department
in its discretion may determine, said associations are authorized to
make such loans and advances of credit as the Federal Housing
Administrator insures or makes a commitment to insure pursuant
to Titles I and II of the National Housing Act and to obtain such
insurance."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
Acts and by unanimous vote of the members of the Commission for Financial Institutions, does hereby make and promulgate the following regulation with respect to loans secured by mortgages on real property made
by building and loan associations under Titles I and II of the National
Housing Act, pursuant to the authority granted in the said last paragraph of Section 273 of the Indiana Financial Institutions Act, as so
amended, as follows, to wit:
Section 1. The making of loans, secured by mortgages on real
property, by building and loan associations in the State of Indiana,
pursuant to the authority granted in the last paragraph of Section 273
of the Indiana Financial Institutions Act, as amended, shall be subject
to the following restrictions, to wit:
(a) Any such loan shall not exceed sixty per cent (60%) of the
appraised value of the real estate offered for security, as determined
pursuant to Subsection (b) of Section 275 of the Indiana Financial Institutions Act, unless it shall clearly appear to the Board of Directors of
the association, and the Board of Directors shall so find and insert in
the minutes of the meeting at which such loan is granted, that the pro. credit
posed borrower is otherwise entitled to the amount of the excess
requested over and above the said sixty per cent (60%) of the appraised
value of the mortgage security offered aside from the security itself.
All such loans shall be subject to the other general limitations prescribed in Section 275 of the Indiana Financial Institutions Act.
(b) The total aggregate amount of loans secured by mortgages on
real property, made pursuant to the last paragraph of Section 273 of
the Indiana Financial Institutions Act, as amended, held by any building and loan association at any one time, shall not exceed ten per cent
(10%) of the total amount of paid-in credits on its capital stock unpledged to the association as security for loans.
This regulation shall be in full force and effect from and after
the close of business on the 22nd day of April, 1935, and remain in
effect until modified, rescinded or repealed by subsequent regulation.
Witness, my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 17th
day of April, 1935.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
167
THE DEPARTMENT OF FINANCIAL INSTITUTIONS
BUILDING AND LOAN DIVISION
IMPORTANT BULLETIN
April 1, 1935
asso.This bulletin is being forwarded to all state building and loan
cts
instru
tment
depar
This
na.
India
of
State
ciations operating in the
all officers
the Secretary of each association to submit this bulletin to
d and
and directors of his association, asking that it be read, studie
n it shall
eratio
consid
such
ed
receiv
has
it
After
ered.
thoroughly consid
association.
then be placed in the permanent minute records of your
slip hereto
ated
perfor
the
sign
ary
secret
your
We further request that
and considered by
read
been
has
in
bullet
such
that
ng
ed
showi
attach
department imyour officers and directors and forward the same to this
mediately.
ations are classified
For the purpose of this bulletin, all state associ
associations:
"B"
class
and
"A"
class
y
under two groups, namel
which meet EACH
1. Class "A" associations are those associations
of the following requirements:
the total liabilities of
(a) Unimpaired capital, which means that
not exceed the total
shall
olders
the association to its creditors and shareh
.
tment
depar
the
by
mined
value of its assets as deter
to provide for any actual
(b) Contingent fund or reserves adequate
to be determined by the
or probable losses, the sufficiency of such fund
of assets such as
items
all
of
department, from a fair valuation
, securities, office building and
mortgages, real estate, sheriff's certificates
equipment and similar items.
reasonable withdrawal demands
(c) Sufficient liquidity to meet the
wing needs of the community.
borro
able
of its shareholders and the reason
reasonable dividends upon its.
(d) Sufficient earning ability to pay
outstanding shares.
e all associations unable to
2. Class "B" associations shall includ
of the class "A" associations.
meet any one or more of the requirements
the foregoing classifications.
of
one
Your association comes within
tment to bring all associaIt is the immediate purpose of this depar
will be no question as
there
in
tions under an "A" classification, where
of return to members, some
to solvency, ability to pay a fair rate
the
withdrawal demands, as well as
reasonable ability to take care of
it exists.
which
in
nity
commu
the
in
reasonable demands of borrowers
be
a position, there appears to
Unless the association can enjoy such
nce.
existe
its
no further reason for the continuance of
orium, in March, 1933, all assoAt the time of the National Morat
each
into two classifications and
ciations in this state were divided
license. This
cted
restri
or
al
gener
a
association was granted either
in
ny of the reports then on file
classification was based upon a scruti
tment at
depar
the
to
ble
availa
n
this office and upon other informatio
nal
now elapsed since the Natio
the time. More than two years have
now
have
basis
cted
restri
a
upon
Moratorium. Those associations placed
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Federal Reserve Bank of St. Louis
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had ample time within which "to get their house in order." Some associations receiving general licenses must now be reclassified, due to
changes in their condition and to additional information received by the
department from time to time. It is manifestly unfair to the community and to borrowing and investing shareholders, and to the building
and loan industry in general, to permit impaired and restricted associations to continue their operations without some definite and constructive
plan for rehabilitation under way. The acceptance of new money from
investing shareholders by an association whose shares are worth only
eighty (80) or ninety (90) cents on the dollar, constitutes a palpable
fraud for which the officers and directors are responsible. If the
books of the association do not properly reflect all losses, which is
probable if your appraisals of real estate and other assets are inflated,
or if proper allowances have not been made for losses on the delinquent loans, or if items of expense have been erroneously capitalized,
the annual statements and the reports to the department are misleading.
