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Federal Reserve Bank of St. Louis
413.1a - Source aaterial (Pockets Only)
Possible Methods of Iiiiproving
Study h10
Bank Supervision
Part 2
Bank Sus-ensions Stu ' of 1 6
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
PAR? TI
wOm1141142101AMIJIMMUMELA
rIVOYMTIMN
lbia etaff resommmid"-1. That appropriate steps be taken to effect a censolidaticft
of
bank supervision functions of all existing Aiderml agencies;
2.
Tht_t such consolidation be under the Dowd of Governors,
with a Federal Bank CoLuisAon and a District Federal
Bank Commission in
in accordance
each Federvl reserve district, to whom would be delegated,
ed
with authority grantrd by the statutes, the aeAministrative duties involv
in tilt, supervisior of all insured banks; rad
7
That other appropriate steps be taken simultaneouely to
thert-of
increase the efficiency of public supervision and reduce the cost
ations; (b)
by (a) requiring less frequent, but more effective, examin
or directors;
providing for thorough audits by certified public accountants
than agi merely
(c) utilising through review and analysis, us a supervisor,I. rather
chancing the
a statistical medium, more satisfactory call reports and
strengthening various
methoa of publication thereof; ant (di simplOying amid
ttions amd
provislons of the law directly or indirectly relating to examin
superviaion.
such reorganization should include, es a mimimism, the superwisary
functions of that
Comptroller of the Currency,
hoderml Doposit Insurance CorpormtimM,
Federal hesorm bystee,
hoconstruction finance Corooration, and
becretary of the %reavury.
In the absence oi
complete unificAtion or reorgani4al.lon of uhe banking
agenda*,
structure, including the funotIonu ef the variouti Federbi credit
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Federal Reserve Bank of St. Louis
it woulc teem practical to limit any consideration of the reorganit‘tion
of the superviLor:y functions to thoLe which reLite to banko
com-
mercial depoaits.
The eoLt comiaicated 4.nd delicc.tc: phase of coLaolidi,tioli of bank
supervisloa relates to the possibility of supplanting the Etat superviserY
functions ant; agcncis by the Federal. Onificotion or eommerciAl banks
under iederal cht..rtcr-doubtlews the most sati:itactory atiuoto objective
but highly improbabl of attainment cmcept by series of stew, ovk,r a
period of tine, during which personalities &nd other cireumstanoos may
change-would of necessity carry with it a roorcanisatiom of the supervisor/
functions uncier on* Federal body and the elimination of State supervision
of mica banks. In all probability this would aroma. vidosous objections
by 6tale commissioners and thEir sup?orters, including most of the nonmembc,r
banks and some 41enber banks.
Unification through membership In the .jslima
saor through deposit insurance would not neoesw,rily carry witA it centrali
tion of supervision under one Federal body, although it should, nor would
it necessarily mean the immediate elimination of &tate supervision.
Irrespective of the form or extent of unification, or even if no 2rogrem
of unification is effected or attampted at thiE time, there is an urgent
need for the i,Amediate combination of all existing Federal supervimory
functions as a
most practical and effective meane of strengthening the
country's banking syste:u.
danifectly, the supervisory responribilitic of tbe Federal
could not be delegated to the State deprirtments.
body
Of course, close co-
supervisory
operation between the Federal agency and the respective State
authorities could and should be provided for by grantini authorit
to
exchange oopies of reports of examinations, requirements, etc., In all
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Federal Reserve Bank of St. Louis
frv
States where they are desired. The practical and probable solution,once
unification through deposit insurance or the Federal Reserve System and
effective supervision are provided by law, would be the gradual elimination
of State supervimion largely through the efforts of bankers thftwelves
boommos of tbe expense and sonfusion to the banks.
With the sontinuation
of SU,.te chartering of banks, nominal supervision by the &totes end
effective supervision by a Federal &gamey although not ideal mould not
be totally unlike the situation which exists with respect to certain other
type', of businesses.
.
principti
1/04814.0
it Mild
bone of the
be advantageous to consolidate under one
body all of the inanimation amd supervisory functions now exercised by
thi Federal agencies above mentioned are indicated in the followinp pare-
80,010••
Many powers, responsibilities, and rosette's, and divisions of the
staff of the T.D.I.C., are similar to those of tho Oonptroller of the
Currency. Althoogb the Comptroller ham retained all or moat of his original
and primary superviiory powers relating principally to notional benkr, and
the F.D.404. has boon given certain supervisory functions in eommeation with
State minninher books and iirtain rumitisma relating to natiomal amd litato
maim books, the Yedoral Seism irotono by the terms of the original
Federal Misoorvo Alit sod sibosinsat anindninti to tho Federal statutes,
particularly by the UMW Asto of liSS amd
hos boos **largo! with
Amy inportant recmnsibilities in oonmootion with the regolmties of both
national and State banks and their affilibtes, away of which involve a
serious werlapping of and conflict with the powers, responsibilities, maid
ronotions of the Comptroller and the Y.r.I.C., with respect to many important
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Federal Reserve Bank of St. Louis
policy matters as well as numerous administrative details, and the development of a large staff with many similar divisions, all of which are evident
not may to the personnel of the three offices involved, but to banks and
memy outsiders as eolle
the leard's solutions of mew eases sad problems involving State member
bombs are comparable to thoee reanhed hy the Comptroller and the
under similar cirsumelenses. In other eases the Board's decisions differ
fres these reached Or the lemptreller er the F.D.I.C. Much of the detail
work performed by the leerdes Mesearch and Statistics, Legal, Bank Operations,
mud &animations divisions Is similar to, and overlaps to a very great extent,
the work of corresponding division of both the Comptroller end the Y.D.IX.
It suit seeessaril,y follow thet the thirtresix field offices,
maintained sod eetablished by the three Federal supervisery agensies, like
*Us esporionse a eossiderable amount of conflict and overlapping ta the
performaace of their flactiono.
The Secretary of the Treasury has sertain posaers relntimg te the
licensing of banks, oonourring in the appointment of receivers for natiomal
banks for their failure to maintain reserves leder section 6191 of 13.B.R.B.,
and st few other matters which ere regarded by soma as supervisory powers.
ths
R.r.c. likewise
WISTWASO sertata peepers of a supervirory nature
in SeMneStLen with the making of lea's to, or purchasing of preferred stalk,
sepilhal netee emd debeaturos free, banks in need of rehabilitation aide
ism facts Noy he emphaelood by the following hy?othetical ewe,
*pica' of many.
A national bank with half of its oapital represented by preferred stook
purshased by the R.F.C., regarded as being in good sondition and ander sound
memagement, is enemined by notional ascaaiaers in the field, whOils report is
sent to and amaysed
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Federal Reserve Bank of St. Louis
ar the distrist *tot nationial bask
examiner Who may
or ms; mot write to the bank pointing out certain miscellaneous features. A
copy of the report iv delivered to the Federal reserve bask where it is
reviewed or analyzed for credit and other purposes.
A copy of this report is
forwarded to the Comptrollerls office in Washington where it is reviewed mnd
analysed by an assistant chief national bank examinor and may be considered
hy the mhief national bank examiner and by a deputy oomptroller„ in certain
swat and a formal letter of eritimism is prepared. The district agency
memagor of th. 111474•, whe is interested in matelhimg the trend of the bank
mill revtew the report of examinBtion and forward his views to Washington
with res.)ect to what changes or corrections, if any, might be required. The
Washington office of the R.Y.C. may then call for a copy of the report of
examination for the perpoos of having it analymed and reviewed in detail, /f
the bank at a later dots 'oohs truRt ivvers, the report is reviewed is the
examinations division of the swerve bank And its report and rocommomdation
is rintod throsgh the division of examinations in Washington, Which dividdli
obtains fro. the Comptrollerts office the latest report of examination sod
the files, and in
many eases preceding reports, for the purpose of review
Board,
sod analgsiO in preparing its momorandum and recommendation to the
'Mach in turn are considered by the Bobres comma and secretary
before
lomscelation to the Board for its fin61 concidemtion mod riling. After
Swift sonsidered the Comptroller's recommendation, which is likewise based
ion sad
I'M a review and analysis of at least the latest report or examinft
the files, if the bank ia in bad or unsatisfactory condition, comforomoos
may be held botocen the representatives of the Comptroller, the R.F.C., end
the Board. 4i mew of such Gazes conferences are held by the district chief
examiner of the Comptroller, the agenoy menager of the R.F.C., mod °Moors
of the reeerve bank. In additios, the FeD.I.C. may be interested in or
regisotod to participete in the doliberattasa NW plans, neoessitating their
smalysis of the current reports of oxamimatiom and the files.
Thie iSparticular
tree ta theft awns whore considaratios is given to the torminvtion of Willenne
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Federal Reserve Bank of St. Louis
On many occasions views and opinions held by the Board nnd ito
staff have been found to differ from views held by the Comptroller and
the F.D.I.C. and their staffs on various policy matters es well as
adainistrative details.
They have differed both as to policies and
requirements and the methods of effective enforcement thereof. Such
differences ere frequently evidenced in the drafting of reasamended
legislation, regulatione, rulings, opinions and interpretations.
Addi-
tional illustretions relate to the form end content of call nnd examination
reports; the methoe and extent of classification and eliminetion of securities deereciation, losres, etc.; conditions precedent to the issuance
of voting permits, ce2itel reductions and establishment of branches; the
definition of interest; the type and base of statisticul information to
be gathered and publiehed; etc.
Changes in established or uniform policiee, interpretetions, reports,
procedure, etc., are desirable end necesoary from time tn time to meet
varying circumstances.
Under the existing setup, when the Board or either
of the Federal agencier desires to make any such chenges, it is neceseary
to confer with representatives of the other agencies in order to avoid any.
conflicts and to acquaint them with the coatempLated chanees.
Often in the
past this has neceesitated extended conferences, or even serier of conferences,
recultinf in long delays to the great expense and embarraesment to the Eloeird
and many disadvantagee to the beaks concerned.
Under the present setup banks ere frequently confused es to 10lich lave
or whose requirements, suggestions or instructione they should follow, or as
to whom they should turn for information or guidance on certain problems,
mob a. mergers, loan limits, merginal requirements, intereet rates, publication of reports, affiliate lettere, etc.
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Federal Reserve Bank of St. Louis
Such eonfuzion may result because.
of one or more of the followings
1. Various provisions and limitetions set forth in the
Federal Reserve Act and other Federal statutes relating
to both State and national banks;
2. Examlnationa and correspondence by the ComiAroller of
the Currency or his representatives, particularly in
H.C.A. gro4s;
3. ?rovisions for the examination of national banks hy
the Federal Reserve System and joint examinations by
State departments with the F.D.I.C. or the Federal Re—
serve Lystem;
4. Examinations, rulings and practices of the F.D.I.C.,
colusbrtd with
relative to State nonmember banks,
banks;
l
nationa
and
member
State
5.
Regulations and rulings by the Federal Reserve :late's,
affectine, uoth national Nat. Stet*. .4ehb(..r benks;
6. Regulations and rulings by thf- ColnAroller of tht
Cumming, affecting both national and State member banks;
7.
Various transaction6 with and through the Federal reserve
banks, the F.L.I.C., and the L.F.C.;
o.
Reports to the Federal restive banks; and
Numerous other matters.
follow—
A forceful illustration of such confusicfn is iodinated by the
a very simple
ing copies of correspondence recently hwadled, relating to
but Involving
subject. (Various otner illustrations of a similar nature
froa tine to tiae.)
different and Aore complicated subjects have been noted
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Federal Reserve Bank of St. Louis
"BISHOP NATIJNAL BANK OF HAWAII
Honolulu, Hawaii
August 31, lase,
The Compsroller of the Currency,
Washinwton, D.C.
Dear Sir:
We respectfully request that The boatmen's National
Bank, St. Louie, Missouri, bn avroved by you Pn a clunlificd re—
serve agent forreserve purposes of this bank.
Trusting VILA you will accede to this recuest ftqa so
notify us at your early convenience, we remain
Tours very truly,
tioyirAt ant! Cnshier."
ce rip.
'%'-',pt-11-.),3* 14, 1930
'Tice ?resident tad Cachi4n.;
Bishop National Bank of Hawaii,
Honolulu, &Await,
Dear airs
Tour lett,zr of AL;01_.t ZI„ re4uevtias thht The
Beateenso National Usk, Bt. Louis, Itseseri, be approved
ae :,ualifivd ria‹nie egest for riser's purposes of your
bank, has teen referred to the lewd et Governors, Tederal
ileoorvt, wiAtoia.
Very truly' yours,
(Sgd.) Gibbs Lyons
Pe.out; Caaptrols.:r.'
•t
*• *
*
war' ;..1 ine
"Mr. Gibbs 14rons,
Deputy Comptroller of the aseveney,
Nashingt4A, D. C.
Defir far. 4T-wag
nit mill aOrnovilot- ressipt ef the letter dated
Most 31, 1936, frogs the Bishop National Beek of Nesaii,
Honolulu, Ruwail, ATIo- :/ou referred to the Bo:;_re for repl:/.
It is noted that the Bishop Mations' lea if Maven has
Bea, rt. Louis,
The Bc...tN(.11/s
rok4uk;A4d
Missouri, be approved as 6 qualified reserve agent for resemi, purposes.
It *pinery tiut spy action with regtrd to this
request ohmic be taken under the provisions of section i)t
of the !Wised ftetutes of the United States. isseordingly,
the matter would seem to sem wittin the juriOdictiou ef your
office Tether then of the leerd o and, pursuant to your telephone conversation with one ol the hoard's Assistant Counsel,
the letter is beinr returned to you herewith.
Very tru4 yours,
NEC) 104 P. Betimes
L. P. BOW',
Assistant beeretary."
* * * * * ****
iephasia may be *woo to this iiinstesties Oy notin4 that shun tho
Board's Division of Examinbtions received the eememeleatien ter attention
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Federal Reserve Bank of St. Louis
and sought legal advice in the matter, the Board's counsel, feeling that
the matter should be handled by the Comptroller, indichted a desire to
study the atiltutes very carefully before making a definite reply. In
view of thia it is not at all surprising that the bank would be extremely
confused upon receipt of the Comptroller's reply.
In addition to the confUsion resulting from the various matters imdieated
above, banks, both large and anall, are forced to incur considerable additional expensen in the preparation of frequent and divers reorts required
to be submitted to the various supervisory authorities, often covering the
Base general subject matters but required to b, set up or split up differently
with respect to achedules or explanations of certain groups of items, amd
because of the necessity of employing legal counsel to "Interpret" or
reconcile the many laws, regulations amd rulings of the different authorities.
METHODS OF ACCONFLISHINO CONSOLIDATION
The foregoing paragraphs indicate the supervisory power', which should
be consolidated.
The following chart or outline and comments indicate a
feasible method or form of reorganization of banking supervision under
ome Federal body, and applicable under either type of unification of banking structure, without reference to the extent or details of the changes
la the laws which would be necessary.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
MN&
211
,BOLWD
44sTY-2#
1111110151111
144i2114,
=Asa aL iika MAW
Seorstery-far Board of Severiors
Secretary-far lederel Desk Commisaios
Couneelp-for Beard of Oamersors
Comsat/4er Federal Salk Commiasios
kiffeearoh and Etatisties
Security Lams
Pissal Agest
Salk Opersiloss
Sammimatisms
Federta Dsposit Insurmsee Peed
Prosidest or First Vice President
Vies President
MAW
Senior Examiner
Monier /raft Isamtner
Saslow Asoommtest
Stetistlelammdmalyst
Assistant Comssel
Sposialiat
101., D.
Sone amminere
Zone Trust Examiners
Examiners
Assistant Saamimare
Stenographers
Clarks
P
,Boar6 oi c9vernoxe
Functions:
1.
General direction of the operations of the twelve Federal
reserve banks and their money and credit policies, etc.
k.
Examinttion of the twelve Federal reservP banks, delefated
to the kederal Bank Commission.
iemeral policies of semaercial banks with respect to mow,
sredits, investments, measemmmit, operations, stamdards, etc.
Determination
of basis upon which banks any be admitted to Inman's. benefits, unless all
aro blanketed in by law.
4.
Appeals of commercial banks in certain matters over which contro-
versy has arisen with the federal Bank Commission.
b. Generhl policies of extmination and supervision of ocommeroial
banks, the details thereof being delegated by law to the Federal Bask
Commiskion.
6. Determination of general policies md administrytion of the
Federal Deposit Insurance Fund.
7.
Appointment and removal of members of the federal Bank Commission
and approval of the Dihtrict Federal Bank Commission.
Method of Selection.
One of the principal criticisms of the Board of Governors which have
appeared in the press relates to the politial character of tho ap2ointments
to the Board.
The criticisms and objections In this connection oould be
removed to a great extent by the Presioent continuing to appoint one Board
member such two years, and as the regular terms hereafter expire, successors
'mould be apnolnted from the variout sections of the country, subjec to
confiraation by tne SonLte, from a list of nominees consisting of threc to
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Federal Reserve Bank of St. Louis
five persons for each. vacancy, nominated by outstnding organizttions
representative of banking, industry, commerce, agriculture, etc., such as
the Aaerican Benkers Arsocipction ane the U.F.% Chanber of GomTcrce, etc.
It
ir areumed that such nomint-es would posserc a record of autetndinf ability
ene accomr)lishmentr, and would be satieftctorT tc the various sectionz ,Nad
fpctions of the country inetauch es the membership anci influl7Tice of the
nominatinf organi7ptons are national in dharecter. It ceuld rot be argued
by any one, except, perhaps, politicians of a certain type, that such
appointees would have other than a broad national view of the financial and
econoaic system or that their acticriF and deliberstion,F would be narrowed
solely to the interest of the aation't, banks at the expense of all other
forces in our economic system.
will
145
Any efforts at concolidation of supervision
be Irv:tautly regorded by most of the exietiag sup?rviFor; autorities
another step la the direction of their ultilate elimLnation and it is
natural to expect thefl to endeavor to arouse public and ;olitict.1 sentiment
against such c-pacentration.
It is, therefore, considered 400d and necessary
strategy to incor:lorste in any progrc-n of repronization this and everj other
favorable point to elimin7.t(i or reduce cniticisms ae mucY. as poosible.
Sueh
a aethod of appointing Boerd membcrc. vluld tenc; to ovProome the opposition of
many outstanding critics.
h4eral
Bank
Commisskon
Functions (through e cubcommission locrAed at end cooperAinz with,
but not under the control of, each Federal reserve bank,
as described below).
1.
Administration of ecneral or fundamental policies laid down by
Us %lard of Governors relative to the operations of commercial benke.
2.
Appointaent or nomination of District Federal Bank Commievioners
and the approval of examiners and assistant examiners end their salaries,
annually.
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Federal Reserve Bank of St. Louis
v
r%
Z.
tirection End coordin6tion ol extminiAion
am4
of Ell commercL1 1Lnks, including Epecial lettcre of criticiesw in
connection viti
xaminttior. reportE,
4. teter4inCloy, of foriE 61k c'mtent an(' az-Et/on of review
&me anElysie of cs,11,publiehed an4 special rel,ortt, etc., rccuiTed of
bEnkc and affiliEtcd
Final review and apircr-al of cherterb, etc.
6. ConeisrEtion of atTeLls in certein cb,,ek; which
b* ent
fro:a the veveral edstricta.
7.
ten
Exanir,, ticdn of th
Laincr:i
twelve Fede.rl. reaeNde banke 1),: a creu- of,
are specialistc, b.ad.:Jted by the necessary man
1;c-f7er from the e;,;Aminution foxce in tlie ditrict.
8.
aL,?orta to an6 c.Jufreneea with tile Botxcl o: Gova.nor.
Orten4sation.
1.
r1--nsist of three nemtqmn, 77ith srtiefector;- education,
experience, inte7rity, etc. (if nocererv, specif/7 thp. mi.nimum), and
mart be eniz:tr;ed in and hr.ve had at letst eight yearP of experience ee
cmtv:ting offie!ers of commorcial hsnkr or ))snk holOinp companif,s or
in the ruporvision thereof, with the rank of senior clsminer or higher.
R.
Appointment by the Boerd of GovernorE, for one year, subjEct to
cant/met/on by the ffonste, tnd may be reep?ointed theresfter for an in-
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Federal Reserve Bank of St. Louis
i3
definite number of terms et ese year eseh *Mout confirmation (if slush
preeedere is legally precticable)i
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Federal Reserve Bank of St. Louis
3. Stott srgesisatieer—
(a) A oesretery mud the eseessary eesteleate and personnel
who *Ay be effIsially eomeeeted with the genera seeretaryss office
fteetieuieg umder the lewd of Uovernots.
(b) A counsel and the neeessar) moistest*, as indicated for
the oecretary's office.
(SI Mosessary control of and ematact with keseareh and statistics
Division with respect to statisties of eommereial banks.
(4) Ressesary antra of and eantaet with Security Loans Division
vith respeot to sestrity loan activities of osomercial banks.
(e) Control et sud Oustact with Meek Operstisee Diwipion, with
respect to the amossaarf operating date esseeraing the twelve federal
reserve busks, and to whatever extent that division handles operating
Arts assesniag eameercial banks, such as, under the preseet Set-upo
statistieal data taken tree sell reports, checking to aseertain that
eall reports have beam *Chatted by all Walks and affiliate*, etc.
(f) Control of sod eleataet with the F.D.'. Fund Division with
respect to the adadmistratias ef the seemseemete ter laseremee
purposes, tht salvaging of assets of failed beake, essowlidatiomo
of problem banks, sad the investaaat of the insuresse hod,
(g) Control and contact with the Fiseal Agent's Divisiem with
respect to receipts and disbursements, etc.
(h) Control of and contact with the Saaeisations Division with
respect to essoinotions, follow-ups, analyses, and various other
types et review work hoodlize in connection with all eemmeraial
14
banks of the country, and for the proper examination of the
twelve Federal reserve banks and reporting thereon to the
Board of Gegermore who will continue to be directly in charge
ef the operatiems sad policies.
for
iMil
sa
liggaigLnalait
1"11111691
l.res:e
v
MOM:
1, Rumination and direct supervieien of cemmorcial basks smd
affiliates tm each district, insluding letters of witteisms, its*. is
accordance with general policies formulated by the Beard of Governors and
the Federal Bank Commission at Washington.
t. Applications for charters, branches, trust powers, Wimps la
ets.
3, loorgsmisatiess, liquidations, etc•
4, Study of sad roommundations sonsersiag assogssost
blahs,
with a view to improvement or removal.
5. Inedling eell reports, publications, etc.
6, aspilatism and analysis of statistical data covering gamma
00060Rie
oreditionot ioolidlog both basking smd other busisomsos, mod
furnishtsg Weeposio thspoof to lisbingtm,
7, Ihrmishimg lowhioitoo with emomisation reports er amarese owe.
of, togolhor with sufficient data in 'sweeties with problem' MON Ter
organisations, ate.
8. Handling mattere in connection with dopsit insurance, including
assessments and records thereof, reorganisations of problem banks, liquidations, salvaging of assets, etc.
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Federal Reserve Bank of St. Louis
1, At wed Federal reserve beak, have a onsmiesion °assisting of a
edstrict keaeral bank Commiesioner (or Federal heserve Benk Commis:ioner),
presilident or first vice president of the reserve bank, ent e vice
presieent (who is in contact with the banks of the dietrict through credits,
puolic relations, etc.).
k.
The commissioner should be appointed by the Federal Bonk Commission
in i,ashington, with the approval of the tcoard of Governors.
For strategy
purpoees, it sight be desirable to have the commissioner appointed bv the
board of edrectors of the bank and approved by the Board of Governors or
the kederel bank Commission in Sashincton.
integrity, education, and experience in
He should be quhlified by
banking or supervision of banks
in some important capacity, and be a resident of the district, either at
tne time of appointment or in the not too far distant pest.
He would serve
of a
in a oepacity somewhat similar to that of the commissioner of banking
and
btate, in that he would be immediately in charge of the examining staff
responsible for its conduct and for the review of reports of examinetion and
the preparation of all correspondence between the commiesion are'. the banke
on the one hand and the commission und Washington on the other.
He would be
aided in his problems and deliberations by the president and a vice presiOent
of the reserve bank, who would be required to pass+ upon or approve certain
important matters.
6.
The commiseionerle staff would be ac inrAcated by the chart ebove.
General Comments.
In order to effectively combct the arguments am objections which would
be inetantly and vigorously raieed by Stetee' riOlts theoriets, opponents
State
of eo-callee absentee control or regu1tion, including Aany congresemen,
bankers, State commissioners and others, the
law shox4d be very specific and
emphatic with respect to the placing of res?onsibilit. for the examination
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Federal Reserve Bank of St. Louis
and supervision of commercial banks under the District Federal Bank
Commission, to the greatest possible extent, with
Ett3
little as possible
primary examination or supervision work done by Washington.
It ehould
be understood that a great amount of discretionary sower should be
exercieed by the commission in each district and that the prinelpel work
of the Washington office, other than the maintenance of gal trained and
efficient examiners am. other personnel in the district ()Meet., would be
to formulate taneral policies with a national aspect, prepare instructiens,
forms of reports, etc., and to review the wore of the twelve dietrict
commissions only to the extent thet it may be neoeeeer
to be aseured that
the banks of all districte are being subjected to the same standards to be
greatest extent practicable, coneidering the peculiar economic conditions
and other situations which may be found to exiet in certain dietricte or
certain Ltates thereof.
ance at least two of the three vsembere of the Federal Bank Commission
in each district would be officere of the reserve bank who are appointed by,
and directly responsible to, the directoreethereof, who in turn sllould be
aslootod to represent banking, commerce and industr*, and agriculture, with
aue respect to tne geographical subdivisione of the distriot (thiF should
be done on such besis that the total number of directorr will be equitably
distributed to the various Statue of the dietrict in eucL naceler thet eech
State will have at leest one director on the board of the reeerve bank at
all tiaes), it ie essumed thet no Stete of the dietrict could compliin that
its benks would be examined or aupervined without :.()me degree of repreoent6tion.
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Federal Reserve Bank of St. Louis
11
oi
.91:
It would be necessary to maint,ain
amincitione
in reshinLton
P
division
the principal
tions, sp2ropriately enl?rged and reorvanized, which would
furnieht-d.
medium through Which the Federf?.1 3ank CoTmineim rtyald
informatioa concerning the examinsti:-n
cl.untry.
It is conten?lete
of examina—
rupervition of th:?. tanks of the
thet thie division rould be the larselit ,1_,71.01)n
necessary for thc, elmTission to laintain, principally
because of ths, large
volume of prolleTz to be banild in connection wit, call repoIts, reports of
corrpspondence, bank management, accounting princiA,:s and
district commisvions, instmictione,mftmunls,
prcticee, 1-.erni1P1 of
deposit ireirrfrce, etc., and it would see'r prectic.9ble far
Federel Pank
envmissio-! to delegpte tr, the division of examintions th2 msonsibility
for handlinv immediately
P
lrrge portion of the corres7meence in connction
vit!1 the datP118 of f?yemlAstions, reports, 0e3osit in2urance, etc., dirr.ct
with tne Dirtrtt
keders1 Bank ComrAst.ion, without the nccersity of reference
to the Fpdeml Bank Commission.
It is RFEUMCe thet the divielonis Pmetionr In connection with the
eyeminAion cf the trelve reserve btnkt wcule continue ts te of such ntture
and imporUnce tbat one' essietant chikf shoule be ferclally reriEned to
', 7nelinfz, of evAminations of the: reeerve banke end the preparati^n of the
tYT ,
necessary correspondence in connection thareeiLl, es well
8E
possibla
accasionsl visits to the twelve bankt in connection with the examination,
accounting, personnel and operating problems which trise from time to time.
It would also seem advisable to give consideration to the questton of what
functions and metters affecting the supervision of the: twelve reserve banks
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Federal Reserve Bank of St. Louis
shoule. be !landled by the division of eyamins:tionr or 7.;,/ the division of
bank optr, tions, keepine; La wind that the division of exaministions should
hptve on the road at all timcs examiners yho are well versed in the problemr
and policiee of and the operating conditions 'hien exist et all of the
In tlis connectioa it
ruverve
coutempiLL4 ts.,t a crew of
approximatel7 ten senior eminers of ti'„: dlvL.ion coulc and should aandle
all of Vie work in connLction Tith the exazinations of the twelve reserve
Inaks, calling upca the Litstrict '''ederal Bank Commission
dietricts to furnich Irxn
of the respective
.ouining forces suffieioat manpower to
handla routine vririficti=s, sue.: z.s cash, custodies, trbasite, ete.,
Buell :nen tc 1Jc. rzlec.sed pro:aptly after the completion of their resptective
:. savinze in s.:11,,rie, travelint
functions, thus effecting conaiderabl,
cmpenses, ctc.
requirk.e
At the mos time the ten f,enior e).=1n,,,rs should be
conoider ;c:rsonnel, op,mtine irobl•mc %.a. —.A10 ,s, auOltlag
•clt%T.luro, etc., o' tht, twLlve re.J,rve 13ake, with
,;,
efficAency
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econotty throuchout
vyslem.
view to standardi7atian
AtivatAito a 12B4O114411sw4mAir
t4, Board of Governors.-
Some of
the principal reasons for the consolidation of bank supervision under the
Board of Governors, to be administered by a three-man Federal Bank
Commission in Washington and a District Federal Bank Commission at each
of the twelve Federal reserve banks, ns indicated in tht preceding paragraphs, may be summarized
followst
1. lecessity for authority' commensurate with responsibility;
2. The existence of the nucleus or base of the necessary
elates through the facilities of the twelve Federal reserve banks;
B. Expeditious handling of matters, through one body and decentralized adminiatration;
4. Closer and sore effective cooperation with banks and bankers'
associations;
5.
Improvement in the quclity of examinations and supervision;
6. Reduction in costs of examinations and supervision of banks.
Through various, statutes, principally the Federal Reserve Act end the
Banking Acts of 1933 and 19!!5, and the responsibility for promulgating
regulations, the Board of Governors is charged with very definite and heavy
responsibilities with respect to control and regulbtion of monetary and
credit matters in the United States, with particulLr reference te interest
rates, reserve requirements, open wirket operations, securities loana, etc.
The considerable amount of publicity aiven to the Yedeml Reserve System in
the last few years has caused the average aan on the streets, who is
familiar with banking matters, to aesociate the Federal Reeerve System with
total responsibility for the soundness and policies and practices of all
banks. in many instances individuals or large groups even attribute to the
Federal Reserve Oystem responsibility for the activities of investment
trusts, aortgage com)anies bnd various other financial agessies.
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This has
developed irrespective of the Bourdle leek of definite authority with
respect to the examinetion and supervision of banke and the continued
existence of the Comptroller of the Currency and the forty-eight Stet'
banking departatents as the primary charterin-
examining and supervising
authorities of national and State banks, respectively.
Furthermore,
nany economists, bankers, and others recognise the urgent need for the
consolidation of at least all Federal bank supervision, if not all bank
supervision, in order to eliminate the destructive effects of adainietrative
competition in laxity, confusion to banks through varying types and degrees
of beak reguletion, excessive chart_ring of banks, etc., and have ehFrged the
Beard of GovernorE with at leest a moral reeponsibility for exertine a strong
leadorehip in thie and other necessary banking reforms.
In vice of the definite responsibilities which are stated in the
statutes ane this attitude on the part of the public anri the tendencies of
primary superviaory authorities, either directly or indirectly, in attempting
to shift responsibility for certain unpopuler conditions or situations,
perticulerly in times of etrese, it iv only reesonable that the Board should
have sufficient difect authority to meet its reoponsibilitios to the public
in noraal times es well ae in perials of emergency.
The Sesrd ems discharge its legal end morel responalibilitiee only by
termslatios sod enforcement of pound monetard; and banking policies.
ioruulbtion must be based upon an intelligent enelyais
interprctation
of elute pertaining to general economic and banking conditions.
Successful
enforcement must be predicated upon two factors: the power of counsel emit
and
persuasion, effective in most cases if exercised by men of personality
cherecter; and the fear of penalties, neceasery with certain types of
oeexers.
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Federal Reserve Bank of St. Louis
The anly logical and effective or reliable mcene end agencies
through which formuletion and enforcement can be accomplished by the
Board ares examinations, statistical and special reports of banke and
their related organizations, prepared am; analyzed, and criticisms and
requirements followed up by adequate and competent personnel directly or
indirectly responsible to the Board of Governore.
The efforts of the Board to control credit, in the interest of the
ienerel public (particularly with respect to speculative securities) in
19L8 and 1929, throueh the officers of the reserve banks holding prayer
meetings with many of the outstandinc offending bankers in an effort to
curtail securities loans rather than the Board or the Open Market Committee
resorting to increased discount rates, or more positive actions, appear Us
be an illustration of the difficulties of attempting to control the witmation
by persuasion indirectly rether than by direct authority, which many contend
now should have been conferred upon the Board and exercieed nt th!t time.
"During this period the Federal Reserve authoritiee had no parer to correct
the situation.
The* could dlead and warn but they had ao rikht to
discipline.° .1,/
From the experience which the Board hes hed with the Comptroller of
the Currency and the F.D.I.C., in the enforcement of unifort requirements
with respect to the eliminetion of securities depreciation, loan losses,
valuation reserves, published cell reports, voting permit conditions, the
examinations for voting permits, etc., it is not reeeonable to expect that
reoueeto for any and all sorts of informetiou ano enforcement of requiremente or policies which the Beard might deem to be pertinent and important
in connection with problems of mometery *patrol and other policiEs would
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Federal Reserve Bank of St. Louis
"Text of Addresses Praising President (Roosevelt)"--by William T.
McCaffery, Pres., Lincoln Nat. Bank & Trust Co., Syracuse, NJ., on
the Democratic Committee half-hour radio program devoted to Neiness
Bankept Ang. 26, 1956, p. 2
Ken's views on the Mew Deal. ,Ths
meet with 100 per cent cooperation on the part of the above mentioned
bodies in the future. For instance, in formulating its monetar
and
credit control policies it will be necessary for the board to obtain
certain types of statistical inform:tion from banks, including national
banks, and in certain circumstances it may be necessary that the exalinera
of banks, including national banks, develop in their reports certain type;-,
of informatics with respect to loan and iavestnent policies. In this
matter many of the examination reports of national banks analyzed by the
Board's Division of nominations for other purposes have indicated marked
weaknesees.
In discussing the method by which a Federal reserve bask can, in
considering an applicetion for rediscount, ascertain whether or not a
member bank is proposini to use the asvets of the Fedtral reserve bank to
supply deficiencies in its credit already used for specultive purpoaes
ed
insteac of for agricultural or commercial purposes, Senator Glass indicat
to Governor harrison that he would not have to go by the face of the note-he should know what the bank ie doing if the examiners are worth a threepence. 1./
The mere inclusion of a blank schedule in an exanination report
fora does not mcesserily mean that sound conclusions supported by adequate
data as to the uses to which the banks' credits h,ve been put would always
be set up in all of the reports by rational or F.D.I.C. examiners.
The
expressed
ability and attitude of the eyaminere 6nd thfir instructions, both
and implied, must be considered as factors.
to be
The time may come when it will be highly desirable for pressure
types of
brought to bear by the examiners or district supervisors on (tertian
1./ P. 52, Hearings 211 6. Ro. 710 Jan. 19:51
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Federal Reserve Bank of St. Louis
offenang banks, in .3any of which situations the Comptroller of the
Currency, having no responeibility for credit control or monetary policies
and, perhaps, being in diaagreement with the Board with respect to its
policies, including those affecting real estate or securitiet loans,
depreciation, etc., would most likely fail to eooperate to any extent,
particulbrly because of his own views wit). respect to such matters and
in soae cases largely in order to avoid incurring the ill will of ogrtala
powerful banks and bankers, etc.
It 14 loll known that tbo Comptroller of the Ourrenc:i and the Board
have not favored and enforced identical policies with respect to the
elimination of losses and depreciation.
The Comptroller bas not seen fit
to share the views of the Board in connection wit
reserves; he hal
the use of valuation
seen the neceseity for the application of the lemrdes
standard requiromontv in connection with the issuance of voting permits
involving national banks. The dependence upon the Comptroller of the
Currency and the F.D.I.C. for the development of satisfactory information
through examinations and otherwise, in the consideration of applications
for voting permit, flad Clayton Act permits and in effecting necessary
corrections, has not been satisfactory to the Board, in nom7 important 01114.6
The F.D.I.C., or at least several of its senior staff members, in a conff,Tencf,
with representatives of the R.F.C., the Comptroller of the Currency, and tbe
Board declined to take any part in the matter of adopting uniform policies
with respect to the showing of eapital notes and debentures in published
statements in cases where banks had impaired eepital.
The F.D.I.C. declined
to adopt the Board's regulatione with respect to ahoorption of exehange
charges. It is understood thet approximately nimetlion of the State esper.
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Federal Reserve Bank of St. Louis
visors were opposed to the Bo:Ard's definition of interest (Regulation Q)
and influenced the F.D.I.C. in taking its position in this mattPr.
Presumably, these poaitions were taken in order not to incur the ill
will of banks, although the policies defined and laid down by the Board
were believed to be sound end necessary. If in matters of this sort these
agencies declined to go along with the Board, is it not much more reasonable
to expect that they would decline to go along in more important matters,
particulerly when they felt tbAtt if they adopted the Board's views and coopercted
it, such action would lead to critisiant by the banks, politicians
or the public?
It therefore seems necessary thA the ngencj chz,rged with the
responsibility of attempting to regulate deposit curransy amid =edit policies
by banking institutions should be clothed with ample power and authority to
ascortain, through examinations and reports of agencies or personnel definitely under its control, that its policies are being carried out, and in caee
of violations, it should be in a position to directly and promptly enforce
its policies and eliminate offenders.
It is not reasonable to assume thet bankers and the public in general
would expect a single man (the Comptroller of the Currency) to veto, in
effect, policies relating to the nation's money and credit, ',hie have been
decided by a public-spirited bovrd of seven. men to be sound amd necessary.
This natter is of considerable importance in connection with Stetc
banks whit* are not member* of the Federal Isservo
setup the F.D.I.C. is in a position to obstruct to
*sten.
Under the present
considerable extent,
through influences upon State nonmember banks, any 'Alia.* shish the Board
might determine to be necessary, although total banking resourcee in the
Federal Reserve System constitute a small percenteu of the total banking
resources of the country.
The very large number and asatteration of State
nonmember banks could become a considerable stumbling block psychologically
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Federal Reserve Bank of St. Louis
because of their closer connection with the people in the smaller oommunities
who exert considerable influence upon questions of national policies debated
in the press and by politicians.
In this regard the viewn of a small temi
balamr, in many cases et least, could easily assume proportions omparable
to the infleosoe of the larger metropolitan banker whoee institution represents hundreds of times more assets than the mall town banker's bank. It
is hardly necessary to state that the assets and activitiea of the national
and State banks of the United States must be, to a very great extant at
least, the medium through which effect can be given to sound monetar
and
credit policies.
Numeroue instances have been noted where State supervisors have exerted
their influencts to the utmost to obstruct policies of the Board. IllustratOns are: Pennsylvania, with respect to capital rehabilitation, depreciation,
losses, etc.; Waehington and Indiana, with respect to the showing of capital
notes and debentures in published statements. numerous instances where the
State authorities were very much opposed to the Board's requirements were
discussed by telephone with Federal reservc &gents in connection with votinc
permit and Clayton Act permit applications.
Many other anc: more importanl
illustrations coula be used.
Many persons have expressed the view that the insured banks of the
country ehould be examined and supervised as to aetails by the
because it has its capital at stake and therefore would be more sealous
in protecting its financial interest by keepine, the insured banks in a
sound conaition so as to avoid failures, than would the Board of Governore
or any other supervisory body which has no money at stake but is merely
responsible for seeing that the provieions of the law are carritd out.
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Federal Reserve Bank of St. Louis
Such a view is not tenable. The matter of general supervision of the
banking structure (including the Federal reserve banks which must continue
to function very closely with the commerciU banks of the country) in the
interest of seemd money and credit policies end the protection and development of depositors', stookholdersl, and the general public's interests by
the enforcement of sound basking principles is of aore far-reaching
importance than the mere
mechanics of protooting the finenciLi intereete
owned by the &P.C., represented by capitol stock of a comparatively small
number of banks of the country or the financial responsibility wash the
F.D.I.C. mey be called upon to meet in those wises of failure which are
hoped and expected to be comparatively few. Furthermore, the iederal Roserve System, which is owned and pup vrteo by its4J, meber Llanke
or
Lhe
country, furnished directly (4,1159,k4illbb6.:M of the total capital stock
of 11289,299,556.99 of the F.D.I.C. The remaining 4150,,:),X),
was con-
eidered as a retribution to the banking gysteea by the Treetury beceui.e of
the $149,1t8,500 which had been paid into the Treasury by the redercl refer
as
A
195k.,
frenchise
tax.
in
through
eerve banks up
adcition, t4/the
larger portion of asseesments made by the 1.L.I.C. had been piAd bi
national and State bankr which are
Reserve System.
members oi and support tLe Federel
Therefore, it i6 obvioue ehat the Federal Beeerve
should be more interested in even its narrower Noe-Lion of Ixot,acting
the insurance fund through the necessary measures to keep t17.e Insured
beaks sound, than are the directors of the F.L.I.C. or the Comptroller of
the Currency.
Even if all cusidnations anc folloseups were handled &ceeaatel4 by
some ether federal ageney—such
65,
the Comptroller of the Cul:Tone:7 or
the F.D.I.C.--there would still be the necesuity for reviews and analysee
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Federal Reserve Bank of St. Louis
by the Board's staff of ell reports of examinetions Rad the corretoondanse
files to eecertain therefrom, if poseible, to whet extent the. Board 1:,
policiee were being followed or if groper reeuirements, follow-upe, etc.,
were being enforced voluntarily by such authority.
auch a setup woule
leee the good service and advice, btsed upon many intimate contacts over
a long
period of time, of officers of the Tederel reeerve banks, except
ee euch servicee sight be ueed by the Boerd in reviewing ene analysing
the eases ee m means of dbeck-up on the activities of SUCh examining
.111thority in the respective districts. If proper efforts at enforcement
of satisfactory policies were not being sad*, it would be neceeecry for
the Board to hevm .porer to cause such edministrative body to met in
connection with ell benks engaeing in violetione of the le,Te or policies.
This then would conetitute, in the last tnalyets, a setup similtx to thet
which 11%s been euvestee above, except with the added fpulte of useless
dullicetion of ell reviewe and enslyses and endless conflicts, biekeringe,
etc., resulting from differences of opinions of tiv? two bodies, both of
which would end Shield feel Owl: they htd a res?onsibility for thinkinf
and acting according to their own judgment.
In writing on the matter of credit control in garch 1956, Jasob
Viner summsrized views similar to those expressed in the foregoing paragraphs, presumably based largely upon the result of his joint investigation with Charles O. Hardy in 105, on the availability of bank credit in
the Oeventh Federal Reserve District. jj
jci ". . But unless it is directed with this danger in mind, (that
our unit bnnking fystem will not be strong emough to withstand a
severe depression without wholesale oollspee) the nsture of the
examining process is itself such Es to impose upon the activitiee
of the banks a perverse oyclichl pattern from the point of view
of etabilization. The examiners, through the qualitative credit
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standards which they impose on banks, indirectly influence the
quantity of bank credit. When businees iv prosperous and optimise
prevails, examiners, like the bankers themselves, must tend to
appraise credit risks in terms of the favorable concitions of the
moment. The bankers, and especially the small bankerce, confident
that whet is good enough to pass the seratimy of the examinere
ahould be good mese to meet their omn standards, persist on
their cereer of credit expension. Later, whom the tide of businese turns, when banks begin to fail ane loess 'high were passed
without criticiem during the boom days have to be written off as
bed debte, the examiners are blamed. Reacting in a perfestly
ruturel mariner, they become stricter end more exacting ia the
standards they apply, and they prese the banke to licuidate loans
and investments which the banks, if left to their own devices,
would be happy to keep in their portfolios. The procees of beak
examinetion thus tends to encourage credit expansion durieg the
upswing of the business cycle and, mere eeriouely, to intensify
oredit contraction during the downswing.
"There iv sn obvious ours for this perverse effect of bank
examinetion, requiring throe innovetions in the edmenietration
of the examiretionet unified control of bank supervision and
examileition; co-ordin, tien of exemenetion -policy with credit
control polic; (Inc systematic anC continuous supervision and
instruction of them:seiner* in terms oi a uniform sue flexible
policy. Fully to attain all of these objectives ecul6 require
the centralisation of all bank examining functions uncer the
direction of the federal Reserve Board. Some progrese toeard
eentralization of examinetions hes been seem in the lark, few
years Ps the result of the examining authority acquired by the
FDIC over insured non-member state beat. Importent pregress
toward co-ordination of examining policy ha* also been made
edministratively, through gentlemenls agreements between the
exacta:mg authorities. It is still possible, however, for the
Comptroller of the Currency, the FDIC, the RFC, and the fortyeight vtate examining authorities to neutralize through their
influence on the individuel beaks the efforts of the Federal
%serve Board, aS tbe central credit control agency, to secure
a loosening or a tightening of bank credit. For h time during
197:5-M, while the President, the Secretary of the Treasury, and
other federal officials, were arils( the books to relax their
credit staadards from their deep depression severity, varioue
of the embalm. agencirs were exercising pressure on the banks
to enrge their portfolios of eesets slammed 'doubtful' and
'slow', 'slow' being a tecnnical examining term as to whole
meaning no two examiners min be found to spree except that it
does not mean slow. full unification of the adminietratiom of
examinations meet welt upon full unificetion of the banking system
set a whole, but the recent banking legislation has failed to bring
ablest statutory improvement in even the federal situation, a failure
for which there is not the excuse thut it failed aerioua political
obstaeles, for the only obstecles in the way were the minor rivalriee
of the several examinine authorities, who parheps did not all love
Elce other as much EV g0tle Lesocrats should.
*** * * ** * * *
. From the point of view simply of efficient administration of oredit control policy, whatever that polio might be, reorganization wae obviously neceseary. It eat urgent that there
be one central agency in which responsibility rootlet? for credit
policy, and in which was vested all the important control powery
so that they could be exerciied in a harmonioas and co-ordinated
fashion, and the exiating situation fell far short of this. .
Without taking into account the diffusion of authority over
security margins, purchase of acceptances, and bank examinations,
. to say nothing of a host of other minor provisions which
•
have direct bearing on the volume of bank evedit, it should IA
apparent that so foatastic an exhibit of administrative disorder
could never have been deliberately designed by man, but mast have
been the product of a long proeees of patchwork legislation for
which control of the volume of credit was not a major objective.
If it waa desirable that as far as practicable there should be
centralization of these powers in e eingle agency, then the
logical agency was the Federal Recerve Board. .. • I hope that
by a process of further piecemeal legirlation the Federal Reserve
Board will gradually acquire undivided authority over most of the
se
other instrumentalitier of credit control to which I helve referred. •
The Board of Governors and its staff in Washinft ton, together with the
facilities, personnel and contacts established
at or by the twelve reserve
banks, constitute a nucleus or base for the development of a satisfactory
system of supervision at a minimum of difficultiee or coots to banks.
Problems arising in connection with
bank eyaminations and supervision are
often solved in the light of many other Picts, euch as those with which officers of reaerve benks are familiar through their lon
exoerience end
contact with the operations of the banks involved.
Although the dietrict national bank examiners' offices
have been
maintained for many years, their contacts are limited iargely to the national
banks and through examinutiono.
The diatrict officee of the F.D.I.C. examiners
are comparatively new and their contacts are largely
limited to th•ir examine-
tiona of State nonmember banks, which, as a general rule. are small and
r
p
Taken from "Recent Legislation and the Benking Situation" in The American
400nomic Review, Vol. XITI, Mo. 1, Supplement, garch 1956, (after he had
participated with Charles O. lardy in preparing e "Redort oa the Availability
of benk Credit in the Seventh Federal Reserve District' in 1050
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$i)
comprise a relatively small portion of the banking business of the districts.
Like the district
offices of the Comptroller, each district office of the
F.D.I.C. is conducted by a chief examiner.
On the other hand, in each
district the Federal Reeerve System has been established for maiv years; is
posted in detail with respect to the condition of both national and btate
monber banks through reports of examination and various other reporte and
operating contacts; is thoroughly familiar, through the development of
statiatics and otherwise, with the general banking and economic conditions
of the districts; and can rely upon the combined judgment of the directors
and senior officera of the reserve banks in all important or problem
cases, as compared with only one nen, a chief examiner, in the case of the
Comptroller of the Currency or the F.D.I.C.
One reads in all sources criticisms of bank examiners that some are
extreme1y lenient, some extremely hard-boiled, with a few in between.
Same
say examinations should be conducted by men in the btates because they are
familiar with conditions there; others say the examinations should he
conducted by examiners who are not subject to local influences, etc., and
who are more acquainted with general economic and businees conditions.
Some say there are different methods and varying degrees of proficiency by
the various types of examiners who receive varying salaries, who are
subject to varying conditions of appointment, etc., etc.
From all of these criticisms there stands out prominently
one fact,
among others: that there is need of training of bank examiners, that thf
training should be of a continuing character, and that all examiners shoulc:
be trained along the same line, and from this it io obvious that the only
possible way of developing ano training examiners ie to have them all
working under, and responsible to, the same supervisory body, who would
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Federal Reserve Bank of St. Louis
1)1
conduct training elapses and hold regional conferences, sad smmully or
1ess frequently hold a joint conference of at least the key exeminers.
Many matters required to be handled by the Board involve the
Comptroller of the Currency, the F.D.I.C., the R.E.C., and sometimes the
Secretary of the Treesur, under the existing setup, sash as mergers smd
consolidations, establiehment of branches, voting permite, etc.
Numerous
illustrations of serious difficultiev resulting to the bank, from delctyr
attributed largely to the fact thet more than ant supervisory body was involved, resulted durix4 and shortly after the bank holiay and even in a
greet number of casev since thtt time where mergers or consolidations were
unnecessarily deleyed after the public wav apprised thereof.
Another and
very important advantage of consolidation of all supervision would result
if all banks—national, State member and State nonmember-.....1111110 Mier 01W
body in each district.
Such a plan would permit and fleeessitaft the
employment of eapable end well-trained examinere !!Itsd commissiemore at each
of the reserve bienks, who would be capable of deciding on the correct
volution of the probleme
8V
they erise, in line with the general policiee
eatablished by the Board in Weahiagton.
operetion of the
Furthermore, the counsel and co-
officers of the reeerve banks, and even the board of
directors, if necessery, would permit of a degree of decentrelization of
all details of supervision as well as a large proportion of the more
important problem of determining policies thAn would be feesible under e getup eimilar to thtt of the Comptroller of the Currency or the F.D.I.C., where
the administrative head of the exeminetion and supervision work in each
district would be a chief examiner, who would not heve the benefit of the
advice end counsel of the Federal reserve bank executives, beeed upon an
intimate knowledge of the past policies end prhetises or a bank in question,
obtained through long contact and the many experiences with the banks,
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Federal Reserve Bank of St. Louis
sucn as reserve deficiencies, loan and rediscounting policies, fiscal
agency end safekeeping transactione, struggles with managing officere,
etc.
Thie feeture of decentralization of examination fand supervision
to twelve districts substantially
meets one of the objections, often
mentioned, to consolidation of examination anc supervision of all banks
under one body.
The extent to which delays and confusions am occasioned under the
present aetup of supervisory agencies is indicated in the case of a
State member bank owned by a holding company affiliate which desires to
absorb tvo nonmember bank effilintes (both of which have outsttnding
capital notes and one of which exercises trust powers) and convert into
a national bank with truat powers. In such a case, the condition
of
the existing banks as reflected by special reports of examination by
nationel examinere (unless the general rule is broken and State reportE
which may have been made recently are acceptable), the details of the
proposed plan, the condition and management of the new bank anc of the
holding company affiliate, and various other matters, would have to be
analysed and diecussed in varying degrees and agreed upon by and between
the following supervisory agencies and the officers;
State bank commissioner.
Comptroller of the Currency (both the district and
ITIohington offices).
and
Washington offices).
R.F.C. (both the district
F.D.I.C. (both the district and Washington offioes).
Federal heserve Symtem (both the Federal reserve bank
and the aserd).
Secretary of the Treasury.
The importance of this matter is multiplied when it is considered that
many reorganizations are being Waited and many more may be effected if
branch banking ie developed in this poostry•
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Federal Reserve Bank of St. Louis
It bac been stcted that ame Federal body could not do the necessary
constructive thinking and planning far the money end banking system of
this
country end at the same time handle the large amount of administrative
details incident to the examination and supervision thereof.
Thir aituation
is admitted and provided for by the commissions outlined above.
The three-
man Federal Benk Commission in Washington is suggested because of the
nature and importance of its functions--to formulate administrative policies,
review the examiw,tion zind supervisory operations of the twelve district
commissions, and handle appmal caves.
The volume, mature and importance
of policies and problems to be handled in connection with boat omperwision
are such
PT
to make the serviceo of a compact commission of three mem more
satiafactory than one man.
The work to be handled by euch
COMM/9Si=
should
not be of snch nsture as to require ouch quick or onap judgment that three
men would not have time to consider it.
Thia 'mule be particularly true
if all of the actual exeminationr work and eontact with the banks in the
form of letters of criticisms,
7,4
001UNAS
for eorrectiona, constructive
suggestions, end eamferences, were hrndled in the first instance by the
District Federal Bmnk Commissions, with appear cases handled by the commission v
in Washington.
This syrtem would greatly expedite any reorganizations, er
follow-ups of matters criticized in reports of examination, etc.
Likewiae,
the Board of Governors would be relieved of an anoreoue amount of
administrative details, which are too great even under the present systert
where reviews and follow-,ups of examinationo of only 'Atte member brinks
are handled, and would be enabled to devote its energies to • study
eeememic conditions and the promulgation of
of
monetary and aredit policies
&ad the broad general policieo of bank supervision, which would be
administered by the eemmission direstay under it. Plso, there must be some
body to which Lhe Board of Governors' detailed duties, as the supreme banking
authority, may be given or delegated.
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Federal Reserve Bank of St. Louis
In the various districts many important problems will arise from
time to time involving queetions 65 to ehether banks should be closed
or absorbed by other banks, or mew capital be revuired, or the manavement
be removed, or lesser penalties be imposed, or a reduction in cepitsl be
permitted, or trust 'powers be granted, or brenches be sstmblished or new
banke be chrtered, etc.
Under a plan of dementrailsatiom of smpervision
in order to eypedite such matters the7 should be considered and decided
in the district largely.
If so many and Fuch important matters wore
left to the jue,gment of one mnn, considerable criticisms would ariee
from more than one source. If the otatutes were to provide for only one
: arrangement that he discuss
commissioner in a district, with a workini
with and accept counsel or advice from officers of the reserve bank on
the various important problems, such nrrangement would not be known to
bankers and the public and therefore vould not satisfy the critics.
Furthermore, rederel reserve bank officers would be loath to counsel and
advise with the oommissiomers without a specific duty to do so and it
would seem difficult to hold thew responsible for bnnl; supervision in the
district unless they were specifically designated ,s,s commissioners.
With
a throe-man District Federal Dank Commission, ono serving largoly on the
administrative
hes.d of the organization and tho two othors principally
as couneellors and edwisorm but with definite authority and responsibility,
there Should be no undue deity in the handlini., of mere hdministrative
details by the commiseiqner or in the solution of important 2roblems by
the commission,
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Federal Reserve Bank of St. Louis
The District Federal Bank
Commission is suggested av a direct
medium for the examination end supervision of the banks of the dietrict
in order to eliminate the criticisms, or 'possible financial responsibilities,
which might result if the work of examination and supervision of the menber
banks were oondasted by the Federal reserve bank as slash.
Consideration
ehould be given to the advisability of providing in the lay that no
financial reeponeibility shall fall upes the Federal reserve bask beessre
of any action or requirement by the Distriot Federal Bank Oveniseion, making
it obvious tnet in acting
NS
commiseioners the individual members tire not
hating in their capacity ell officera of the bank. For all practical
lurdoses ouch precaution does not seem to be necessary, particularly if
the commissione are given legal authority and are required by the law to
act to change the managements, or to force *organisations or liouidettons
in cases where tendenciee and practices or economic c,mditions inaicate
the necesaity thereof.
This doee not seem to be a situation exactly
parallel to that which existed in Canada in
. , when the Centdien
ital'
Bankers Association, composed of principal officers of the ten Canedien
banks and charged by law with certain supervisory responsibilitiev, euch
414 the handling of note issuee, the traininE of employees, clearing house
practices, etc., desired not to be responsible for the examination and
supervision of the banks in lieu of the public exhinining authority, which
the Yedercl Reserve Systen iv now generally regrded es in tnio country.
The need for closer cooperation between banks, bankers' aesocietIons
and bank supervisory authoritiev hav been strevsed es a very important
means of improving the caliber of bank management Lad developing a eatis—
factory syetem of internal check or supervision.
Banking litereture
contains. many opinions that satiefactory bank management and policies and
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Federal Reserve Bank of St. Louis
and
prctices cannot be accomplished by legiclation
thet before
considerable heedway Can be made bankers and the bank supervivory agencies
must mutually work aut banking problems and difficulties.
Bankerst
ageocistions, clearing houses, confereacea, etc., are frequently mentioned
A'S desirable mow to the necessery end. It i8 obvious that contacte with
the forty-eight State z„nd the three principal Federal supervisory authorities and discussions and solutions of mutual problems by banks and bankers'
associations are mush 1ess satisfactory under the present setup than would
be if all bank ompervisies wee MAW OW body, with the actual administrative
work and contact with bankers decentralised to the twelve Federal reserve
districts.
The experiences of the last few years emphabize the nffcessity for
improvement in the quality of bank exeminations and supervision.
Under
the foregoing plan the following improvements would be eesily poeLible:
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Federal Reserve Bank of St. Louis
1. In each district there would be a sufficient number of
examlners to exemine rblky of the itaTer btnke with brenchee
or groups simultaneously.
having a la ger force of examiners in the districts would
permit of the cevelopment of specialists, euch t.fq trurt or
affiliate examiners.
a.,•
Training of exaAiners by conferences, "schools", etc., and
the isstuace of uniform instructions eith respect to
classificetione of assete, management, etc., could be
easily effected.
4.
The total number of extminers now under the various jurisdictions could be considersbly reduced, all the better ones
Wing retb.lned.
5. /a the future better traned end quelified elm:Diners could
ane more inducements to
be employed because of better
career men.
6. Uniformity of examination reports, follow.up requirements, etc., would be posvible.
7. The judgment of the ristrict Federal Bank Concaision
would be decidedly superior to thet of the district
chief n:AivnLi bank examiner or the State department.
8. Frc/m their various cant%cts and experiences with the
banks, Federal reserve bank officers couid add conaidersble information to the examination reports
where necessary, particuLirly in problem cases.
9. gore detailed and superior examinations, resulting in
fewer examinations, would be probnble.
10.
mt6tt and
Uniform amc Lound requirements conic
from
pressure
or
objections
of
fear
without
enforced
outWe personv.
The total annual costs of examinations and supervision of banks
by Federal agencies under the prevent system are estimated at approximately:
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Federal Reserve Bank of St. Louis
Comptroller of the Currency
Leposit Insurance Corp.
Board of Governors
Federal meerve bvnks
0,200,000
2,500,000
1,400,000
1,330,000
Total.... 0,400,000 jj
Tide includes total salaries an4 oxpenses of the Board Lit Washington
(not including expenses in connection with surrancy matters) and
expenses of bank examinkition depertments of the 11. Fedora:. reserve aanks
(including so allowance for overhead, such as light, rent, etc., and
comlvarativelz, small allowance far officers' salartas, presumable limited
to those officers devoting all or an estimated portion of their tine to
baxik supervision work). The eztimpts of $71,200,)i0 for thc Comptroller
of the Currency, including the 12 district officev, is based upon the
Comptroller': annuel re7.,ort for 19Z4, .11, does aot include expcuset, in connection
3
with redemption of currency and other matters which apparently do not
relate directly to bank examination and supervision. The estimate of
0,500,000 for the ia.I.C., including its district offices, represents
the estimated total of the annual admimistrstion expenses of the eovvration, as indicatf.d by the report of the Corporation te of Jun4 50, 19564,
?here are no figures available for even en estimate of the costs of
examinationsand supervision by the 46 &tate banking departments. ConsidPriny,
the fact that State banks bad, on December 51, 1955, deposits (exeluaive of
iatra.bank deposits) of approximately Wedoodoodoo, as smopered with
$21,000,000,000 of national bank deposits; that most Mtate banks are subject
to examinatiomsand supervision by either the Federal Alsoerve proton er the
F.D.I.C., or bo.tb, at letlet to a certain degree; sid 'monolog that the
frequency and nuality of exAminutions and supervision of State basks is
equivalent to that of national banks, which as a rule are not examined or
directly supervised to amy appreciable extent by either the Federal Reserve
or the
examiners, it may be liberel to assume thEt the coats et
isamimatissmand supervision of the Etat. banks by the State departments per
$1,000,000 of assets would be approximately 60% of the mists of ememioatisoo
amd supervision of national banks, or am aggregate ef approximately 01.100,000
per year, which would mean a total aggregate annua1 coat of examinations and
supervision of all banks in the United States estimated at approximately
$14630,000.
Although it is obvious (from the very nature of the organisation and
operations of the existing supervisory agemeiee) that a eonsiderable savings
in the soots ef bunk emamloatiemo amd supervision could be effected by
A
re—
organisation alimg the lines imdloated la the presiding logos, no attempt
is made herein to estimate the extent of posrible savings, er to indicate
the number et examiners or office eaployees who should he retained er
eliminated, without impairing efficiency. These natters could be determined
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Federal Reserve Bank of St. Louis
properly only by conducting a mufti marvel of the personnel and soots
of mainteining the three Washington offices cnd the !6 district officer
by the Comptroller ol the Currency, the 7.14I44, and the Fedi:re' Pesirve
System. This matter seems to be of snob tremendous importtace as to
justify seek ingremr.
The extent to each costs of bank examinations and empervisisn—all
now being borne directly or indirectly by the books ef the country—could
be reduced depends largely upon the followings
1.
Changes in the structure ef tbe banking systen—vbetber
placed under Federal charter or eanducted under the present
system;
1. lieorganisation of all Federal bank supervision under are WWI
The extent to which State examinations and supervision is
continued (if hanks are permitted to operate under Clete
systems);
4. Changes in the laws requiring examinations by directors anti
C.P.A.'s—making fewer examinations by public supervisory
bodies necessary;
Changes in the lams providing for ltrgar minimum capital and
branch beskioesidiere bank eenagement is more highly developed
and tetanal supervision is meoh more practiceble and effective.
Under a single federal system of *bartering sod Supervision of banks
tremendous savings could be effected. Less, but substantialsavings, oould
be effected by a revision of the laws, requiring only that all banks be
subject to Federal supervision under one bad-J.. In suds oase it is possible
that many :Astern would praetioal4 eliminz,te examinstion und supervision
opposes. Joint examinations by Ctate and F.D.I.C. examiners or by Statr
sod Federal reserve examiners all invariably involve more expenses than
Si
equivalent examination by a lidera' tupervisory body solely, especially
on escort of duplioation of examiners/ efforts in the classificntion of
assets, oonsidering management and operating policies end practices; and
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Federal Reserve Bank of St. Louis
in the preparation of the reports, follee-upe„ correctioue, etc., all of
which involve z. duplication of overhetO mete. Likewise, considerable
unnecessary expense is attributable to the existent). of the three Federal
supervisory bodies in lashingAon, where general policies are deUrained
and the examination and sepervisery work done by the
district organiml-
tiens of each body is reviewed, much of which is overlapping an4 conflicting.
It meld be reessaible to IBOOMMe taat the formuletion of policies uad the
neceesery reviewing of the reports et exaninatien Oad the other supervise!,
functions now Ilandled by the three Mira bodies is Washington could be
handled by one body with it staff not a peat deal larger than the Bosrdis
preeest staff, with the addition of the necest;ta4 clerks an° stenographer's
particularly if .the work ia reergemieed to the extent that 'Loh sr prestLeally
all of the direct aciaaiaatios sad supervisory work is decentralised te the
11. Federal reserve banks or diatriet6.
the addition et oily e small per
cent of the office etzffe of the district national bank and FoL.I.C.
examiners, together with their better fluid examiners, the Federal reserve
hanks eould amply handle all bank supervision in their respective districts.
A large portion of the office overhead of the field officee of the 11
dimtriet netional bfAnk em!.minerz ane of the district F.D.I.C. examiners,
Inclucing the chiefs thereof, could be eliminated without lowering the
efficipncy of superviemn.
Under the prevent eeteup banke are eIemined by State or national
examiners on en everere of from one to two timee eech year, und in addition,
State henke are exemined by the F.D.I.C. or the Federal reeerve exeminers
either jointly with the State department or imp:irately once each year.
With ?roper legal powers to =fore, the lees end regulations without
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Federal Reserve Bank of St. Louis
questiom ana with better management and internal supervieion through branch
banks and larger banks, together with adequate examinetions by directors
or C.P.A.te, clearing houeee, etc. (if all banke were under Federel
charter or merely subject to examinetion and supervisien by the Federal
Reserve Syetem),
reel examination once each 1S or 24 mentbs--except in
problem banks--would be ample &nd woulc also effect a tremendous savings
to the banks.
OBJECTIONS TO CONSOLIDATIOP
Most of the objectione to the oonsolidation of bank eupervlsion, alon€
the lines indiceted in the foregoing sections of this memorandum, may be
expected to come from:
1.
The present supervisory officials, and their banker
friends, supporters who are deeiroue of preserving
their poritions;
Certain types of bankers who desire to continue to
obtain speciel privileges from lax banking supervision and avoid more positive supervision;
F. Certain element& of the peneral public, including
politiciane, who are influenced by the proteste of
bankers and who espouse the theory of Stateel rights.
To thew whoare familiar with the actual facts pertaining to banking
operations end supervision, it is obvious that mort of the so-called
objections offered really are good reasons for eonsolidetion and merit but
little consideration.
However, considerable importance must be atteched
because of the paychological or political factore involved.
Bens of the principal mattere in connection with which the objections
hove bees sr may be offered ere summarised below:
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Federal Reserve Bank of St. Louis
10
Onseentration of power in a politically appointed
lewd of Governors. (Melly persons heve recautly
attacked the further eentralisetion of power in the
various departments under the present administration,
and the Beard of Governors iv usually included in such
attacks. Nov persons take the position that there ie
a need for more decentralization of bank control end
regulation, arguing that banking end SCODOKie prObleas
are different in the varioue sections of the eoustry
and that succeneful bank supervision can come from only
those persons who are on the grommd and familiar with
the peculier local problems. These objections are
substantially met by the commissions above described.)
2. Bank examination and supervision as related to the
control of mom* and credit. Nest of the objections
besed upon this point mealy have their foundation in
No. 1 above. Auny of the ontotamding treomooists of the
country take the position that the eontrol of mosey and
te
credit is closely related to and dependent upon defini
ces.)
and
practi
es
polici
regulation of banking
Z. The ultimate elininetion of State superviaion, contrary
to the Litates, rights theory. (The principel objectione
s
in this connection come from the State bank commiseioner
tion
in
s,
connec
friend
and certein types of their banker
with their fighta against branch banking, and movements
of
to enact sounder laws with respect to the reguD!tion
ized
recogn
banks. Many State bankers, perticultrly those of
abilit, fevor the sonsoliection of all bank supervision.)
objection
4. Delays and indecisioas Am handling problems. (This
certoin
which
ences
the
experi
upon
y
largel
appears to be bused
and
during
on
nizati
with
tion
reorga
connec
books have het in
be
should
delays
but
y,
such
holida
bank
subseqwest to the
the oxiotemse of severel
assidered to have been caueed
ease. had to pass for
the
which
h
sOpervisory bodies throug
e
approval because of the veriou laws.)
speakers
S. Rigorous standards or requiremente. (Many public
State
ond
al
amd euthors, including ammo high in both nation
ists
econom
sowermmenttl positions, some well knovn an4 sound
not
ntly
and bankers, and numerous other bankers, appare
by superemento
requir
able
reason
and
vound
aecustomed to
e System
Reeerv
l
the
d
federa
cherge
have
ities,
visory author
with attempting to set standards unnecessarily high,
ation
perticulerly with rempect to credit dolicies, elimin
sioh.)
depres
of
;*
peri.o,
in
etc.,
of losses, deprecittion,
OTRXR CROW FOR
Tgulogyma
QY BANK SUPERVISION
Aad personnel of
In addition to the reorganization of the structure
systeTt of twelve
the oltamimimg amd ompervising agencies into a Federel
nating body at
district unite alder tbe moral direction of one coordi
precticee which
Washington, there are many thamges in both the lpws and
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Federal Reserve Bank of St. Louis
tf
•
should be effected simultaneously in the interest ol efficiency and
ec:Dnomy of bahk exaluination and supervision, most of which should have
a
tremendous appeal to the pdblic and to a majority of the banks. of the
country, and many of which, although sommihat objectionable to certain
types of bankers, are necessary to the correct functioning of any
centralized system of supervision to protect depositors, shareholders,
the F.L.I.C., and the general public.
I.
Examinations.
(a) hegular examinations of insured banks to be stride by the
District Federal Bank Commission aot less frequenti,y than once eech k:44
months, nor more frequently than each II to 18 aonths, unless indications
are that general ecow.Imic conditione have been undermined (as by drought,
flood, crop failure, etc.), in which ease mere freuent examinations light
be mad*, provided approval of the Federal Bank Comthission or the Board
of Governors is obtained, either for specific banks or in blanket form
but
not to run beyond the end of the year in which given.
(b) Special or punitive examinations of insured banks to be made
at the discretion of the Listrict Federal Bank Commiseion (perhups if the
approval of the Federal Bank CommisEion or the Board of Governors is
obtained) as a. result of the failure of a bank to maks the neceseary and
required elimink4tions and corrections; to publish adequate and ethical
statements; to aaintain adequate capital; to maintain sound operating
practices and policies; to maintain a management with character and attitude
conducive to sound. banking, etc.
(c) Costs of the regular examinations to be absorbed by the System;
cost of each special examination to be assessed against the bank, without
exception.
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Federal Reserve Bank of St. Louis
Free examinations by the Spittos immid take care of State
prf.ctiee, would invite
examinations in time and the byetem, Els a matter of
furniah them with co:4es
the &tete examiners to join in examinations and
ld be provided.
of the reports, for which legal authority ehou
by the System of the
This would entail the additional absorption
troller of the Currency and
present examinetion costs incurred by the Comp
ed by member Ix:like to four
his examinere and the very emall awount reimburs
and most of the Federal reserve
of the Federal reserve banks. All F.D.I.C.
banks' examinations are now free.
This plan nentenplates, of courv
the
the management of the ineurance
consolidation of all Federal !supervision and
fund under the 8ystem.
the banks of the country would
Perheps the method with most appeal to
defray ell extmimtion end supervision
be for the Federal Reserve System to
reguler operations, any deficits to he
expenses out of the eernings of its
ng!, from invest4eats of the instal-enc.
paid out of surplus, leaving all earni
future unexpected loszcs or to ultieately
fund to accumul6te to provine for
nts.
reduce the necessity for assessme
Provison should be mtde th#A, if,
rnors, the Oystenss earnings and surplus
in the pdgnent of the Board of Gove
any one yeixr to aeet examination
accumulations should not be adequate in
cit should be provided for out of the
and supervision expenses, the defi
nts of the insurance fund. All direct
accumulated interest on the investme
n of the twelve reserve banks, and
expenses in connection with the operatio
uding the board t_nd its staff, would be
a pro rata share of overhead, incl
reserve banks.
segregated and borne entirely by the
to be feesible for the follow—
This plan of defraying expenses appearu
ing rebsons:
1.
le wets are
Examinations and supervision at reesonab
their operations in line
necessary to teep banks in sounc condition and
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Federal Reserve Bank of St. Louis
with the Lroad policive prescribed by the 6wrd, thue cuttint down thc
exkxricnced iu the peatt resultink,, in heuv:i
large number
losses to deposiLara .xict vcry L:amaging disturbonces to tny orscral economic
situation.
2, It 'would be leas burnensome to th* balik..; than having to poky
direct ask;esswenta for exazUnatior expanses, because bank:: %re not as
intereiten in receiving 4nly a i3aPJ,1
part of th4. profits of tiae Feckral
Reserve bystem (even if the absorption of examination expenses should
reduce uiviciends ia leun years) as in avoiding the peyment of examination
41,68.0646Ut6
direct.
t.
A iaro perceuti46 of the banking reiviurces 13 aou in th..,
iederal Waserve bystaza uad member bulks case interested in good exazinations
and supervision of all nonine:Aber b4ukc, becaue of the general benefits to be
derived therefrom by the banking industry, tht reduction of inzurancir aeseepA400411, etc.
Thkei is the aame principle
.:pplied in levying asaszmentr for
Liepoait insurtami4wher4in tne larger btlike (most of which are aelmbi.xv of the
Spites and
) insurance) arc cclit,d
.
many large: depoaits not covered b.
LApoi. to pay Ligher effective retest:, per 41,',24:0 of tota inLured devotits
Luea tbe mallow bLakti where pructically all accounts Ere fully covered.
4. State nonmembfr b6nkt would bt7 required tc continue te p&y
asessmento for &tate exEminttiont in all of thore !Atter ritich would not
diLcontinuc their deptrtmunts. (This would ago appl:,. to Ihc Ettte member
banks.)
S. It *Quid be difficult to properly estimate cost:1 of examinetieing in order to directly aileems nommexiber bank6 on the ground the,t they
make no direct contribution to the ebrnings of the Fodern1 Revervc Eystem
and tacrefore are aot entit1'.6 to any free exiAm,tion:).
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Federal Reserve Bank of St. Louis
6. Member banka receive many other free services not nearly
so necessary to the protection and preservation of the System end banking
in general es adequate examinations and supervision.
7.
Total coeta of examinations and oupervision (aost of which
are borne by banke directly or indirectly) should decrease appreciably
for the following reasons:
(a) Under the present plan national banks are now being
examined four time in each 24 months, as compared with
once under the suggested plan.
(b) State nonmember banks are now being examined by the
to 4 times each 24 months and
State departmenta from
twice by the F.D.I.C.) jointly in most cases.
to 4
(c) State weber banks are now being exemined from
tiO0O 01:016 24 months by the State depertments end twice
by the fideral Reeerve banks, ueually jointly.
(d) By consolidation of tne various examinetion formic eamsiderable office and supervisory overheed should be eliminated
anc the number and expenses of field examiners should be
somewhat reduced, assuming thet the more efficient examiners
in all existing agencies would be retained. By reducing
the number of examinatione of, let us say) a national bank,
from 4 to 1 in each 24 months, it would not be expected
that the expences would be reduced accordingly, because it
is contempleted that the less frequent examinations would be
more searching and thorough and by well-trained and experienced
examiners. At the eame time it should be provided thet such
examiners be paid much better ealeries as inducements to
continue in the profession. However, such examinetion costs
aight retsonably be expected to be reduced 50 per cent.
(e) Many State banks which do not and cannot convert into
national banks would take active meesures to practically
eliminate State banking departments from the examinetion
and supervision functions; otherwise State benkr would Ws
a distinct disadvantage in thia matter.
II. hedita or _Zxaminationa by Certified Public Acqountointip.
In order to eomewhat fill in the gap resulting from fewer examination by the public supervisory authorities, provide in the law for:
At least ame audit or examinetion to be made in each calendar year
by C.P.A.'s, reports of such audits to be divided into two parts.
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Federal Reserve Bank of St. Louis
Part 1, to bc sent to all shareholders mnd reviewed st
the next subsequent shereholdere' eeeting, ahould consist of
2tetement of operetione or profit and loss,
a balance sheet,
and en enelysis of surplus and capitel accounte edjusted to
reflect ectual valued, together with such schedules as are
deemed by the C.P.A.'s to be adequete or neceeral7 tn sueort
the statemeuts. These stateeonte sh:Juld be certified by a
coweittee of the directorm and the C.P.A.'s.
Part 2, to be prepared as u supplement to ?art 1 for the
directors and senior officers, should contein the usuel or
necessary detailed schedules and. comAents releting to the
condition and operetiony of the bank. The report should show
in logical arrangement all large loene, investments, and other
importent or criticieed iteme, together with a stetement of all
,
pertinent facts auch as dates purchesed or made, dates renewed
value,
book
or
ing
,
carr:
the
end
etc.,
collaterel or securitioe,
y—
leaving adequate celumns to be used by the directors in classif
and
ibility
collect
slow
l,
ing such assete as to loss, doubtfu
slot history, with the poseibility thet in connection with each
slow item there be indicetod by the directors the. date on which
the
the item is expected to be or could be liquidated, to support
control
the
various
various actuel or estimated values assigned to
should be
1.
Values
Part
in
nts
ed
stateme
certifi
the
in
s
account
assit ned to the assete by the directorc durin the course of the
e
audit so as to be incorporated in the final report of the C.P.A.l
more
and subject to their review and comments. This would require
the
by
pation
for
partici
ibility
and
reapons
prompt consideration
directore th:Ja veuld be Vle ceee if the C.P.A.'s submitted their
reports based upon book values only to be supplemented by an
official report of the directors at a later dete reflecting pheir
appraisal of the assets. This would appear to be a prectical
volution to the problem caueed by. the fact thet C.P.A.'s in this
country are not generally qualified by experience to properly
evaluate assete, particularly limns of banks, bad directors
generally are not qualified auditors.
Bank
In order to avoid confUsion resulting from the District Federal
COMMiBeiOn'S
examiners appearing simultaneously with the C.P.A.'s, the
C.P.A.'s should send to the District Federal Bank Commission
E
confidential
of the
notice of their intention to make the audit one month in ndvance
definite date.
tentative date; another notice to be sent shortly before the
when the
If by some chance the Federal examiners should appear at a bank
a:rroxiltately
audit of the C.P.A.'s is in process, they should asoertain
arrani:e not to
the date am which the reeort will be available and should
C.P.A.'s has
aake their examination of the bank until the report of the
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Federal Reserve Bank of St. Louis
received and enalyzed.
In case of a bank with more then ten breeches
rhere the benk maintains its own inspection system which is setisfectory
to the dirtrict Federal reserve bank, C.P.A.'s need eudit only the head
office end ouch key or large brsnches which have general powers and
transactione and assets on a large scale somewhat like independent benks,
etc. (If a branch has capital stock allotted to it or is semi-independent
of the heed office because of size, strong management, etc., or somewhat
controls the other branches La the zone and handles rediscounts for Wen,
superviees credits, etc., actine eomewhet ts a district head office where
policiee may be said to emenate, etc., such branch should in all ceses be
required to be audited.)
In branch bank situations, the C.P.A.'s mhould certify as to the
consolideted statement and that the general accounting And credit control
of all branches eee in accordence with head office policies and are sound
and satisfactory, and thet they have audited the accounts of the head office
and all of the key branches, specifying such branches.