Furthermore, if copies of the annual statements have been mailed to
the shareholders through the United States mail, a Federal liability
exists. As officers and directors it is to your interest to ascertain the
accuracy of the statements and reports referred to, before these statements are signed and distributed, especially where they are deposited
in United States mail.
As the reports of examiners are submitted to this office, each report
will receive the most careful consideration. This applies to associations
now operating under a General License, as well as those operating under
a Restricted License. If the department finds, after examination, that
the association can qualify itself as to solvency, sufficient reserves, sufficient liquidity and ability to pay reasonable dividends, it will then be
classed as an "A" association. If such association cannot measure up
to the requirements of a class "A" association, as shown by its own
statement, or as shown by reports of our examiners, or other information
received by the department from any other source, the association shall
then be classified as a "B" association. Those associations receiving
a "B" classification will be required to take IMMEDIATE steps to conform to the requirements as set forth under an "A" classification. In
many instances this will mean the complete reorganization of the association, or the organization of a new association and the taking over of
sound assets and trusteeing of undesirable assets, or having the same
liquidated by this department under section 41, and the following sections, of the Indiana Financial Institutions Act pertaining to liquidation.
Associations able to show marked progress in their attempt to
correct any unsound conditions which exist, will, of course, be given
reasonable time within which to accomplish their program. When so
requested, officers and directors of associations needing rehabilitation
will be expected to make a personal visitation at the office of the department, where plans can be promulgated for the future operation of such
association. This department will give every pos'sible cooperation and
service to those associations requiring rehabilitation. On the other
hand, the department will insist that the officers and directors, after
studying the condition of their association, take immediate steps to place
the association in a sound condition and in a position to function normally in its community.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
169
We submit herewith the following suggestions which must be given
careful consideration by the management, with a view to placing the
association in position to meet the borrowing and investment needs of
the community at the earliest possible date:
1. Appraisals should be made of all "Real Estate Owned" by competent appraisers. Such appraisers should not be interested in the association, at least not as an officer or director.
2. Appraisals should also be obtained on properties securing mortgage loans which are badly in default.
3. Office Building Account and Furniture and Fixture Account
must be adjusted to reasonable figures.
4. An adequate Contingent Fund for losses should be provided.
5. Worthless and questionable assets should be segregated and
taken out of the association by charge-offs, or by obtaining sufficient
write-down of share value. (Any operation of this kind must have the
full approval of this department.)
6. Insurance of shares might be obtained from the Federal Savings and Loan Insurance Corporation, if this should be necessary to
restore public confidence. Undoubtedly, the obtaining of such insurance
will be mandatory in many cases of reorganization or rehabilitation.
7. Membership in the Federal Home Loan Bank might be acquired,
thus insuring further liquidity in those associations unable to function
in a normal manner, either as to payment of withdrawals or as to the
lending of money.
8. Special consideration should be given to the personnel of each
association. Competent men should replace incompetent ones. To compete with other mortgage lending institutions, our state institutions
must be operated by board of directors composed of men whose minds
are attuned to present day conditions and who can immediately sense
the necessity of a change of policy, when such change is necessary.
While the above, at this time, are merely suggestions of this department, we ask that the board of directors of each association immediately,
and upon their own volition, take all necessary steps to place their
association in good standing.
Liquidation is imperative if the association can no longer serve a
need in the community in which it is located, if its assets are so impaired as to make reorganization impossible or inadvisable, or if its
directors and officers persistently fail, neglect or refuse to comply with
the law and the regulations of the department. An association which
permits its managing personnel or their friends to profit on real estate
deals, transfers and other transactions may avoid liquidation only by
removing the persons responsible for such practices.
The department will also carefully scrutinize those associations that
are now in voluntary liquidation. If, in the opinion of this department,
such liquidation can be carried on in a more equitable and less expensive
manner, the department will not hesitate to take charge of such liquidation.
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Naturally the department will be reluctant to liquidate any association, which by rehabilitation or merger can be of real service in its community, and for that reason liquidation will be resorted to only when
rehabilitation or merger is impossible. The Indiana Financial Institutions Act, sections 47 and sections 114 to 136 inclusive, provide for
such rehabilitation and merger, and we specifically call your attention
to these sections. Many associations can be rehabilitated and placed
on a sound basis by a comparatively small write-down of stock values.
Bad and doubtful assets can be segregated and placed in the hands
of trustees with participating certificates issued to the shareholders.
Such operation does not take anything away from the shareholder, but
does place the association in a position where it should progress and be
of benefit to the shareholders, as well as the community.
The program of the department herein set forth has been discussed
with and has the approval of the outstanding building and loan men of
the state. They realize that if the building and loan industry expects
to survive and discharge the duties and responsibilities which it owes
to its thousands of members and to the public at large, immediate
steps must be taken to restore public confidence and to place the institutions in position to function in a normal manner. We trust that the
department will have your wholehearted cooperation and support in its
efforts to accomplish this result.