It is realized that many of the small unit banks in this oountrT can
ill afford th
co,:t of audits by C.P.A.'s, as indicated above.
castle the District
In such
Federel Bank Commission should be given authority to
decide (with the approval of the Federal Bank Commission) whether an audit
by the directors would be estisfactory or whether en audit by C.P.A.'s
should be required.
If either type of audit should appear to be uaeatia—
factory in any case, the District Federal
Bank Commission, eith the
approval of the Federal Bank Commission, should have power to piece thf.bank
on the list for soeciel exeminatione for which all chergee should be aeseecad
against the bank immediately, including salaries, traveling and mieeellaneous
expenses of the examiners and the actual stenographic and
expeneee in connection with the preparation of the report.
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Federal Reserve Bank of St. Louis
other office
In this connecteit
tion, it is
WNSUMe
that indebtedness of some or all of the directors,
particularly those with influential power, or their interests, subject
to criticism, past experiences and difficulties with the management of
the bank, current trends, indicated by thorough analyses of call and
examination reports, etc., would indicate the extent to which conrideretion
might be given to the matter of insisting upon audits of C.P.A.'s or
frequent or special examimtions by Federal examiners.
If such audit :;Tocedu-...e were followed shareholders could b.c. full7
acquainted with the finencial condition and operation of their bEnk.
The
chances are that the depoeitors end the public, through looks, comments tnd
conversations, would become acquainted with the eemdition of the bank and
t,a a result of ral of whist the direotore and officers would naturally
tighten up on Itany unsourW and IMOmfe practice*.
Such a. procedure would cut down the visible corts of supervision,
acquaint the management with the real condition of the bank, nnd develop
the iden of self-egntrol without cost or sncrifice.
Under such practices
and circumstilnces it would seem to 1)(. I
- erfectly adeomte
nd safe to
provide in the law thnt the federal examiners should make exeninations only
once in eech 24 months or as frerniently ts fects and circumstances would
Wiest*. to be necesstry.
The foregoing suggestions for audits by C.P.A.'s contemplate that
the tistrict Federal Bank Commission shall have authority to determine the
eligibilitzi for btnk audits by the C.P.A.'s of the district, oae of the
eeneideretions being that no C.P.A. or firm shell be eligible as the
designated auditor of a bank for more than three years in succession. Of
course any auditor or firm muet be * sembcr of good stsndin, in at least
one Stat
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Federal Reserve Bank of St. Louis
asrocittion in the district.
50
Audits by Ca.A.or should be made and rd*orted in aocordance
l Bank
instructions or standards published or approved by the Federa
the ohareComnissiJn and should contain the written authorization of
of comments,
holders for such auditors to 2roceed„ and th,, fc11 text
:tc.
exhibits, achcdule.s, ,
The certificate should indicate (1) the extent
liabilities,
to whiel the tuditors were instructed to verify wets end
into the various
analyze operetIonc, and the extent to whict, they went
which they desired
matters; (?) whether or not all records cad Information
ees requested
were furnished Lnd all explanatione by officers and employ
iu their opinion the
by them were satisfactorily Liven; (5) rhether or not
s, etc., contained
bel8ncf... sheet JAV amlytes of surplus, undivided profit
whether the
,'ort reflect actual values, conditione, ett.; and (4)
,
in the re,
ions of the law and the
bankte oper&tiontwore in accordance with the 2rovia
principles of eound banking.
A certified copy
of each complete report
ct Federal Bank
should be sent immediately upon completion to the Dictri
remains), together
Commission (and to the Etat* bankina depGrtment, if try
, etc., which the
with any instructions as to corrections, ohanges in policy
a result thereof.
directors or ahi..reholders give to thc *Moen: as
g laws (1n5) contain the
In this connection, the Wow Hampshire baukin
following:
jalaids,L
11Paidattiga iat %aka
directors of every institution
"46. 4y Ikustefes. the trustees orsioner
shall, in person or by a
under tie superrivion of the commis
thorough exsainutiem of
somaitte• appointed free their board, make
months, and shall make
the affair. of the institution anee every six
hed by him fear the
eled transmit to thf commissioner, upon blanks furnis
after they are made,
parpose, a report of au& examtaatiens forthwith
per publishvd in
newspa
some
in
t
repor
and shall publish a cony of such
bc no nevepaper
there
if
or,
d,
locate
the place where the institution is
o, ane shall
theret
st
neare
piece
there, in a newspaper published at the
containper
newspa
the
of
copy
a
fertikvsitil trdnamit to the oommieeioner
ing smeh report.
shall employ
iti! Public Accountt4t4 If the trustees or directors
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Federal Reserve Bank of St. Louis
a certified public accountant, approved by the commiseioner„ to
make one examination each year thet examination and the pmblication
of hie report shell be in lieu of the ssni-annual exeuinations of
the trustees and the publication of their reports; provided, that
nothing herein shell relieve the trustees of any' responsibility
as sueh truetees."
III.
Cala Eeeorts.
Provide In thc
fort
Two cull reports to
seb-litted on (efinite datee annuelly,
semely, June SO and December n. Require two sarprise call reports—one
is the sprig. and the other in the fell.
v
The two reports eubmitted an
the fixed dates should contein stipulated inforsation reletini, to surplue,
profits, etc., Lad other informetion set up in appropriate achedulets,
Which aay be necessary in connection *ith the Board's study on ecanoaic
conditions and. trends and which may be used in the compilation of- annual
reports. The two surprise reports should contain regular stetements but
isay be otherwise eondensed, osateising sehodules covering only thoee
important iteas which may be desired in soonoetion with a study of certain
trends or as a sort of surprise obesk-up so certain of
soeb ea loans secure
beakri activities,
by stocks and bonds, real estete Lulls, Government
securities, etc.
These reports should be expreesed in acteal insteet of book value& and
pubssitte4 to the Dietrict Federal Bank CO4U143i0M.
There the.y would be
analysed for information showing &beet end capital condition, carnini.e,
trends, etc., useful in determining aupervi ory oolitic& especially
in
connection with the regular examinations end the necessity for speciel
exaninatione. Lazedietely after June end lecedber of 'mai ychr the Lietrict
Federal Bank. Comeiseion ehoeld compile in one volese coneition raiJorte of
all banks in the dietrict for dietribution to the banks and to the public
requetAing same—such compilation to ihclude Information with respect to
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Federal Reserve Bank of St. Louis
earaino, surplus, awl carpitel eharges, etn.
In lieu of the present requirement that call reoorts be lablished in
newspapers, the ;ublication of the above mentioned. semiannual oempilations,
mt that a oop7 of each call report be posted in a
together with the requirem,
conspicuous pike, in the lobby of the bank until goo month after the next
succeediut com7 is pre,,ared
posted therein (such report to be peeled
not later th.4 ten :'.!-,yr! [fter. .the Onie of cell), would seem to be a more
2atia:actori -.et!-,o4. of 2utaiention than now exists. In tbe ease of a branch
bank, a copy of such. call report shoule be omitted in the head office and
at each branch in the stme manivI..
In order to show the oublic in the
brancb cclAunity the extent to which the branch its receiving (*volts and
plecinz credits in other iNtalities or in Government or other types of
bonds, it night be required that the. braneh nlso oort its individual statement alensside the, consolideted statement. It is not believed thEA the
postint of the report in the lobby of the bmrk would ereete any
rumors.
undue
Thic procedure ir follorqed In Missouri and possibly other States.
In lieu of
reports, re7uirements are mede in Canada vs indicated
below:
d interesting feature of Canadien banking le
"A useful
publication
the
OY the Government every month of a detailed
(,./oettion of each bank. The Bank Act 'squires
th
sta.tement of
sh the Government with monthly stetsons** of
tbo blahs to
ame la addition to those as annual
their assets en6
statement to the areholders. Ilso latter differs esly slightly
from the ammmal g frAl meeting, taco, with the profit and loss
statement sod the eport of the auditors. * * * Both sets of
statements ere pub ishe( widely and are subject to the closest
e both by the press and the banke triemselves.P
scrutiny and ans
lir 'Analysis of Bank Ste
Pattersaa (1972), Ch
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Federal Reserve Bank of St. Louis
taN, coadian isankipti by t. L. zs,tawert
p• 40•
3
Section 5f of The Bank Act (of C:.naea, 19'14 Revision) contains the
follovint, except for the pErenthetic&l expreseions,
eti:)21iedt
certified -a per
oopy )4 1' the stetelAent (oigned
extract from the annual report of The Bank of
thc, folloA
Uontreal) cm of the profit and loss account, together ritb a
utea of the annual general meeting shall be
cop) of the
ur weeks thereafter to etch shareholder at hie
aent within
t office address, as shown by the books of the
last known
rently therewith a certified co y of each of
bank, ..nd cl.ka
these shall besent to the Minister (of rinance ."
sition of the Bcnk on not October, 1975:
ebeet omitted)
"?he General Statement f the
Wo A4 BOG,
JACKS= DOrDb,
Joint General .iianseers.
CHIRUE B. GORDON,
?resident.
BANK Oi AONISSAL.
TO ?Hi ShLREHOLDM OF
Ille havia compared the hove 6tatement. with the Books aad Accounts of
the Beak of Montreal at th4 i;ef.cd Office, tind with thc certifirt i*anch Pe—
tame,. We havc cLeeked the obsh and verified the investments and
securities at tne dead Off! p and at several ef the 7/rincipal Brunches
of the Bank *t. the end of tt , financial year. le have likewise, at various
eokal the aush and verified the securitit.s
dates throuchout tLe year,
at several important Branchee.
110 have to report thatt (a) we hcvo obtiatted all thc informction amd
(b) in our opinion the transactions of the
explanatiese we have repair
notice, hk,ve been within the powers of the
ir
leder
13ank, whir* have ogee
above btatemest disslosee the true
'the
opiniono
Banks sad (e) in our
sheet by tIle book, of the Ban17.
as
*
it
;:1,Li
condition of LL,.., Bath,.
NORMAL, november Elst,
lats.
CHAELFS A4 801006011, Cat.,
of the firm ef Creak, Cushing Iodises )
)Auditorr
W. D. GLENDIVING, C.A.,
Campbell,
of
•
Glendinning
dos)
of the firm
beak stocks are regarded in Canada as
R. Y. Pomeroy stated,
held by people of both lhrge and small
prime investments, see are wi
means for incole return."
1.7 Mere Banks do Not Fail°
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Federal Reserve Bank of St. Louis
assiikba holm
July 19U.
1
The nontEly return must be certifityi as followas
"I th.elLre t1.10, thr) above return I! corroct according to
the books of 'Vie bank•
E. F.,
Chief Accountant, (or Actink Chief
.:Iccountant,
tht. ease zwi bp).
re f.,'ecl-:re tN0 the foregoin return it> t:
best of
our knowledge andkbelief earroet, and shows truly and clearly
firlbncial pcditior. of the bank, r.„o r‘quixed by sections
one hundred and teiclve and coo hundred and thirteen of the
alsok Alt; Lnd wt f*rther doo14:ra tt' t tau; Bulk. s never, -t
any tine durine thekperied to which the said return relates,
held in 17,4xItit::
-otes lee!! than flrty per :antun of th:, cash
reserves which it he! in Canada.
(Place).
.
day of ... .19.
• • .this
A. B.,
President, Cirict:;-Pr..:.cident, or Director
acting am President, “_tile case me,,
• Dep
General Manager, (or tie grincipel
officer, jajtkt,_sdatLm4„jat)."
The statements reflec liabilities and capital under seventeen control
accounts and assets under
ty. They show most of the assets at 'estimated
loss provided for", "at not
than cost, less amounts (if any) written
off", "not amesodinc market Values", etc., and the various control aseounts
reflect "shares of and loans to controlled companies", i'mortg-P.s on real
estate sold by the bank", various other classes of sloe or aum-licuid mete,
several classifications of secitrities and loans, etc,
Canadian banks do not appear to be reouired to publish the monthly
returns or annual statements.
wever, The Barik Act oentaine the followings
45ec. 1419
1".tnntuA. S
w
an:1
1 t
h
)13
*143. If any sopy of the s tomont or of the protit and loss account sub;:ittod un4,4.1r Li'actionififty-threc oi this Act,
kaiv
not been signed es required biithat section, is teased, circulated
as4 oopgy
such statement is itscuii,d, circulatcd
or published without having a 'Copy of the auditors' re!lort attaChed
therto, the bank, and every 4rectqr, general manager or other officer of the bank who is knowiagly a party to the default, shall bt
liable to a floe not cxceediug two hundred and fifty dollars.
R.S., c. 12, s. 145."
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Federal Reserve Bank of St. Louis
5;
(sea. le3)
"(2) 2very presides% vice-president, director, auditor, i;enerl
skenager ar other officer of the baak or trustee who negligently
(knowingly) prepares, signs, approves or concurs in mny account,
t respecting the affairs of the
statement, return, sport or
bank containing any false ard3:71e7ive stwtel6rnt, or rin: return wbich
does not set forth the true fini,?ial position of the bank including
all the laformEtion required by saction cue hundred and thirtoen of
this Act, shall be guilty of an indttotable offence punishable, unless
V law prescribed tharfor, by
e greater iiunisnsent is in rav
Imprisonment for a term not exceeding . throe (five) years., R.S., c. 12,
• 11634,9
It hes been said that before
*meet of the/Offi(!e of thc'
.z/of inforv tilpp
Isepoetor4esers1 of Banks in Canada in 104, the ssitt(,
statamasta was of =eh more iluportunce thaL elnce thetAlAte mnd that when
the government h&c; no depixtment t.) examine the b&nkt,t, to check. the condition and operetions, 4uoh sore detailed reports veri! nucesocry, so that
the general pane would be adequately informed *tie Ole to look out for
itself in the natter of velecting sound benks ekth which to doal.
The average bank statement recutred to bi published on call dates In
the United States ure not primarily informattve,
50
frir as the Esnixml
public is coneerned. By zany they are rloirded es soriewluit concealing
rather thtz revealimgpospeciall:t to persino unsuspioious End uniaormA
a46 to bt,Akinii conditions and pr&ctices
in the form of
The average advrtitlewalt, usually
0Ondensed atatese t f eondition and Elven prominent apcee
at call ei.ats, to Oces les',2 rev
2he prirtlel use of euch statemento,
thorefore, mould seem to be by anillysts to indicat- trends, comparisons,
etc.
4 prided themselves
A large percentage of de- ritor:,3, ho.vever fuel: th,
upon the exorcise of the
by their dealings with b
pie of caveat einptor Nni mo4 llave been misled
by the inforAiAion put out by• the banks, now
hold Federt.1 banking supevisory authorities at last morally reeponsible
for awl; of the di:fiat/tido whiel artiie out of failurtio, even toucll the
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Federal Reserve Bank of St. Louis
91.
banks may operate etrictly within the laws but fail on accouat of *canoeic
conditiome. Inch of this feelin* appears to result from the activities amd
ztatenents of certain !
nubile authorities and the tendencies to extend
regulations too minutely *in the interest of the general public."
If the supervisory authorities desire to shift a large degree of
responsibility for the selection of mound banks with which to 4eal from the
Federal Meserve byetem to the &later* tbemeelgoo, ant if the yublicatien
of etetements is to be continued, Onch etntemente should be modified to such
extent or to be adequately revealin
and not concealing,. If Federal bank
supervisory authorities ere charEed
th or assume responeibility for
protecting all of the depoeitore and
general public by the ma:nteneneo
of all banks in sound and entiefactory
to the qublic, then it would 8.?-pnr to
Mon with propur service rendered
unnecessary for C'e 1-)ariks t, be
required to publish call reports ane adee4te
pow shosild be given to the
aupervisory euthorities to step in ane thanEe the 2.1ancicuent or reorganize
or close any unsatisfactory bank so PS to Arevent a bad situation growing
worse or resultinp in more loeses. etc.
Und
such circumstances it would
appear that the submission of audited 'range]. tatsmoate to all shareholders
and the oublicetion of semiannual conpilali
*could furnish ell of the information desired
of all )1anks in ehce. district
omaliotot the depositors, end
tbe general public.
IV. Simplificetion and Strengthening of Provisienv of the Laws Islatimi
to Superviolon,
*ith reepect to the necessity for simplification or elimination or
reduction of various detailed limitations and definitione in the stetetes
relating to bank exaninations and supervision end broadening or strengthening
or "putting teeth* in the powers of tilt supervisory authority, some specifie
mattere
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Federal Reserve Bank of St. Louis
defecta end difficulties are indicated below,
'
(a) Inadequate authority to reciuire correctionr, climinntions, incrcased capital, prevent dividend. paymmts, prtIvent uw.7ound preticf.t.;, or
to take othcr action necessary in thc interest of enforcitv nmnd banking
practicer, or to penalize banks for failure
comply nith recommendations
or requests.
(b) Inadequate power to Change management, force reorjtni7r.tina or
game in liquidation a bola *ere practices ere objectIonable or d'ngerms,
losses and ei.lrninge or genera eensomio oonditionr indicate no ehance ,f
profitale operation of the hank in the Puture, before :rseete t.r• (liselpated
:
. the ultimte expense of
or daid out to inside depositom 0
unsuanecting
depositors.
(c) Inadeuate control aver a bankor selling its esecta to rroid legal
rezArictions er requirments of the supervisory body in the care of merFers,
etc.
(d) Inadequate provirtc,ne in the laws 12&%ing it =ndotor7 that vnr1,3.aor..; authoriti6a
(e) liccesEit
1;:t cer
. Te8 or c:%nes.
fat t:
Car penalties suitable to the offenses, tn tnke enre of
aituations where the extreae imnalty of cloying, t(.,rmintint, 'lesbership, or
remz)vine; aan4omant iv act justified, msultinE in no notion by the supervisory authority.
(f) Inadequate aut'lority to remove bi:ak officers, nnd th
unsatisfactory
procedure Involvini, other aupervisory authorities and prediettne upon
repetition of uasound practices or 1:totivitirs. ete. It is not clear that
an officer who is gargled to dicontinue n cert7111 ?ractiee can be romovf1
if he dote discontinue thrt practice but shifts to anot).-rr nrctice equally
se bad and after being warned to discontinue the eecand practice ahifts to
a third, etc.
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Federal Reserve Bank of St. Louis
.58
(g) Inadequate contriA over tha type or content or state,aents in
banks' advertisement, power being limited to the :itibliention of call rieorti
*blob are usually located in such Vptes or ,;.ectIon
1.)criodicvls ued in
such form that comparatively few h&ve an opdortunity of sc(Ang them, the
formal advartisemento appearing in such proeimmce tht they exe noticed.
PnrtherTore, such advertisementii contain wordint of such
noture that nine-
tenths of the public think thtit they are the oall report statements required
by las.
(h) Inadfxuste zhowlae.
the call or 2ublieihw &tLterants e relation-
ships and transactions with affiliates, especially loant to and investments
in and loans upon the ctockE
other oblUctiont,4 of subsidiary t,:nd
affiliated orgralizations.
(i) inadequate tuthoritj to examinc holdinc: coil!pany affiliates, affiliates
and compmnies affiliated with bankt and to require statements therefrom. If
specific provisions on thase matter:: are to be retained in the statutes they
should be clarified and extended in such a way that there will be no question
ea to authority to examine all compani::.0 in a given group :ind to rec.uire hay
necessary corrections, terainotion of relationshipe, reports, etc.
(j) Inadequate authority to require all holding company affiliates to
obtain voting permits or suffer penalti •s.
If tble low is retained it should
be modified to increase the dower to revoke permits for entre er impose other
penalties.
Cooperatively too many actions by stockholders can
a aaximum of two or three or
very few shares voting,
&a
be taken with
in several holding
cowpany affiliate cases where standard conditions sere objected. to old no
permits leers issued.
(k) The Atlantic Nntioaal Bank, Jucksonville, Florida, 17ao subjeet to
enamimetien and supervision by the Comptroller of the Currency.
Onder the
bank holding eempany law thie bank was determined to be an H.C.L., anc as
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Federal Reserve Bank of St. Louis
5"
such 'as required to Agree tc certain things before it could obtain a
oermit to vote the stock of its subeidiary member banks.
It would seem
more practicable end mach more satiefactory to both the bank am the
supervisory authorities if the laws hao been changed in such respects as
to give the supervisory authorities ecually as nue, regulatory power with
respect to the H.C.A., as a bank supervieion matter rather thcn
permit matter, without all the necessar
;.f'
a voting
a„,pliestions, conditione, agreements,
and other complications.
(1) The American Trust Company of 6an Francisco, t zufmber bank, was
subject to examination and rupervision, to e degree, la), the Federal Moserew
System.
Ae e matter of sound baokint practice, nothing was dome shoot
the H.C.A. status of the balk motil tho booking holdint, coapany law was
enacted.
If it was proper, as a membership matter, for the bunk tr:,
be
controlled and operated by Atlas Corp., Pacific Eastern and American Com—
pany, why was it neceseary to vo to the extent of previdini in the laws
that the holding companies must obtain a permit to vote the 6tock of the
banks, such orocedure involving many details with respect to agreesents,
qrohibitions, etc.?
Why not give supervisory authorities,
be
a membership
matter, power to determine whether the relationship is sati;:factory, and,
if it is not satisfactory, authorize the Federai Reverve System to terminate
membership of the bank if it does not make the changee deemed to be necem—
sary?
(m) The necessity for certificatione by the Board of Governors and
com—
the Internal Revenue Depertment with respect to exemptione of holding
pany affiliates.
(n) Provisions in the law requiring approval of the establishment of
branches (see X-9708, 4-L6-Z8) as compared with The Bank Act, of Canada,
which contains
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Federal Reserve Bank of St. Louis
no provieions or limitations relating to the establishment,
removal or closing of br8rIchcNs, <hough in several sections the act
recognizes branch banking.
(o) Zoo detailed and technical definitioas
iisitLtions rel&tive
to various aatters, such, &s types and amounts of loLas
mt„
.
vqle or
rediscounted, investalents, rcscrvcs, capital, dividends, interest, deposits,
affiliates, executive ofticcre, etc.
No attempt it) made to point cut the details of all of the existing
defects or to ladicet4i, the- changes which should be made.
This in itself
would constitute a major subject of stud:i. me would depend upon the extent
to whicL the gunern1 banklug structure
4UL
supervision may be sltred. Nany
of thc defects in thv laws appear to have resulted from the practice of
attempting to correct every little evil by passing new or amending existing
eections in the banking laws.
The only satisfactory remedy to this situation
would seem to lie in a complete recodifieatLen of the bankini Uwe, to
provi6e for supervision on the basis of sound banking practices rv,thcr thaa
by legal definitionr aum'i limits. Placing
coamcrcial benks under federal
charter, or even changes making them subject to supervision by one iederal
body, would carry with it the necessity of alimini,tiou of many of these
defects*
It is frequently stated by
bunkers, economiete, and others that4enim
beaks can neither be operated nor properly supervised by legal definitions
and liraits solely and that prescribing too 4614 definitions and limits tends
to make the narrow-minded or unocrupelous banker (the kind most ntedine
regulation) think up methods of circumventing the definitions and limits or
causes him to opernte in terms of the full limits prescribed, or to do
everything not specifioally prohibited by the law, even though in his
peouliar situation such limits may be extremely dangerous. In
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Federal Reserve Bank of St. Louis
many of suCh
6
eases the examiner or the supervisor is tt a total lorr to enforce sound
staadards or policies, or to supervise on any bbsis other thaa by the
definitions anc limits laid doen in the 1111.
V. Othq. Chances.
Branctl Jukracknt ste,
reesonab4 004.9, would permit of a better
type of lenagement tilroueh brotder experience and superior training, both
technical and a6ministrative, and better internal control or supervision
thr0u0 standardisation of alpacas sod procedure, auditors located at
principal offices, traveling inspectors, reports, credit eontrol, transfers
of e-rolloyees, etc., than would be possible in small unit banks. The super.
visory erobleme are much more complex and difficult in the Unit4, :tAtes
where there nre 15,000 boards of directors and groups of bank officers,
than in Canada with 10 or in England with 5 groups, resulting in much more
detailed exEmination un
auvervieion work and tuch higher nest per $1,3)30,000
or reeeurces involved. It is not reaconable to expect thnt 15,300 grouos
of bank offieerv and boerds of directors will develon and maintain broad,
sound bankint policies coordinated with netional economy ne rendily and
effectively ..os would be possible if all of thf. unit bltnkt -,ere transforeed
into, say, 5...) or 100 brunch banking ontfitF.
This mOcre, it more difficult
for tbe regulatory authorities to formulate and rnforce good policies and
it *leo recuires an immense amount of misviontry work becruse of so many
little hard-hesded bankerr anc boc,rde of directors
cavinct and to pleale•
The ext!..i6ini, e.n6 follow-up work likewise is more difficult in the system of
bankinv with a lerge number of unite than in branch banking thcre the transacttonc ere henLled ct br61nch,+ inore rxt,
6
r.Altine mattor and all of the
policies in connection with which are determined by tbe hene or sone offiees
and thr very /arge emount of missionary work rsiatine to good accounting
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Federal Reserve Bank of St. Louis
systems, internal aueitp, credit ,Iolicies, etc., which ere performed in
the
Itf, an0 Federal examll.wrv, is hp,ndlNi
United State by the St,
the inspeoters mod auditors from the hemd or district offices of the
breach bLnks themselves' te breach
hSlkinE", CAW,
Government examiners heve to do is ta entaln
about all the
the head offices fld key
brunches and see thst the benks' own cudite, examinations or inspections,
policie5 it thc varioui branches nre in accorl witb the srlund
3ystem
)olicies ttt the heed offices. The system of credit analyeis
and control in the Canadian branch bankr very matAriAly lightens public
supervision*
b. Ma ellminution
840ejantial reduction 211 _teLlit nterwstlent-ctore
13. jiectuiring largey npapap 2.1L;Lts1
,tion0_12
d.
4her oritrret strilwent corgLi-
bafore_ chprterinf Nnks;
r;AlrfPctqu =tem
trkAnine ban)ierpt
Imam un-
01144490 Percone—galtiatkatia. VuoinesT,
likewise would eliminetr 'zany difficultieS and responsibilities amd
criticisms of el:pervision of omarrcitl banks.
UMW. cf the nrture of these ruggcsted chenve es well as sany mot
forth in the precedine section, it say be advisable to couch the chenvd
provivions of the strtuter in gamma or inoffenrive, but sufficipntly
authoritative, language or to withhold the Changer until a sore propitious
time, bAsed upon subeer.uent experiences sore clearly revealinE the necessity
for the mdditionEl chrngr,v, thus avoiding the possible charger of the Boprd
secklnE tc obtein autocratic power for deswtic purposes,
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Federal Reserve Bank of St. Louis
•,
7-28-36
Messrs. Skees
Goodman
Jones
Wilkes
Please indicate b- ch.-c
on the left-hand column
which of the items have been and should be covered in your
memorandum.
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Federal Reserve Bank of St. Louis
C.F.C.
1. Compilation of mhlAry costs of supervisory functions sad
field examiners of Federal Reserve System, natiosal,
Federal Deposit Insurance t;orporatient and 6tate AVAA;s1UVt.= 9,epertments, and consider the exicst toa whioh co;;t3
meld bo redwood by enneolinotion ol supervision iunctianki,
and et the same t4me provioe adequate Jorge ‘v
bank?, rnd brene one Pram., patems.
Co:-AP ane difficultii.s in the system of many mall btiniw
oompared with hrnnota
Z. ;Standardization of procedure, methods, responsibilities of
examiners is the twelve districts, ma accordance with policies
determined by the certrel Authority.
4. Other pobuible ware by 'thief: boll* mam!nstions oould be improved
or suppliance! by more effective supervisory methods, including
feasibility of atvointment of resident inspeotora,
uao of
audit reports of eertififie, secoantants, etc.
V
5. Inoresse directors' sense of responsibility.
6. 6tress the principle that hankers vre trustees and not sposwistore
V
for their depositors who supply nine-tmlbs of the moots mi.
their custody.
7. Types of requirements where there is necessity for joint esoferemisa
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Federal Reserve Bank of St. Louis
to eliminate differenoes, etc., such as uniform call reporte,
affiliate reports, examination reports, etc.
8. Diffieulties in arranging joint or simultaneous emainzitions
of heading employ affilibte groups,.
9. Policies re claesifisatien of assets
re ciilorge olfb iA W‘oup
tir enaminers sod
require-
depreciation, tat *me ol
valuation reaervas, etc.
lo. hational baukti „diAkt up the crinciphl ,xort,wn of tue Federal Bsservs Cysts% yet ths Abaft hiai hat little, effective superviaca4 cautrol mar abtional
Iota' bularies in the varies& Moral empervisery °flies& in
Washington and en* district in the field.
lk.
Watimatt4A number of persons who could be eliminated efficiently
mad the amount of such savings.
15. Present necessity for duplicate copies of reports of
MalliMerb
tions of nattonal hankr end at least duplicate analyses thereof both in the field snd in Washington.
14. Superior Judgment and ecnelnsion ms to stops to enforce seeeesery
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Federal Reserve Bank of St. Louis
corrections and compliance with policies if notional banks were
subject to examination by examiners for tilt Federal reserve
bank, in that under the present setp-up the national examissr
in charge and the district able national examiner pass left.
east, Awes. the sonniner in charge, the ehief rederal reserve
moseimer sad the sememel of officers of the Feder‘l reserve beik
email pees judgment (the intimate knowledge of the reserve beats
officers re the past policies and practices of the beak
in questton obtained through long contact and tbe mem,
experiences 'Jib the bank,'ma as reserve deficienciee,
struggles with nommgement,
pelicies obtainei their*
rediscount's's, flees' eraser amd safekeeping transactions,
and
numerous other geese e oonlact mead be extremely
valuable.)
15. Outline or chart of organisation functions both in Washikfton
and the field offices.
16. Character and ability of State examin,rs.
17. The resulting confusion and expense to tho beaks.
18. Inability of many states to maimimim aespellemt emd large smooth
staffs to extmine their large books sr groups, (Mhede Mani,
Ohio, New York, Utah, Georgia, eolith Carolina, etc.) and the
crowing defect in this connection an amount of the tendency
towards consolidWons, branch und group systems.
19. the narrow viewpoint by State
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Federal Reserve Bank of St. Louis
OXAMUMWS
relative te general
oeonomic conditions and the effeet upon loeal auditions,
efficient organisatiom mod banking praetiees sad problems, as see,
pared with the superior sod mere unbiased sennsol to the field
examiners under the Federal reser,* banks, and the further fact
that additiomal training and souse' if all bank examinations
should be eamoontrated in one staff. making special traiaine
seesiems er unferenees highly desirable.
-4-
204 bore is web less fear 41 the part of Yedsral reserve examiners
than of the &tate
natiemal examiners of losing their jobs
through pressure resultieg free eriticisms of banking practices
end osnagenent, etc. The elininatiea of polities should be
develeped fully, showing the contributing offset upon inferior
exeminatims.
V21. Me influence of weak bank supervision polleiso
tho states OR
banking in general and the existing. of my laINVOIld bombing
prestige* not oballanged and the seasoemeat effect upon natieual
banks, as a Melt of comparison of supervision policies.
MIL lbe psychologieei end actual effect of a national bank or a State
ember bank being in a position to withdraw from the 4stem if
vigerees oorrections are demanded by Federal examiners.
2D4 Details relative te the legality of supervision by Federal egmley
if banks are pereitted to continue emoting oder State laws.
IC The effect upon State examiners' Jobe and the legal responsibility
of the State supervisors. Consideration should be given to the
question of free examinations by the Federal agony, giving
sufficient time for the states to amend their Uwe relative to
onaninations of banks WWI. Yedoral supervision, which any still
be operettas miler State lase eld Outs *arum,
tio Seeessitg for aorbilig out sone sart of diplomatit plea siagehy the
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Federal Reserve Bank of St. Louis
Federal agency would begin using State examiner, the glib% be
-5-
left in State zones, ete. (At least until objections blow
over, Mid thipeafter if they grove qualified, being careful
to word the law so that the Federal body mould oemetrwe it
advantageously if neeessary.)
Se. New is umegement la other organisations regulated--by State end'or
federal authorities?
27. Is the penal* for violation of the banking laws end resUlations no
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Federal Reserve Bank of St. Louis
severe as to cause the supervisory authorities to hesitate to
act in
asoy cases?
Consider ignorance of the laws and regulatiese,
willful intent and evasion, the nature of the offense, the sweet
et mew involved, ete•
In the handling of voting permit applications (and quite a few
Clayton Act applications), it was noted that conditions existed in
State member banks which the Board desired to be corrected and imposed
certain requirements designed to correct the unsatisfactory conditions.
This occurred in the case of Industrial Trust Company, Providence,
Rhode Island, where the Trust Company, a member bank, was carrying in its
investments and publishcd statements a total of approximately $8,000,000,
representing stock or bonds of its subsidiary bank building corporation.
klthough the Trust Company had been examined as a member bank from time
to time, no such requirement had ever been sugeested.
It was explained
by the membership boys that the Board was without authority, as a membership follow-up matter, to make a correction in this matter.
A somewhat similar situation not involving the carrying of the trust
company's investments in its subsidiary bank building company, however,
WEE
involved in the darine Trust Company of Buffalo and Aarine Midland Corporation voting permit case.
(The BancOhio Corporation involved a similar situation relating to
service charges.)
Of course, prtctically every voting permit case involved the
imposition of requirements to correct unsatisfactory conditions in national
banks, which the Comptroller apparently had made no real effort to correct.
if anything is done, the law should be changed to give the supervisory
authority sufficiently broad and comprehensive powers to enforce reouirements
to co-rect unsatisfactory conditions as e follow-up matter, from time to time,
rather than as
8
trading proposition in advance of granting permits.
In
other words, strintent requirements should be enforced in all cases rather
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Federal Reserve Bank of St. Louis
511
than the immediately past practice of spanking only those bad
boys who
come in to request a permit to do something and who are found
to have
jam all over their hands and fac,_s, when it is generally known
that a
great number of others have equally as much jam smeared over
their faces,
but who are not required to wash them as an examination follow
-up matter.
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Federal Reserve Bank of St. Louis
1
•
Re examiners:
1. Pay should be comparable to that of efficient bank officers in order
to obtain and retain mature and sound men who will command and keep
the respect of the bankers and mho may be expected to develop into
career examiners.
2.
There should be ample time for the appraisals of all the important
assets of the bank, the management and the operating policies and
practices, earnings and dividends, etc.
The examiner should not be
forced to make his examination according to schedules.
In addition to the present scope the examiner should intelligently
report on the economic conditions of the community, the trends tIlareof,
etc., with a particular view to furnish information upon which action
towards consolidation, etc., might be predicated.
3.
The examiner should classify banks as, let us say, problem and nonproblem banks; problem banks should be examined as often as conditions require, say not less frequently than 8 to 12 months - as
regular examination with the understanding that if the problems are
sufficiently serious to warrant, special examinations may be made.
Non-problem banks should be examined not more frequently than each
18 to 24 months.
4.
The Dist. F.B.C. should keep card records in the form of indexes to
trends of important matters in connection with each bank, as well as
the community in which the bank is located.
5.
The D.F.B.C. dhould instruct field examiners to look particularly
into certain matters which may be based upon trends, confidential
information or tips, etc.
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Federal Reserve Bank of St. Louis
He Should also request the C.P.A.'s or
580
111
—2—
C
directors to publish specifically certain matters amaiTiot specified
matters in connection with their annual audit or examination of
the bank.
6. Problem banks should be visited by the D.F.B.C. or a capable
assistant after the examinations for the purpose of discussing 7ith
the senior officers and directors the possibility of new capital,
management, expenses, mergers, or other matters in connection with
which warnings may be necessary.
7.
Reports should be mailed by the D.F.B.C. only to non—problem banks,
reports of problem banks being delivered in person.
8.
Close and diplomatic contact should be maintained with State examiners.
9.
There should be held semi—annually round—table conferences of examiners
in the district.
One of these should be based upon a prearranged and
logical program and be held in the Federal reserve bank of the district
where probleat difficulties, procedure, uniformity, etc., would be
discussed.
The other conference might be limited to the senior
examiners, at which would be present representatives from the Washing—
ton office for the purpose of discussing uniformity of policies,
check up on the personnel, etc.
In this connection, uniform training
of the examiners should be deireloped.
See Appendix #2 in the Stark
F4e.
10.
There should be a strict charge off for reserve policy enforced
even if the examiners do miss classifications occasionally.
11. It should be made mandatory for the examiner to make a thorough
examination and they should be punished for negligence or guilt by
being fired and/or fined, etc.
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Federal Reserve Bank of St. Louis
-3-
12. Remove examiners from the influence of politics.
intelligence tests.
Consider general
Consider education, training and experience
with particular emphasis laid upon integrity. In other words,
make him strictly a professional man.
13. The D.v.B.C. should make a continuous study or survey of each
community or section, pointing particularly to the economic needs
for a unit bank or branch, etc. He should study trends, examination reports etc., of each failed bank as a kind of post mortem to
see just why the bank failed and how the failure thereof could have
been avoided if positive action had been begun in ample time.
Such
a study doubtless would be of considerable value in watching the
trends of the existing banks.
14. Improve the classification of loans with respect to the history
of the classifications, accounting for previous or present classifications of each loan which is now being or which has previously been
classified.
This would constitute a check up on the examiners and at
the same time be a very good trend record.
15. Give the examiner full power to examine holding companies and affiliates
and the supervisory authorities full powers to require corrections,
etc., just the same as in connection with banks. Eliminate voting
permits.
Such relationships are either good or no good.
The
examiners and supervisory authorities should report and use their
discretion and their powers accordingly.
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Federal Reserve Bank of St. Louis
-4-
16. Require the increase and permit the decrease of capital stock in
accordance with the nature of the assets and deposits and general
conditions of the bank and community, etc.
17. Require one regular call report as at June 30 or December 31 and
tro others, one in the spring and one in the fall on surprise dates.
The reports should contain such detailed statements of assets and
liabilities, earnings and expenses and be supported by such schedules
as will enable the supervisory authorities to analyze therefrom
trends, unsatisfactory situations, etc.
Reports properly prepared
would be useful in keeping up with the bank's trend and condition
without the necessity of the present practice of frequent examinations.
18.
The examiner should be required to give sound and constructive criticism rather than limiting their criticism to fault-finding or destructive criticisms.
19.
The D.P.B.C. should outline matters to be investigated and commented
upon or stated in both the open and confidential sections of reports
in something like the following order:
Assets; Liabilities; Capital
accounts; Earnings; Management; Policies and practices; Trends; etc.
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Federal Reserve Bank of St. Louis
Fix the law to require 1.
Regular examinations of insured banks not farther apart than
18 to 24 months and not less often than 8 to 12 months, unless
indications are that economic conditions, such as brought about
by drought, flood, crop failure, or som
lesser evil, have been
undermined, in which casemore frequent,_examinations would be
n\
made, provided approval of the Federal Bank Commission or the
BoG is obtained, either specific or blanket,,,not to run beyond
the end of the year in which given.
9
Costs of regular examinations to be absorbed by the System.
3. Punitive examinations to be made at the discretion of the
District Federal Bank Commissioner, provided approval of the
Federal Bank Commission or the BoG is obtained, as a result of
the failure to make necessary eliminations and corrections,
publish adeouate and ethical statements, maintain adequate
capital, maintain sound operating practices and Policies,
maintain a management with character and attitude conducive
to sound banking, etc.
4.
All costs of punitive examinations to be assessed against the
bank, without exception.
5.
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Federal Reserve Bank of St. Louis
Without exception, in each calendar year at least one examination or audit to be made by directors or independent C.P.A.'s
for the directors in line with instructions and on specified
form of report to be attested by directors that they have gone
over all matters therein thoroughly and that they represent
the true picture, etc., including a certification that the
value placed on each asset control account represents not more
555
o
than the market or realizable value. (The report might be
arranged in such form that one column would show tne book
values and a parallel column the directors' appraised values.)
6. In the case of a bank with more than 10 branches where the
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Federal Reserve Bank of St. Louis
bank maintains its own inspection system which is satisfactory
to the District Federal Reserve Bank, the directors or C.P.A.'s
need examine only the head office and such key or large branches
which have general powers and transactions and assets on a large
scale somewhat like independent banks, etc. (If it has capital
stock allotted or is semi-indenendent of the head office because
of size, strong management, etc., or somewhat controls the other
branches in the zone and handles rediscounts for them, supervises credits, etc., acting somewhat as a district head office
where policies may be said to emanate, etc., such branch should
in all cases be required to be audited.)
In branch bank situations, the C.P.A.'s should certify as to
the consolidated statement and that the general accounting and
credit control of all branches are in accordance with head
office policies and are sound and satisfactory, and that they
have audited the accounts of the head office and all of the key
branches, specifying such branches. In addition to the C.P.A.'s
certificate, require that the directors also attach a certificate
to the consolidated report as to the practice of valuation, etc.
Give the District Federal Bank Commissioner power to determine,
with the approval of the Federal Bank Commission or the Board of
Governors, whether directors' examinations in any case are
satisfactory and if not to require C.P.A. audits, and if the
•
3
bank fails to do so, it may be placed on the list for punitive
examinations which should be at least equivalent to the C.P.A.
audits and for which all charges should be assessed against
the bank innediately, including salaries and travelling expenses of the examiners, miscellaneous expenses, and the actual
stenographic and other office expenses in connection with the
preparation of the report, etc.
7.
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Federal Reserve Bank of St. Louis
The District Commissioner to compile annually or semi-annually
in one volume condition reports of all banks in that district
for distribution to banks and to the public requesting same,
such compilations to include information with respect to
earnings, surplus analysis, etc., with a possible view of the
elimination of the requirement that call reports be published
in newspapers, provided that one copy of each 'call report shall
be posted in the lobby of the bank until one month after the
next succeeding copy is prepared and posted therein, such report to be posted not later than ten days after the date of
the call. In the case of a branch bank, a copy of such call
report to be posted in the head office and each branch in the
same manner. (In order to show the public in the branch community the extent to which the branch is receiving deposits
and placing credits in other localities, etc., it mi,7ht be
required that the branch also post its individual statement
*alongside the consolidated statement.)
•
1. The affiliates of the bank to be examined or audited in the
same manner as the associated bankst
2. Reports of examination by directors and C.P.A.'s to be furnished to and analyzed by the District Federal Bank Commissioner.
3.
Not less than two nor more than three call reports per calendar
year, one to be fixed on a definite date, say December 31st or
June 30th, the other two to be called for on varying dates, one
in the spring and one in the fall. Such reports mi,czht vary as
to form and content, depending upon the amount of statistical
information to be derived therefrom.
An alternate system of call reports might be as follows:
Require
two reports on definite dates annually, namely June 30th and
December 31st.
Reouire two other surprise call reports, one in
the spring and the other in the fall.
The two fixed rerorts
should contain stipulated information re surplus, profits,
expenses, etc., and other information set up in appropriate
schedules which may be necessary in connection with the Board's
study of economic conditions and trends.
The two surprise re-
ports may be somewhat more condensed and shorter, giving
schedules cover'_ng only those important items which may be
desired as a sort of surpt.ise check-up on the bank's activities,
such, for instance, as loans secured by stocks and bonds.
4. No mention of examinations of State banks by State authorities.
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Federal Reserve Bank of St. Louis
Free examinations by the System would take care of State examinations in time and the System as a matter of practice would
invite the State boys to join in the examination and furnish
them with a copy of the report. The law should authorize the
System to furnish the State authorities with a copy of the report.
•
Fix the law to —
1. Give the F.B.A. power to force consolidations or mergers or
liquidations where petty jealousies and the volume of business
and other matters jeopardize the policies and public interests.
Or as an alternative, to take over as a protection against losses
and dissipation of assets, etc., in advance of the bank's becoming
a trap for the ignorant and innocent depositors while the wise—
money boys are withdrawing at the expense of liquidation of the
most current assets of th- bank.
2.
Give the F.B.A. power to prescribe investment limits and order
changes in the limits from time to time.
3. Give F.B.A. power to order assessments or force liquidations before
assets have been dissipated.
4. Give F.B.A. power to order the discontinuance of loans to directors,
officers, employees and their interests.
Make such power sufficiently
broad and effective.
5. Give F.B.A. power to force a dhange in dtvidend and reserve policies
wherever expedient in the circumstances.
6. Give F.B.A. power to order or force the directors to direct and
supervise or get out.
7.
Give the F.B.A. power to examine and kick out directors, officers
and employees whose integrity, experience, education, etc., does not
tally with requirements.
Do not require the F.B.A. to approve the
personnel in advance but to review and make requirements if the
personnel turns out to be unsatisfactory.
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Federal Reserve Bank of St. Louis
579
•
—28. Give the F.B.A. power to order the publication of informative
statements, if any, and based upon adjusted or true values rather
than upon mere book values.
9. Give the F.B.A. power to order that statements be posted in the
lobby of the bank until one month after the posting of the last
preceding statement.
10. Require the D.F.B.C. to publish in a semi—annual report detailed
statements of all banks in each State of his district and to furnish
at least two copies thereof to each bank concerned and perhaps to
all registered public libraries, etc.
This may be in lieu of the
System requirement of the publication of reports.
11. Require the F.B.A. to make a thorough report on bank conditions with
recommendations as to what dhanges, if any, should be made in the
laws each 5 or 10 years.
At the same time require that continuous
studies of trends, etc., by the F.B.A. through the D.F.B.C. and the
publication of the significant data involved.
12. Require examiners to verify, either by tests or by entirety, loans,
deposits, etc., at each examination. In lieu of such requirement
applying to the examiners such verifications might be required in
connection with the audit or examination required to be conducted
by the directors or C.P.A.'s for the bank.
15. Require audits by directors or approved C.P.A.'s for the directors
annually,
copies of the reports to be furnished to the Federal
reserve bank of the district.
Such report dhould be made on specified
form and should contain certain information which should be developed
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Federal Reserve Bank of St. Louis
•
—3—
by real auditing and examination rather than a mere formality, as is
so frequently done under the present system of examinations by direc—
tors.
The Federal reserve bank should determine whether such reports
made by the directors or C.P.A.'s are correct and ample and,if not,
the bank should either be placed on the problem schedule or require
audits to be conducted by C.P.A.'s designated by or approved by the
D.F.B.C.
14. Regular examinations should be free, all specials to be charged for
on the basis of salaries plus traveling expenses plus actual expenses
of typing of teports, etc.
15. Permit State charters subject to approval of the F.B.A. before a bank
can open for business and set forth in -the statute the things which
the F.B.A. would be required to consider before approving a charter
in any case, requiring also that investigation of the application be
made and a thorough report thereon be filed.
16.
Not to transfer with the examination conducted by the State examiners
who may examine the banks as thorough and as open as they desire.
This would be an attractive feature to national banks as compared
to State banks.
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Federal Reserve Bank of St. Louis
r-
6
With respect to weaknesses of our present system of supervision, the
following ideas are set forth:
Study No. 4 covers some of the outstanding overlapping and conflicting
provisions of the laws with certain comments and illustrations thereof.
Study No. 6 covers administrative competition in laxity with particular reference to the nature and functions of the various supervisory
authorities, the effects of parallel systems of banks, and the development
of administrative competition in laxity as a result of our banking
systems.
Study No. 5 covers more specifically changes in the laws from time
to time, which apparently were made for the purpose of permitting one
system of banks to compete favorably with the other systems.
Study No. 7 summarizes some of the outstanding arguments for and
against the unification of the nation's banking structure in connection
with which many weaknesses of supervision are indicated.
Study No. 12 covers branch banking in connection with which it is
noted that many of the problems of supervision are solved or 1Pssened
to a great extent by the existence of branch banking on a large scale
in several countries, including Canada and England.
In these memoranda many weaknesses with respect to examinations and
supervision are set forth in detail.
At this point it seems advisable
to summarize these and all other major weaknesses of our banking systems
from the standpoint of examination and supervision.
Some of the important weaknesses are indicated as follows:
1.
The legal basis of our banking structure--national and 48 states--
resulting in competition which in turn promotes A. C. L. in supervision.
2.
The existence of super-imposed secondary supervisory authorities,
namely, F. R. S. and F. D. I. C., ?ach with inadecuate supervisory powegsi
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Federal Reserve Bank of St. Louis
10
-2both with respect to scope and detail.
3.
The unfortunate existence of the feeling on the part of a vast
majority of the public that the Federal Reserve System is responsible
for our banking system. The department store character of banking
subjects the supervisory authorities to criticism by the public in cases
of failures or losses to custom,,rs through investm nts handled by the
bank, etc. If the banks were split into (1) commercial with respect to
deposits, loans and discounts, etc., (2) savings, (3) trust, (4) investment, and (5) long term mortgage institutions with clear-cut distinction
in law and practice as to the responsibility of the supervisory authorities, the public mind would be cleared of lots of confusion and there
would be less blamed upon the supervisory authority and it would also be
more apparent to the public or depositors that they should look out for
themselves more in the matter of choosing sound banks than they seem to
have in the past when they depended upon government supervision.
4.
Our system of public responsibility as compared to private
responsibility:
There are too many examinations, too many supervisory
laws and regulations, etc.
These kill the tendencies which the banks
might have to develop their own systems of inspection, controls, etc.,
and they tend to develop the idea, at least on the part of certain types
of bankers--who are the very types needing to be closely regulated or
kicked out--to do everything not specifically prohibited by the laws
and regulations.
5. Examinations are too f-equent to be thorough with the limited
number of men available.
6.
The caliber of the examiners is somewhat limited by the pay
and the tendency to accept jobs in banks.
7.
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Federal Reserve Bank of St. Louis
The time allotted for examinations is far too short in many
-3cases to do good jobs and Pven if the pay were better many of the better
examiners would in all probability quit because of their being conscious
of the fact that they can not do justice to the examination in the period
of time allotted and under the other existing circumstances.
8. Inability under the present laws or practices to obtain corrections with respect to the matters pointed out or recommended.
This is a
recurring cause of good examiners leaving the departments.
9.
There are too many detailed definitions which are too limited
in scope and too few discretionary or broad powers and rules.
10.
In various examination departments there is entirely too much
politics.
11.
The existence of a large number of unit banks. widely scattered
over the country, as compared with closely coordinated branch banking
outfits in Canada and England.
This makes it more difficult for the
supervisory authorities to formulate and enforce good policies and it
also requires an immense amount of missionary work because of so many
Acird-headed bankers and boards of directors tc convince and to
please.
In Canada tne supervibory authoriLies have only ten large
banks to tell what they should and should not do whereas if Canada had
our system of unit banks as compared with branches the supervisory
authorities would have to convince and please the officers and the boards
of directors in approximately-.%000 cases.
12.
It is not reasonable to expect that 15,000 grours of bank
officers and boards of directors will develor and maintain broad sound
banking policies for the country like they would if all of our unit
banks were transformed into, say 50 or 100 large branch banking outfits.
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Federal Reserve Bank of St. Louis
- 413.
The examining work is more difficult in a system of banking with
a large number of units than in branch banking systems because the transactions are handled at banks more as a routine matter, all of the policies
in connection with which are determined by the head office or the zone
office, and a very large amount of missionary work in the matter of good
accounting systems, internal audits, credit policies, etc., which are
performed in the United States by the state and federal examiners are
handled in Canada by the inspectors and auditors from the head offices
or district offices of the banks themselves. In such cases about all
the government examiners have to do is to see that the banks'own audits,
examinations, inspections, systems and policies at the various branches
are in accord with sound head office policies.
14.
The system of credit analysis and control in the Canadian
branch banks very materially lightens the public supervision in this
same matter.
15.
In branch banking systems there is developed a much superior
management with respect to knowledge of fundamentally sound banking and
credit policies and practices.
15,000 separate and independent sets of
bank officers and directors are much more difficult to study and whip
in line in the United States than 30 to 40 would be in Canada (assuming
that the United States has approximately three times as many banking
officers as Canada which has at present only 10 banks).
16.
One very Staring weakness in our system of bank supervision is
in permitting banks to run too long in the wrong direction in many of
which cases assets are dissipated to take care of runs and withdrawals
of wise money at the expense of the ignorant and the innocent.
The
supervisory authorities should be given more authority to step in and
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Federal Reserve Bank of St. Louis
- 5 change the management or require the policies to be changed if the bankers
do not make such changes themselves upon receiving suggestions from the
authorities.
In this connection, refer to page 151 of the Minnesota study
and also quote from the report of the Attorney General of South Dakota.
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Federal Reserve Bank of St. Louis
1
•
Once upon a time a bank in sound condition and well managed by men
whose integrity was above ouestion in the community and as a result of
all of which was not subject to runs even though banks in the surrounding
communities were beinE run upon was not terribly concerned with the unsound credit policies of the other banks across the street or in neighboring towns and in some cases really wanted the competitive banks to fail
because it would mean new business and less vexing competition.
The story is different now. Each bank is called upon to contribute
to the insurance fund to pay off the mistakes of the unsouml bankers
mentioned above.
All banks are interested in the sound operation of all
other banks all over the country.
Aside from the psychological effects
of failures because under the present setup each bank has a direct
pecuniary interest in the soundness of every other bank and since the
banks in Vermont realize that poor banking policies in Georgia which
lead to failures will affect the cost of operating the banks in Vermont
or Montana, all auch banks are interested in seeing that all others are
properly supervised and because of this interstate and nation-ride
aspect it could be regarded that the only feasible plan would be to
coordinate banking supervision under one body without respect to state
lines.
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Federal Reserve Bank of St. Louis
585
•
Mr. Cherry of Counsel's office telephoned for my opinion in connection with tcA problem that has arisen in connection with the Board's
regulation on loans to officers. He stated that the president of a
bank owns a hardware store operating under a firm name, unincorporated.
Prior to the issuance of the regulation or to the time Ahen the examiners called his attention thereto his bank discounted austomers'
notes bearing the endorsement of the hardware store.
Recently the
hardware store has discounted its aastomers' notes at the bank "without recourse". It is understood that the "without recourse" procedure
has been developed on account of the prohibitions of the regulation.
I told Mr. Cherry that in my opinion it looked as if such a procedure
was developed in an attempt to evade the regulation. In cases of
this sort it is doubted that the bank would take the hardware store's
paper Pndorsed "without recourse" if the bank were operated by officers
and directors not owning the hardware store. This situation does not
seem to be covered by the Board's regulations but should be in order
to prevent further evasions.
Of course, the hardware store could in-
PN)
corporate, with the president of the bank owning 98 per cent of the
7/
stock thereof, and then endorse its paper at the bank "with
re-
course" and evade the provisions of the regulation. It seems that the
Board's regulation should likewise be amended to take care of such cases.
This is a good illustration of trying to supervise the operations
f a bank by means of legal definitions rather than vlithin the priniples of sound banking and management.
This illustrates another
necessity for the simplification of banking laws and regulations and
at the same time broadening the powers of the supervising authorities.
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Federal Reserve Bank of St. Louis
ii.11
,;„„
•
- 2Not only has the officer of the bank resorted to a practice at evasion
but most likely (if the hardware store's endorsement is any good) has
weakened the character of the paper which the bank handles by leaving
off the endorsement.
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Federal Reserve Bank of St. Louis
•
Reasons why the B.O.G. may be regarded or referred to as a secondary
supervisory agency:
1. It is a convenient term for a reference without using many words
in the text.
2. Prior to the Federal Reserve Act, the Comptroller and the State
departments were the sole supervisory authorities in their respective
jurisdictions.
3. In the beginning the Federal Reserve System was limited very
narrowly by law and practice with respect to supervision. Its primary
function was in connection with rediscounts, transit, currency, reserve
depot, Ptc.
4.
Although some added supervisory authority has been given to the
Board since the Act was passed, and
the public, due to recent publicity,
now regards the Board as the principal aurervisory authority, the original
and primary au 4-hority vested in the Comptroller and the State departments
has not been decreased (appreciably, at least).
The Board has not been
given supervisory powers commensurate with its moral responsibilities
to
the public and its legal responsibilities for credit and monetary
matters.
5.
There are still many particulars in connection with which the
Board has no supervisory authority whatever.
So from the standpoint of priority, the Comptrollcr of the Currency
and the State departments may be regarded as primary, and until recently
they were also the principal supervisory authorities. In the beginning
the Board had practically no legal authority and, until many years elapsed,
apparently did not desire to assume any, either directly or indirect
ly.
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Federal Reserve Bank of St. Louis
•
- 2What supervisory authority it did have placed upon it by law or later
assumed in practice was acouired almost entirely for the purpose of aiding
the System in its other functions, particularly with respect to rediscounts, etc. Hence, it was clearly in the early stages of its development
only a secondary or incidental supervisory agency, and it still is to a
great extent, even though it may now be regarded as the principal agency.
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Federal Reserve Bank of St. Louis
•
c:-
I
Mr. Dyas,of counsel in the Comptroller's office, asked if Monarch
Cornoration and Hyson Corporation had been determined to be or not to
be holding company affiliates of Sterling National Bank and Trust Company,
New York, N. Y.
He stated that although he had not shared in the ruling,
his office had held that these companies are holding company affiliates
of the bank and had either indicated or threatened to indicate to the
bank that it did not have a legally elected board of directors inasmuch
as these corporations had not applied for or obtained a voting permit.
Mr. Dyas indicates that the Comptroller's office feels that these
corporations actually control the bank, although in strict legal theory
it appears to him personally that there probably is not a holding company
affiliate relationship which can be proved against the opposition which
the bank and the corporations offer.
Mr. Dyas indicates that his principal worry is as to how his office
can force or induce the bank to cause its "actual" holding company affiliates to apply for and obtain a voting permit.
I stated that it was
the Board's staff's view that no technical holdine company affiliate
relationship can be established on the basis of the facts as stated to
us. I indicated that there had been filed neither an application for a
voting permit nor a request for determination by the Board under Section
301, and that it appeared unnecessary that either of such steps be taken
by the bank or the holding company in strict legal theory.
This illustrates a difficulty arising out of the existence of ambiguous or complicated laws and different interpretations by more than
one supervisory agency charged with responsibilities in connection with
such matters.
The difficulties arising in this case are due entirely to
interpretations and policies in connection therewith.
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Federal Reserve Bank of St. Louis
- 2Mr. Dyas understands that the facts in this case are as follows:
Monarch Corporation owned 10,000 shares and Hyson Corporation owned
11,400 shares of the stock of Sterling National Bank, as compared with
41,239 shares voted (presumably at the 19:35 election of directors).
Monarch Corporation was 50% owned by S. H. Golding and 50% by Mrs.
S. H. Golding, who owned the same percentage of Sterling Holding Company,
which owned Sterling Mortgage Company, which owned Hyson Corporation.
I made it plain to Mr. Dyas that I was not attempting to make or
indicate a ruling in this case. I merely stated that the Board's
counsel had felt that on the basis of the foregoing facts--which were
all that were available in our files--no holding company affiliate
status existed in legal theory and that I was in agreement with such view.
I indicated to Mr. Dyas that I was unable to suggest a solution of the
predicament in which the Comptroller's office appears to be situated in
trying to enforce its ruling that a holding company affiliate relationship exists.
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Federal Reserve Bank of St. Louis
•
An illustration of overlapping and conflicting authority resulting
in delays, indecision, etc., is found in connection with recent conferences of representatives of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and the Board of Governors on
the matter of which figures to use for bank suspensions and failures for
the year 1933.
From discussions at the conference, it is obvious that representatives of the various agencies have on numerous occasions before given
considerable thaught to the matter but have not been able to reach a
unanimous or satisfactory agreement, and that this has caused a considerable amount of effort, confusion, and delay in many respects. The
impasse seems to have resulted from arbitrary or individual views of
representatives of the different agencies; figures already used by the
various agencies are clung to by those persons who do not want their
ideas to be defeated; possible uses of the figures--as to several
specific purposes, such as to equalize suscensions, possibly show large
suspensions during one political administration and small figures during
the next
etc.
The conference in the Board room in March, 1937 (obviously not the
first conference on or consideration of Vlis matter) was attended by
the following representatives -
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Federal Reserve Bank of St. Louis
Comptroller of the Currency:
Mr. Folger
Mr. Kane
Mr. Washburn
Federal Deposit Insurance Corporation:
Mr. Warburton
Mr. Thompson
•
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Federal Reserve Bank of St. Louis
2
Board of Governors:
Mr. Smead
Mr. Horbett
Mr. Kennedy
Mr. Morrill
Mr. Blattner
Mr. Wingfield
Mr. Paulger
Mr. Leonard
Mr. Cagle
The idea of a Federal bank commission may lessen some-
what, in the minds of certain types of persons, the objectionable
features of too much concentration by and control in BoG, particularly
the matter of administrative detail.
Certainly, without any question
or doubt, one national body can not do constructive thinking and
planning for the banking and money systems of the country and, at the
same time, handle the large amount of administrative detail necessary
in our wide-spread setup.
buch a commission, in which would be placed
the administration of the banking machinery, would be a good arguing
point.
borne have said, "Let the insured banks of the country be
examined and aupervised as to detail by the F.D.I.C., since the
Corporation has its money at stake and naturally would be more zealous
in protecting its financial interest, through keeping all of its member
banks sound, than would any other supervisory body which has no money
at stake but is merely responsible for seeing that the provisions of
the law are carried out.'i
Thio codention will not stand up under close
analysis.
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Federal Reserve Bank of St. Louis
•
-;
The Reserve Banks since their creation have paid to the
Treasury approximately $167,000,000 in the form of franchise taxes (?)
which was used as FDIC capital along with another large amount put
up directly by the Federal Reserve Banks.
System is b,".. naturally
•
Thus, the Federal Reserve
interested in the FDIC.
System is owned and supported by the banks.
The Federal heserve
Would it not be a logical
argument then to let the Federal Reserve System administer the FDIC to
keep each of its members sound for the protection of all its other
members, directly and indirectly, and at the same time avoid
duplications of laws, regulations, examination reports, requirements,
etc.?
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Federal Reserve Bank of St. Louis
Aside from the fact that Federal Reserve Banks and member
banks have furnished and will be expected to continue furnishing the
capital of the F.D.I.C., which should be perfeeted by keeping the
insured banks sound, there is a broad public responsibility of keeping
the banks sound for the protection of depositors, stockholders, and
the public generally, through avoidance of bank failures in a community or on an area or nation-wide scale.
In addition to all of these
factors, the matter of guaranteeing to the people a reasonably sound
monetary and banking system and service is vitally important and can
be accomplished only by a central or unified organization.
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Federal Reserve Bank of St. Louis
•
Oneof the difficulties now experienced by American banking
lies in the fact that banks witn commercial deposits also accept
savings deposits and, with respect to assets, do a large amount of
savings bank or mortgage investment company financing or banking,
instead of confining their assets to self-liquidating types.
In contrast, British and Canadian banks have very little or
no long-term, slow assets, such as real estate mortgages, etc.
Another difficulty lies in the fact that in the United States
there are so many small unit banks that there is not enough commercial
bank business to go around, as a result of which both small and large
banks have been forced to lower their assets standards and seek assets
unsatisfactory to commercial banks and at the same time seek other
sources of income, such as foreign investment underwriting, trust
activities, insurance agencies, etc. If unit banks were eliminated
now or appreciably diminished over a
period of the next decade or
so, and branches were established in such places where business
justified, a long step would be taken in the direction of improving
the banking situation.
As long as banking of the department-store
variety is profitable in this country, there will be extreme difficult
y
in reducing the number of banking offices.
In the first place, persons
denied charter privileges will resort to political pressure and the
very
weakness of our governmental agencies will permit of the growth of such
institutions, partiaalimlywherea considerable amount of important
pressure is brought to bear.
In the second place, demagogues and other politicians must
keep an ear open to their constituencies as well as any considerable
amount of pressure brought to bear by individual voters in a given
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Federal Reserve Bank of St. Louis
563
community. Politicians and others will press for the establishment of
banking facilities in such communities.
Unless there is a strong hand
to oppose such political pressure, very little will be accomplished in
the matter of improving or chartering practices.
In the third place, the American people, generally speaking,
have been pampered to such extent in the past that the bankers and the
politicians feel that they must cater to them; and in view of our past
banking practices it would be extremely difficult to suddenly reform
them along the lines of British and Canadian financing plans.
and Canadian citizens as a general rule are much
British
more ready to obey
customs, practices and laws than American citizens, and have not
developed the habit to the extent as developed in the United States of
pressing for changes in the laws and customs which wauld benefit merely
a local community or a handfUl of citizens. It is too frequently the
case in this country that special laws and rules or inceptions have to
be recognized.
The mere fact that England, Scotland and Canada have practically
no governmental bank examinations or supervision yet have had
practically no failures, argues well for branch banking, for banking
under Federal control rather than provincial, for a type of management
well trained through apprenticeships, sound banking customs along
fundamental commercial banking lines, and a spirit and appreciation on
the part of the general public of those countries for sound banking
practices and management along safe lines, with reasonably adequate
servi ces both with respect to deposits and credit rather than a
catering to individual or community whims, supported or sponsored in
many cases by politicians.
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Federal Reserve Bank of St. Louis
-3-
It is easy to point out that our difficulties lie largely
in these directions rather than in the lack of bank supervision.
If sound and strong bank examinations and supervision—which can only
be accomplished under a unified body with plenty of responsibility
and authority backed up by a disdain for any meddling efforts by
politicians--were adequately strengthened or put on such basis that
there would be no appeal by unsound banking from the requirements
imposed by the supervisory authorities, the very na,;ture of our political
complex would cause an enormous amount of effort
the politicians to
modify the provisions, acting under pressure from the bankers and even
from a great number of individuals not connected with banks, particularly
those who believe in easy credits, etc..
Then, again, there would be
impassioned appeals by politicians to the people on the ground that
their liberties were being strained, etc.
So we are practically confronted with the situation where we
cannot hope to establish a complete reform o
going in the general
direction of a desired goal, even though a more direct road would be
more economical and the
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Federal Reserve Bank of St. Louis
more desirable,if the people would only see it.
•
In connection with the overlapping, complex statutory powers
of supervisory authorities, the question of reports of holding
company affiliates is important.
Recently Mr. Hostrup and Mr. Baumann have been considerably
worried about the proposed follow-up scheme in connection Ath
general voting peridts.
They drafted a report form but counsel
advises that there are no specific provisions in the law permitting the Board to require that such reports be submitted
annually.
There are indirect references or provisions in the
statutes under which the Board might construe authority to request the reports in the case of holding company affiliates of
State member banks. In the case where there are only national
banks or subsidiaries, the Comptroller could, it is believed,
reauire or request the reports but here again it is most likely
that he would hesitate to do so because it would be more or
less obvious that such reports would not be desired primarily
by the Comptroller but by the Board.
Mr. Hostrup is to set up a brief memorandum pointing out
the provisions of the statutes in this connection.
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Federal Reserve Bank of St. Louis
576
•
The efforts of the Board to control credit (particularly
with respect to speculative securities) in 1928 and/or 1929, through
the officers of the reserve banks holding prayer meetings with many
of the outstanding offending bankers in an effort to curtail securities
loans rather than the Board or the Open Market Committee resorting to
increase discount rates, appears to be an illustration of difficulties
of attempting to control the situation by persuasion indirectly rather
than by authority, which many contend now should have been conferred
upon the Board and exercised at that time.
From the experience which the Board has had with the Comptroller
of the Currency and the F.D.I.C. in re uniform and vigorous requirements
with respect to the elimination of securities depreciation, loan losses,
valuation reserves, uniform and detailed call report forms, voting permit
conditions, the examinations for votine permits, etc., it is not reasonable to expect that any and all sorts of information and enforcement of
requirements or policies which the Board might deem to be pertinent
and important in connection with problems of monetary control would meet
with 100% cooperation on the part of the above mentioned body in the
future.
For instance, it would appear that in formulating its monetary
and credit control policies it will be necessary for the Board to obtain
certain types of statistical information from banks, including national
banks, and in certain circumstances it may be necessary that the examiners
of banks, including national banks, develop certain types of information
with respect to loan and investment policies.
The time may come when it
will be highly desirable for pressure to be brought to bear by the
examiners on certain types of offending banks in many of which situations
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Federal Reserve Bank of St. Louis
eN
r
•
'` • +`
-2-
the Comptroller of the Currency, having no responsibility for credit
control policies and perhaps being in disagreement with the Board with
respect to its policies, would most likely fail to cooperate to any
extent, particularly because of his own views with respect to such
matters, and in some cases largely in order to avoid incurring the illwill of certain powerful banks and bankers, etc.
(It is well known that the Comptroller of the Currency and the
Board have not shRred and enforced identical policies with respect to the
elimination of losses and depreciation.
The Comptroller has not seen fit
to share the views of the Board in connection with the use of valuation
reserves; he has not seen the necessity for the application of standard
requirements for keeping them in connection with the issuance of voting
permits involving national banks.
The F.D.I.C., or at least several of
the senior staff members, in a conference with representatives of the
R.F.C., the Comptroller of the Currency, and the Board declined to take
any part in the matter of adopting uniform policies with respect to the
showing of capital notes and debentures in published statements in cases
where banks had impaired capital.
The F.D.I.C. declined to adopt the
Board's regulations with respect to aborption of exchange charges.)
Presumably, these positions were taken in order not to incur the
of banks, although the policies defined and laid down by the
Board were believed by them to be sound and necessary.
If in matters
of this sort these agencies declinadto go along with the Board, is it
not much more reasonable to expect that they would decline to go almg
in more important matters, particularly when they felt that if they
adopted the Board's views and cooperated with it, such action would lead
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Federal Reserve Bank of St. Louis
to criticism by the banks, politicians or the public.
It therefore
seems necessary that the agency charged with the responsibility of
attempting to regulate deposit currency and credit policies by banking
institutions should be clothed with ample power and authority to
ascertain (through examinations and reports) that its policies are being
carried out, and in case of violations it would be in a position to directly
and promptly enforce its policies and punish offenders.
It is not reasonable to assume that bankers and the public in
general would expect a single man (the Comptroller of the Currency) to
veto in effect policies relating to the nation's money and credit,which
have been decided upon by a public-spirited board of 7 men to be sound
and necessary.
This matter is of considerable importance in connection with
State banks which are not members of the Federal Reserve Board.
Under
the present set-up the F.D.I.C. is in a position to obstruct to a considerable extent any policies which the Board might determine to be
necessary through influence upon State nonaember banks, although total
banking resourcespin the Federal Reserve System constitute a small
percentage of the total banking resources of the country.
The very large
number and scatteration of State nonmember banks could become a considerable stumbling block psychologically, on account of their closer connection with the people in the smaller communities who exert considerable
influence upon questions of national policies debated in the press and by
politicians.
In this regard, the views of a small town banker, in many
cases at least, could easily assume proportions comparable to the influence
of the larger metropolitan banker, whose institution represents hundreds
of
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Federal Reserve Bank of St. Louis
more assets than the small town banker's bank.
,•11
-4-
(Numerous instances have been
noted where State supervisors
have exerted their influence to the utmost to obstruct policies of
the Board.
Illustrations are: Pennsylvania, with respect to capital
rehabilitation, depreciation, losses, etc.; Washington, with respect
the
to/showing of capital notes and debentures in published statements;
Indiana, ditto. It is understood that approximately 19 of the State
supervisors were opposed to the Board's definition of interest
(Regulation Q) and inflaenced the F.D.1.C. in taking its position in
this matter. ,
Numerous instances were telephoned by the Federal Reserve
Agents in connection with voting permits and Clayton Act permits,
where the State authorities were very much opposed to the Board's
requirements.) (Other and more important illustrations could be used.)
CEC
7-28-36
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Federal Reserve Bank of St. Louis
•
MEMORANDTJ M
In preparing the general statement supported by the auditor's report
\
to shareholders of The Canadian Bank of Commerce, as of November 30,
1935, there was included next to the last item in the balance sheet
"shares of and loans to controlled companies $3,700,611.11." As required,
the annual report included on the next pages "statements of controlled
companies", at the bottom of each of which was a note showing the bank's
investment in the companies.
\-
To illustrate, the statement of The Dominion
Realty Company Ltd., Toronto, showed total liabilities of $27,028,000,
000
including capital $7,978,/surplus and reserves $7,426,000, first mortgage
bonds $11,623,000, with the following footnote:
g*-
"Note--The bank's in—
vestment in the above company is carried on its books at $3,000,000."
The statement does not show by whom the first mortgage bonds of $11,623,000
are held.
In the monthly return of the chartered bank made to the Minister of
A
Finance the law requires that "the interest of the bank in such corporations
shall be shown separately in any return respecting the affairs of the bank."
In submitting the annual report by the directors' general meeting of the
shareholders the law requires that "there shall accompany the statement (of
the bank), a further statement showing the assets and the liabilities of
each auch corporation, and the value placed upon the bank's interest in the
corporation."
Whether or not "the bank's interest" covers mortgage bonds issued by the
corporation which might be held by the bank, is not clear.
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Federal Reserve Bank of St. Louis
If
The Canadian
-2—
Bank of Commerce owns any of the $11,623,000 first mortgage bonds issued
by The Dominion Realty Company, the statement does not dhow it.
A further defect lies in the fact that the law seems not to require
that the statement show the extent to which the corporation is controlled
by the bank.
7-11-36
C.E.C.
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Federal Reserve Bank of St. Louis
MEMORANDUM
The essential purpose of external supervision is to protect
depositors, shareholders (particularly the ignorant and innocent and
those lulled into innocent confidence by the public utterances of
politicians and others), and the general public interest.
The tay to
do this is to make certain that such qualities as inexperience, incompetence and dishonesty on the part of the management are detected and
corrected in time to permit the taking of remedial measures before it is
too late.
C.E.C.
8-13-36
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Federal Reserve Bank of St. Louis
r:10
•
MEMORANDUM
In connection with the laxik of classification of assets,
the public interest must be borne in mind.
The State commissioner
or State examiners could well ask the question, Shall we classify
the assets strictly in accordance with the present or current
depreciated values and thereby close the bank, or if we permitted
it to remain open cause both the bank officers and directors, as
well as the bank commissioner, to violate the statute, or shall
would
we be hard-boiled and close the bank in the circumstances which/most
probably precipitate numerous other bank closures?
It may be that Federal reserve exFAliners and the Federal
reserve banks would not have desired to close a great number of banks
as a result of hard-boiled classifications of assets on the basis of
the then existing values, but certain Federal reserve banks would have
forced the banks to rehabilitate their capital or close them.
If such
conditions have been found to exist, the point to bear in mind is that
/KY
the State examiners and State commissioner would permit conditions to
drift and drift and drift, whereas under our proposed set-up the Federal
reserve banks not only would be required to classify the assets properly,
but would be required by law to force corrective measures or take over
the operationsof the banks at the first signs of real danger or
difficulties rather than to permit the banks to drift into worse conditions from examination to examination until the breaking point has been
reached.
C.E.C.
https://fraser.stlouisfed.org 8-11-36
Federal Reserve Bank of St. Louis
5le
•
MEMORANDUM
(It can no longer be stated that well run and sound banks can
just continue to compete with the banks operated unsoundly until
they fade out of the picture by virtue of their own bad practices,
etc., because all banks--good and bad--are now banded together for
mutual protection by the F.D.I.C. and the general influence of
public authorities, and it is not fair to good banks to have to pay
for the guarantee of the poor ones in the F.D.I.C., who are unfairly
competing by paying high rates, absorbing charges, making loans
freely, etc.
There now exists a new and pronounced responsibility
of the supervisory authorities in this matter.)
C.E.C.
8-13-56
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Federal Reserve Bank of St. Louis
t-3
•
0
MEMORANDUM
The banking laws of the State of Missouri, revised 1929,
section 5373, provide that call reports shall be made to the
commissioner in such form as to contain certain stipulated items
'..4nd such other items as may be necessary to inform the public as
to the financial condition and solvency of the bank, or which
the
commissioner may deem proper to include therein."
The section also
provides that such reports, exclusive of the verification, shall be
published in certain classes of newspapers,and in all cases a copy
of the said statement shall be posted in the banking house
accessible
to all". (The statute does not seem to state how long the
statement
shall remain "posted in the banking house accessible to
all".)
The same law contains section 5372 on "CommUnications
from
Commissioner Must be Submitted to Directors and Noted
in Minutes",
and section 5371, "Reports of Directors' Examina
tions—Penalty for
l'ailure to Make or File."
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Federal Reserve Bank of St. Louis
• Pt JR.,
MEMORANDUM
Mr. Crays has discussed a scheme of avoiding frictions and
legislative objections by changing Federal laws and influencing the
states to pass necessary enabling laws whereby the state examiners
shall continue to examine and see that banks operate properly under
Federal rules and practices, leaving the state examiners to do the
work along the lines that Federal examiners would pursue, if all of
the work should be left to the Federal examiners.
In my opinion any
attempt of legislation along these lines would be pounced upon more
readily by the association of state supervisors as a scheme to put
skids under them than other possible steps.
C.E.C.
8-13-36
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Federal Reserve Bank of St. Louis
011
pi_ •
•
MEMORANDUM
One of the reasons offered by some of the Reserve banks as
to why non—member banks remain out of the system, is that Reserve
banks are not in a position to give them certain types of service
which their correspondent banks give, one of which type is "invest
—
ment counsel". Thought should be given to the advisability
of
establishing investment counsel service in connection with the Researc
h
Division, thence through the Statistical Division of the Reserve
bank.
Perhaps the Board's Bulletin could be used in some manner.
It seems that the larger correspondent banks tend to discour
age
membership, perhaps deliberately, in order to retain their close
connection for profit purposes.
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Federal Reserve Bank of St. Louis
539
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Federal Reserve Bank of St. Louis
If a federal bank commission is created by law to be
responsible for the administrative details and there should
be a district federal banking commissioner, he should consult with
at least certain of the senior officers of the reserve bank of hie
district on problem banks if no others.
Iherefore, the law might
provide that either the federal bank commission (in Washinkton)
or the board of directors of the Federal reserve bank designate
at the beginning of each year two operatinE officers to serve
E48
the
oounsellors with the district federal banking comraissioner for
sion
year, or le designated as an advisory committee or supervi
committee, or some such designation.
5,11_
•
With respect to government lending agencies obtaining the business,
it would seem advisable to set forth the real reasons why the lending
agencies were created and to show that most of the sound reasons which
existed during the hoarding days do not now exist.
One pcint to emphasize
is the necessity of banks to be made liquid in order to meet the withdrawal demands of frightened depositors. Banks simply could not lend
in those days as freely as governmental agencies because there were
no runners on governmental agencies.
The responsibility for creating
the runs is generally laid by the politicians and certain of the
ignorant public to the banks themselves. The fact that banks had been
chartered and supervised by governments under the most detailed laws
and regulations known in the world should be one of the reasons why the
supervisory authorities should be held largely responsible for many of
the failures. If the banks had never been created, they could not
have failed. If, after creation, they had been reouired by the supervisory authorities to operate on sound bases only, they would not have
failed except in a few scattered cases.
With respect to the banks that were still open, certainly blame
can not rest upon their shoulders for the hoarding movement.