SMALL LOAN REGULATION NUMBER 2
METHOD OF KEEPING RECORDS
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective
on the 22d day of May, 1933, and is now in full force and effect, and
Whereas, Section 1 of said Chapter 154 provides in part as follows:
"The department is hereby authorized and empowered to make by
its order such general rules and regulations and specific rulings and
findings not inconsistent with the provisions of this act as may be necessary for the proper conduct of such business and the enforcement of
this act," and
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its
entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are
conferred on and vested in "The Commission for Financial Institutions,"
and
Whereas, Section 10 of said Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1333 provides in part as follows,
to wit:
"The department is hereby authorized, by a majority vote of the
members of the commission, to make, promulgate, alter, amend or repeal rules and regulations, for any or all of the following enumerated
purposes:
•
•
•
•
•
•
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
171
"(b) Prescribing the methods and standards to be used in making
the examinations and evaluating the assets and prescribing the forms
of reports of the several financial institutions to which this act is applicable," and
Whereas, to the end that in classifying small loans and fixing the
maximum interest rates which may be charged thereon from time to
time, it is necessary that the department have before it a correct indication of the actual operating results insofar as each licensee is concerned.
Now, Therefore, it is hereby ordered by the Department of Financial
Institutions by the unanimous vote of the Commission for Financial
Institutions of the State of Indiana that the following general regulations be adopted for the purpose of regulating the manner of the keeping of their records by small loan companies, firms, co-partnerships,
and individuals licensed by said department:
1. The small loan business shall be accounted for on a separate
set of books from the books and records used to record any other business
in which the said licensee may be engaged.
2. The cash received from the small loan business by any such
licensee shall be kept in a separate fund in the office and shall be deposited in a separate bank account.
3. Any expenses which are common to both the small loan business
and any other business or businesses which may be engaged in by the
said licensee shall be separated on an actual basis insofar as that may
be possible, and whenever it is necessary to separate such expense on
an arbitrary basis, the method of allocation shall be approved by the
board of directors if such licensee be a corporation and such approval
recorded in the minutes of such board together with an explanation
thereof. And in all cases the journal entry showing the distribution
of such common expenses shall contain an explanation of the method
followed in the allocation thereof.
4. The department may from time to time require correction of
the method of making such allocation and the result thereof if deemed
necessary in the case of any particular licensee.
These regulations shall be and remain in full force and effect from
and after the 1st day of March, 1935, until repealed, rescinded, or
modified by subsequent regulation.
Witness, The Department of Financial Institutions of the State of
Indiana, by R. A. McKinley, its Director and the seal of said Department
at Indianapolis, Indiana, this 28th day of January, 1935.
SMALL LOAN REGULATION NUMBER 3
PROVIDING FOR CERTAIN FAIR PRACTICES
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective
on the 22nd day of May, 1933, and is now in full force and effect, and
Whereas, Section 1 of said Chapter 154 provides in part as follows:
"The department is hereby authorized and empowered to make by
its order such general rules and regulations and specific rulings and
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Federal Reserve Bank of St. Louis
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172
findings not inconsistent with the provisions of this act as may be necessary for the proper conduct of such business and the enforcement of
this act," and
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are
conferred on and vested in the Commission for Financial Institutions,
and
Whereas, Section 10 of said Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933 as amended in Chapter 5
of the Acts of 1935, provides in part as follows, to wit:
"The department is hereby authorized, by a majority vote of the
members of the commission, to make, promulgate, alter, amend or repeal
rules and regulations, for any or all of the following enumerated purposes:
"(c) Defining what is a safe or an unsafe manner and a safe or
an unsafe condition for conducting and transacting business by any
financial institution to which this act is applicable."
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
acts and by unanimous vote of the members of the Commission for
Financial Institutions does hereby make and promulgate the following
regulation for the conducting and transacting of business by corpotations, firms, co-partnerships, and individuals licensed under and pursuant to the terms and provisions of Chapter 40 of the Acts of the
General Assembly of the State of Indiana for 1933 in order to secure
proper conduct of such business to the end that such business will be
operated honestly and fairly and within the purposes of said act, and
as defining a safe manner of conducting such business, to wit:
1. No contract for a loan shall be entered into for a period longer
than twenty (20) months if repayable in equal monthly installments of
principal or twelve (12) months if repayable in any other manner.
2. Monthly payments shall be required on all loans where the income of the borrower reasonably justifies such monthly payments.
3. All licensees shall use due diligence to collect principal payments according to the contract, not inconsistent with the best interests
of the borrower.
4. The collection by any licensee from any borrower of more than
the following amounts of interest shall constitute unfair operation of
the business of such licensee, within the purposes of Chapter 154 of the
Acts of the General Assembly of 1923:
(a) On all loans made on or after May 15, 1935, the original
amount of which is paid in full to the borrower; that amount of interest
which would have been collected at the maximum rates permitted by
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
173
General Order No. 3 issued concurrently herewith had the loan been paid
off in thirty-six (36) equal monthly principal payments.
(b) On all loans made on or after May 15, 1935, the original
amount of which is used entirely to pay off a loan then owing to the
licensee, the amount of unused interest on the pre-existing loan, as
hereinafter defined.
(c) On all loans made on or after May 15, 1935, the original
amount of which is paid in part to the borrower, the remainder being
used to pay off a loan then owing to the licensee, the sum of (1) the
unused interest on the pre-existing loan, as hereinafter defined, and
(2) the amount of interest which would have been collected at the
maximum rates permitted by General Order No. 3, issued concurrently
herewith, on the principal amount of additional money actually loaned
had it been a separate loan paid off in thirty-six (36) equal monthly
principal payments.
The term "unused interest" as used herein means the maximum
amount of interest which could have been charged at the maximum rates
permitted by General Order No. 3 issued concurrently herewith, had the
loan been paid off in thirty-six (36) equal monthly principal payments,
less the amount of interest actually paid thereon.
5. No licensee shall pay any bonus or commission in any form
either directly or indirectly for the purpose of inducing any borrower
to apply for or receive any loan from such licensee.
Any violation by any licensee of this or any other regulation promulgated by the department shall be sufficient cause for revocation of the
license of such licensee.
This regulation shall be and remain in full force and effect from
and after the 15th day of May, 1935, until repealed, rescinded or modified by subsequent regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 11th
day of April, 1935.
SMALL LOAN GENERAL ORDER NUMBER 2
MAXIMUM INTEREST RATES
1
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its
entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are
conferred on and vested in "The Commission for Financial Institutions,"
and
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective
on May 22, 1933, and is now in full force and effect, and
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Federal Reserve Bank of St. Louis
No. 10
174
Whereas, Section 1 of said Chapter 154 of the Acts of 1933, provides as follows, to wit:
"The term 'Department' as used in this act shall refer to, mean and
include the Department of Banking and/or the Department of Financial
Institutions and/or the successor of either of them."
Whereas, Section 2 of said Chapter 154 of the Acts of the General
Assembly of the State of Indiana for 1933, provides as follows, to wit:
"It shall be the duty of the department and the department shall
have power, jurisdiction, and authority to investigate the conditions
and ascertain the facts with reference to the business of making small
loans, as described in the first paragraph of Section 1 of this act, and
upon the basis of such ascertained facts:
(a) To classify such small loans by general order according to
such system of differentiation as may reasonably distinguish such classes
of loans for the purposes of regulation under the provisions of this act;
and
Now, Therefore, it is hereby ordered by the Department of Financial Institutions by the unanimous vote of the Commission for Financial Institutions of the State of Indiana that the following general regulations be adopted for the purpose of regulating the manner of the keeping of their records by small loan companies, firms, co-partnerships, and
individuals licensed by said department:
1. The small loan business shall be accounted for on a separate
set of books from the books and records used to record any other business in which the said licensee may be engaged.
2. The cash received from the small loan business by any such
licensee shall be kept in a separate fund in the office and shall be deposited in a separate bank account.
3. Any expenses which are common to both the small loan business
and any other business or businesses which may be engaged in by the
said licensee shall be separated on an actual basis insofar as that
may be possible, and whenever it is necessary to separate such expense
on an arbitrary basis, the method of allocation shall be approved by the
board of directors if such licensee be a corporation and such approval
recorded in the minutes of such board together with an explanation
thereof. And in all cases the journal entry showing the distribution of
such common expenses shall contain an explanation of the method followed in the allocation thereof.
4. The department may from time to time require correction of
the method of making such allocation and the result thereof if deemed
necessary in the case of any particular licensee.
These regulations shall be and remain in full force and effect from
and after the 1st day of March, 1935, until repealed, rescinded, or
modified by subsequent regulation.
Witness, the Department of Financial Institutions of the State of
Indiana, by R. A. McKinley, its Director and the seal of said Department
at Indianapolis, Indiana, this 28th day of January, 1935.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
175
SMALL LOAN GENERAL ORDER NUMBER 3
MAXIMUM INTEREST RATES
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are conferred on and vested in "The Commission for Financial Institutions,"
and
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective on
May 22, 1933, and is now in full force and effect, and
Whereas, Section 1 of said Chapter 154 of the Acts of 1933, provides as follows, to wit:
"The term 'Department' as used in this act shall refer to, mean
and include the Department of Banking and/or the Department of Financial Institutions and/or the successor of either of them."
Whereas, Section 2 of said Chapter 154 of the Acts of the General
Assembly of the State of Indiana for 1933, provides as follows, to wit:
"It shall be the duty of the department and the department shall
have power, jurisdiction, and authority to investigate the conditions
and ascertain the facts with reference to the business of making small
loans, as described in the first paragraph of section 1 of this act, and
upon the basis of such ascertained facts:
(a) To classify such small loans by general order according to
such system of differentiation as may reasonably distinguish such classes
of loans for the purposes of regulation under the provisions of this act;
and
(b) To determine and fix by general order such maximum rate of
interest or charges upon each such class of small loans as will make
available adequate credit facilities to individuals, without the security
generally required by commercial banks, by inducing efficiently operated
commercial capital to enter such business in sufficient amounts to provide
such adequate credit facilities; the department may from time to time
upon the basis of changed conditions or facts redetermine and re-fix
any maximum rate of interest or charge previously fixed by it but such
changed maximum rates shall not affect pre-existing loan contracts lawfully entered into between any licensee and any borrower; any and all
orders which the department may make respecting rates or charges
shall fix and contain the effective date thereof, which shall not be earlier
than thirty days after notice given to each licensee by depositing such
notice in the United States mail directed to him at his address as shown
by the records of the department."
Now, Therefore, the Department of Financial Institutions of the
State of Indiana, by virtue of the power and authority conferred upon
it by law, and by unanimous vote of the members of the Commission for
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Federal Reserve Bank of St. Louis
No. 10
176
Financial Institutions of the State of Indiana, does hereby make, and
promulgate the following general order with respect to the classification of small loans and the maximum rate of interest or charges upon
each such class of small loans, such general order being made and
promulgated to make available adequate credit facilities to individuals,
without the security generally required by commercial banks and to induce efficiently operated commercial capital to enter the small loan business in sufficient amount to provide such adequate credit facilities.