Depositors
became scared because of the large number of weak banks which failed.
As the number of failures multiplied, the public acquired a general
fear of the solvency of banks.
The banks which were operating conservatively when competition
was not so pronounced were practically forced to take chances and extend loose credit as a result of the government's policy of chartering
new and competitive banks and at the same time in creating both long and
short term credit agencies and fostering the Postal Savings System, etc.
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Federal Reserve Bank of St. Louis
5e
2
This tendency towards looseness on the part of conservative banks had
a multiplied effect psychologically until so many of the banks of the
country were lending on slow and undesirable types of credit that many
of their depositors knew that their condition was seriausly threatened
after adjustments were made in real estate and other properties as a
natural let-down after the period of high inflation of such assets
resulting from the impetus begun during war times.
Had not competition
by loose chartering and creating government credit institutions been
developed, many banks could have continued their sound credit policies
on reasonably bankable assets.
An enormous amount of trouble would
have been saved to the originally well managed banks (which later
succumbed to the trend in competition and when the drop in values
came, particularly after continuous rumors resulting from the failures
of poorly managed banks, they likewise had to close), if supervisory
authorities had thought in terms of long-term sound conservative banking
(rather than developing easy credits to unworthy borrowers on long-term
or questionable assets) and bankers had been required to invest in
reasonably self-liquidating credits; and,in my opinion,a considerable
amount of trouble would likewise be saved to the banking industry in
the future if the politicians and supervisory authorities, together
with the influence of the governmental credit agencies, were prohibited
from urging,and practically requiring, the banks at the present time to
advance credits which heretofore have not been regarded as conservative
commercial banking credits.
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Federal Reserve Bank of St. Louis
3
In a large number of cases of bank failures or difficulties involving reorganizations, particularly in New Jersey, New York, Pennsylvania,
and many other states, real estate mortgages and participation certificates
issued and/or guaranteed by the bank constituted one of the serious
problems.
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Federal Reserve Bank of St. Louis
Banking may be likened unto public utility corporations such as
transportation companies, gas and electric light companies, etc., in
that they deal with or serve directly a large percentage of the
public and indirectly a much larger percentage. They are different
from public utility concerns in that most of the customers of banks
are persons who have entrusted their funds with suc'i banks for convenience and safe keeping. In the case of utilities, the Government has assumed the responsibility for seeing that the public is
served adequately and safely and at a reasonable cost.c In the case
of banks, the Government has not assumed so much responsibility in
the matter of adequacy and low cost of service as in the matter of
safety of the depositors' funds. In the case of utilities, the
money involved is advanced by the proprietors and bondholders. In
the case of banks, usually about ten times as much of the funds
involved are advanced by the depositors and the public as by the
proprietors. Therefore the necessity and responsibility for supervision with particular reference to the matter of safety is evident.
The failure of a utility company does not result in a loss to the
general public (except the bondholders and in some cases where the
stock is widely scattered) except in the matter of loss of service
whereas the failure of a bank usually affects the public very
greatly through the loss of funds on deposit in the bank. Therefore, the matter of management and the examination and supervision
thereof assumes much more of the public responsibility aspect.
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Federal Reserve Bank of St. Louis
805
•
MEMORANDUM
Some state that a great number of big banks, and possibly all
or some of the Canadian branch banking outfits, were in a very bad or
insolvent condition during the depression days, and that if such banks
had failed, or should in the future fail, it would absolutely paralyze
the whole economic system.
In the first place, the government or Canards
of her ten nation-wide branch banking outfits which
control all of the commercial banking business and practically all of
the savings banking business of the Dominion.
In the second place, no
information is available as to the condition of Canadian banks and from
the type of management and the liquid character of their assets, it is
reasonable to assume the banks were not in danger of closing.
Even if
the ten banks should have failed in the depression days, the situation
could not have been any worse than it was in the U.S., culminating in
the bank holiday of aarch 1933.
Supposing, as the thought is frequently
advanced by the critics of branch and large scale banking in the U.S.,
that the U.S. should adopt branch banking on a large scale, with
comparatively few big banks, to replace the very large number of small
banks in existence at the present time, the chances are that our Government
would take very strong protective measures to prevent large-scale failures.
It would be much easier to take such steps with the relatively few branch
banking outfits (say, not over 1,000, ranEing from very large and widespread institutions, such as Bank of America, down to the smaller but well
run and well capitalized banks without any branches, or the smaller branch
outfit confining its operations to branches or offices within county
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Federal Reserve Bank of St. Louis
551
-f,-
limits or very small trade area limits) than it was in 1932 and
during the bank holiday of 1933.
C.E.C.
8-13-56
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Federal Reserve Bank of St. Louis
ultimately
es.
In considering the question of merging small banks into branch
systems, etc., serious consideration should be given to the National
Banking Laws as they now stand, which permit a national bank's assets
and liabilities to be transferred to another national bank or to a
State bank without the necessity of submitted the plan to and obtaining the approval of the Comptroller of the Currency.
In this connection, it may be remembered that the Board has been
requested to issue a great number of limited voting permits to place
national banks in liquidation where the deposit liabilities and a like
amount of assets thereof have been previously transferred. In the
case of the Union County Trust Company, Elizabeth, New Jersey, the
Board refused to issue a limited permit to authorize the merger of
the First National Bank of Cranford into the trust company, establishing a branch thereof at Cranford, due to the unsatisfactory condition
of the trust company which was the holding company affiliate and a
nonmember bank. Of course it was realized that the First National
Bank of Cranford could have transferred its liabilities and assets
to the trust company, leaving only a hull of the national bank to be
voted into liquidation, and it would have made very little difference
ia this case whether the Board would issue a permit to vote the
national bank into liquidation.
(1
Although the law does not directly impose upon the Board the
responsibility in such cases, the general public and particularly the
1//
depositors of the First National Bank would have complained volubly
had the Board issued a permit to the bank and later it should develop
that their deposits which were transferred were lost on account of the
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Federal Reserve Bank of St. Louis
•
-2unsatisfactory condition of the trust company, and in the public interest
it would seem that the supervisory authority should have authority in
such situations commensurate with the responsibility which the public
will attribute to such supervisory authority.
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Federal Reserve Bank of St. Louis
Statistics show that a great number of the failed banks were very
small and that a great number of the remaining banks are likewise very
small, many of which are located in small towns or small communities.
From information obtained from many bankers and baak holding company
officers, it is obvious that many of the small banks do not desire to
remain small but are forced to do eo because the laws do not permit
branching. Doubtless there are many cases where banks in county seats
and other good-sized country towns would be perfectly willing to take
over neighboring small banks and operate branches or money depots if
permitted to do so by law.
At the same time it must be borne in mind
that a great number of the small banks do not desire to be absorbed
because the managers thereof realize that absorption
would mean the
loss of their jobs. Furthermore, it has been my experience,:that the
small torn bankers are about the most obdurate type of men we found
and that they could not be convinced of the poor quality of their
assets, etc., which would be necessary to adjust in any merger program.
The fact still remains that those small banks which desire to be
merged or consolidated, in the interest of soundness and better
management, should not continue to be prevented from doing so by
obsolescent, if not obsolete, laws.
It follows also that the small banks desiring to consolidate should
not be compelled to remain outside of the Federal Reserve System, which
could be brought into the aystem by mergers with other larger banks which
are or could become eligible, with the proper changes in the laws.
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Federal Reserve Bank of St. Louis
rra
- 2Consoliiations should be provided for in the interest of protection
to depositors and the public welfare rather than from the stockholders'
viewpoint, as has been in evidence heretofore. In other words, the
directors acting with the supervisory authorities should be permitted
to effect consolidations in an emergency without waiting for the
favorable vote thereon of stockholders after having given sixty days'
notice, etc. The machinery should be made simple, but including the
approval of the supervisory authority in each case.
The law providing the machinery for consolidation should be
prompted by the needs of the community and sound banking rather than
the fear of development of the idea of branch banking extension.
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Federal Reserve Bank of St. Louis
•
MEMORA/1 DUM
In the handling of Clayton Act applications, the Division
compared the information, particularly with respect to classification
of assets, sound management policies, etc., forwarded in or with the
applications with the classifications and comments contained in the
F.D.I.C. and national reports of examination whenever available.
In
many cases the F.D.I.C. reports of State nonmember banks contained unfavorable comments with respect to management and operating practices
and severer classifications of assets than the information submitted
by the applicants or the reserve banks indicated.
In connection with voting permits, the F.D.I.C. reports in many
cases indicated very unsound conditions in State nonmember banks, whereas
the copies of State reports of examination submitted with the voting
permit applications were not nearly so severe in many instances.
In the latter part of 1933, the Division borrowed examiners from
the twelve reserve banks to work largely on voting permits.
In the
summer of 1934, the Division again borrowed men, some being examiners,
who devoted a large portion qf their time in Washington to the analyses
of Clayton Act applications.
q From
time to time I discussed with these
men banking conditions in their respective districts, particularly the
classifications, experience and thoroughness of examinations of State
examiners. In many instances these Federal reserve examiners indicated
in their conversations with me, that it was a widespread practice, in
certain States at least, for the State examiners to first look at the
amount of surplus and undivided profits available for charge-off
purposes and then classify assets accordingly.
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Federal Reserve Bank of St. Louis
'41
-2-
From my conversations with Betts of Lanes, Harrison of
Atlanta, Brock of Richmond, Wighton of NeA lork, McConnell of
Minneapolis, Varnes of San Francisco, and Shull of Cleveland, it is
my recollection that various instances were recited where the State
examiners had set up comparatively small amounts of losses and doubtful
items in Texas, Georgia, South Carolina, West Virginia, Indiana, Ohio,
New Jersey, Washington, Oregon, etc., when the same exEminers admitted
that the Federal reserve classifications in the case of State member
banke were probably more nearly correct, and in the case of State nonmember banks admitted, in conversations, that they had to make liberal
classifications in order to avoid impairing or wiping out capital stock
in numerous State banks where it was doubtful that the necessary capital
contributions could be obtained.
These cases I cannot now recall, and the only way to obtain them
would be to go into the matter with the various examiners. The foregoing
and the following remarks are predicated upon conditions that have existed
/Pt
in the past and even
a great number of communities or sections during
the depression days, particularly during the '20's when many rural banks
were failing in the West and the South, and no responsibility is accepted
for their applicability at the present time, current knowledge of improvements, if any, in this matter not being available.
From my own experiences, conversations, and contacts with State
examiners, and national examiners to a certain extent, and reports of
examinations coming into my possession, it can be said that there existed
in the State of South Carolina, from 1926 through 1932, a considerable
amount of laxity in the classification of assets and in the enforcement
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Federal Reserve Bank of St. Louis
•
-3-
of rules and regulations.
I have had State examiners tell me that they
were instructed to be very careful of their classifications in order not to
show capital impairments in situations where it was not probable th%4
17'
capital rehabilitation contributionz could be reasonably obtainedr \Banks
were failing in neighboring communities and had failed in the same to
to such extent that only one bank remained and further disaster would have
resulted if the examiners had classified the assets according to their own
judgment of values.
In the case of Bank of Western Carolina, with head office at
Aiken, I obtained, through a confidential source and without any breach of
ethics an my part, copies of examiners' reports of every branch of the Bank
of Western Carolina, and from the knowledge which our officers had of only
some of the assets which were listed in the reports of examination, we were
convinced that the bank's capital was greatly impaired and had been impaired
for many years, although the examiners' classifications showed the capital
to be intact.
In order to tide this bank over a temporary tight seasonal
period our bank rediscounted a batch of papers, collateraled by a safe margin
of other paper.
A few months after the above mentioned examination reports
were prepared showing the capital intact the bank closed, it being admitted
,by the officers of the bank that it
A,,,N L4 4444,
jimpiciped for some
ired and had been
time and that in the interest of all depositors the bank
should be liquidated immediately rather than to permit the wise depositors
withdrawt4t their funds at the ultimate expense of the ignorant or innocent
depositors.
In the case of the Peoples State Bank of South Carolina, certain
of the State examiners, on various occasions, laughingly hinted or stated
indirectly that the bank had relieved them of another worry by taking over
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Federal Reserve Bank of St. Louis
-4-
a State bank, the capital of which was known to be greatly impaired,
and was facin
a forced closing.
In at least a great number of such
cases it was evident that the purchasing bank took in the assets at
book values and continued to carry them at such values. The result of
branches
such practices in purchasing unit banks and establishing/thereat was to
greatly increase the amount of assets of the branch bank which were
generally regarded as worthless or certainly of doubtful value.
Something like a year before Peoples State Bank closed, as of the
last business day of December 1931, I was supplied, without soliciting
or committing any breach of ethics, with copies of the latest reports
of-exam±muttlat of practically all of the branches of this bank.
Such
reports revealed some losses and some doubtful items but did not indicate
g-larte19446I-tammirsowt.
Again, from the knowledge which certain of our
officers had of only some of the assets of the bank, we were convinced
that the bank's capital was greatly impaired, if not entirely wiped out.
A short time ago I was talking with persons in South Carolina familiar
with the liquidation of the bank and was told that the liquidators had
either paid off or had made provision for the preferred creditors and
that there would probably be a small dividend for the common creditors,
possibly not to exceed 25%.
As I recall, the classification of assets
mfKle by the receivers and their representatives within approximately six
months after the failure of the bank showed that only a small percentage
could be expected to be received by the unsecured creditors.
Incidentally,
the agent for the receivers, who had a considerable amount of say in the
classification of the assets and who practically administered the affairs
of the receivership, was, up to the time of his employment as agent for
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Federal Reserve Bank of St. Louis
4
•
-5-
the receivers, a State bank examiner who had examined many, or practically
all of the branches.
After the failure, several other former State examiners
participated in the examination and classification of the various branches
for the receivers.
So, it is not so unreasonable to expect that the examiners,
acting under instructions received from the Superintendent of Banks or under
their own initiative, had been classifying the assets of the bank quite
liberally before it closed.
In the case of The Beaufort Bank, Beaufort, S.C., which closed in
July 1926 (and the condition of which/had occasion to look into in connection
with my investigation of the fraudulent activities of the South Carolina
Credit Corporation and its officers, some of whom were officers of The
Beaufort Bank, and the books, records and office of which were maintained
in The Beaufort Bank), the State examiners' reports of examination did not
reveal the true condition of the assets of the bank by a long shot, and the
State Banking Department did not place the bank in the hands of the receivers.
This was done by the directors of the bank largely under pressure by the
Federal Intermediate Credit Bank for remittances on crop production notes,
etc.
The auditors for the receivers of the bank ascertained that the assets
were worth far short of the book values and in addition found that there
existed a liability for something over $1,000,000 of funds which had been
credited to the bank's account in its New York correspondent bank and which
should have been allocated to the various accounts of the Credit Corporation
and remitted to the Intermediate Credit Bank fdr credit on the crop production
notes handled by the Credit Corporation.
No bank examiner or bank superintenent worthy of the title would
have permitted that bank to remain open,/, and no
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
with the intelligence
•
b
-6-
of a ten-year-old child in going through the records of the bank could
have failed to sense an unsound condition and a totally unsound or crooked
management.
There was no semblance of reasonably sound bank management or
bank supervision exercised during the latter part of the period of this
bank's life. Yet, the exnmination reports on file in the bank were somewhat complimentary with respect to the management and made no showing as
to the real condition of the bank.
After I went witNibank holding company in South Carolina, in
the middle of 1930, one of my duties was to examine unit banks which were
desiring to sell out to the holding company by which I was employed.
Previous to my connection, this work had been done by other officers in
the group, at least one of whom was previously a State bank examiner and
who was fairly familiar with the condition of a great number of the State
banks in the State of South Carolina.
I distinctly recall one case where
this examiner told me of examining the assets of a bank which desired to
sell out to the holding company and where he had set up losses to such
extent that the holding company made to the stockholders of the bank an
offer to assume the liabilities of the bank for all of the assets of the
bank plus a contribution of $200,000.
The capital of the bank was approxi-
mately $250,000.
Shortly thereafter the Peoples State
There was no trade.
Bank examined this same bank and paid, partly in cash and partly in stock,
$250,000.
The report of examination of this bank did not reveal such
7-44
4
4
4 /"
641
"
'
44
conditionect..4 411.44.4. "41"" )14
In another case I examined a bank which desired to sell out to us.
After examining and classifying the assets I determined that the capital
was practically wiped out and that, in addition, the assets which were
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Federal Reserve Bank of St. Louis
•
•
-7-
not classified as losses were largely slow.
Accordingly, I recommended
that no purchase be made although the bank was in a strategic location.
Shortly thereafter the bank failed!
The last two or three examination
reports made by the State examiners revealed no such condition.
As a
matter of fact, my recollection is that they were very favorable.
There are numerous other cases in South Carolina of a similar
character.
From my i)qp
1 South Carolina and North Carolina I examined
during 1930, or shortly thereafter, at least five national banks which
desired to sell out to the holding company by which I was employed.
Two
of these banks, both small, were examined and determined to be in satisfactory condition, with no capital impairment.
The national bank
examiners' reports with respect to the classification of assets reflected
conditions just a bit more liberally than my reports showed In the case of a national bank at Florence which I examined in
December 1930, the national examiners' reports, although reflecting some
unsatisfactory assets, did not reveal by any means the true condition of
the bank, in my opinion.
My recommendation-or offer for the stock was
to assume the liabilities and take over all assets and, in addition,
require a contribution from the shareholders of approximately $250,000.
No deal was effected, the officers and directors of the bank being
supported to a great extent in their contentions by the national examiners'
reports.
The bank was forced to close the first part of January 1932,
partially because it had a small balance in the Peoples State Bank which
had been closed, partially because of the psychological effect of other
banks closing, but largely because of the condition of the bank's own
assets.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-8-
In the case of Edisto National Bank, Orangeburg, S.C., the
president of the holding company by which I was employed, in the
first part of 1930 purchased 30-odd per cent of the stock of the bank,
which was practically a working control in view of the friendly attitude
of the president and the executive vice president, without atim-segf.rnitamaking an examination but relying upon the last three or four reports
of examination made by national bank examiners.
In view of the fact
that we did not have control and the fact that talis bank
mined
Co14-4.
C1/4
by national examiners, I was instructed not to other with the inspection
or examination of this particular bank.
However, in 1931, in view of a
pending deal to acquire more stock and the general knowledge of the
condition of the bank,which I had obtained through more or less indirect
;040:t.
;
contact and information, I sAciLidialirimpassied permission to make an
examination.
Upon doing so I found that the bank was in much worse
condition than the national examiners' reports had ever revealed and that
the bank's capital was greatly impaired.In spite of the efforts to
improve
the asset condition and other efforts, this bank was not licensed
after
the bank holiday.
It was forced to reorganize with the depositors waiving
a considerable percentage of their deposits.
In the case of the Merchants and Farmers National Bank of Charlott
e,
N.C., the president of the holding company by which I was
employed, acting
upon information contained in the last several
reports of examination
submitted by national examiners and withoutmgmANP4
Momaking an independent
examination, and without any of us being consulted
as to the purchase trans,e5-44
action, acquired, largely for cash, erfriPestimactely
3Oper cent of the stock
of the bank and had a definite understanding that if other stock
could be
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Federal Reserve Bank of St. Louis
q•
-9-
obtained it would be purchased on the same basis.
Several months later
I was instructed to make a survey of the personnel and operating
practices of the bank with a view to economy and efficiency.
During
this two or three day survey, although not going into the value of the
assets but after looking through certain files and the national examiners'
reports, I suspected that I should like to make a regular examination of
the bank even though we did not have control.
In the summer of 1931 it
was maneuvered so that we could make an examination of the assets of the
bank.
During the course of this examination, after analyzing the assets
very carefully, I almost dropped deed because of the large number of doubtful
or worthless assets contained in the portfolios not criticized by the national
examiners.
My recommendation was not to purchase any more of the bank's
stock but to bribesome one to buy'Ithe 33 per cent
-hands
which we had, off our
Although continuous efforts were put forth to strengthen the asset
position of the bank and a great deal was accomplished in this connection,
this bank was not licensed after the bank holiday.
The foregoing cases are recited because they are not necessarily
and primarily cases where the public interest required that the examining
authorities be lenient or keep the banks open.
They illustrate more than
anything else either the rankest kind of competition in laxity or gross
ignorance and incompetence on the part of the examiners and the supervisory
authorities.
In every case which I mentioned above, if the examiner had
"
,1144
classified the assets properly and the aupervisory authorities had 12:
their duty, the banks could have been taken over by other banks in the
same community or by branch banking outfits before conditions drifted to a
state where capital was impaired.
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Federal Reserve Bank of St. Louis
-10-
In my work as special accountant of the Bureau of Investi
gation
of the Department of Justice, analyzing, preparing and assisting
in the
prosecution of violations of Federal banking laws, among other things,
I found several instances which I can now recall where from all
later
appearances and events the capital of the banks must have been impaire
d
in violation of the law and where other violations probably existed, although not reported by the examiners.
The nature of my instructions and
work was such that I was limited to establishing evidence to
support
charges of violations of the Federal banking laws.
Every investigation
which I undertook was based upon am alleged violation of the law reporte
d
by some Federal examiner.
Although instructed to limit my work to the
development of the alleged reported violations, in several instances I
uncovered other violations which were apparent on the surface but
which
the examiners had not ascertained and reported, although in no case would
I or was I instructed or permittedossvito conduct a Ifial
examination of a bank.
in
In the case of the Fourth National Bank of Macon, Ga.jjan investi
gation which I conducted in the first part of 1929, I discovered
numerous
violations which the executive vice president had been carryin
g on for
several years and which had not been reported by the nationa
l examiners
the time of the failure of this bank.
The executive vice president was
4
short, and a small item
to be a bona fide collection item but
which turned out to be a part of his fake scheme was
reported to us.
Being
instructed to develop the facts in connection with this
matter I discovered
the other series of violations which, it is obvious
, a thorough examination
should have discovered, certainly if the examiners
had made any sort of
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Federal Reserve Bank of St. Louis
"C
4
-11-
investigation of the speculative activities of the particular officer,
which were handled through the bank.
In this case the bank closed
during the first part of 1929 or 1928 (before the stock market crash
and the general depression and after banks in Georgia had gotten back
into a more satisfactory condition after the difficulties of late
1925-26).
As I recall, the receiver of the bank and the president and
other officers explained that the failure was due to the asset condition
of the bank, which unsatisfactory condition had existed for a long period
of time, although the reports of examination did not reflect such condition.
The Farmers and Traders Bank, Atlanta, Georgia, closed on or
about July 12, 1926.
The State Banking Department took charge.
The
public accounting firm with which I was associated was employed to make
an audit of the condition of the bank in line with the Banking Department's
usual procedure in the case of failures.
My firm put me in charge of the
audit, which was completed by five of us in about eight weeks.
In the
meantime, I was designated as the liquidating agent or representative for
the State Banking Department in the matter of collecting notes, etc.,
which was the usual procedure at that time.
My firm was employed to audit, on a basis similar to the above,
30-odd other but smaller banks in the Manley chain of banks, which chain
consisted of banks located in Georgia, Florida, South Carolina, New Jersey,
and New York, totaling between 125 and 150 in number, and most of which
banks located in Georgia and Florida closed around July 12, 1926.
Most
of the banks were small nonmember banks.
During the course of the audit of the Farmers and Traders Bank,
I faand that the senior officers of the bank had misapplied approximately
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Federal Reserve Bank of St. Louis
-12-
$750,000, and thct on various dates prior to the closing the amount had
approached $1,000,000. The scheme of misapplication had been in existence
for several months, but the State examiners' reports did not reflect it.
Furthermore, from my knowledge of the asset conditionsof several of the
banks in the chain, acquired during the period of audit and from conversations with State bank examinerz, Uh( ..s13LIt conditions of many of the banks
in this group were much weaker than the State bank examiners' reports
indicated, classification of assets having been made on liberal bases in
view of the penalties in the law with respect to operating banks with impaired capital.
It should be stated that the field examiners for the State Banking
Department were not directly to blame for failure to reveal the $750,000 misapplication, because there were too many banks in the chain for the few
State examiners to cover simultaneously and assets were being shifted so
rapidly that only simultaneous examinations would have revealed the true
facts.
Furthermore, a great number of the banks in the chain were located
in Florida and, of course, the Georgia examiners had no jurisdiction over
the Florida banks and vice versa.
Moreover, the Bankers Trust Company,
which was a corporation but which was not subject to examination or supervision by the Banking Department, was the medium through which the "fiscal
agency" operations for the chain were conducted, including the so-called
ft call money" transactions handled for the Florida
banks which were burdened
with surplus cash during the Florida boom days.
These facts are recited to prove conclusively the inadequacy and inability of the State Banking Department to cope with a situation of this
sort.
If the examinations and supervision of banks located in Georgia,
Florida, Alabama, Tennessee, Mississippi, and part of Louisiana were to
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Federal Reserve Bank of St. Louis
el
A
-15-
•
be centered in the Federal Reserve Bank of Atlanta, it would be very
easy to corral enough examiners to make a simultaneous examination of
a chain even as large as the Manley chain was.
In this case separate
examinations of the various banks in the chain would have revealed the
call money shortage if verifications of requirements had been vigorously
and intelligently pursued and if the examiners had attempted to consolidate
the reports or even compare and discuss them intelligently, especially
with the examinations of the Farmers and Traders Bank.
Also, it would have been advantageous to examine the books of the
Bankers Trust Company, but no such authority was available then.
In the
first place, most of the banks, if not all, were nonmember banks; in the
second place, if soft of them had been member banks and the present laws
with respect to affiliates had been in effect then, it is doubtful that
authority to examine the Bankers Trust Company would have been provided
in the statutes as they are now drawn because the Bankers Trust Company
did not own or control, directly or indirectly, controlling stocks in
banks and neither its officers
nor directors constituted a majority of
of cases
the officers or directors of such banks and in a large majoritilthe directors and officers of the Bankers Trust Company had no official connection
whatever with such banks--merely acting as financial adviser .
r•
was
The call money shortage/handled by the officers of Bankers Trust
Company, who were also officers of Farmers and Traders Bank and who
acknowledged credit of the call money as officers of the bank but who
never entered the transactions on the books of the Farmers and Traders Bank
but merely dissipated the funds through the Bankers Trust Company for use
in various schemes and promotions of certain officers thereof, such as
real estate developments, etc.
C.E.C.
8-15-36
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August ;-'6,
I have just had an interesting conversation with Mr. Grinden, trust
examiner for the Federal Reserve Bank of St. Louis, who dropped in for
a few minutes while on his vacation trily through the East. 7e talked
about trust examinations and general examinations in the states of
Indiana, Illinois, Missouri, Arkansas, Mississippi, Tennessee, and
Kentucky.
He indicated that from his experience with the trust examin rs in
Illinois, they were pretty good and that, although having had no joint
examination experience with the Indiana trust examiners he understood
that they were making efforts to do satisfactory trust examination work.
All other states in the Eighth District have no trust examiners that
eould be dignified by the term. He stated that in Missouri the State
Banking Department feels that there is no legal duty and no need for
the examination of trust departments. In Kentuoky and all other states
of the District, except Illinois and Indiana, the examination fee is
not based on trust assets but on the assets belonging to the bank. In
these states since there is no provision for fees, there is no interest
in the trust departments, whiCh means no examinations. In Arkansas, Missauri,
and Kentucky, the state exa iners are not really interested in the trust
departments. In Missouri they will lend the Federal Reserve examiners
men to do checking and counting, etc., but when the trust report is
complcAed it is signed by the Federal Reserve examiner sad sent to the
bank by the State Department.
In all probability the attitude of various other State Departments
could be ascertained to be s.)mewhat similar to Kentucky, Missouri, and
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Federal Reserve Bank of St. Louis
583
- 2Arkansas. If so, it would seem that laxity in such examinations could be
used as a very strong argument in favor of a program of consolidation and
improvement, particularly if stress is placed upon the probability that
one of these times we may wake ur and find considerable difficulties in
trust administration. The situations may also furnish good argument for
improvement in the regulation of trust assets and other trust operations.
Generally speaking, the national examinations are much stronger than
the exam'nations in the Eighth District. The principal defect in national
examinations is that the examiners are working against time and they have
r 1)\
to type their rerorts in their hotel rooms at night, etc., in order to
N`
i
sake the next job or to make the rounds.
The national examiners seem to be lore liberal In the classification
and criticism of assets and certain policies than the F. D. I. C. examiners
and this liberality seems to have developed within the immediate past.
(Reference was made to the condition of certain assets in the First National
Bank of St. Louis which Mr. Grinden examined over and over while he was a
clearinghouse examlner and which he knows to be of ruch nature as to
warrant considerably more criticism than the current national reports
contain.)
\•
All of the State Departments in the District are subject to politics.
In Arkansas the political parties have not changed so rapidly and as a
result the Banking Department has not been subject to such violent
changes as in some of the other states.
Illinois has some very good examiners and some who are poor.
Missourils examiners are developing somewhat but they do not have 4
great deal of seal or Interest in their work and are more or less care,-
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Federal Reserve Bank of St. Louis
- 3less in many particulars.
Kentucky has a pitiful excuse for an examination department.
The Tennessee department is not known to Grinden because he has conducted no joint examinations in that state.
The Arkansas department is tied up in politics but some of the
examiners have not been changed for some time. They do not have very
much zeal or interest in their work although there seems to be some
development. Several of their examiners can easily qualify as very
hard drinkers as compared with the amount of the work they do and the
intensity of their classification of assets and criticisms of operating
policies, etc. Some of them are subject to criticism by the banks under
examination.
In Missouri the examin.rs
work on a time schedule.
In Illinois examnations are made twice a year and the examiners
are zoned, generally speaking, and work more or less un,er a time
schedule.
In Kentucky the examiners are nice fellows and are perfectly willing
to do whatever the Federal examiners suggest in a joint examination.
They don't know and don't pretend to know the fine points of examination.
As examiners they are totally incompetent in the first place and in the
second place there are not enough men to conduct satisfactory examinations
of the banks in the state.
Arkansas has a sufficient number of men to conduct one examination
per year. The law requires one examination per year and permits two.
The practice is one.
The examiners are qualified only by experience and
not by education and training.
They are not 'sufficiently paid. This
kills their ambition and interest in their work.
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Federal Reserve Bank of St. Louis
... 4 'hint examinations in Missouri are typed by the Federal Reserve Bank
and the state boys change the first page ani the last page, which is
usually prepared by the Federal Peserve examiner and certain copies of which
he signsond merely signed by the state examiner and forwarded to the State
banks. Only one Missouri examiner writes his own reports. The others depend upon the Federal in the case of joint examlnations.
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Federal Reserve Bank of St. Louis
MEMORANDUa
One reeds in Lil sources criticism's oi bank examiners--eome
extremely lenient, /60;46 extremely hard-boiled, with v few in between.
Sone say examinii.tionv ahould be conducted by Aen in the staUs because
thei would be iamilita &AL cJwitions
should be conduct
other
say the examinations
examluere oalo are not subject to local influences,
etc., and wno are noxt:
witz bancral economic Jzi business
conditions. ,
-;one say tak.Vbare different mothods ,_nd varying degrr.y.es
of proficiency by tue v..rious tiypcs of exaainIrs 4ho recetve varying
salaries, who are subject to varying conditions of appointment, Ac.,
etc.
From all of theL%,, criticisms there :Asada out prominently one
fact, among others: thA there i9 need of training of bank examiners,
that the trainint should be of a continuing character, ane that all
examinere should be trained along the same line, and from this it is
obvione that the only possible way of developing and training exKleiners
is to have them all working under, and responsible to, the same supervisory boot*, who could conduct training claseee and hold regional
conferences, and annually or leas frequently hold
at lcast the "key" examiners.
C.E.C.
8-5-56
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Federal Reserve Bank of St. Louis
b
joint conference of
1111Z1101ANDEili
L The queetion of whether or not an examiner of a netional bank
ehould make an exmination of its H.C.A. hinges on two questions:
First:
Does the H.C. heve any finencivl tr(-nsactions or
relLtionships with the bank, which may have ultimate
effect upon the condition of the member bank?
Eecond: Iv the H.C.1-. compl-ving in all respects cite the
provislons of the law, the agreement contained in
the application, and the tgreement signfd et the
time the general permit wae issued?
Cleerly it
iF
the duty of the national examiner, under the statutes,
to make such examinetion of the H.C.A.
4Wit would
be necesaary to determine
the probable effect of the relationship npon the bank if he finds that there
are monetary traneactions between the H.C. and the bank.
It is not clear
that the netional bank exeeiner hae any duty or responsibility, in the
absence of financial transactions ane reletianshipf between the H.C.A. end
Um bank, with reapect to ascertaining 5dhether or not the
provieions of the
law or the akreement contained in the application or the acreement executed
at the time of the issuance of the general votinc p(rmit, welch relate only
to the a.C.A., are being compliedvith.
There is no chubt thEt a Federal reeerwe examiner would go into all
of these matters in connection with the H.C.A. of a State member bank.
illustrates one of the difficulties involved in havin
This
different sets of
examiners, such as the examiners of nationhl banks, the examiners of State
mogioniber banks, and the examiners of State member banks, when all of such
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Federal Reserve Bank of St. Louis
553
-2—
banks are in an H.C.A. group and involve the provisions of the laws
and tiv agreement* with respect to the H.C.A.ts.)
8-1k-86
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Federal Reserve Bank of St. Louis
orm F. R.181
BOARD OF GOVERNORS
OF THE
•
FEDERAL RESERVE SYSTEM
Office Correspondence
To _
Files
From
Ir. Jones
Date
November 4, 1936_
Subject: Notes on address_ofRobert_V,
Fleming, President of the American
Banker& AasQ0Lation at the 1936
10
6 P0
Convention.
Study #10
American Bankers' Association membership, 12,472, whose resources
represent roundly 91% of those in the banks of the continental United
States.
The American Bankers' Association Economic Policy Commission has
published a report on the subject of over chartering of banks.
Under "Better Supervision as Aid in Reducing F.D.I.C. Risk", Fleming
advocates policy of charging off losses currently and not allowing them
to accumulate.
He also states that Chairman Crowley of the F.D.I.C. has
indicated that a reduction in the rate of the F.D.I.C. assessment could
be considered favorably when bank management and supervision have clearly
demonstrated that the banking system has been on a permanently sound basis.
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Federal Reserve Bank of St. Louis
852
Form F. R. 131
BOARD OF GOVERNORS
•
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Mr. Cagle
Fro
Glenn M. Goodman
Date July 28, 1936
Subject:
In connection with your suggestion regarding the accomplishment of
unification through universal membership in the F. D. I. C., attention is
directed to the situation which exists at this time, which in my judgment
is manifestly unfair to national banks and in a degree to State member
banks, in connection with charges for examinations.
It is a practice of the Comptroller of the Currency to continue to
assess examination charges against national banks. .44.Wm4-14144.4a14—.4.4.as...—
a •
—
I
ezp...r.g.9,...eatetTritrere.. It will be seen, therefore, that the State banks are
getting something free at the expense of the Federal Reserve System which
is largely supported by the national banks.
Carrying this idea farther into the F. D. I. C., it will be remembered
that the payment by the Treasury of $150,000,000 theoretically was derived
from the funds previously paid into the Treasury by the Reserve banks in
lieu of franchise tax.
Adding to this amount the assessments against the
surplus accounts of the various Reserve banks for the benefit of the F. D. I. C.
it will be seen that the assets of the F. D. I. C. have been almost entirely
provided by the Federal Reserve System.
The F. D. I. C. bas been able to
pay its operating expenses out of its income from investments and essentially
membership in the F. D. I. C. has cost the participating hanks directly
practically nothing.
The rrincipal portion of the F. D. I. C. costs has
probably been in connection with their examination and supervision activities
in connection with nonmember banks. In other words
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Federal Reserve Bank of St. Louis
the nonmember banks are
561
Mr. Cagle - (2)
being largely aupported in the F. D. I. C. by the member banks.
The above situation auggests that if unification is accomplished
through universal membership in the F. D. I. C. something should be done
to require the State nonmember banks to pay their just share of the examination costs. In the same connection, something should also be done
to give national banks the same freedom from examination charges as is
now enjoyed by State member banks.
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Federal Reserve Bank of St. Louis
Form F. R. 131
BOARD OF GOVERNORS
OF THE
111
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Mr. Cagle
From
Glenna. Goodman
Ehae July 27 1936.
Subject: Clearing House Associations
In connection with the study on examinations, it is suggested that
it would be desirable to present information as to the number of clearing
house associations which maintain examination departments. It is thought
that this might have some importance at this time due to the fact that
many of the associations have discontinued their examining departments.
It is possible that the American Bankers Association will be in a position
to supply this information.
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Federal Reserve Bank of St. Louis
5(3,1
•
193%
riles
C. 14 Cagle
Excerptsfrom Mrs Sargent's letter to Mr. Paulcer re exmenotions of
State member banks:
"/n compliance with Board's letter of November !, 12!4,
1-9011, it has been mr endeavor to cnduct At 'oust one regular examination of each State member bank, includinz its Trust
Department, (luring each celendar year jointly with the State
Banking authorities wherever nossible."
"A complete mu:Illation of these %. :ks eaeh calendar year
jointly TAU State authorities is becoming rather difficult
under existing conditions. The problem primarily centers La
the five largest Cali'^ornia banks due to the examination dates
fixed by the Stlte Banking Department and the fact that the
Department conoentrates its entire staff for these exlalnations.
* * * * Member banks being only about 10% of the total anaber,
and having over half of the total resourcee, the State Depart
,
ment is not always able to arrange examination schedules to
suit lur convenience. Ilen examinetion dates ere fixed hy the
California Deeartaent, they often oonelict with our examinations
in other states so thcgt it is not alwaye possible for us to
call in our exaainers from the various branch districts for an
examination in California. The expense Involved does not
warrant the maintenance of an adequate staff to aatch the State
examiners in the important essignments necessary in the examination of a large -ank. As a result, there is duplication of
work, delays, oonPusion and inconvenience to the bank under
examination.
see believe that we oould examine these five banks independently of the State with much less o)nnision to all ooncerned, more speedily and at less oost. Of oourse,
an independent examination of the American Trust Company or the
California Bank, we could not make simultaneous entrance and
would cover only the larger and more important branches.
Simultaneous entrance and coverage of all branches, however,
is not eonsidered necessary as we would have a report of the
examination of the State, which i8 required to make a complete
examination of each bank and all branches ono* each year and
is aot permitted under the law to accept our examinations in
lieu of the same.
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Federal Reserve Bank of St. Louis
- 2-
"We hnve made every effort tossible to get the Cali'-ornia
more even s-,read of the larger examinaantorities to ?mike
tions throughont the year and they have cooperated to the best
of their ability, but it will be noted from the enclosed list
that the two most lifficult examinntions were not started in
1W56 until the close of the year. These examlnatIons are just
now being completed so we are late in getting startad on our
19t7 schedule and will have difficulty in completing it within
the calendar year.
"There arpear to be two solutions, cither one or both of
which cauld be exployed: (1) Couduct inderendent examlnations
of some of the larger banks on dates that will fit into our
ova schedule, and/or (2) examine two or three of the larger
banks once every other 7Part acceptinc
Stqte reports for
the odd years."
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Federal Reserve Bank of St. Louis
m F. R. 131
O
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Frona
_Ailr_.__Cagle
Mr. Hostrup
Date August 27, 1956
Subject: _Sta_tutor7_pr_oviai_ons concerning
reportalithxaminations of affiliates.
A-
The following rough comments are written pursuant to your request
for a summary showing the weakness of the statutory provisions for
reports of condition and exminations of affiliates and holding company
affiliates. (Page numbers are pages of the latest edition of the Federal Reserve Act.
All underscoring4o sufTlied)
Section 5211, Revised Statutes, (page 194) provides that each
national bank shall obtain from each of its affiliates other than member banks and furnish to the Comptroller of the Currencynot less than
three re,:orts during each year, and that each such report "shall cpntain
auch information as in the judgment of the Comptroller of the Currency
shall be necessary to discg.ose fully the relations between such affiliate
Lnd such bank and to enable the Com troller to inform himself as to the
effect of such relations uyon the affairs of such bank. * * * * * * * *
"Fie Comptroller shall also have Jower to call for additional rerorts
with respect to any auch affiliate whenever in his judgment the same are
necessary in order to obtain a full and complete knowled.ge of the conditions of the association with which it is affiliated."
These provis-
ions are made applicable to holding company affiliates as well as affiliates.
Section 9 of the Federal Reserve Act (pa4es 28 and 29) provides that
each bank admitted to membership under auch section shall obtain from
each of its affiliates other than member banks and furnish to the Federal
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Federal Reserve Bank of St. Louis
-2—
Reserve Bank of its district and to the Board not less than three re iorts
during each year, and that each such report "shall contain such inform—
ation as in the judgment of the Board of Governors of the Federal Reserve
System shall be necessary _____Itod_isclosefulltns
affiliate and such bank and to enable the Board to inform itself as to
the effect of such relations lion the affairs of such bank. * * * * *
Any such affiliated member bank may be required to obtain from any such
affiliate such additional reports as in the opinion of its Federal Reserve
Bank or the Board of Governors of the Federal Reserve System may be neces—
sary in order to obtain a full and comaete knowled e of the condition of
the affiliated member bank."
These provisions are mIlde applicable to hold—
ing company affiliates as well as affiliLtes.
With reference to examinations of affiliates of national banks, Sec—
tion 5240, Revised 5tatutes, (page 119) provides that "in making the
examination of any national bank the examiners shall include such an
examination of the affairs of ail its affiliates other than member banks
as shall_be necessary to disclose fully the relations between such bank
and such affiliates and the effect of such relations u)on the affairs of
_such bank."
Section 9 of the Federal Reserve Act, (page 30) provides that
"In connection with examinations of State member banks, examiners selected
or approved by the Board of Governors of the Federal Reserve System shall
make such examinations of the affairs of all affiliates of such banks as
shall be necessary to disclose fully the relations between such banks and
their affiliates and the effect of such relations upon the affairs of
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Federal Reserve Bank of St. Louis
-3—
such banks."
These provisions are not a,plicable to holding com any affil—
iates unless they are also technically affiliates of member banks.
Section 21 of the Federal Reserve Act, (pages 122 and 123) rrovides
that "Whenever member banks are required to obtain reports frm affiliates,
or whenever affiliates of member banks are required to subnit to examination,
the Board of Governors of the Federal Reserve System or the Comptroller of
the Currency, as the case may be, may waive such requirements with respect
to any such report Ird examination of any affiliate 4
. "in the judgment of
the said Board or Comptroller, respectively, such report or examination
is not necessary to disclose fully the relatlons between such affiliate and
such bank and the effect thereof ui.,on the affairs of such bank."
With reference to examinations of holding cpm:_any affiliates, Section
5144, Revised 4tatutes, (page 180) provides that no voting permit shall
be granted except upon the condition, among others, that the holding conl-,any
affiliate "shall, in making the application for such permit, agree (1) to
receive, on dates identicalhose fixed for the examination of banks
with which it is affiliated, examiners duly authorized to examine such banks
)
who shall make such examinations of such holding c mpany affiliate as shall
be necessary to disclose fully the relations between such banks and such
holding conTarly affiliate and the effect of such relations u )on the affairs
of such banks * * * * *; (2) that the re orts of such examiners shall con—
tain such information as shall be necessary to disclose fully the relations
between such affiliate and
such banks and the effect of such relations u on
_________
the affairs of such banks; * *
* * * *"
All of the provisions as to reports and examinations of holding company
affiliates and affiliates containee a phrase which indicates that the T-Yurpose
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Federal Reserve Bank of St. Louis
of such reports and examinations is to disclooe relations with banks and
the effect of such relations on the banks.
The various sections referred
to do not provide specifically for reports of condition and exriminations
made for the mr)ose of ascertainin
the financial condition and character
of the m_anagppnl. of the holdinz_c_illpany affiliate or affiliate.
Possibly
the necessary authority to make a full examination or require a complete
re ort from an affiliate is implied in the statutory provisions, since it
may be argued that the poor financial condition of an affiliate would
have an effect on the afiairs of the affiliated bank.
On the other hand,
it may be argued thcA the best way to disclose a bank's relations with
its affiliates and the effect of such relations upon the bank is to examine
the bank. In any event, if it was intended in the statutory provisions
referred to above to give the Board and the Comptroller oower to get at
the financial c ndition and management of affiliates by means of reports
and examinations, it would be better to use words to that effect in the
statute.
There is an additional weakness in the statutory provisions _or
examinations of holding company affiliates in that, unle2,s they are also
technically affiliates of member banks, there is no statutory authority
for examinations unless the holding company affilinte applies for a voting
permit.
There is moreover no enforceable penalty for refusal of the hold/
ing company affiliate to submit to examination unless it holds a voting
permit. The weakness of these provisions arises, of course, from the
fact tht the law does not require, a holding company affiliate to apply
for and obtain a voting permit.
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Federal Reserve Bank of St. Louis
As far as subsidiary national banks are
cmcerned, the law does not even cpntain a quorum requirement for elections
of directors as a means for forcing holding company affiliates to obtain
voting permits.
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Federal Reserve Bank of St. Louis
F.R.181
BOARD OF GOVERNORS
OF THE
1110
FEDERAL RESERVE SYSTEM
Office Correspondence
To Mr. Cagle
From
Date
April 23, 1936
Subject: Companies controlled by the
chartered banks of Canada -
Mr. Goodman
16
P0
In accordance with our conversation yesterday there is attached
hereto, among other things, a supplement to the Canada Gazette showing
the Return of the Chartered Banks of the Dominion of Canada as of February 29, 19M. You will note that Item 31 of Assets is captioned "Shares
of and loans to controlled companies".
In this connection your attention is invited to section 53 of
"The Bank Pet", a copy of which is sttached, which pertains to the annual statement of the directors concerning the affairs of the bank.
Subsec-
tion (5) provides
"Whenever a bank carries on any part of its operations in the name of a corporation controlled by such
bank, then there shall accompany the statement, a further statement showing the assets and liabilities of
each such corporation, and tne value placed upon the
bank's interest in the corporation."
The Act requires that a copy of the annual statement, together with certain related reports, be sent to each shareholder.
V024/
yK-6-1
,
In connection with theAreturns of the chartered banks, made to the
Minister of Finance, copies of which are sent to the Bank of Canada (the
central bank) subsection (7) of section 113 of the Act provides as follows:
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Federal Reserve Bank of St. Louis
"Whenever a bank carries on any part of its operations in the name of a corporation controlled by such
bank, then such bank shall, for the purposes of any return required under the last preceding section, transmit or deliver theretith a separate return, showing the
assets and liabilities of each such corporation, end the
interest of the bank in auch corporations shall be shown
separately in any return respecting the affairs of the
bank."
r-Oi
-•
s.;
Memorandum to Mr. Cagle - (2)
There are attached annual reports of The Canadian Bank of Commerce and Bank of Montreal, with markers inserted at the statements of
controlled companies.
GMG/deq
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Federal Reserve Bank of St. Louis
m F. R. 131
o
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Date July 181 1956
/.
Subject:
Mr. Cagle
ir
From
Glenn M. Goodman
Without having information as to the extent to which the various
clearing houses conduct examinations of their members at this time, the
question is raised as to whether or not it is necessary for clearing
houses to examine their members where extensive and detailed examina—
tions are made by the Comptroller, the F. D. I. C., and examiners for
the Federal reserve banks.
This auestion is raised with particular
reference to the cost of examinations. It would seem that there might
be some duplication here which could be eliminated either by fewer
-411i
Federal examinations or no clearing house examinations.
I have not thought this matter through but merely raise the point
for such consideration as it may deserve.
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Federal Reserve Bank of St. Louis
r-
Form F. R.181
BOARD OF GOVERNORS
OF THE
•
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Date
Subject:
Files
November 4, 1936
English Securities Act,
From_ Mr. Jones
18--852
P0
Study /10
Taken from page 539 of the October 17, 1936, issue of The Accountant:
"STATUTORY REPORT AND AUDITOR'S CERTIFICATE (A 1819).--A statutory report has only to be issued by a public company. Such reports
are usually printed and, by the provisions of Section 113 (4), a copy
of the auditor's certificate is included in the report. It should be
noted that by subsection (5) of Section 133 of the Companies Act,
1929, the directors are required to send a copy of the report, certified as required by the section, to the Registrar of Joint Stock Companies forthwith. The auditors will therefore have to have completed
the required audit at the time of the issue of the report. In practice, of course, it is usual for the auditors to prepare the whole of
the report, attach the necessary certificate, obtain the directors'
approval and signature and often see to the dispatch. Finally, therefore, the audit must be completed before the issue of the report.--W.C.S."
On page 537 of this issue is a description of the fining of directors
of an English company for failure to submit a copy of the company's annual
return to the Registrar of Companies.
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Federal Reserve Bank of St. Louis
811
•
MEMORANDUM
Chapter 261 Section 48 of the laws of New Hampshire, relating
to savings banks, trust companies, B. & L. associations and state
banks--1935---provides that trustees or directors shall, in person or
by committee appointed from their board, make a thorough examination of
the affairs of the institution once every six months, one copy of the
report thereof to be sent to the CommiFsioner and a copy to be published
in a r-wspaper.
QUERX:
in all or even
Is it reasonable to assume, first, that the directors,
majority of the cases, could make a thorough examination;
second, that if qualified they would take the time to make a thorough
examination twice each year; and third, that they would prepare a frank
and candid report if it must be gublished in the newspaper?
QUERY:
Is this one of many situations where over-zealous
legislators in what they may regard es honest endeavors to protect the
depositors and the public in general, where too stringent requirements
result in lax administration thereof because administration of the letter
or the spirit of the law in all probability would work considerable hardship upon a great number of institutions?
These comments also apply to section 49 with respect to the reports
of C.P.A.'s being substituted for one of the annual trustees' or directors'
reports.
The provisions of section 50 appear to be still more ridiculous
and much more apt to be very laxly administered.
572
C.E.C.
8-11-36
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Federal Reserve Bank of St. Louis
MEMORANDUM
In the voting permit case of Trustees, Citizens Union
National Bank of Louisville, Ky., Agent Wood stated that his
opinion of the trust company involved (name not recalled at
present), with respect to management, operating practices and
asset and capital condition, was highly satisfactory.
His
opinion was predicated upon his personal knowledge of the officers
and information which he had been able to obtain through state bank
y
i departments or examiners.
When we requested the Agents to have
simultaneous examinations of H.C.A. groups and one of the 4. Louis
Reserve Bank examiners went into the affairs of the above mentioned
trust company, a very unsatisfactory report %as made, which caused
Mr. Wood to change his opinion to a very great extent.
It appears that the State examiners have never gone into a
great many matters which were requested in the Division's simultaneous
examination form or suggestions, which indicates either laxity in
examinations or inefficiency, and which also indicates the danger of
depending upon such examinations for information as to the general
state of the banking conditions of the nation.
C.E.C.
8-11-36
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Federal Reserve Bank of St. Louis
554
•
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Federal Reserve Bank of St. Louis
"
"4"t
-'.6'.."4"1
10
Article by B. M. Anderson - Chase Bank - in Chase
Economic Bulletin, May 1930, being an address delivered
before the North Carolina Bankers Association May 8,
1930.
Opposes legislation approving nation-wide or
Federal Reserve District-wide branch banking. Proposes
St
4.ALZ‹.
brakes by supervisory
that the proper regulation
authorities, banks in county seats or trade center
towns
might establish branches within very limited
or small areas such as the county or state or in some
states even an outside strong bank may come in and
establish a branch, but in all cases the unit banks
should be protected.
If branch banking on large scale areas were
encouraged by Federal legislation there would follow
a very dangerous competition by larger banks, some
for the purpose of obtaining business, others for
the purpose of rrotecting themselves against the
first type, all of which lould be extremely dangerous
to the future of banking and business unless very
carefully restrained by supervisory authorities (which
would be difficult or practically impossible to do
under our present machinery).
(This article shoule be reviewed in writing
up No. 10.)
•
In an address by L. R. Lunden, member of the faculty of
the University of Minnesota and consultant to the Division of
Banking of the State of Minnesota, at the convention of the
N.A.S.S.B., Detroit, Michigan, September 14 to 16, 1936, he
related an experience In participating with the State examiners
in an examin-ition of a State bank in which the examiners had
carefully classified all loans and in a discussion of them
with the officers he learned that the bank's officers were
had
thoroughly familiar with all of the lines and/excellent credit
information. However, he learned that they had practically
no information about the investments (amounting to considerably
more than the loans).
Neither had the examiners devoted much
time to an analysis of the investment account.
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Federal Reserve Bank of St. Louis
He also stated:
"As worthy a suggestion as is the one which
license bankers on the basis of ability, I still
see difficulties until there hcd been a complete
turnover in the personnel of bank managers.
Until that time came, the need for better 5upervision would exist, and even after that, the department would have to keep pace with the improvement in the quality of bank management."
•
September 18, 1936
I talked with Mr. Ross of the Federal Deposit Insurance Corporation
today concerning requirements that the Corporation makes of banks being
admitted tc membership in the insurance fund.
He said that each case was
•••
analyzed on its merits, but that usually a bank was required to be "clean"
before
being admitted to the fund.
They make requirements as to charge-
off of assets, but there was no set policy as to such charge-offs.
Some-
times high-grade depreciation was charged off, other times it was not.
They
apparently operate strongly on the maintenance of a 1 to 10 ratio of capital
to deposits. In some instances banks have been admitted to the fund after
the directors have executed an agreement to make certain corrections.
There
have also been cases where a bank whose capital situatIcn was somewhat on a
border line of the 1 to 10 ratio, has executed an agreement that a 1 to 10
ratio would be maintained.
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Federal Reserve Bank of St. Louis
•
MEMORANDUM
The newspaper review of the New York Bank, Oct. 24, 1936,
carried reference to an item in the "Sun, Oct. 23, p. 43", relating
to "suggestions have been made that the Federal Reserve Board continue
the good work it performed several years ago in breaking down into
more intelligible items the various kinds of loans which are made by
member banks", stating that there is still no way of checking the
volume of finance company obligations held in bank portfolios, reflected
in all other loan figures.
C.E.C.
10-28-36
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Federal Reserve Bank of St. Louis
814
LAWS OF NEW HAMPSHIPE RELATING TO
SAVINGS BANKS, TRUST COMPANIE8,
BrILDING AND LOAN ASSOCIATIONS AND STATE BA1KS
(1955)
Chapter 259
10. Bank Pepoilt. The treasurers of all institutions unier the supervision of the commissioner shall balance their books at the close of business on the last business day in June in each year, and within fifteen days
thereLter shall make reports to the commissioner, upon blanks furnished
by him, showing the true conditions of the institutions at that time. The
commissioner shall prescribe what information the re-orts shall contain and
their form, end shall seasonably furnish blanks upon which they shall be
made.
11. Commissioner's Reports. The commissioner shall file with the
secretary of state, on or before September first in each year, his annual
report, which shall contain a statement of the resources and liabilities
of each institution under his supervision, the amount of earnings of each
institution for a twelve-month period, or for such period as he may select,
and the disbursements for the same period for taxes, expenses and other
charges together with the rate and the amount of the dividends paid during
the time. The report shall ale° give the names of thP officers of each
institution, the amount of the officers, bonds, the total salary and oompensation paid to officers and employees, with such other information as
he may deem necessary. He shall make such recommendations therein as he
thinks will promote the public good.
Chapter 261
pavan Aim_ of BankO
48. By Trustees. The trustees or directors of every institution under
the supervision of the commissioner shall, in person or by a committee
appointed from their board, make a thorough examination of the affairs of
the institution once every six months, and shall make and transmit to the
comaissioner, upon blanks furnished by him for the purpose, a report of
such examinations forthwith after they are made, and shall publish a copy
of such report in some newspaper published in the place where the institution is located, or, if there be no newspaper there, in a newspaper
published at the place nearest thereto, and shall forthwith transmit to
the commissioner a copy of the newspaper containing such rer,ort.
%i4BY Public Accountant. If the trustees or directore shall employ
a certified public accountant, approved by the commissioner, to make one
examinotion each year that examination and the publication of his report
shall be in lieu of the semi-annual examinations of the trustees and the
publication of their reports; provided, that nothing herein shall relieve
the trustees of any responsibility as such trustees.
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Federal Reserve Bank of St. Louis
Lavas of New Hampshire -
50.(Certificate of National Bank. If a savings bank 11,18 its place
of business in the same office with that of a national bank the treasurer
of the savings bank shall cause a committee of the directors of the
national bank to indorse upon the reports of the examinations of the
affairs of the savings bank, to be returned to the commissioner, a certificate, under oath, that they made an examination of the affairs and
securities of the national bank at the same times when the savings bank
examinations were made, and found them to be correct.
51.
Neglect to Furnish. If the treasurer of a savings bank
shall neglect to furnish such certificate within thirty days after the
examination the .:!ommissioner by notice in writing duly served shall require the treasurer to appear before him at a time and place appointed
and show cause for such neglect. If no sufficient cause be shown, or if,
such cause being shown, the treasurer shall fail to furnish the certificate within a time fixed by the commissioner, he ehall remove the savings
bank from the office of the national bank, and if the treasurer is Also
cashier of the national bank shall remove him from the offiae of treasurer.
Chapter 264
11. Reports. Every such cornoration shall, in such form and at such
time as the commissioner may require, but lot exceeding five times within
any calendar year, make a report to said commissioner, signed and sworn to
by its president or treasurer and attested by the signatures of not less
than three of its directors, showing ,Iccurately the condition of such
corporation.
12.
Tom; Publication. Such report ehall be made within ten
days of receipt of notice, shall exhibit in detail and under appropriate
heads the resources and liabilities of the corporation at the close of
business on any past day specified by the commissioner, and shall be
published by and at the expense of such corporation in a newspaper in
the place where such corporation is established, if there be one, otherwise in one published nearest thereto 'n the same county, at such times
and in such form as may be directed by the commisBioner.
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Federal Reserve Bank of St. Louis
TO ALL FT rE.F.AL
AGLNTS:
The attached outline of .oints to be covered in connecti6n with simultaneous
examinations of grow.) bank:. and affiliated organizations owned or controlled by
holdin
company affilihtee is divieed into three -)arts as
aid or guide to the
examiners ia )re)arini. data for their reports on:
Member Banks
Holding Compz-ny Affiliates
Other Affiliated OrgF,nizztions
The outline was made sumewhat ler4thy and detail(il in order that there micht
not be mitted in any case certLin matters which have not been covered in yrevious
cxaminttion re ,orts in a :iAications for voting permits, but which should be covered
at least once before final consideration of a)plications for full voting permite.
It is rot contemplLted that the e>aminers should answer each specific (liestion or
point outlined separately ane in the order outlined in all eaEes.
A Eeneral
statement :aiEht cover the several _oints ovutlined in many crses, such as i(E)
MANAGEENT a., 2 Extent of Control ..
(a) through (f)". If there is no
pertinent information to be given in e-mnection with certain :Joints or ruestiom.
it will not be necessary to state "none", no reference being necessary unl<
there is something of im)ortance to report or comment on.
The extent to which the examiners should
int
the various matters ain-
lined and other important matters in any s?ecific or special case not mentioned
must necest,arily depend upon the examiners' own gJot? judgment in the circumstances,
keepinE in mind
; (1) financiLl condition of each bank and eac
other organization in the group - balance sheets and correct ap-)raisals of fs e
as of the same date for all units. (2) Ncture and extent of evininEs, dividends,
etc., of eacL unit in the group. (3) Management of each unit in the grlomp. (4)
Nature and effect of relations.
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Federal Reserve Bank of St. Louis
II
56
In the small group where thE holding company affiliate and itE subsidiary
member bank nnd .)ossibly its affiliate are examined simults_nfously by ane man,
witl: assistance, it is not contemplated that separate re)orts will be neces—
sary. In sue. eases it is contemplated that separate sections of the re:ort
will be devotec to eech unit of thk group. In e simple ease, management of all
units in the group s'nould he coveree: tocethfir; same is true of relations,
policies, etc.
In considering the applications for voting peraits, it was noted that affil—
iate( reluLionshipsin several instances have been re2orted
as terminated.In all
such cases the examiners should ascertain and report as to whether Yr not each
relations were actually and equally terminated, showing the date,the exact manntr
and the purpose of such termination.
There are pending many apliot-tions for v,
)tini, permits of holCing com7any
affiliates whic.fi control no state member banlc, all bLnks in sucll
national and state nonmember banks.
1-orups being
In all such cases the Foderd Reserve Agents
daauld make the necessar'
z' arrangements for the a)yropriste superviriory authorities
to have adet:,uate simultaneous examinations made of all unity of such groups,
particiy.tinc therein to whatever extent is desirable or necessary to develop
infarmation
biS
indicated in the attsched outline.
Aany holding companj affiliates are banks and trust comimalies.
In conmetion
with the regular exEiminations of these institutions most of ti:e items ment:
in t.
section pertaining to noabankiag holding company affiliates of the out—
line attached will be covei-ed.
Any items not included in thc regulEr examinatiom,
should be covered to such extent that the applicationsfor full voting perlits may
be considered froa the dhta contained in the examination relorts.
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Federal Reserve Bank of St. Louis
It le, conteuvluted taut the Federal heserve Agents will notify the
uncersigned of their arraatements to naukc simultaneous extminations of all
group 1)anks, togetner Litn their affiliated orEanizGtions,
indicv.ted in
he attichecl outline and will forward one coad.ete c3py of the re)ort of
e,,ch such exLminatim Go soon Gs ?ractictble.
buch reports f-43 are drePred
by nationa bank exf,minerr will be available throuEh the office of the
Comiltroller of tu
Cu rency Llid need not bt form-rded by the Agents. It will
be necessary, howevt,r, for the Agent:: t) forward a comActe copy of each
re)ort made by state exrminers and/or examinert,
, for the federl. resere banks
in orcer that sufficitnt dtAa mLy be available to pass u on tt
full voting :er-fli%s r-nd for 3ther reaLans.
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Federal Reserve Bank of St. Louis
Very truly y urs,
heat-ions for
'V
t ""
`CY
Statement of A. L, M. Wiggins. Hartsville. S. C.. Pres.. South Caroltna
Bankers Association
Mr. Wiggins* / would like to lake briefly just one or two other points.
The fact that all banks would be equally safe, assuming that a guaranty
fund provided safety, there would, of caurse, be no discrimination between
banks, which in turn wauld enceurae what I would term "wild-cat" management,
taking the chances to make a profit and if they made a profit it belonged
to the stockholders, if they busted the bank, the guaranty fund would pay
the depositors, which I think would increase eaterially the number of failures
that we might expect, once the bank guaranty fund began to operate.
The Chairman. You do not think it would be possible to improve the
supervision and superintendence?
Mr. Wiggins. I think it Tauld; but no degree of supervision or superintendence will replace honest and saund management.
The Chairman. Well, it would be very easy to replace a 1,ad business
official with e good one if we gut the ower there, would it not?
Mr. Wiggins. You could remove the official, yes; but even under any
rensonabie Ilanking supervision, laws supervising brinks, there would be
plenty of opportunity for a banker to take chancee and if he made money he
,ould get by.
The Chairman. Have you anything further?
Mr. Wiggins. It will also renove the local responsibility of stockholders end directors to depositors. There are many banke to-Jay that are
in a sound condition because the directors and stockholders have taken aut
or the bank assets that proved unsound or worthless, and it is ly opinion that
the bank is essentially a local institution and it will best serve the
function for which a loonk is designed if there is that local responsibility
by stockholders ani directors to depositors. Of course, it is apparent to
all of us that it will practically put out of business all banks not !xl the
guaranty fund, except such banks as are outstandingly strong mnd "ndependenti
A great many nonmember bE.nks are not in a position to-day to become member
banks; they woull not be acceptable as Inember Ir:riks because on a licluidation
basis of the assets of some banks to-day they could not qualify ror Federal
reserve membership, which mould mean that these banks necessarily would pass
out of the picture through the failure route. * * * * * * *
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Federal Reserve Bank of St. Louis
** *
***** * **
ci:.3
MEW. MERU
OF
ALLeS
Februury 4, 1932.
<3
.
41r. Eugene eyer, Governor
Federal teserve Board
, qishineton, L. C.
!
reer Governor . eyer:
luring the pest two months our examiners heve perticietted in F.
number of elember stete bank eeaminetions conducted by the etste FierSdn leparteent of Texas, and in severe]. of these examinations the eggresete of loeses
estimeted by our eeeminer exceeded the losses set up by the stete examiner by
an nmount so greet test no definite cenclusions could be drawn rs to the bank's
solvency, or as to the corrective measures whiee the bane should be required
to take, except after srriving at some conclusion es to which of the two
examiners had correctly clessified the assets of the bank. I am referring
especielly to recent eeeninations of the following banks:
Loss
Late:
Security etate Benk, Hedley, Texes
Jitizens etste Bank, .4emphis, Texas
First ;State Bank, Roby, Texas
Junction St. Bank, Junction, eexes,
\\,/
11
Our -xaminer:
11-10-31 .:17,000,000
11-14-31 126,000.00
12- 5-31
65,000.00
1- 9-32 156,000.00
stimete d:
-tate .xeeiner:
4,000.00
27,000.00
39,000.00
12,000.00
Anclyses of the reports of all of these exnminftions (except that of
the Junction ,Ante 3enk of Junction) heve been forearded to you End ere now
ith respect to two of these banks (Hedley and -ioby), we have
in your fths.
received letters from eecretery Morrill callins Fttention to the discrepancy
between our examiner's loss estimetes end those of the state examiner, end inquiries 's to whet efforts, if any, ere being mede by the member benks'
directors to elieinete the assets which our examiner clnssified as losses but
which mere not so classified by the state eeeminer. These in eiiries would seem
to imply either (e) thet the Board is under the impression thtt the directors
foferred to ere sufficiently nwere of the loeses in their
of the eenber beT
conscious of their duty to remove them as to ceuse
banks snd sufficiee
then to voluntarily eliminete Gssets which, tt,oui.,,h questionable, ere not
clessed by t-se stete examiners as losses; or (b) thet the Board wiehes me, in
such ceses, to make a demend upon the member benk for the elimination of ell
assets etich our exeminers clvssify as losses.
Cn the first score, 1 reret to sny that the everege member stete
bank in this district cennot be depended u2on (under preseet conditions, et
eny rete) to thke the initintive in reeovine losses not recofnized by the
e heve e few well-meneged stnte
officiel exeminers in their clessifications.
institutions in our memberehip that have re de it a practice in tLe -est to reile4,3nove losses voluntarily ts therf develop troll tiee to tile, but just now these
cases ere the exceptions rnther tber the rule.
,,?,-eee
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Federal Reserve Bank of St. Louis
Page 2
On the other hand, I am wondering whether or not the Boerd wishes me
to sdopt the prectice of demeeding of our mamber state barks the removal of eny
losses set up by our own examiners, irrespective of whether such losses are
recoEnized by the state authorities or by the directors of the examined bank.
I shall, of ccsirse, gladly underteke to cerry out any instructions which the
Board may eive me along this line. I desire, however, to respectfully submit
my views es to the probable advantages and disedventages of such a policy.
(In the first piece, I am convinced thet while state bEnking laws
Jgive the (etete Banking Lepertments E certain scope of eupervisory euthority
thet cennot be legally shared by l'ederel reserve banks, there can certainly
le Oa"
be no euestion vs to the legel rietht of the Federel keserve 3oerd to dictete
the terns and conditions upon which a member state bank mey retrin its memberrieeht may properly be
ship in the 3ystem. I em eeeelly coevinced thet
used as c menns of brineing pressure to bear upon member banks for the elimination of unsetisfactory conditions end practices. Indeed, I do not believe
that there is &Tellable to the Yederal 'eserve euthorities eny other practical
or effective means of enforcine their de-lands for such corrective meesures.
The policy would therefore prove effective in securine the desired results if
the Federal T,eserve ,eeent be nutorizee to wern a member bank thet its feilure
to correct its unsatisfectory conditions would result in a recommendation to
ederel eserve Bovrd by the I'ederal .,eserve eeert that the bank's membership in the eystem be terminated.)
e'
In the eecond place, I think such e policy would result in P more
prompt rehsbilitation of many dengeroas situations with respect tiRdithich the
state autnorities ere now disposed to temporize end procrastinnie. 0 Yxperience
over the neriod of the east seven years has convinced me thEt the classificetions made by our own examiners ere far more accurate than those of the stete
examiners. This is principally due to the fact that the classifications mede
by our men, unlike those of the state examiners, ere uninfluenced by considerations of expediency and, perhaps in a lesser degree, to the fact that
our examine:8, as a rule, are superior in nbility to the eversge exeminer
employed by the state./
(There ere, however, certain disadvantages which the policy referred to would enteil and e Act, should be given due consideration. First,
ca----Fis I pointed out in my receLt letter to s;ecretary Morrill, it would be
,t sq. extremely difficalt for us to pursue the prectice of making independent
'‘Irk
corrective demends ueon our 71ember state banks without giving the State lient;ing Commissioners grounds for orfense on the score that we were unduly inveding
their field of supervisory euthority. In that case, the reeulting breach in
our fri nely and cooperetive reletions with the state authoritiPs would
\.4" probably completely destroy the valuable cooperation which we are now roe.
CelTing from them in the form of arrangements for joint examinetions of
member banks, and in mealy other ways.)
4
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Federal Reserve Bank of St. Louis
Page 3
Another fsctor which I think should be considered is the pose5ble
effects which a more ri6id supervisory policy an our pert might have upon the
present mortality rnte among nenber state Welke. There is a fine distinction
heve to be drnwn between banks which should be kept open
' which would see,
at any reasonable cost and those whose sueponsion would probably be lesb disastrous to the community than r continuance of their operations. In any event,
t
it is cert, in the% there ere some member state banks in tl,is distric whose
lone
.
not
could
survive
they
expuleion from the -yutem would be a blow Which
As the Board knows, we heve always mode it a practice to follow up
by writing to the
examisetion relorts which reflect unusually bed conditions
ng lee-1 stees were
injiiri
exemined Welke or to the :Amite Banking Lepartment and
as I edbeing taker to correct the unsatisfaetory conditions. In eddition,
ttrough
n,
occrsio
Timed r. Morrill, our :xecutive Committee frequently ts.kes
stions,
correspondence and conferences with member Winks seokine credit accomod
urge
end
to cell attention to deneerous trends in tnir condition snd policies
any peremptory
the adoption of renedial measures. 4s, however, v.ve never msde
inuance of
demands upon auch banks for the removal of bad assets or the discont
exclusively
unsound prectices, believine, as we did, thnt such demands belonged
3oerd's
the
in
If,
ioners.
commiss
banking
stet()
to the prerozatives of the
would like
course,
of
we,
us,
is
erroneo
rights
our
opinion, this oonception of
to be correctee.
tering
In thie connection, there is one phsse of our nethod of aeminis
ion
express
en
hrve
to
desire
te 41ce-lihtion function ueon 'which I perticalsrly
copies
furnish
to
e
bank hes never mrde it a practic
A' the Josed's views.
the examined banks, exce)t in a few instPnces
to
reports
rs'
exlmine
of our
policy was
where the examined tesiks specially requested such copies. This
end hes never been
ort:ineted many years eeo by ny pregiseessors in office,
if we furnished
changed. I am informed thet it wes based upon the belief thf-t
tend to disturb
the examined banks a copy of our examiner's re2ort it might
und that et the
underst
I
ties.
euthori
banking
-tate
our relationships with the
opinion among
time our present policy wss sdopted there was e difference of
that it
view
the
held
y
majorit
the
our officers es to its nerits, but thet
d
examine
te
to
reevrts
rs'
examine
would be unwise to forward coplea of our
banks
reserve
other
the
with
cnted
connection I have communi
banks. In
copies of reports
art find thet six of them furnish :number stnte banks with
own examiners,
their
by
mrde
coverini.E exeminAtions or credit inveetientions
our
ovrilners'
live
to
while the other five do not. 'anifestly, if we ere
me-tsr state
certein
re7orts es a basis of discussion in an effort to brine
essets and
their
s to a procper realization of the denerous elements in
bouS,
banks irvolved
policies, we cer•ot expect the effort to succeed unless the
'',
report.
examiner
heve a copy of our
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Federal Reserve Bank of St. Louis
Fevin
set fort', ebove our present svstee, of ccreletir-
Page 4
work in this district, I should sp2recisLe an expression of the 3oard's views
in regard thereto, and any criticisms, instructions or suA„estions thEt you
care to offer vs tc changos t:1-t should be msde in our present practices and
methods.
Yours very truly,
(S) C.
;alsh,
Federel ,ieserve :gent.
COpy,
"411118.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
MEMORANDUM
In his testimony during the Hearings on H.R.
11562 in larch and April 1932, W. S. Elliott, Canton,
Georgia, in re a question by Mr. Brand, "As I understand
you are opposed to the guarantee of bank losses from
failures of banks, to any extent whatever?" stated,
"Well, except as provided by the double liability on
the stockholders and by strict supervision and
restriction that may be thrown around the banking
business under legislative enactment by Congress."
Even though Mr. Elliott's speeches and writings,
which are frequent and extended, generally express
opposition to unification, consolidation of supervision and branch banking, the above quoted statement
seems to indicate that he favors tightening up on
supervision by Federal statutes (unless, of course,
he made these statements at an unguarded
C.E.C.
7-20-36
moment).
r
•
CONFLICT OF REGULATIONS ON SAVINGS DEPOSITS
ISSUED BY BOARD OF GOVERNORS AND F. D. I. C.
On page 14-A of a national bank examiner's report of examination
of National Savings and Trust Company, Washington, D. C. (a non-member
bank), as of August 12, 1936, was listed a number of accounts which
the examiner stated do not conform to requirements of Regulation Q of
Board of Governors.
In a letter dated June 25, 1936 by this bank to the Comptroller,
it was stated that it was their understanding that they were allowed
to carry these savings accounts in accordance with Regulation IV of the
F. D. I. C., although it was understood that guch accounts were in conflict with Regulation Q of the Board of Governors.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
5/24/35
.eaulger
Problems in connection with voting
permits
In connection with lir- Hamlin's request, the following outline is sub-
mitted:
A good many of the problems which we have had in the pt,st are involved
in the cases now being handled and those which will be hrIndled in the future.
idroblems have ariFen in obtaining and analyzing the great mass of data
involved and in deciding policies which should be followed, and it was
necessary to issue limited permits on account of the volume of cases and
work involved, inadequate information, unsatisfactory conditions with respect
to holding companies and subsidiary banks, indefiniteness with respect to
policies, plans for termination in several cases and effect upon the status
by R.F.C. purchtses of stock.
General permits are now being recommended in all cases where current
complete information through examinations and otherwise indicate conditions
to justify.
Some of the more important problems are indicated below:
Holding: company affiliates in many instances are mere shells and their
157
chanceF of meeting the reserve and other reouirements set forth in the
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Federal Reserve Bank of St. Louis
-2-
statutes by 1938 are very remote -- unless their banks make unexpected
profits which are distributed to the holding company affiliates.
This will
protably mean that the Board will be faced with the problem of revoking
general voting permits, provided the law is not chanFed or the status has
not been terminated in the meantime.
Another problem is in connection with the requirement of holding companies adjusting their as:ets to reasonably sound values, based usually
upon reports, for the following reasons:
1.
To determine if capital is impaired.
2.
Necessary adjustments in capital stock to remove
any impairment.
3.
hffect upon the dividend policy of the holding
company affiliate.
4.
True statements to shareholders, depositors of
the subsidiary banks and the public.
The kind of information which holding companies should furnish to the
stockholders and the public raises the question as to whether a MI balance
sheet showing corrected figurec, corrected values or the present requirement
of publishing only certain amounts of pertinent information, such as
the
amount invested in the capital stock of all the banks in the group, the
amount invested in a particular subsidiary bank, etc., such information
being required to be published by each subsidiary member bank rather than
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Federal Reserve Bank of St. Louis
1
-3-
by the holding company.
The matter of adjuFting the carrying value of the
holding company's assets, particularly its subsidiary banks' stocks, offers
a problem of whether or not such stock should be based upon values estimated
by the holding company after allowing for the capitalization of earnings and
control, if any, or values as shown by the books of the subsidiEry banks after
adjustments necessitated by examiners' classifications or market values.
An important problem rises in connectton with the matter of overlapping
authority.
-s to cause their
Should the board only require holding compani,
subsidiary banks to comply with requirements of the Countroller of the Currency
or 6-tate authorities with respect to (a) the elimineition of (1) loFses, (2)
\,/
depreciation (especially Group 2); (b) capital ratios to deuosits; (c
correc-
tions of criticisms relating to (1) management, (2) operating practices,
particularly the more important practices.
Determining the conditions precedent to the issuance of voting permits imam
has offered many problems particularly (a) eliminations of (1) losses, (2)
depreciation in securities (especially Group 2, since the Comptroller of the
Currency ordinarily does not require this elimination after each examination);
(b) manner of elimination -- that is, by (1) chrrge-off, (2) use of valuat'on
reserves (the Comptroller of the Currency o (cts to this manner, as a general
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Federal Reserve Bank of St. Louis
-4-
rule, except with respect to depreciation in banking houses and furniture and
fixtures, but has approved it in a few cases, especially the larger city banks,
upon special reauest and showing by them; (c) intra-group transactions and
relations (1) investments, (2) loans,
3) padding transactions; (d) adjuFtments
in the eliminations by holding company affiliates with respect to (1) carrying
velue of assets, particule-rly subsidiary bank stocks, (2) termination of impair-
ment of capital stock ana necessary adjustments therein, (3) earnings and repair-
ment of capital as they affect dividends in accordance with paragrPph 7 of the
application; ( ) publication
subsidiary rational banks c)
correct balance
sheets affecting particulcrly items in which los:es and depreciation have been
classified, other real estate, banking houses owned by subsidiary organizations
the stock of which is ccrried by subsidiary banks as securitie6 investments;
(f) correct showin{, of capital structure, particularly where debentures hnd
preferred stock have been issued when impairments exist on account of losses
nr waived deposits or preferred stock is retirable at a premium, etc.
The overlapping of responsibility and authority of the Federal 1Leserve
Board with respect to (1) Comptroller of the Currency, (2) State supervisory
authorities, (3) R.F.C.
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Federal Reserve Bank of St. Louis
Many of the problems are of clerical nature or relate to proceLs of obtainin
g
and analyzing pertinent information relating to condition, management,
etc., as
indicated below:
(a) Inadequacy of details of pertinent facts in the applications
concerninE. (1) financial condition, (2) management and (3)
probable effect -- oast, present and future -- upon the member
banks involved;
(b)
Necessity for additional data through satisfactory examinations
and special memoranda prepared by examiners for the agents;
(c)
Difficulties in xxxiximg arranging examinations of various
units in groups (holding company affiliates, national banks,
State member banks, State nonmember banks, insurance ompanies
and various other corporations) with the Comptroller of the
Currency, the F.D.I.C., and the State authorities.