1. CLASSIFICATION OF LOANS
The following classifications of small loans as described in the first
paragraph of Section 1 of Chapter 154 of the Acts of the General Assembly of the State of Indiana for 1933, are hereby established:
(a) Class A shall be that part of the unpaid principal balance
not exceeding one hundred ($100.00) dollars of any such small loan.
(b) Class B shall be that part of the unpaid principal balance in
excess of but not less than one hundred ($100.00) dollars and not
exceeding two hundred ($200.00) dollars of any such small loan.
(c) Class C shall be that part of the unpaid principal balance in
excess of but not less than two hundred ($200.00) dollars and not
exceeding three hundred ($300.00) dollars of any such small loan.
2. RATES OF INTEREST
The following rates of interest are hereby fixed upon each such class
of small loans as determined by paragraph 1 hereof:
(a) On all small loans in Class A, being that part of the unpaid
principal balance not exceeding one hundred ($100.00) dollars of any
such small loans as described in the first paragraph of Section 1 of
Chapter 154 of the Acts of the General Assembly of the State of Indiana
for 1933, at the rate of three and one-half per cent per month.
(b) On all small loans in Class B, being that part of the unpaid
principal balance in excess of but not less than one hundred ($100.00)
dollars and not exceeding two hundred ($200.00) dollars of any such
small loans, at the rate of two and one-half per cent per month.
(c) On all small loans in Class C, being that part of the unpaid
principal balance in excess of but not less than two hundred ($200.00)
dollars and not exceeding three hundred ($300.00) dollars of any such
small loans, at the rate of two per cent per month.
3. EFFECTIVE DATE
This general order shall be in full force and effect on and after the
15th day of May, 1935, and shall remain in full force and effect until
modified, rescinded or repealed by subsequent general order of the Department of Financial Institutions; and Small Loan General Order
No. 2 promulgated by the department under date of January 28, 1935,
is hereby rescinded and repealed effective at the close of business on
May 14, 1935.
In Witness Whereof, the Department of Financial Institutions has
caused this general order to be executed by its director and sealed with
the seal of the department at Indianapolis, in the State of Indiana, this
llth day of April, 1935.
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Federal Reserve Bank of St. Louis
19341
SENATE — No. 100.
85
3 amended by inserting after section twelve the follow4 ing new section: —
5 Section 12A. The word "reorganization" as used
6 in this chapter means, without limiting the generality
7 thereof, any merger or consolidation, or a trpsfer of
8 all or a part of the assets of trust company to any
9 bank, trust company or othei\corporation, or any
capital or capital
10 other change in the assets,
11 stock of a trust company.
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Federal Reserve Bank of St. Louis
1
11
olef COMMONWEALTH OF MASS.-REPORT OF SPECIAL COM. FOR INVESTIGA
TION AND STUDY OF BANKING STRUCTURE--Jan . 1934
[Jan.
SENATE — No. 100.
86
APPENDIX C.
CHAPTER 167.
EXAMINATION OF BANKS.
The commissioner, either personally
2 or by his examiners, or such others of his assistants as
3 he may designate, shall, at least once in each year,
4 make a thorough examination of the books, securities,
5 cash, assets and liabilities of all banks under his
6 supervision, including an accurate trial balance of
7 the depositors' or shareholders' ledgers, the ability
8 of the bank to fulfill its obligations, and also whether
9 it has complied with the law; and he may also, when10 ever he considers it expedient, make, at the expense
11 of the bank, such further examinations as he deems
12 advisable. The expenses of the annual examination
13 of a tnist company shall be borne by the company,
14 and shall be limited to the actual salaries of the
15 examiners and other assistants taking part in the
16 examination, and such additional sum for the over17 head expenses of the division of banks and loan
18 agencies as the commissioner shall determine to be
19 attributable to examinations, such amount to be
20 distributed in the same proportion as the direct
21 charges. The commissioner or the person making
22 the examination shall, at the time of any such ex23 amination, have free access to the vaults, invest24 ments, cash, books and papers. The commissioner
25 shall preserve a full record of each such examination
26 of a bank, including a statement of its condition.
SECTION 2.
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1934.]
SENATE — No. 100.
87
27 Copies of the reports of such examinations shall be
28 furnished to the banks and may, in the discretion of
29 the commissioner, be furnished to federal authorities
30 that have the right to examine such banks. The
31 commissioner may accept in whole or in part exam32 inations made under federal laws in lieu of any
33 examination the commissioner might otherwise be
34 required to make under the provisions of this section
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Federal Reserve Bank of St. Louis
88
SENATE — No. 100.
APPENDIX
[Jan.
D.
CHAPTER 167.
FEES AND EXPENSES.
SECTION 30. The compensation of the special
2 agents, counsel, employfes and assistants, and all
3 other expenses of supe *sion and liquidation, in4 cluding costs and expens incurred by the commis5 sioner in relation to such ank, shall be fixed by the
6 commissioner, subject to th approval of the supreme
7 judicial court for the count where the principal office
8 of such bank is located, an , upon the certificate of
9 the commissioner, shall be aid out of the funds of
10 the bank in his hands; pro *ded, however, that the
11 compensation paid any specia‘ agent shall in no event
12 be at a higher rate than the highest salary established
13 in said bank, or at a rate in excess of one thousand
14 dollars per month, and that the total compensation
15 of special agents, employers and assistants shall not
16 exceed the total pay roll at the time the comxnis17 sioner took possession.
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Federal Reserve Bank of St. Louis
REPORT OF SPECIAL COMMISSION FOR INVESTIGATION & STUDY OF BANKING STRUCTURE-Maos.--Created by Chap. 35, Resolves of 1933
(Jan. 1934)
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Federal Reserve Bank of St. Louis
e"
SENATE — No. 100.
[Jan.
Under the terms of the bill, the Commissioner of Banks
is given the sole responsibility of deciding when actual
use shall be made of the resources and powers of the
guaranty fund. Whenever the Commissioner finds that
any member bank either has already entered into "an
unsound or unsafe condition," or will do so if it continues
in business, he may so certify to the directors of the
Guaranty Fund. Thereupon, the corporation controlling
the fund shall immediately take possession of the property and business of such bank.
The corporation's first duty, upon taking possession,
shall be to provide such funds as it may find necessary to
preserve the assets of the bank and manage them in a
business-like manner for the protection of depositors.
Thereafter, the directors of the corporation may follow
one of two courses, — they may either decide to carry on
the business of the bank until its condition can be raised
to a point which would justify a return to its original
management, or else the corporation may, and at the
request of the Commissioner shall, discontinue the business of the bank and proceed to liquidate its affairs.
If the first course is chosen, the bill provides that the
bank shall not be returned to its original management
unless and until all funds advanced to the bank from the
Deposit Guaranty Fund shall have been repaid to the
fund, or until the corporation shall have received satisfactory security for such repayment.
On the other hand, if the corporation decides to liquidate the bank, the bill provides that the depositors shall
be paid the full amount of their deposits, with interest.
Such payments are to be made within three years from
the time liquidation begins, and in such installments as
the directors of the Guaranty Fund may determine. For
this purpose, the corporation shall use, in addition to the
assets of the bank, whatever sums may be required from
the Deposit Guaranty Fund in order to make up any
deficiency which otherwise would fall upon the depositors.
1
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Federal Reserve Bank of St. Louis
-2—
In practically all of its other major features, and
even
in most of the details of its wording, the
Co-operative
Guaranty bill follows the plan mapped out for the sav-
,/
32
SENATE -- No. 100.
[Jan.
ings banks Guaranty Fund. In case the Commissioner
of Banks should certify that any co-operative bank has
entered into "an unsound or unsafe condition," or will
do so if it continues in business, the procedure to be
invoked by the directors of the Shares' Guaranty Fund
would take over the management of the bank, supply
funds to preserve its assets, and then either undertake to
restore the bank to a strong condition, or proceed to
liquidate its affairs, just as in the case of a savings bank.
If liquidation ensues, the corporation shall pay to the
shareholders of the bank the full amount of their shares,
with interest. Such payments are to be made, however,
within five years from the iime liquidation begins, instead
of three years, as in the case of a savings bank.
REPORT OF SPECIAL COMMISSION FOR INVESTIGATION AND STUDY OF BANKING STRUCTURE-MASS.----Created by Chap. 35, Resolves of 1933
(Jan. 1934)
P.
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Federal Reserve Bank of St. Louis
The Commission feels that real estate loans should
be limited to an area where constant supervision may be
maintained, and an area within which all directors may
have some knowledge of values. There appears to be no
reason to place narrow arbitrary limits upon thobe banks
which are situated near ti county or state boundary. This
applies especially to savings banks and co-operative
banks which cannot now lend outside of the &tate. lhere
should be some way whereby the Commissioner of Banks
could be sure to have brought to his attention loans
that exceed the assessed value of the
1934.]
SENATE — No. 100.
37
property. At present there is no provision that this
information be included in the written application filed
with the bank when a borrower asks for a loan, except
in the case of credit unions. By adding such provision
and requiring the examiner to report all loans exceeding assessed values, there will be an opportunity for the
Commissioner to note loans that may possibly be excessive.
Lack of publicity of the true condition of a corporation
may often cause more injury than would be done by
exact knowledge of an unsatisfactory condition. With
a few exceptions our commercial banks give a minimum
of information concerning their financial condition while
they are in business, and even less is available once they
have gone into the hands of the Commissioner. Cooperative banks have long given their shareholders a
reasonable amount of information. Corporations in general have been publishing more and more detailed information. This Commonwealth has long insisted on complete information being made public by its public utility
operating companies and insurance companies authorized to do business in the State. The Commission is of
the opinion that banks should give adequate reports to
their stockholders, and that the Commissioner should be
required to keep depositors of closed banks informed of
the progress he is making in liquidating or reorganizing
such banks.
1
•
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At the present time the State Banking Department is
(I)charged with the responsibility for protecting deposits in
state-chartered banks amounting to more than $3,000,000,000, the safety of which affects the welfare of all
living in the Commonwealth. It is further charged with
liquidating or reorganizing those banks which have gotten
into difficulties. To assure the quality of supervision
and examination that is essential requires men of great
ability. The Commission finds that the present salary
schedule is not sufficient to compensate such ability. It
therefore recommends that the subject of salaries in the
Banking Dcpartment be referred to the committee on
Ways and means for a general revision in the
direction of higher rates of remuneration.
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Federal Reserve Bank of St. Louis
BOOKS OPEN FOR INSPECTION.
The Commission feels that the amount of information
contained in returns of banks published under the provisions of section 26 are totally inadequate to indicate
+nip financial condition of such banks, and that each
1934.]
SENATE — No. 100.