Th
have
their programs and requirements and banks Which are subsidiaries of holding compani s lepresent a small portion of all
banks and examiners cannot neglect others for those in holding
company groups;
(d)
iviany technical phases of the law are new and violbtions are
numerous, although perhaps not intentional.
Mnny problems hpve arisen on account of unsatisfactory conditio
ns with respect
to (a) managemcnt of the holdint, company and their banks in the group anc
existing dolicies which should not be approved by the Board;
(b) holding com
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Federal Reserve Bank of St. Louis
pany affiliates add little or no strength now or in the future to the subsid-
iary banks; (c) important banks in the groups needing additiona1 capiTal
(comparatively few); and (d) major corrections yet to be made affecting slow
ahd doubtful classificEAions in other real estate amounts and large amounts of
loans predicated upon real estate which is potential other real estate.
The program of rehabilitation furnished by the R.F.C. has added problems as
follows:
(a) Temporary termination of the H.C.A. status in several of the
smaller cases where only one or two subsidiary banks are
involved.
(b) Termination of the H.C.A. status with res,Ject to some of the
subsidiary banks in the larger groups by other banks in the
same group where no rehabilitation was necessary.
(In such
cases the question is raised as to what should be done in the
way of requiring cori-ections and eliminations by the banks in
a group which is temporarilzJ removed from the H.C.A. status
but which, for all practical yarposes, will continue to be
controll,d b,y( the holdinL company and will be considered as
being in the group by depositos and the public generally.)
One of the most difficult problems which has confronted this Division is
in connection with obtaining satisfactory data with respect to holding company
affiliates and their subsidiary organizations - both banks and other companies.
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Federal Reserve Bank of St. Louis
-7-
The applications, generally speaking, were entirely unsatisfactory in this
res)ect.
Larly in 1934 it was decided that the board could not act intelliFently
in a great majority of the cases vvithout a considerable amount of aeditional
information End it was decided that such information could be developed and
furnished best through a program of simultneous examinations wherever
practicable.
Accordingly, on l'ebruary 10 (Exam 20) the agents were requested
to arrange simultaneoys examination progrms and forward to this Division reports
and memoranda thereon at the etrli st orEcticable date.
After the agents
covered all unius in the various EA groups and carefully prepared pertinent
facts for use by themselves and their committees in recommendin
the cases,
as outlined in El-am 'KO, the emount of additional information requested by
letters from this Division would have been reduced to a minimum.
Finally, by
the use of examination reoorts and memoranda forwarded by certain of the aLents,
together With the additional information requested by letters, hLs given us
sufficient facts upon which our recommenCations can be based, except in those
few cases where simultaneous examination programs have been arranged for the
next three or four months.
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Federal Reserve Bank of St. Louis
4),
Re:
Cbartering Beaks
The chartering of banking institutions is not is itself, Pram a
practical standpoint, so terribly iwportant. The more important phase
is in connecton with the regulation and supervision o' bank operations.
There is one practical advantage in centering Chartering of banks in
one body; namely, that it is easier to prevent than to cure a badly'
situation created because banks were chartered where there was no
economic necessity and where the economic needs of the community cauld
have been better served by a branch or agency of a larger and stronger
bank. There are other atvant%ges of eliminating state Chartering which
may be regarded by a great many as largely theoretical. If the states
rere to be permitted to continue chartertng a large number of small
banking institutions and the Federal government were resronsible for
keeping such institutions in saund Shape and under sound alanagement,
there might be a tendency for the Federal government to alibi for any
later troubles in the small banks, taking the position that had the
charter power been r,roperly exercised the development of branch banking
would have been rorwarded.
Charters for many private corporations are obtained by certain
per,9ons, usually incluling ane or more lawyers, who are not directly
identified to any great extent at least with the later operations of
the corporation. /n many eases the incoporatore are more or less
professional incorporators.
Although such practices are not common in
b$1nking circles, there appears to be nothing to prevent the spread of
such practices to the banking field. Indeed, it is now common for
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Federal Reserve Bank of St. Louis
certain types or groups of persons to purchase control of banks from the
original incorporators and there appears nothing in the statutes at the
present to require that the ner purchasers be sound and experienced bankers
as it is presumed would be the case in chartering a new bank If paver to
do so were vested entirely in a Federal body.
The states charter many types of corporations such as railroads and
bus lines, communications, airlines, utilities, securities, etc., which
are subject to aore or less minute regulation and supervision by the
Federal government *Idle subject to practically no regalation or supervision by the state issuing the charter.
More receatly the Federal government hns tkken upon itself the
responsibility of regulating and supervising balk holding companies Whieh
had been dhartered by variaus states, principally Delaware and New Jersey.
In most of these cases the states have exercised aboolmtely no powers of
regulation or supervision and it does not appear that the states have
authority to do so for any appreciable extent.
Wirther, for s:-,me time the Federal government has hn-1 duties and
responsibilities in connection with the regulation of supervision of
member banks chartered by states. In this ease, however, the states are
charged with responsibility for regulation and supervision,
It would appear that if the machinery were to be revamped to place
upon a Federal banking body complete authority to regulate and supervise
in all aspects banks whidh are chartered by the states, practically
superseding the present authority of the state supervisory bodies, the
situation would not be greatly different from that which exists with
respect to non-banking corporations, and of eaurse any Federal statute
providing such machinery should not attempt to interfere with the
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Federal Reserve Bank of St. Louis
- 3supervisory powers of the states chartering such banks. It may not be
assumed that all of the states would readily assent to relinquishing all
anspervirory powers but if the problem could be handled through Federal
Deposit Insurance and the Federal Reserve System by furnishing protection
and services without directly charging for examinations, letting the
whole system absorb the examination expenses, it is 7ossible that the
state chartered banks would take it upon themselves to bring the necessary pressure to bear in their respective states to practically eliminate
examinations aad supervision by state banking boards.
There could be developed a tremendous appeal to the banks in this
connection by cutting down the number of examinations, simplifying the
regulations, decentralizing out of Washington the administration, and
eliminating direct examination charges. It would seem that such program
would appeal to the smaller banks to a greater extent than to the large
banks. It is believed such a program could be sold to the large banks by
emphasizing the necessity for the F. D. I. C. to be operated under sound
principles and that if the beaks and the country are uniformly and carefully supervised, the chances of losses to the Corporation and breakdown
of the System would be lessened immensely. It is believed that the
principle of insured deposits would be much leas objectilnable to the
better bankers if the F. D. I. C. were consolidated with the Federal Reserve System and full supervisory powers were granted. If the smaller
Insurance,
bankers of the country are sold on the idea of Federal Deposit
such
then no serious objections should be expected from that saurce to
exam:ntion
a coasolidation program if it is arranged to eliminate the
costs, audits lyr reports, detailed regulations, etc., etc.
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Federal Reserve Bank of St. Louis
411
NOV 4- SW
MEMORANDUM
ToS
Mr. Carson
Fromm
Mr. Jones
Subject:
Case study of First National of
Elmira Corporation, Elmira, N.I.
I. ORIGIN. HISTORY. AND FURPOSES OF ORGANIZATION.
1. Misl.ory of (imp or H91diama COMD*W.
1928
Organised
June
Under
Laws of the State of hew York
As
The Second National of Elmira Corporation.
Stock wcs issmed hS a dividend declared on
the stock of The Second National Bank of
Elmira.
Reorganised on -
August 51, 1929
As
First National of Elmira Corporatioa
Increase of stock
Sold for cash through issuance of rights
to stockholders.
7,
As n part of this reorganisation The Second National Bank of
Elmira merged with The Merchants National Bank and Trust Company of
Elmira, the merged bank operating under the Charter of the first named
bank and changing its name to First National Bank & Trust Company of
Elmira. All the capital stock of the holding company was trusteed for
the benefit of stoCkholders of this bank and the stock certificates of
the bank carried an endorsement to that effect.
This endorsement was
removed in January, 1954, and separate certificates were issued to stoCkholders of the bank for their interest in the holding company. This
action was for the purpose of effecting a legal separation of this bank
from the holding company in order that First National Bank & Trust Com,
pany would not be
considered a holding company affiliate of the amber
banks in this group. Actually, however, this bank is the parent bank
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Federal Reserve Bank of St. Louis
•
of the group.
Two former subsidiary banks of the holding company were
placed in liquidation during 1954 and their deposit liabilities and certain of their assets were taken over by the parent bank which placed
branches in the former locfttions of these two institutions.
The parent bank has a third branch which was established in
the loc&tion of the old Merchants National Bank at the time of the reorganisation in 1929. There was no indication in the files of any plans
to convert any of the remaining mubsidiary banks into branches of that
bank. All three of the present mobaidiary banks of the holding company
are in the banking district within which the parent bank is permitted by
New /ork law to establish branches.
However, there is another bank in
the same town with one of these banks which would be au obstacle to this
bank's becoming a branch of the parent bank in view of a State law prohibiting the establishment of a
branch
by an outside bank in a community
wherein there is already located one or more bank*.
2
. ArtiUMites
90,t $91ated OrialuisatiAW
5 National banks (including the parent bank)
1 Stnto amber tank
3. Omitted.
4. Purpose of Grogp or ficading CompaRy.
The holding coapany as originally organised had for its purpose
the acquisition of control of
other banks in the Elairs area which
could be converted into a branch Waking gystem of the parent bank and
also to act as a securities affiliate for this bank.
The holding company
has broad powers to engage in various types of business out its activities
appear to be confined to holding the stocks of subsidiary banks and to
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Federal Reserve Bank of St. Louis
•
-5liquidating other assets which it holds.
II.
ORGANIZATION OF BOLDING OOMPANT.
1. TXpe of Holding Cegany.
First National of Elmira Corporation belongs in that type of
holding company designed to hold stock of sdbsidiary banks for the benefit
of the pareat bank where the ownership of the parent bank and the holding
Issipmmr is practically identical.
CutAil Stricture.
Class
_
Par value
Authorised
Outstanding (Including
trlasury stock)
Stock in treasury
Common
$1 per dhare
49,500 ahares
49,500 shares
429 shares
3. Method of Aquirigg_2124_2LagaLL pad Folic,' es to Amount 0 HoP.
Apparently cash was paid for the stock acquired of subsidiary
LAnks.
AS the holding ammo, ems oily 50 of the stock of one bank and
only slightly more than 510 of the stock of the other tvo subsidiary banks,
it Lppears that it is the policy of the holding company te own only sufficient stock to insure control.
4. dethod qf IstliblahAng Sant&
Only existing banks were aoquired.
5. hon-bankW Aff4iates--TyRes and_hasaiu•
None.
6. Statue
to Votimaglerm&t.
A general voting permit was issued to the holding oonpany on
E3hember 18, 19155, after it hod 4ised the standard general voting permit
agreement.
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Federal Reserve Bank of St. Louis
The holdimg
was required to obtain this perait under
40411,
one of the semditions a assimership et the *tete member beak in this
group which was admitted tie esUbership In IWM.
II.
RELATIOfi TO SLBSIDIAMI NIMES.
1-
2usgaall_002__EarAi_naLlsakz,
None.
2. Utent and *star, Qf Maw-went of Subsidiary Banks.
,f
a. Amditine aad sanervision--tYPe/control ana coordiqatiqp.
Apparently the parent 4eak keeps informed of tne affaira
af the holding company and the subsidiary banks but if so. it is done
through unofficial swans.
A director of the subsidiary State zember
bank is chairman of the board of the parent bank and another director
is vice president and director lf the holding company.
This constitutes
the entire interlockings of officers awl directors between units in this
group.
At the tine of the divorce of the parent beak from the holding
company, through distribution of the holding oonpany stock
the bank's
shareholders, all directors and officers of the parent bank were removed
from official connection with the holding conpany
WIG
were replaced by
three directors and officers who are apparently little more than trustees
of the assets of the holding coapany.
7he examinersof the subsidiary banks apparently noticeino
interference in their affairs Or either the holding company or the los-Pent
hank.
b. Per:sonata ,and perpoismal_policies.
Each bank appears to be independent in this regard althmuilk
it is possible that they follow policies formulated bly tb• wont bloke
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Federal Reserve Bank of St. Louis
c.
Ty.
)es of services rendered to iva'tsidisipy bankim
44w
(1) qvisr ordlnory conditioqs.
Apparently the parent bask performs the usual services
of a correspondent.
(2)
Uader the ellorgemy immilijimmofjp5-U.
During 19F4, the holding eompeny assisted in the
strengthening of two of the subsidiary banks by the purchase of additional
common stock.
d.
sa
n Method
There was no evidence of any mennienset foes being paid to
eithcr Vle holding company or the parent tanks
Dividends paid by the sub-
sidiary banks to the holding oompany have tn gest ease been in excess of
the net income of sudh banks but it does not appear that any of the subsidiary banks were planed in & serious financial condition as a result
thereof, nor does it appear that any supervisor:. authority has requested
a discontinuance of the peament of dividends.
e. Othu stirviets.
None
Cont
t
to SubsIdiarY Bankal
f
ion
It appears that the holding company, with the .!'..ssistance of the
parent bank, has hsd aufficient financial strength
to give whatever assis-
tance was necessary to the subsidiary banks.
4+
GOITAX ;MOW
There is 'owe question as to whether the results of operations
od management of tact parent bank is altogether satisfactory.
The report
of examination of the vrent bank as of June 17, 19155, inncated a large
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Federal Reserve Bank of St. Louis
number of objectionable assets in the bank and commented on the need. for
more conservative Methods and sounder policies concerning salaries, loans
to directors and dividend payments.
Surplus and undivided profits of
tits bank had declined to t972,000 since 1950 through net losses of t279,000
and dividends of t695,000.
The files contain no more recent information
as to ahether the situation in this benk hos improved.
The bank apparently
nag had a rathr good reputation and it appears that its etanding at the
head of this group has been beneficial to the subsidiary banks of the
holding oompany.
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Federal Reserve Bank of St. Louis
MEMORANDUM
Subject:
Mr. Carson
rot
Case study of First Bank Stock
Corporation.
From: Mr. Jones.
I. JRIGINJ HISTUR1. AND ARMS OF OR3AMIZATIOh.
1112,14,01 CQMIAMY.
1. illateu of_ Groun
Imierperated
-
April 1, 19k9
-
Lamm of the State of Delaware
'trot Bank Stock Investment Company
Nom changed on August 26, 19k9, to First
As
Bank Stock Corporation)
•
/11
The respective interests oontrolling rhe First
National Donk of St. Paul and First **timid
Bauk and Trust Company of Minneapolis. A majority
of the stock of the holding company was issued in
exchange for noldiugoof stockholderu of these t*o
banks.
t.
Se national beaks
1 State member bank
State nonmember banks
lanagemant eonpany
Industrial finance Cempmmy
Miscellamoems companies, holding reel estate, liquidating
assets, etc.
12 Aiscellermous ,Ionpanies either inactive or in liquidation.
17
1
1
5
3, Omitted.
4.. Pump at gawp
r
OVUM•
The First Bank Stook Oorl:orl_tion *as organized to meet th,1
competition given W the two parent banks through the organisation of
Las Northwest Bauoorporation dhain.
The holding comi,any has very general
and broad powers but its activities appoar to be confined to holding
stocks of subaidiaxy banks and affiliated oompanies.
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Federal Reserve Bank of St. Louis
-2-
II.
WziA4A2Allagi4iiiiiiiiaiumNix
I. TYD* of Holding Cowan,The Firut Bunk Stock Corporation it of tho
CJ,,,Any
holding
type.
Ca.444,14rukcjare
Authorised
4,0J0,0/.) shares
OutstLading
4,125,811
(including Ap7(J5 4/5
shares in Tret.sury)
Par value 0.0
Par value of capital stock was redwood from 425 to Oa on
leLruary 16, lvA (us af December 31, 1935), at shish tine
write-doon
of approximately 4,66,t1)000)0 W&V tuAen in stooks of subsidiary organisations aad charged to surplus.
b,
likaaLALLrialeLla6s4.9.1jmatiLsold
64) tO AAPWak tO
Control of the first 17 bit;;As actilired by the Firet Bank
&took Corporation was purchased for caat but it appear* that moat of the
ataer subsic,lary banxs, twit/ding the 2 Aey banics, and
nonbanking cotes
panies sere acq,Imd through exibanse of stook of the bolding sempan7
for that of tfte banks accitired.
The policy of tha aolding company appears to be to obtain as
etock
muLth/o.0 the subsidiary banks as pokwable throw* excnangs of stook und
to try to Awep the former owners interested ia the management amd
operati,41
tae bizik Viro'
stackholflert, al
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Federal Reserve Bank of St. Louis
finansial interest by virtue ef being
auldiaz company*
4. Kikti.4s4k of istAblisAnit Bffinr.A
Amparently in all ciuies existing banks ware aequired. Your
41461111
banks in the State of Michigan were merged into a national bank in the
locatiom
at ose
bankvith branches in the other three towns. In several
instance* asthma' banks were converted into State banks (to take adverttage ofIxemrespital requirements of State laws).
5. lbadmelang Affiliates—Woes and Purposes.
a. DegAlhat
securitilts.
Sone.
b. Trot operatiopg.
None.
c. Other actkvities.
First Service Corporation,
Minneapolis, Minnesota
A service corporation for country
subsidiaries.
First Bancrodit Corporation,
St. Paulo Minnesota
kindustrial finance cookAny gam*
im securing au additional outlet
for fUnds of banks in this group,
principally in /*ILA. loons,. it
does a general finance Wane's,
including the financing of 60 is.
sumacs, promisee= the installment
plat.
Leasehold Investment Company,
St, Paul, Minnesota
A holding company for building leases.
lierling Coapany,
Jamestown, horth Dakota
A real estate hvloinE conpamy.
Merchants Desk Building Company,
at. rani, Miamesota
A holding esepany for stocks of monbankimg ommpenies and *leo li-,uidator
of assets tam over from banks.
*sett' Madame' Company,
Austia. limmeeete
Am insurance aging and liquidetes assets
taken over fres banks.
First Minnow*lis Coz17.any,
Minneapolis,
Former securities affiliate now liqmidating its emote and those taken over
from banks.
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Federal Reserve Bank of St. Louis
••••
2* IniiiiiiiikliaLALIMMINWOliariatrilauka*
a. hatiligAINUMMIAMIPAP
Auditors of the key banks and of the service corporfttion mnke
periodicel wxaminations or the units in their respecttve jurisdictionse
The bolding compeny coordinates the supervision through its executive
officers. Two of its aenior offissrs are the dresidents of the key bunks
es4 the gresident of the holding sanpeasy me formerly 7resident of the
aliebsopelis ksy bask*
t, tormaiajogLamingiaMilia.
Ito two kir banks Medi* parson's' matters it their ova megrim
mittens sod the city banks in their prisdictien. The service corporatism
repos,* OR perennial matters in the comstry
Seeeessry °Magee and
corrections appear to be made tty the holding oempeny.,
Se
TIMOR a sel7i911. rmilitr90
)lidicusiksicr
(2
IP 20401,XLINVW
iianctitioxi•
Besides periodieal emsmisatLemsef all subsidiary banks,
axeept
the two key bwnkso there ere finished sash services ee instal-
lEtions of accounting systems, Jalousie tem serviee, purchasing and selling
g
securities and commercial paper (not at a profit, bosever), fUrnishin
eredit and statistical reports, procuring issuranoe coverage, praparing
advertising and publicity, pus-Shaming sopplies, obtaining lega advice
and smosel in cozzection with ta impertsat litigation, and in general
with
overlesking the affairs of the mebeldiar, Maks and assisting them
suggestions regarding loans, investment csd general operations.
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Federal Reserve Bank of St. Louis
4nder tn. essraepor
riag 195! and 1934, the holding snow mode emstri-
-6in
butioas totalink, i8,938,000 tc enbcidiary bapks, closed or placed
tance
liquidation & number of unprofitable banks and rendered other assis
the
such as strengthening managelaent, securiut, prefarrea stock aid tly
n.F.C., giving advice, etc.
d. CcommiDatixl AeA1400--ealilluks
or
subadiariep.
Service sed memagement fees -Ire collecte(1
nonbanking companies.
Me banks and
These are all considered reasonable in sommaiw
g
Few of the banks except the two key bhnks have been payin
key banks jdraatically
dividends. Dividends and service fees from the two
proper in view
snpport the holding company,which is considered qntirely
ed for the benefit
of the ftv:t that the hi,;ldin4. company group was ort;:,nih
of these two banks.
loRS
3. Results and Gontributj.ons of Holdir4: Compunx or GrouD OPqat
to Subsidiary Banks.
diary
The holding company has made contributions to the subsi
been a severe strain
banks thenever it has been necessary which has not
an the reeporees of the holding company.
4*
key banks.
licked as it is hy the financial strength of the two
g financial condithis holdint; company group Is, ano has been, in a stron
tion.
were
Rather high prices were paid for tile subsidiary banks that
y in stock of the
acquirad, but inasmuch as payment was made principall
of stocks of subsidiary
holding compnny, tbe resulting shrinkage in value
of the holding company
bmaks is merely reflected in a Shrinkage in value
of the holding
stock. This write-down was actually Laken on the books
subsidiaries and
cosapany ,,Lien it wrote down tae value of stocks of
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Federal Reserve Bank of St. Louis
04.
reduced the par wave of its cm ,toeits,
Ma financial 3trength of this
group has app!trently hose vtr7 benceicial to the smaller and country
units in the group.
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Federal Reserve Bank of St. Louis
t
MENORANDON
Tos
Mr. Carson
From
Subjects
Mr. Jones.
Gams gird, of 4henmst Assocastles" mod nhelletional
Shama an* of Doeten*, both
of postsfte ilmamadowetto.
I. ORIGIN, HUMOR!, AND PORK= OF OIGABIZA2101.
1. Histo*, of Wasp 9r itactiaz Comomy•
WAIMALAWILLibMai.
aillil-AgARGUAK
JrguniIed
April 7, 1864
(Conversion of Mats benk
corporeited in Maesn4busetts on
May 6, 19360
Kay
Under
National Bank Act
Laws of illsoseehnnette
07
Individuals
National Sbeemst Mak
(3tock imaged ems reserved for stookholders,
officers end "friends"
of this bunk.)
a, 1928
2. AffilLstsifind Otbsr Related OrgonisnWei,
3 National banks (not including llattaial Bbsanut Bank)
1 State nemher bank
3 State asonember banks
1 leak building holding 011001,
1 Real estate holding sompon,
1 Investment trust (other then Shenmet Association)
1 investment comemi in lilnidation
1 Sow assimir
1 Financial serviso corporation
3, Omitted*
4. Peppigle
Gpalo 9riloldlat_Conomy,
'Me National Shavout Bank has all powers of a national bunk
including trust peners. Its control of the other units in this group is
for the purpose of engaging in activities which it is prohibited from
doing by la* or which it is not oassidered desirable for the bank itself to engage in. It is the parent organisation of this group, having
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Federal Reserve Bank of St. Louis
actual, if not lepel,control
of all units in LLIC
t:i."014,J
hirA
the po
:Able exceptieh et me State nakmoswer bank, we imurose bigot Ossipsar.
It olvya5 les. th,
t majority of the stuck of
conuectima vitt thia bank is rogawded only ae
tnvestoent,
steak eamed hawkag boss the result of liquidation of a dobt.
aimmat Adraseiattos has broad powers to invest in securities
sad real *stet,. Its trustees ore allege. practically uncontrolled dia,
area** ia the making of investmento, The association was organisk
for tho dual ;tarp**, of opersting ea Mk invw,
'
3ontrol of independent banks for the benefit oi
LI-44,1. ALIA. Lo amluirc
:.3ilaanut Bask
because of provisiams of law not allowing the bank to establish brenehos
aued iowItiona.
ORWIRD,ATIOh JF ROLDING ODKPAN/.
leasuCjAldiagagaRfat.
The National Bhaummt Bank is a bolas& oanpany of this group
only by 'virtue of provisions in various trust agreannats, etc..
it controls all organisations in the grau? even though it does met
actually bold title to the controlling stock ia any of the units of
the grasps
The only unit in the group of which the National Shawmut Bank
owns stock is the Melrose Trust Company wherein the Shawmut Balk alaims
that it does not exert 'control.
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Federal Reserve Bank of St. Louis
Shawmut Aseociattan is an investment trust type of holding
lath no ismagemmit or direction of the beaks is the group.
410
2. CaRXtal LAMM,
JIMIIIMAIRMINWS
MOM/test
Cletstemdiag (exclusive
of toresimer aheces)
In treasury
Par value
1100•000 shares
4000,000
4100.000
400,000
!,622
aloe - trustees have
power to *tote
capitol and hove
given stat.d value
of $5,000000 to
400,00m shares
outstanding*
SLUM
lighasf AcnctirisitittimiLIRf
per share
and/Ng/sr 4, V3 Amount to _30/4,
The stock of the Melrose Trust Company waled Isy Stational Shammut
Sank r,,sulted from ttft liquidation of a debt*
Shosueet AssocLtion acquired Isctrol of one benlr through as exchange
of shares of Shmount A0400010411R tOr otoOk of that bank &r.' obtained eentr,,lling
interest in its other five beam spestrently toy purchase
ovners*
Etack free fOrmer
Apparently the %meat policy is to acquire only c suffleient amount
of atock to conotitute oontrol sand to allow the minority stockholders to hole
a substantial interest and have a voice in the asn*gement*
4.
billigisialur ebuidiguarki,
This group was formed through sequisition of esietin47 banks*
So bitalligkii AcrLUAU* °' ?llama
11.
211SUBLALiendailie
The tug investment trust',
givupp Mhommmt Aeseetaties
enti Chassid Bonk Investment Trutt, dee/ ts SeSuritiee only for their
oon Amount and for tnvestment purposes*
The invrstment company in lioul.
dation, %spout Corporation, tat formerly the securities affiliate of
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Federal Reserve Bank of St. Louis
.010,
National (hawmut Beak, but has diseentinued its securities business and
is now in liquidation,
luidaistaMsop pane*
ce gMiOr
Winchester national Sank Mmilding Trust,
Winchester, Kassasbusetts
Bingham Trust Aisoeiation,
Nimgban, Nassashasetto
.0was beak building of a
national teak in tbe group*
-Holds title to ause reel
estate of a State nonnelber
bank in the group.
Caribbean Seger Oempsob
Boston, Igassashmsetts.
-Controlling stock in this
compann which is smogs&
in the production of wirer
with properties in Cuba,
was aequired by Shauent
Corporation to protect
National Shaamat laskts
position as a ereditor.
Devonshire rinanciel ::- ervice Corporation,
Poston, dassachusetts
...Owned by dkammut Corporation,
tbis organisation is
a part of tile credit and
collection ispartaant of
National Shammnt Beak,
handling repossossed automobiles alai satairreat lien
notes.
44 Sena aa to Vetlag ?mat.
A gamma" voting permit was issued to etch holding florpror
affiliate on July 30„ 1956. The Shawmut group raised a great ammber of
objections to warioue requirements of the Board in eonnection with the
issuance of both limited and general permita. The National Shammut
Bask objected to the elimination
f" group 2 depreciation rrom its
mete as preseribed in a limited voting permit condition. The Board
subsequently raised this requirement
from national banks in all
holding company groups. An exteneon of time was also given to eevpral
of Bhawout Assosiatisals basks to Niko trartais write-offs. Both holding
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Federal Reserve Bank of St. Louis
-5ompany affiliates claimed that they should not be dPemed "holding company
affiliates" but the Board decided Jtherwine.
They objpctod to the condi-
tions specified by the standard general voting t)ermit conditions, claiming
that the procedure *us in violation of sound accounting principles.
The
Aettar -Aas not pressed, however, after the Board asked for particulars as
to such charge. They asked for other modifications of the standar° general
voting ?emit oonditions and the Board authorised slight changes in the
wording of tneir agreement. Prior to the execution of the general voting
permit agreemeste
Motional amount Doak asked and receivor3 assurance
that such *greenest mold sot be binding upon the National Sha4mut Bank
after it hod °eased too be a !bolding oempeny affiliate° of the subsidiary
member banks, and also that proposed, changes to the truat agremaent under
xhich Sharmut Association was organised woulo terminate
the holding cos,-
pany affiliate status of the bank.
III.
RELATION TO SUBSIDIARY BANKS.
`171191117454011
Serv
&Wm,
The National &await Bank conducts all relations vith the other
Ilenks in t:
group.
At least one officer or director of each bank in the
. l'oup is an officer or director of the parent beak.
k.
Extent and hature of Aunm7ement of Staffildilly Beaks.
a.
Auditiag_tad sunervlsion.
An officer of the National Shawmut Bonk visite eoch bank in
the group (except apparently the Aelrose Trust Compaq) once a week,
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Federal Reserve Bank of St. Louis
rit.v or two going over lefts, etc.
b. Pe„Jamel
Lirectora reprpsentiub minority interests sonstitute a majority
we".
of the Board of each of the smaller beSks of the group* but it appears
that Mitiosel Shama Bask has a straw emssgh Influesce to iietersine
policies grid make necessary corrections*
c*
TYpips of serviosa rqpctortft_a_gagisii,str_lniw
The National Shemin Busk famish's', lavestmsat service an6
menagememt oommsel to all banks in the peep except apperestly the Melrose
Trost Goapesy*
The &Mood Shalmst Balk assisted the sebsidiary banks
during the basking crisis principally three" advice end assistance of
effieers of this bank*
A senior vice prominent of the Matiosal Shal:ast
. group
bask gave considerable assistance to one of the matismaL banks ia tik:
*lab las badly in need of closer sapervlsimm et its loam policies*
d.
MIlle the subsidiary bulks paid dividends in moose of earnings
sm intrioss egmesiess, there was no mvidomcs of the dividends being Iftwarrouted, The national 3hawmut Bank charges subsidiary baa.ks fur actual
services and sspgiss furnished. There are no management foes paid to
either holding compopy offiliste unless the assessment for the salary of
vepresantative of the Rational Sbasest Samist mho visits Lae subsidiary
beaker Isom be oonsidsred a managemost fee*
e. 21114wAerviguip
Jtcparemtly the National Shama bask furaithips legal oomnsel,
benefits of cooperative bwia‘ of aapplies, advertising, etc* to the
other banks in the group (with the possible exception of the Melrose
Trust Company)e
3*
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Federal Reserve Bank of St. Louis
Biaiiiii...tiO—CitnVibilti9n$ 01* tioldlIALlikanY
to Subitigkary loan,
OrOuTk Oneratitaii
During the banking crisis, a subordinated deposit of spi.roxisstely
-7-
A22,000 vas pissed in one of the beaks by %smut Aeseciatiou and later
tibia anount was convert.) into stock.
lalLAJOINISW
The Sbeemut name haa probably bona et oonsiderable benefit
to
the subsidiary bank*, especially during lb* bankiag orieis. The
nomagenect of the Notional Shawmut Bmuk bast eacouraged sound tolicies
in tie mnbsidiary baiAks
ficial to tho banks.
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Lho saTiliation appears to have boon bent,-
Referendum No. 63 on the Report of
the Special Committee on Banking, Part I
Chamber of Commerce of the U. S. It.
December 9, 1932
Committee Report
The regrettable record of the past ten years (September 1, 1922, to
August 31, 1932, inclusive) of the suspension of 9,553 banks in the United
States, 4,832 of these suspensions having occurred since the beginning of
the acute depression, clearly indicates the persistence of the need of
providing better protection for depositors' funds. The gravity of this
problem is reflected in numerous ways. The actual losses to depositors
and others, the disturbing distrust of banks and the resultant contraction
of credit have produced far-reaching injuries. Strong depositaries are an
imperative need. This necessity has been foremost in the Committee's considerations.
No selfish interest of stockholder or bank officer, no narrow view of
what constitutes the credit requirements of business, and no popular prejudice must be permitted to delay such adjustments in our banking structure
and methods as will protect the savings and other deposits of our people.
Effective means must be found of fostering the general development of more
strong institutions under the supervision of men of proved integrity and
ability.
Banking fundamentals and not surface symptoms or superficialities are
the true key to improvement. Neither law nor public supervision c9.n be depended upon to correct all abuses in banking, prevent bank failures, or save
the community from personal or business mishaps. Good banks are mainly the
products of properly equipped, far-seeing men of high professional standards
with a keen sense of public interest.
,„
(The human element in banking is a principal factor. Capacity for good
management and improved efficiency of bank executives cannot be supplied by
law. Indeed, rigid prescription of statutes that wauld seek to insure
automatic safeguards presents the danger that some bankers may be encouraged
to feel that practices not definitely prohibited are to be defended solely
because they are legally permissible. The adoption of any public controls
of banking, that are devised upon an assumption that the lowest standards of
practice will prevail, can cause injuries as surely as failure to discountenance practices admittedly bad.>
The business of banking is far too important to be subjected to partisan
strife or longer to be an open field of adventure for the poorly equipped.
The development of sound management of banks is more a charge upon business
and professional associations, and upon conservative banking and business
leaders, than it is upon legislative or administrative agencies.
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Federal Reserve Bank of St. Louis
(13
- 2* * * * * * Similarly, past mistakes in banking are not a true measure
of possible future excesses. Restrictions aimed narrowly at preventing a
repetition of recent mistakes must avoid hampering the development of banking
functions which are legitimate and desirable in themselves when undertaken
with good judgment and wide experience.
There is no disposition to discharge bankers of such blame as is properly
theirs for permitting credit to find unsound uses. It must be realized,
nevertheless, that an individual bank, or banks as a business group, may not
be able to avoid the impairment of the general quality of bank loans and investments and other mAladjustments of bank credit which may result, for
instance, from an excessive total supply of credit proceeding from such
factors as the operations of the reserve banks or from heavy influxes of gold.
When banks are not in a position to escape an excessive supply of credit, it
is almost impossible for them as competitive institutions to prevent this
credit from working out in channels which may prove to be unnavigable. It
would be a mistake to assume that, in order to avoid future investment abuses,
for instance, we need only to lay down a number of rul,,s or to enact statutes
restricting the type or quantity of security operations in which banks may
engage.
The reserve banks make the actual credit contacts with the member banks,
involving such knowledge of their practical operations as cannot be possessed
by the Board in Washington. Greater centralization of power in the Federal
Reserve Board in the control of relationships between the reserve banks and
the member banks presents obvious dangers of weakening district autonomy and
of subjecting member banks to unnecessary interferences by a small, far removed, politically appointed group of men who are not possessed of firsthand knorledge of district situations and of the conditions and operations
of the member banks.
We recognize there is a belief that reserve authorities have not been
sufficiently rigorous at times in denying accommodation to some member banks,
especially those which made loans that were used in speculative transactions
when the banks themselves were borrowing from the reserve banks.
In making its recommendation the Committee is conscious that there
might be danger that the general credit situation, which would lead to the
exercise by a reserve bank of such power of direct action, would not be the
consequence of mistaken or improper uses of credit by individual banks.
Experience has shown that reserve officials through their control of open
market or rediscount activities may be largely, if not mainly, responsible
for an unwieldy or unnecessary general volume of credit.
Their action in the direct control of reserve bank operation, beyond
the practical determination of member banks, might be inconsistent with the
"maintenance of sound credit conditions." Such an unwieldy or unnecessary
general volume of credit inevitably would affect the quality as well as the
volume of member banks loans. Reserve authorities, therefore, after being
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Federal Reserve Bank of St. Louis
3granted the additional power proposed, should be zealous to avoid the unfortunate condition that would result if they are not careful in regard to
their obligation to avoid an excessive volume of reserve credit. A member
bank, or all the member banks, should not be subjected to numerous unnecessary
regulations, restrictions and arbitrary influences designed to correct a condition for which it or they cannot be held primarily responsible.
It would be unfortunate to reduce the attractiveness of membership in
the system for many large institutions, which, because of the practical importance of state laws governing trust operations or savings banking, prefer
or feel compelled to conduct such businesses under state charter. Membership
in the system for an institution engaged almost entirely in savings or trust
business, or both in combination, would have no great practical value for it
or for the system itself. In fact the expense and limitations would preclude
the membership of many desirable banks.
Our position is in direct opposition to a recent proposal (sections 5
and 16 of Glass bill) that after a period of three years a stock certificate
of a member bank should not be permitted to represent stock of any other
corporation except a member bank and the ownership, sale or transfer of sit&
certificate should not be conditioned upon the transfer of stock in any other
corporation except a member bank. We perceive no public benefit or other
merit in this proposal as it affects the affiliation of non-member banks with
member banks.
We believe that the banking relationships between a member bank and its
affiliated nonmember bank should be subject to regulations of federal banking
authorities, including, where necessary, their right to require concurrent
examination of both banks. While acceptance by federal authorities of the
state examination of the nonmember bank should be permitted, there should be
agreement required that the affiliate shall be subject to federal examination
unless the state examination is made concurrently with federal examination
of the member bank.
The Committee recommends that:
Subject to the regulation of federal banking authorities, a
member bank of the reserve system should be permitted to maintain
corporate affiliation with a company organized to transact the
business of originating, buying and selling conservative investment securities.
Public regulation of a security affiliate of a member bank
should prohibit such affiliate from offering to the public in its
own name shares of its stock or the stock of any affiliated institution and should provide precise limitations upon the amount
and character of any loans or credit advances made by the member
bank to such affiliate.
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Federal Reserve Bank of St. Louis
-4It is recognized that some abuses have attended the establishment and
operation of security affiliates. The Committee believes, however, that this
situation is susceptible of correction without the abolition of the affiliates.
* * * * * * * Under proper examination and regulation the security affiliate of a bank can be prevented from visiting undue risk or injury upon
the capital funds or deposits of a bank. With such segregation of risk the
business of trading in conservative securities can be a source of strength
to a bank and can be conducted in the public interest more favorably than
under unregulated corporations or partnerships.
As suggested, the Committee, in opposing the abolition of the security
affiliates of member banks of the federal reserve system, favors complete
and rigorous examinations of such affiliates, limitations upon their operations and restrictions upon the credit dealings between them and the banks
with which they are affiliated.
The Committee recommends that:
The right of national banks and state member banks to conduct transactions in conservative investment securities on their
own account and for the account of others should be maintained.
Your Committee holds that the exclusion of the Secretary of the Treasury
from the Board is desirable because the presence of an official who ranks so
high in party councils tends to overshadow the Board, with the consequence
that membership on the Board is made less attractive than it would otherwise
be. FUrthermore, it must be remembered that the Treasury is a frequent
borrower and is consequently inclined to attach major importance, in the decisions of this body, to the maintenance of easy conditions in the money
market so as to facilitate the placement of goverament loans at minimum
rates. There may be times when a reserve policy favorable to the maintenance
of low interest charges in government borrowings may be of far less importance
than a policy which would induce a more conservative use of credit by the
business community.
The Committee recommends that:
A carefully restricted grant of power should be given to
federal banking authorities to remove for cause an officer or
director of a member bank found responsible, after suitable
hearings, for continued unsafe or unsound banking practices.
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While it is recognized that banking security is not fundamentally a
matter of size, and that there are strong small banks, as well as strong
large banks, a study or the solvency records of different classes of banks
supports the opinion that there is a direct relationship between the size
of a bank, its earnings, and the safety of its deposits.
If there is to be legal recognition and public supervision of group
banking as well as more liberal grants of power in the establishment of
branch banks, it becomes necessary to require a larger capital structure
for banks. As has been stated, the present need is not for more banks but
for stronger banks with ability to serve wider areas than was possible for
many of the banks that have gone out of business with detriment to their
communities, depositors, and shareholders.
It is especially important that the banks that are subject to the
supervision of federal authorities, namely, the national banks and the
state member banks of the reserve system should have adequate capital
structures. The federal government should set a standard in the case of
these banks that would recognize the public desire for the maintenance of
adequate capital and of good management. * * * *
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Federal Reserve Bank of St. Louis
*** * ****
•
Referendum No. 63 on the Report of
the Special Committee on ',finking, Part TI
Chamber of Commpree or the D. S. A.