41
stockholder is entitled to a more
detailed report at least
once every year. Corporations,
other than banks, in
general give their stockholders
fairly complete reports,
sometimes as often as four times a
year. The same is
true of most co-operative banks
in this Commonwealth.
Although the determination of the
details which shall be
shown may well be left to the
Commissioner and each
bank, additional legislation
requiring greater publicity
seems necessary. (See Appendix
A, section 19.)
DEPOSITS MAY GO ON INTEREST MONTHLY.
In order that a bank may not pay out in interest a
larger portion of its profits than earnings and the condition of its capital may warrant, the Commission is of
the opinion that legislation should be enacted to give the
Bank Commissioner power to limit interest rates. At
present banking institutions are co-operating with the
Commissioner and carrying out his recommendations.
There should be some more definite provision provided in
connection therewith. (See Appendix A, section 67.)
-3—
PAYMENT OF DIVIDENDS TO BE AUTHORIZED BY
DIRECTORS.
At the present time the Board of Investment determines the rate of dividend on savings deposits. The
Commission recommends that this duty be transferred
to the president and directors. (See Appendix A, section 68.)
1
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V
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Federal
Reserve Bank of St. Louis
0
CORPORATION MAY ACT AS RESERVE AGENT.
\
At present trust companies may deposit their reserve
funds in any national bank in certain reserve cities. The
Commission feels that no bank not under the jurisdiction
of the Commissioner should act as reserve agent unless
approved by him. It is further felt that power to change
reserve requirements in an emergency should be placed
in the hands of the Commissioner. (See Appendix A,
ection 75.)
V
P
BOOKS OPEN FOR INSPECTION.
1 SECTION 19. The books of such bank shall at all
2 reasonable times be open for inspection to the stock3 holders and to beneficiaries under any trust held by
4 such bank. Each bank shall publish an annual re5 port for the L;enefit of its stockholders. Such report
6 shall contain a balance sheet and a profit and loss
7 statement, and such other information in such form
8 as may be approved by the commissioner.
1
J
•
•
•
—4—
No
-13 20 bank with outstanding common stock of one hun) 21 dred thousand dollars or less may hold under (a) of
22 this section more real estate than is used by it in
23 whole for the transaction of its business.
24 Hereafter, no bank without the approval of the
25 commissioner shall (1) invest in bank premises, or
26 in the stock, bonds, debenture or other such obli27 gations of any corporation holding the premises
28 used in whole or in part by such bank; or (2) make
29 loans to or upon the security of the stock of any
30 such corporation if the aggregate of all such invest31 merits and loans will exceed twenty-five per cent of
32 its capital funds.
1
0
(/'
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Federal Reserve Bank of St. Louis
SECTION 4. Whenever it shall appear to the com2 missioner that any member bank is in an unsound
for (0)1,citc_Ae
3 and unsafe condition to transact the business
4 which it is organized, or that it is unsafe for it to
a5 continue business, he may so certify to the corpor
the
6 tion, and upon receiving such certificate from
in
7 commissioner the corporation shall, by notice
take
8 writing to the commissioner and to the bank,
ss of
9 possession forthwith of the property and busine
until the
10 such bank and retain possession thereof
shall
11 bank shall resume business or until its affairs
the
with
12 finally be liquidated. The corporation may,
business
13 approval of the commissioner, carry on the
com14 of such bank subject to such restrictions as the
while
15 missioner may impose. The corporation may,
16 thus carrying on such business, pay to such bank out
() 94
17
18
19
20
SENATE — No. 100.
[Jan.
sums as the
of the Deposit Guaranty Fund such
the procorporation's directors deem necessary for
order the same
tection of the bank's depositors, and
ed for that purpose.
to be repaid when no longer requir
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Federal Reserve Bank of St. Louis
J. W. Pole, Comptroller of the Currency,
Hearings — S. Res. 71
/F.1/
\he CHAIRMAN. Right Upon triat point:'Can you tell the coml
mit ee what, if anything, is the matter with the examination systenfof the comptroller's office or/and of the Federal Reserve Board,
and have you any suggestions to make to the committee with respect to a modification of either the Federal reserve act or the
national bank act concerning bank examinations ?
Mr. POLE. The examinations of the comptroller's office, as time
has gone on, have gradually been improved until to-day I think
they are about as complete as can be made. The one weakness,
perhaps, is the fact that notwithstanding an examination may develop certain practices in banks which are objectionable, we have
very little beyond moral suasion to enable us to correct those conditions except for direct violations of law, as distinguished from
bad practices which may eventually bring the bank into trouble.
But there are two things: In the case of violation of law, we may
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
•
1
5
request the Attorney General to bring suit for forfeiture of charter.
However, in most instances, the punishment is out of all proportion
to the offense. In cases of bad practices, we can put the banks on the
list for frequent examinations--examine them as frequently as we
feel necessary—and usually that is a question of making bad matters
worse. So that we have often thought that under a proper arrangement, if the comptroller's office had the right to recommend to a
board such as the Secretary of the Treasury and the Comptroller
of the Currency and the governor of the Federal reserve bank in
the district in which the bank might be located or, in fact, the Federal Reserve Board, for that matter—has the'right to remove officers of the bank, I doubt whether it would be very necessary ever
to put that into practice. I think the mere fact it was on the statute
book would be a deterrent which would be very valuable and enable
us to be more effective in certain cases than we are now.
The CHAIRMAN. I had long labored under the impression that th
powers of the Comptroller of the Currency were rather autocratic
and he had a right to summon the board of directors of any national
bank and require the board to correct irregularities that might lead
to disaster.
Mr. POLE. He has the right, Mr. Chairman, to summon boards o
directors, which is very frequently done. But he has no power
beyond exacting from them a promise to do certain things which
might be necessary to improve the condition of the bank. But beyond that he has no power except to put that bank on the list for
frequent examinations or, in cases of the violation of law, to bring
suit for forfeiture of' charter through the office of the Attorney ,
General.
Iv /
The CHAIRMAN. Well, would not the threat of repeated examination and of ultimate forfeiture of charter be very effective in correcting irregularities in a bank ?
Mr. POLE. In many cases quite effective—in many cases quite effective. In others Mr. Chairman, where the board may be obdurate
or the bank may be under the domination of a single person, which
is very often the case, you can exact any sort of promise but performance is another thing.
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Federal Reserve Bank of St. Louis
1
1
J. W. Pole - Page 2
/r31
The CHAIRMAN. We11,-I am asking you these particular questions,\
Mr. Comptroller, for the reason that since it has become known that
1this subcommittee is to prosecute an inquiry into the banking situa1
tion, I have received numerous letters from various parts of the ,
country where there have been bank failures, asking to be told how
it could happen that in some cases within 60 days after national-bank
examiners reported a bank in solvent condition it would fail disastrously, and, to be specific, I have had many complaints from
Kentucky about a large bank failure in that State, saying that your
examiners had, at a quite recent date, reported the bank in a perfectly sound condition, and yet it failed and has created consternation ,
throughout that State.
/
Is there any remedy which you could propose for a thing of that? c,
sort? Ought not your examiners have been able to determine
whether that bank was properly conducted and in a sound condition? '
Mr. POLE. Yes, sir; and did do so. I do not know what statements
you refer to, Mr. Chairman, but, of course, the only statement which
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•
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Federal Reserve Bank of St. Louis
1
6
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
was made was the published statement of the bank's condition. As
far as any statement being made by our office or by the examiner in
the field, that, of course, is unthinkable with respect to any individual
bank.
This bank to which I am sure you refer was an extremely important bank. They had a very large number of deposits and a large
number of depositors, both individuals and banks, and the bank was
regarded as one of the very important banks of that whole part of
the country.
There is a great deal of information that I might file for the benefit
of this committee in connection with which I might not be able to
express myself now and which I shall be glad to do if you wish to
have me do so. But in a general way I will say that there was a
typical bank under the domination of a single arrogant person and
the condition of that bank was well known to our office.
The CHAIRMAN. What you would call a 1-man bank ?
Mr. POLE. It was a 1-man bank, Mr. Chairman. The condition
was well known to our office. The bank has been getting in bad
shape for a number of years, gradually getting worse, until some
action was taken which was effective in requiring a large number of
losses to be taken out of the bank.
Now, that has been done over a period of years. The one salvation which we saw was that the bank was a tremendous earner. The
bank was earning a million dollars a year and a large part of that
was, of course, being used to take out losses. The control of that bank
passed from the individuals to the Banco Kentucky Corporation,
a holding corporation, which corporation, in turn, invested a large
sum of money in an investment house or a real estate broker's firm—
I do not know exactly what they would call themselves—which
failed, and the connection was so well known that a run started on
the bank to which you refer and it was so heavy that there seemed
to be nothing to do in order to conserve the resources of that bank
for the general creditors, but to close it, and it is easily possible—
may I add this, Mr. Chairman—that that bank is not such a dismal
failure as seems, perhaps, to be in your mind.
The CHAIRMAN. Well, I know nothing of the details except that
these matters have repeatedly, in recent days, been brought to my
attention. But you state that the bank was badly managed and
conducting an irregular, if not an illicit, business over a period of
years. Of what effective use, then, is your examination system if
you.are not authorized to correct irregularities of that kind?
j. W. Pole — Page 3
3/
Mr. POLE. Of course, there was a case, it is true, where we did
force a great many.corrections. We did correct them and the bank
was showing some improvement, because we were gradually getting
losses out of the bank, but what closed the bank, of course, was the
withdrawal of deposits occasioned by the failure of the company
referred to.
It is our effort, always, to see what we can possibly do to keep a
bank from failing and we go to every length possible in order to
prevent the necessity of taking such a step, but in this particular
instance we did find it extremely difficult to get the officers and
directors to cooperate with us in cleaning the bank up anything like
as rapidly as it should.
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
•
7
The CH.AIRMAN. As I understand it, your only suggestion for the
correction of a situation of this kind is that somebody—either the
Comptroller of the Currency, or some other official or body—be
given authority to remove officers of individual banks.
Mr. POLE. There is not any doubt but that if we had had authority to remove officers of that bank that that would have been
one of the cases where it would have been employed.
Now, to elaborate a little bit more, Senator, as to why it is not
possible to bring more effective measures to play, I may say that
while, of course, the public is well aware of a bank failure—there
is not any doubt about that--it is not aware of the hundreds of
banks which are saved from failure by our office, and I will venture
to say that within .the last five years as maliy as 500 banks have
been saved from failure through the activities of the comptroller's
office.
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.1. W. Pole — Page 4
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Mr. Wm.'s. I have one or two things following up the points
which have already been raised. Mr. Comptroller, do you, at the
present time, examine the security companies in New York and elsewhere which are affiliated with national banks?
Mr. POLE. We do tha
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