December 9, 1932
Committee Report
•
Br4000 Santim
The Committee presents a number of recommendations with regard te tram*
bankingobleh it consider* to be ane of the Tost important subjeets treated
in its report. The recommendations, followed as a group by supportimg statements, are:
(1) ilational banks, unlimited by restriotions of state laws, Should be
permitted by federal statute to establish statewide bramekes, provided that
im any state contimuinF to prohibit statewide brunches of state basks the
federAl statute Should not become effective for a r.eriod of stx months after
its enaotment,
(P) Pay grant of brood' behhimg peeere to national banks should be given
alee to state member bank* ef Us reserve apotes, oubject to concurreoee of
state lass.
(3) Statutory permission tie eember bmake to establish I-ranches should be
conditioned upom the arrroval of administrative authorities, subject to
definite requirement that the oapital of a braneh system be at least the
aggregate of the oapital that would be required if each banking office in the
system were an todepemdent national bank.
(4) Administrative matherities Should be granted power to re.;uire a
showing in case of the application for a branch th-xt the 7eneral emeitiom
inch would
of the bramek system., as well as the conditions under which the br,
maintenance
of
proposed
the
probability
saceessful
of
operate, imdteate the
been*.
(5) ?be tight to establish a branch in any gtven lock.tion within the
branehtme sem, abeold be demied if there is an ,dministrative finding that
the honking renoirements *f the district of the proposed branch are being
adequately servioed.
(6) There sboul3 be legislative grant of discretion to the administrative
authorities to reouire suitable notice of intention to eztablish a de asvo
branch or to am mire branches by merger, as well as of discretion to withhold
final arTroval for a re&monablP. period of tine.
(7) Subject to the concurrence of the Federal Reserve Board, the mithority
to permit or deny broadtail should be given to the Comptroller of the Currency
with respect to motional basks and to the rumen, bulks with respect to etate
member Maks.
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Federal Reserve Bank of St. Louis
**** ** * *
94
?
Your Ommnittoe believes, however, that one road te imprevemost of omr
booking site...AM LS the orderly smd earefelly regulated development of brands
basking. Iho ism of the independent Oster of some banks, mot sew in a
positios to protest fully the safety of the bank tionositer cor te Purniek
adequate lossitimg facilities to their eommnaities, vould revolt in benefit if
those balks &sold be somvertod into brometass of strong basks. It has also
bosoms gemerslly recognised that there mast be *arena avoidance of tho
*rootlet of emmeoessary inAltntions Mhother thew be unit or branch banks.
Considerable hardship has boom emperienced by some commanitiee because
of the partial or oomplete breth.demm of their banking faeilitioe. In
instamoos it is diffioslt, if net impossible, for loeal intereste to assume
the emtire burden of re-estahlishimg needed banks or ts protect sdeouately
the capital structure mod deposits of misting basks. In a regrettable
mnsber of oases, is the absence of breech banking, weak national sad state
broke oestimme bosoms* me available swims offer to affiliate them 'ilk strong
institutions. arse& Mikis, would
a solution to soot of these
problem, Ohm. emobltes stremai
institutions to invite existing
husks to oembise wit! then amd strategies the facilities offered the public,
includies the establiOhmemt of sash offices as might be rerutred in the
smeller boons and villages.
?be demmittes hes reviewed stsdies of brand, basking *ado here amd
abroed, and concludee that doubts as to its broader allAisability to ear requirements ars unwarramtod and unit yield to the needs of the present sitnn,
tion. It believes, nereever, that branch bmskimg, if it is to be effective,
mast be so devised that 'soh branching ares shall isclude business *enters
possessing adequate finasslial strength sod shall anbrsee a ressemable
sity of agriceltaral„ hissinsos sad Wistaria' enterprises. Phil, the most
desirable diversifieatiom war sot be sessred in all instances, the Committee
believes that state-wide brew* banking will greatly strengthen the Femora
situation and eill provide in
great msmy states the means or Writing%
basking stability.
*** * ** **
Because of the prohihitiomm spon state-wide branch basking hy national
4and state *ember banks ef the federal reserve system. Whisk furnish about
sixty per emit of the banking reeoneee sr the country, mod the fact that
either limited or no bremobime privileges are permitted ',tete banks in mogY
states *ere relief is needled, it is imperative is the interest of genera
improvement that breath booking legislation preened from the Cengremo of the
United Stets*.
* * **** * *
* * * * * in particular, it is of high importance thst the properly
operated unit bank which is adequately *erring Ike financial isterosts of
its community mast not be subjested to unneeessery or uneonemieml sempetiti,froe mow tismeh banks established by outside interests. goeni looking requires alio that branch systems Oheeld not be built by reckl ,,se emmpetitive
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Federal Reserve Bank of St. Louis
biddiag for the shares, of existing basks. If the fiever-beaked* sondition which
exists in some losalities is to be avoided elsewhere* there &aid be a eerb
urea any unbridled race for supremacy in both the lumber sled miles* et bookie'
offieee and upea these forms of aempetities which gape a beik Is aster
reluctantly wee brae& balking in order te protect its correspondent bulking
business or to alataim ite position ia the timeacial structure.
* * * * * * It would te fruitless. therefore, to propos, branch beikkol
as a strengthening measure ritbont requirieg that there be demonstrated
capacity of wanngesout to ape with the problems anfronting It before any
bank is alloyed to engage ta break bosittag.
Ihr lees important is tbe requirement that bulk mining in the epere,
tion of breathes ahead hay. minpaired oapital Amide edegmate to servo the
needs of to amenities ia shish it does business. ta requiring the posoession
of adetrate capital, the Committee reagaises alio that ea effective cheek would
autastioail, be plead epee uadesirable dealepmeat of break banking.
While favor is fumed fir the proposal that the eapital of a branch grates
Ahead not be lees than the aggregate eapital that mold be recuired if ash
break fof the pereat bunk wore ea tedepeedent tuftemel bank, the Committee believes that the additional brook balking poems Should be devised with speelel
etteaties to servicieg the reseirememts of rural ommumaitiee and of small
eitiee• Sege limited srmat of discretim might be give' te edeinistrative
aetheritiee to permit, mdkerecumpilmel oiremetemes, the establishment of
beemehes im seek sommssities if, for instemes, the perm! bask ems moot the
ea:Pita recielvemeste ef state law for indepemdeut stets busks
smelt partion,
ler Impatiens.
After its canvass of the sitnatim, the Cemittee has concluded that the
only effective umnser in *ilk the above reeemmesdatioms could be propeay
carried into offset* emseptimg thous regardiug *vital requirements, woad be
to vest hroad 4iesretimeary posers in reopenettle supervisory officials to
grant or withhold populates to ewe in bras& banking. in order that there
mar be uaifermity is the development of boom* banking withia the °Wines of
till* fedora more, Orates, it is proposed that so far as federal legialttiou
is emaeormed, the authority to preseribe regulations &frosting branches of a
netlemal bunk be vested la the Comptroller of tke Curren.", sad the antheri4,
te preseribe regulatiess affeetteg irenlhee of a state amber bank be vested
ia %be fedora reserve bask, sebjeet is both tnetances to the review mad emcornea of the Fiderel %serve lard. The reserve banks amd the Federal Reserve Beard shield eaiataia emealtative relationships with state superintendents
of beaks and other state baskiag Authorities; in the stetter of allowing or
dsurimg branchv,s to state losber banks. *
amditeNbirtdu. are not is
Messrs, Adams, Adams, Lemsdsle,
accord with the reemmeatim tbat a eatlemal beak be wasted the power to
establish. leder lieitationso state-vide bremeies is those states is shish
*tote basks are not pernitted sesh teessliso wider state lase. They support
the principle of state =tosser in relation be breech balm.
Mr. Lonsdale records that hAs takes this pesitisa for the VOGIOR, among
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Federal Reserve Bank of St. Louis
4Sete - Contismed
ethers, th9t Rinse i* hews deal stets end eatienal baking getout the
autonomy of the st4tee Shedd be respected to ths eldest that national beaks
trumpeting with state banks &mild met be given peen prohibited ender state
laws to state beaks* Se observes that in reesgeltiOn of this amttescordesgrees
in the past has limited the rights of aattemel beam to such as are permitted
to competing state banks operetisg ender state legislation.. Se meetioms as
examples the emealment of Seetiom 11-k of the Federal Beeerve Act, in which it
is provided that trust posers shell not be exercised by national beaks where
such posers will eontraveme the state laws relative to eempeting state hooks
end trait companies, and Sootiest ef the Act which permits rather them emppeis
alawbarehip sof *ULU, banks la the federal reserve system ead allows =oh stet,
basks to booms membove even theegh they are operating breeches to an extent
not permitted eational beinks.
ihr* Sasses ricords that he would twill preferred that the Committee report
follow the resolutions on branch banking, adopted by the Executive Council of
the Amortise Bankers Association in April, liar te the effect that unit
booking laws Should be modified only to es ect04 thst would permit, where
eesessieally justified, mommumity-wide brossii bmiking in metropolitan areas
sled mounty-side boom& loomkini?; in rural districts* In every respect, however,
he believes the actimemw et the liws of the separate states governin7 brftmet
bookie( Should be preeerved*
* *•* *•* 4
lobeassm smpports the Commitioes soommomdation thait asteamil WON
be alleged te establia etate.olde brand's', after a period, in Amiss lasso
laws de set permit state beaks to helm mit bromolhosi• Bs records Os opiates,
however, that ne matienel bask should be .pormitted te establish & trem064
outside the ciiir ef loathes of the paremt boas exeept by takine over en
existies emit bank or a be* already affiliated with it, unlees the breach be
eetabliShed im a city, teem or village Ohm's *ore is no national or state
bank regularly trmmeaoting eustoeary banking tusimoss. Re believes mob a
restriction (mush as provided in the Vandenberg amendment to the Glass 11111
proposed In April, 19St) should be adopted*
The Ossaittee voairseads Out%
(1) Pm/isles, of law end supervision Should require greep orstoms 1140
island* as far as may be pre/4300U mmly national emd state member bulks,
mks all cf their eligible emmirmseats members of the federal reserve system,
mad fteilitste the development of brae& bulking within imp systems to
this limit of legislative grants of power to ;oases, IsommOhiss.
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Federal Reserve Bank of St. Louis
-5(2) Levielatimo should pmihibit group banking ipeteme fro* acquiring additional *opponent bombe of mere than one federal reserve district, except
with special approval of reserve authorities.
(6) Legislation should require that the beaks sod records of a holding
asupser wining or controlling a national bank amd/or a state mober bank,
te made sobjeet to
*ether aspired prior or subselpost to eadh
the
onWess
federal reserve
saminaties tir the Oomptreller of the
and nowesober boohoo the
authorities* Mere a group esatains both
parent sorporatisa end all its components ahead be oubdact to ammtoation by
federal authorities.
(4) Insofar as special regulations rag be seeded for the purpose at mo.
pediting examinatioas of group system, federal authorities should be oupeosred
to require adeqsate reports et esedition of the group banking derperatien mad et
each of its oompemeate.,
(5) In the ease of a group booking °corporation holdieg Shares of stout
of one or uere umber banks et "he fidural reserve system, there should be
statutory requirements for the establiehmeat sod maIntemanse of suitable reserves, invested in readily marketable memotiable emote, other then bank
stocks, in order to assist the group system in proteettng the solving, of its
assements* In general, the amemat of such reserves should te not less thaa
25 per seat of the booking caFital Employed eueopt that in oases 'here doubleliability *Stelae* directly to the stock of the groui- bonbiag corperetima
somewhat smaller reserves eight be designated. Such reserves ihou7.4 set be
available as security for any fore of pledge exoept for the parpeeee for which
the reserves are required.
(6) Legislation Ohould require that after a reasonable tins no component
of a grasp banblog mitten could lend -upon the eoeurity of the stock of the
soopoop of the group miss.
(7) k sopponent bank of a group aystos ahead be proveatad by law froa
leading te soother soppopont of the ear poop am thorn 10 per cent, of the
loading bales wits& sad surplus. Ito leans to oll components of • group
myytoe Amid be limited bir law to s reassemble preporties, say 20 per meat,
of ita eapital and surplas. All loess of erne soopement tank to another asp*
poked ihould bo required to be seared adequatell end Polly by readil:
marketable esemrities or paper ef the type vedisamotobto iv a reserve baba
(8) Tbe eapital issues of a hafts, lonpun, of a grasp talking system
should be esafined to one °lase of stodkl me debentures or other bond issues
ebeeld be permitted.
(9) ?Were' 1A, should require that emr yedertakiag to serge or to effect
other emolmemation of the atom* interests sof tee or mere group banking protons,
containing notional or state aneiter banks ae empsocata, be subjected te the
consent of the federal suiervieeryeathoritione
(10) Federal lav should rewire that any grepp booking sista, oomtaining
national bank or state meaber bulk amponeuts, be peohibited fres owning or
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Federal Reserve Bank of St. Louis
e
controlling the stock of a serperation net ewes& La the usual Waimea, ef
banking unless it has the pereisoion of federal enthoritis vested with
power to zurervise banking.
x
(11) Ives s finale I" the Alidierel Reserve Sward that the siespessate of
use or mere pump motels eustrol the election of directors of a federal re.
serve busk to lime detriment of the interests of other eeMber teas, the beer6
sheeld helve power to limit or seeped the voting privileges0sea group
sempemento.
* * * * •* *
lbs business of a corporation which controls banks three. stock ownership
partakes so much of the nature or banking itself thL.t it is proper to subject
it to public regulation similar to that imposed upon baiskieg insti'utions. If
such regtlation is to be effective, supervisory authorities east have paver to
insrect e&ch component of a group system in aelition to the holds' sompsely.
A single holding company can control national banks end maw sadmsamember st:Ite bilks of the federal reserve system. Its national beaks would te
subject to the supervision of the Comptroller of the Curreacy, es well as of
the federal reserve authorities, and its st&te banks to the supervision of the
authorities of the sttAes in which the benks are located as yell as of reserve
authorities if member banks. /f its netional banks and state member banks are
located ia mere than one federal reserve district, they weed be snbjeet to the
ef the reserve authorities of their respective distriets.
*
** * * * * *
TB allow grew bookie( te develop under diverse laws and regulative* with
sorroamats WOO to sesetnatises by different sets of authorities, federal
mod state, promote peaSibilities of grave abuse arm* shiftiag of assets and
tbresib flaw. or supervisory authorities to dialers the effects of eme nes.
pemsst's gametic* goes the safety and streagth of other components. It is
desirable that all uelher teaks of the federal reserve syste% and the system
itself bit protected treu weibmoossm that might be visited upoe then through
inproper operatics' el' seuweelher 'Mike met new subject to astral supervision.
If grew bask orgenisatieme are to be perwitted to include maw weak barucs,
or through diversity of law sad regulations to visit upen entire systems in an
aggravated numner the veahmessee that may develop in eene ceppenents, grave
hers would reselt te bask depositors end to large sections in Whisk yeah systems
are operating. %regulated grump banking has such peteatialities of abuse that
Ss far as practicable Its development should be related in the public interest
to the evolution, grorth anci solidarity of the national hankie. emd federal re.
serve systems.
•* * * * * It le readily apparent that the eapital structure ef a group
tanking ergenination, the Ietheds
&staining its operating Nulds, and the
establishment sod protection or suitable reserves should conform to rigid
shamdmrds eppileable to banking.
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Federal Reserve Bank of St. Louis
* * * *** ** * *
er.
y
* * * * * * The prohibitions 'hick gemerelly exist against the mokisg et
loans by a bank upon the security of Its ows etoek Should be reeognised Is
relation to the Ftock of a holding company.
** *** ** *
branch banal's, earlier presented, the ommmittee hoe
In its discussion
authorities Should be permitted to require a
administrative
recommended that
for the right to establish a brew*, that
application
showing, is ease of the
branch
system as well as the oonditioms unier
the general omaditione of the
whiob the breach would operute indicate 'he probability or its sucsessful
metastasises; that the power to establish a branch at any gives 10-elation within
a bresehing sires Should be grouted may after an administrative Muting that
amether busks eith er without bessoches, is not adeignate4 servicing tbo batiking
recuireeents ef the district of the proposed bsum0b4 aad that federal supervisory
authorities sbeeld be vested with rover to presartbe regulations vitb respect
to the groating of branch banking privileges,
it is only consistent, therefore, to urge that group banking systems
should be eubject to similar rievuirements when they londertake to add additiemal
emsponent banks.
********
In the Committee's judgment it is highly desirable to prevent group balking
systems, insofar as they oon be made amenable to federal lav end remlstions,
free sagaging in extensive, diverse interests ontsile of the usual field of
bembises
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Federal Reserve Bank of St. Louis
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liadbroWbmilkkis 65 en the Report of
the Oposial Committee on Sacking, Part X
Chamber of Ommmeree of thole S. A.
Demobs, 9, 195t
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Argmmosts is the logstive
Climmdltoose report sad vosamemadatiamol appear to pr0000d spas the
thew that for vestimummosvhalh have appeared la the bends, system of the
semmtgy the individual bake af the esmater have been pristrilyreepsacitie
mods therstero, tho remodly is to give te the federal mom balks and the
newel %corm board enlarged pews of genre/ ever mations/ amd state
boas that are miabors of the federal reserve system,
la sone quarters this feint of vise In developed to MN* an =tout that
there is edema', of federal legislation shish uvula Inaugurate & plan for
se-salted ammifiod bamkine, whisk com14 de easy vith state eammoreial basks
smporvised Ir state antherittes end mese all egummretal basks In the sengtry
to be is a matianal erste% egutrolled by the federal reesrve books amd the
Ardor.' *seam Board. the leverser of the lisogrve Seard, influgmtiel somber*
et the Semate COmmittee ea SmOkint and Omwring, and some premised besieges
sea have expreesed themselves as ia favor slim& legislation*, A bastuges gen
the is ashment for hie Mai* service said, in lies
lismimptignmalla
sif X sere speaking in torus of thew* *•I mild wAr that
all eon's:dal deposit baskiag ta the teited States Abeced be
tarried ea vader ems lao..41hat examinatios of bombs Ind their emstrols should be soder ow matherity* Their reserves should be
'mobilised in the federal reserve prates. Them us could develop
for the esuntry as a whole a sound banking system, and definitely fix
responsibility, Met meld MOB that all basks of *resit, as
distimpiched friss swinge, Mead be matlemal leaks*
WommUllimalla
'As it is ass, banks eve shattered tea Irly, the uatioaal wets.
meat and by geeh of the tertpweight stoke. They are is sempetitlen4
mai omdeavoring to offs. lbo root attrastive ebarters sod the meet
liberal lsics, to say nothing et the liberality of admiaistrative
°Metals in interpreting the lose. The matisaal bookies ast has
to soupote mot oily *ith tbs gest liberal moo* Oesseramently, there
hes bogs a seastant togas* to liberalise booklet lams and to
weaken their administration• re sash eases the ergensat is always
made that it is desirable to liberalise the las se as te enable the
barks to be of greeter service te berreeers.
isimisALlimesaa
Mg Mot queeties almmpm regarding bake deist a dessad-dmpesit
bmmimess should be the WOW of the depeeitio end the ability of tbo
tik to voters them to depositors instantly aton revert, =loss
be tine depeolts, So timought of service to horrewers sheald be pagh.
vittod te impair the eats* mad ssomrity of depositors. 'tasks of dos
posit are, lifter all. primarily smetediams of liquid foods. Only soh
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Federal Reserve Bank of St. Louis
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me of such Node shell& le permitted so Wile emeletest with the
interests of the depositere.
oft 'he early pert of oar geveneneat, emr insinese me largely *me
trf emsroes, awing Visa bond to hosits It me felt at the time* mid
properly
that ve Amid ham a eatimal amd miters enrrmaY.
semeatly„
me gives poser to min emir end regulate tho imbue
thereof. This power wag made effective as to peper mew br tbo National
Seek Ant. *Fa our 'mimes is serried os mostly by tresafers ef benit
deposits, =mew fermium emly a mall part of our sow *easter*. If
control of omr wrens, were emessery in the bergamot's, Imr the federal
government, amine' of enr beak deposits by it me meld mem desirable.
le have traasterrod„ slew atfirmetivoly or a, ampussam, amir polooro
te the federal gevernmest thieh eniht not to be there. I em bitterly
wooed to the lapoireset et the rights of the states in their appropriate
field. it dem men eteenge, hemmer, that is the tam of smelt gravitating ineerd federal magerity we should have votalmed divided rather thAn
unified peer over our deposit looking wales.
basks of deposit hold
peakets,
simoopt for the sorrow In
the liqmid eapital of the people et Os Waited States, The traasfer of
this sapital from one of us te mother" memptly and Bahian Should be
faeilitated. That mess, however, that every bank of deposit is truly
emgmged la a national boatman. Its sommdeeee mad safety is of masers
te enr people everyvheves Oar bootees. ef deposit banks is not legal is
Ohmmeter; it is, med sholid be, national. Therefore, in my judgmemt, it
Amid be govermed
tho settees' law.
lisidallaist
Mow, I realise that of the t4,000 banks of deposit deft baolasso
in tlso Ileitod States say dent 1,000 of thee aro slums'ink. fag
17,006 ere state bean. lifts, those eiremestasees, we probably onset
hope, lamettatoly etleee*, OW the surrender br the state, of their
right te grant twain( oherters. ler ems we sweet veinemporaties
NM"of state busks mid*: national agerters. Tho presided question
'eas me or should m de am? I think
is, therefore, ghat, if anythia(
it muld be highly desirable that all blahs of deposit Welding thew.
eaves out to the pablic to de a astiemal or intermatimel business
Mould be required to be members of the federal 'worm system, ILS
national basks nee are. This muld at moo sebelise all of our banking
reserves lute eme mistral apetnn, ohioh is as it should be. 41•41
Misi.lmiti
have speller emly of belts of lomat. as distinguished troa
banks for savimgs. I believe that beaks fur stria.
fer the ed.
siaistretion 0 trusts er ether speelal time fends sheed be state
beaks, sad that them powers Shemld sot be included In national hamisIng
mimpters. *••*••*
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Federal Reserve Bank of St. Louis
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wse
blimmisimakiWir
The fiemittee itself does oot disease or adreeate tsimified basking'. ear
does it umke the esematial distinetims, emphasised in the quotatiem set sit
mho's. betimea deposit basking and other kinds of beaking and serviee offered
by banks* bat adeptioa of the Committee's reeemmemdatious would seessaari4
lead is the dimities of imemified basking,' eines loth tile Osasitteols 'someesedatiems mad prepesals %remitted beakleg rest lapse imereased esmtrel by
Morel ream brie sed the rodevat Ilmorre board, sr other federal banking
authorities* over emo bloke of the moustry. this mold he justified only if
it were demonstrated that the esmatres umfortemate seperimmee im beak failures
was primarily dee te eismemagemeel em the pert of the take themeeliee sod tbiat
the swaree pursued by the fedseel reeeres basks sod the Iredseal %sere* lewd
had bees sash as to moms* greater depeadommoimmialbee6
Am analysis of the feet** it *ea be fairlr costoaded. dissloeme that
beaks sere formed into emalitieso aet et their ems eiktag mad that the
pelieles of the federal rearm beaks and the Federal leeerve lewd lore
would seem te follow that so
primaray responsible for these eemditioms•
hooks ead the Reserve
therefor?,
ealargod powers should now he easterred epee
aelErdie•••••*
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My earlr Pshreerr, UM* Um Federal Semen, Beard vas matte, extrode
stateliest* te books, in Ohl& it was talkies about their espesulstive loses.'
Tbis vas taateement tie ea atteept to treeefor the primary responsibility for
ihat hed happened, emd ghat was to occur, fres these vitas whoa in feet it ley,
to the bake. As for this respeasitillity, the ember of the Federal bemerve
leard quelled above atids
empthtmg that the federal referee sputum sold
IR *omit
hove dere. either by missies er 4SOMAMOIOS ta 191f, seed hem
avoided a grist* of some sort evesteally, ?he ceases ef the preen'
erisis sad depeessioa le fer deeper thma the stook market. The
eteekmwrikit Ira& les speptematie of ruptures and iislocatieme
vematas all three* the fieseeiel mod oeseemio structure of the
mold* whisk simmer or later would have smarted their effects, lit
if there had bees greater eseremees of What was involved Is the
esemeeic neergemisetisa left after the Great ler* the federal reforge system would have perseedeere temperate policies, isith the
Mat that, Whoa the oasis CUM* it would have bees far less indirreotating mod the resulting dipsweies loss
tone, sever%
eeewtheleimg sled peelimegod0
IllagbalareAlligailLannalt
ta the sweats vhieh have beim =Wad ohm, tbere eas departure of a
?oedemata. kied from the purpeesis of the Asderal Reserve Act. It wae intended
that there shield be ao esatral beaks for the United States ani that tile twelve
missal vessrge beaks should be lastitetimas for redisomato with their elmstime, mud their esseemer, rising and falba( with the seeds of business.
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Federal Reserve Bank of St. Louis
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Ino404416 lbw were operated as one institution and ter paspeess foreign to the
%dorsi Seeirve Act as it stands, slits dientrome emseeemsmsesk Ia the final
amelysis„ there MO interferon. es great nolo aed to meet esseetial nye
with the Waking business of the somata and ell of these them it affects*
Instopi of ben responsive te the mode of the books solt of busineeo—ithe objeot
for thielt the reserve system vas erainell—radkosel reserve outl-orities undertook
to use power) not given to thee frr sigh a purpose, to create conditions dirost4 affeetiag basking wed business. In other words, it MS on attempt at
goverment memegmeasto Legleally„ the emperienee ehleh relined would nes te
Oiled me remiss for onferring Masi swore upon the reserve banks aad the
Poderel Ilessove lewd.
That the 4spreesice
tbs WWI Nets los barn eseese,
essetary
feelers* MI bee boss prolosipsd terse. deflatitostry proerness tbat sad be
**died sad seirseted,
bola ressatly fteltrod by a vell-ames llerspsea
iossuadato•*••* *••
'the deflates was introdused
the sem/sign against stoeksmihampe speselatiee *hi* the federal reserve system, in the
de/loose stall enalogs, teak up fres tho epilog of 1920. 'This
simpsigm isoluded a ~trials' ef credits, whioh heedisepped
pesillietivitr ad started the fell in ooneedity prises obleb Va.
setriverds te teems se dIsastrees. But the meet farwreeibieg
sommetimmie of this empaigs ems thNt it sot public opiates la
the Almeition of deflation. * * * A fall of prises sowed 14r
memetery fasters this gives rise to pretest dieterboaess in the
unreels equilibrimmh /n view of those distilleries, people in
Marisa endeavored to restore equilibrium lr presodasi deem other
pans te a level tith those vhich had alms*
ferthaSte
People von baled to the fact that this method seuld anew ream.
equilibrium at all, but could osly result la the esationties
lhe gamma preens of densities.•••
sibil book legislatios of the gaited States in samjemetion
with the prewalset view Se the emeskry or print* banks in rolatisi to the federal reserve beim bad set the whole morn of
dewelsponst la the direst/seer &floats, Atteatios had previously loss ee absorbed in prevesting emy possible Inflation that
the deer hod bees left wide open for deflating without mg
sespisinm of the drier that lurked therein.•*• The way
strmetsre of the
Mates booking gran astailed Um, estematte enesteatien of the deflation vith snumalAting etrometh.
nhls disaatrous movement could have bees oheaked only Wf
a determined policy of sati-deflation en tho part of the federal
reserve basks, and by their aotiwe latervestien with s view to
the *stomata' of the effective supply of WNW of payment* * * * •
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Federal Reserve Bank of St. Louis
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load aot se•al to follow that current osaditions, including competition
hotline satiate" banks and state Web, sake m000ssory ability of national
backs to have lank affiliates seek as eaviege teaks, organised onSer state law,
quotaticas *Lob are printed above, theft is dloecoutes of provisions 'hi*
mad enable Rational blahs to cooties a eaviago buolmome with thoir eommoreial
tomemmee without thi disadvantages whlek ere sometimes otted se ~sus for a
separate savings institution.
owed for a motimaat bulk to hew, affiliatos of
ta fast, emphasis upoa
any kind tiaras &ttenttan in the waft direetiensigae direetioa of addition of
verioug kieds of besieges seteerrime, besseing awe sad memo remelt* fros mosmeroial leelking4 en the mood that motional bulk* meet resolve opportunities
for sonpotition with stet* babe so the latter are by &tato legislation gtrma
leader
increasingly liberal pemsvo4 Perttoslarly whoa fadOval logislatios
emesidoratioa„ attest's!'" Meet& he divested is the opposite diroetiom--teemrd
*etuvalag the aatiocal teats oed all beaks admitted to ausborship in the
federal mom system euelustesly to tromp cammerelal beelthig end to measure*
*Ilk will permit semmeratel backlog le assume the volume sad the activity the
seustry greatly moods amd vill mike emumereial baking sole a fumes:fa ferm
of ontorprioo, sad to restoration of Ihe fedora ream, Wake ta their proper
rusetions as groat iastitutions of pediment Aar semmerelal basks, vith the
oerreaey they smpply tor tho amentrf fouslied diroolly upon the sommorcial
aeUvit, of tho emmetV74
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Thema qamotles ie thetherer mot tmeseitmeet beddsil ihmald be sitssed
te be as semi of beaks that are members of the fOdeval mom 0
1
'bleb vas Wooded, mad ehoeld bo ardieeed, to provid• facilities 4:61
function-diffiroat
a
very
bas
banking
!sweetmeat
seeatryi
of
the
oommeree
isdestry in all of its
!mid-dist this *vital requirements
the fumetion
ameordtagly seem to
above
meaticeed
bees
have
ski*
ns
terms. Oissideretio
spy way to oomnereial
in
related
Up
not
Obemld
ehiag
require that tatestmeatim
hooking*
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It might be added. so emethereelemost agelast Henri*, affiliates, that
almost Inevitably sash affiliates eve in a postai* of spatial eppertamity to
sell securities to the soaller talks that ere sorreepoldemts of the parent
balk, So left ao the present system eestianos--and it has an important plan
la our banking apctoommobsroby large bulks ia important 'enters have great
members of correopmaisat books ia smaller plasm, the reiatiase shield b•
libel4 of & baikiag eaten aid tho book ta the large ouster should not have
a speolisi tatoreet„ ewes irdiroctly, in selling partfoular sosarities to its
esseeopoadaset beaks,
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?hero is the iturther objeetion thrit there ems to he ea assumption that
imp.
mem trained to eoneereiol beibiag ars ipso fasts, oompetont to Onflp in
are
of
bolkiag
tyros
thew
verimmat teuking. la fad, the flasotiems ta the
oe diffareat, sad the bases fir emesessful judgment and doesimn aro often se
maismole lipouleaco in recent per, gees to
diverse that tho aeoumptlea
t tmakimg omm beet be left to those oho dew* all of
Wiest, that
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their time
Federal Reserve Bank of St. Louis
and at en
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on tlo
.11101•••••••..-...
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111LIMISEOLIMALilland.
%or* aro sosed bust000s 11,1071110 for oestissaisig 11he maimardtip of the
beeretary of the Weston as the lredarel Roo4r.vo Thosids Una llangreee assets'
the Memel Ileum Jot it provided spedfleetly far emonefftels semburdhiP alk
Us board of the lieerehary of the Treamery as as ompreeelem of its dears that
theme bs oleos esepeeetios betimes the Treasury sad the federal reserve blab.
lug antberitiese
AlimiLimmedmi
%der the Set, tbat ihosistav or
Tessarry "wen the reserve bombe se
the gecewessat's flood agemtes %le pereiselea has hese utilised sisee tb,
begjamisg of 1914, It is mot esmeemery to refer mew to the eervieoe of tbo
reserve beaks is the war flammoisgs Una tbo extort of tho governmentio present
tialeesial operations aro massidered,„ tho =teat sod value of the aervioss perteemed by the reserve busks, without mot to the gemmemmeelo are Oslo's.
It is therefore appropriate, and la seeerdemee with good bseluese practise,
that the %Pessary *geld have represontatima la the direoties of the rodent
reserve protons It to to be remembered, tee, that there is pabli• edomatage
is having the fleeal operatics* or the givemsseat beadle* ir the mem belle
sad that* if the learetery of the Tremor, seamed le beasemberetthe Tederal
Iseeree posed, he eight Wiese to emetbeem thle seemegememts /here is further
realm ta the circulates.* that the sifts teamed by the reserve beaks aro
obligations of this
Stetee gsveremests WI* six an-rotated members mod
stay toe swoffieleo—tholiesrettry ef lbe Treasury rad the ilemptroller Of the
imrreaap--the lierd is sertatay is a mottles to base its &mations epee
esseideeettea of the gossral public Interest, A further reason of vital
impeetemee is that the beaks of the ssentry love a wort direst interest is
the goveramestal nemesia' patsies, amd membership of the learstary of the
Treasury ea the board may afford means fir empreeeloa end dissuasion of that
tatereet.
lemna et' link 0
The peopmesil to give to memo beat* or te the ?salsa asserve beard
Wow to remove sensors mud dirusters et bribe that ere ambers of the soserve system merely Chem there asky boo a disegreemeat me to paler to
meat of a beak. er &best the eseedesse of a leas in itself perfOet4
at emse isvolveeaviolatina of prlaelgile sad eostaimaao aseerease of benefit
for aireas,••••••
iiimosagaiNeLlmelasma
ramodoseed th:.4 boxideg
it met alweo
privato Isalases subjected
la while mastless Ile earitel of a bask is oostributed
private siesbWAN* sad belongs to Ibms• ?boy sleet direilere sad tbo direstera la Immo
daet the offleare.
ibe same tins. le seetseplaides et` law, remaining la
02411110 tem* with the somegsmest ef the beak. asallatory
amid
i
offieera
esti
&restore
la
required
illalifiestlase
IlimPort7 PININIrtike soy
but there is a departere ft.es ths petaciples of regolatioe *es these is
direetere mad
proposal that, instead of aessestability
*Mears Wag
stodlithetiers,
mheald
direeters
beteg
both
be ailliellinablAD
to
essematability et
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Federal Reserve Bank of St. Louis
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to wide,eroded Ay the federal gewsemmemte Ibis *IOW be tmetmeemat te
petits oetherity takimg ever same of lie meet eemooftal functions of eamage.
mote isteethetisally, it mgy be mad that, ae lemma Ohms putaio
authorities propose to take over femetimas of esseimment. the, de set here
esetemplate that they will assume omy of the responsibilities of momegoesiot.
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The federal reserve books beer meek the same relation to member Woke ale
member basks de to thtir sem ametemere. 1bese are huetaess relatioashiger.
Aside fres the rarely bestow matters of discounting
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sheik oollostlon. regMe.
latter& es te reserwee• the issue end redemption of metes, mod eertain rights
as to periedie emsosisetioss, the Todoral Ill000rro Act is silemt ea lhe powers
exercised
mem beaks over thoir sembors. ?his business relatimaship is
aealageme to that *ire exists ordinarily betimes esumercial evemaisstieme.
The latredmeldea or asersivo fem. other them mild arias astarolly through
tinstures iateraretiome would be eatirely imesesiatemt with the spirit of this
relatisethipe it has bees fogad that f'primisiVO posers of the reserve banks
la emeemradtmg eoneervative practices on the part of member banks baa been
effective mod it is (widest thnt In the exercise of this Pmectioa the reserve
beaks have geme as far as it is wise in nrojecting themselves into the mousamomeet of iedivideal basks.
In the rrivilege of pariodis examinatisms, to determine lama prestioes amd
gemeral operettas., and the rigbt to use reasonable amid busimees-like diseretioa
in the greattmg of *Wit aememmedation the mem books Ammo a ‘4,111 degree
of contra cad me that
Iasi porta; immilay of rateemslime
The Federal aosorro bond la
relatiem with the beeklag rysteus este
through the teelve federal reserve tasks. Pewee, of the wide aerlaistrottvo
nature of iteilolias there is ordinarily se direct essteet with melbsr beaks.
its general Mies aro the riving of bread Moneta advise sad lb* dompolopmoat of large fiessocial policies abish ore serried out through the isetrugentility ef the federal reserve bamboos ?sr intreftss into this deliberative
bedy the added detioe of hearing amid &melding epee eases of ealpraetice of
member basks reported tor it is unfair am moll as imomasistent with its duties.
It eettlei Lovely. the same tater/W.0es in local lesagement as would be the
saes if such powers were gives te the federal merino books.
Ajokagg Pgiat ef Vim
?be views of the leememie Foliar Commiselom of the Ameriaae Beakers
Association ms the proposal with respect to removal of offieers sad now:tors
sere earlier this yeer apiessed as fellow's
4911Wkisat Wag Selltipmblic bantams, most eassemarily be amtrolls& by strict laws gemming its eperatieme. Nevertheless,
banking in its Nasal operatioms cannot be esedmeted by statute, mer
is it feasible to substitute rigid rules enforeed by public officials
for taditidual initiative aad responsibility.
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Federal Reserve Bank of St. Louis
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" * * * * * * It senne not likely. hemmer, that the mere transfar of the respemsibilit7 fret one set at hum beings, amt. is, tho
°Meer. et beaks, to another set ef homes beings, that is, the
officials is Ilaebissitano vill prove pansies for our financial ill:
,
or be a guarantee asaisst a repectImin
ote mwne error,- - "
1 ItrompAil
jegnent in the Mere.
ildaitted4 the federal reserve authorities iheeld have breed
pavers of supervision ewer the general fieseeial
of
and to some extent ever their pree4Leal everatielltrit is
oatmeal; doubtful that the emastmeet et sedi a law as nee peepooec
lerge4 centralises eestrel ewer detailed eparettai tsactinap
of honks in the heeds of sevemenest officials in Tosiliagtea wield
toppers the sitnAtien•
%Aar all it must he reesetered that art fee of ow Wein.
leader, and beakers haws heretofore empromed the view that mill of
the bless tier the melee speeolatios and coasecseat later eellepee of
1929 attadhee to tile iverirmisme WU,of the rederal liesemin leer;
this
efflas* it salftre sot stuAlher we agree vitt that eriticiw).
it le seationed solely te emphaelre the feet that oftleletle in
Teshingten are ne lees eabieet to errors of jo‘post thms are
fa Sew Tort er elseekere, sad eessegasatki a further teems*
+h.
power
gesesssent officials over tbs baiking strustirs to art
a saawa-tee for h "-- iveltiag0
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Federal Reserve Bank of St. Louis
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lefereedea So. SS es the Report of
tbe Special demeittee en Smoking, ?art II
f!),,,,r,
of Sommers* of the 1:1* s*
Deoember 9* 191W
?till:,
Amite la the Negative
* * * ** * ***
* * * * * * It is ewe pregame., however, that the larger tattoos'. banks
in sada and every state may operate bseelbes thiseghomt their several states,
epee obtalaimg permissions free the Fedora lissom Soinr44 !hat the peopito
• tho state had by lekislation deelered thor vested mo boss* banking et am,
kind within their borders scold set neke eir differesee; hese& Maks woad
be tbrast upon them regardless 0 their wishes,
* * * * * * *••
•* * * * * Si Oeteber 4, 1932, the State Sank DillifieR of the Amerisen
Beaker, Association adopted revolutions expressing determined oppositiee to
the provisions of the ease Bill sublek would give stato-wide breeeh basking
powers to national banks in a31 states regerdless of restriotiess es to brae&
basking em state beaks by state lees,. The resolutima adds* 'This is a
deliberate attempt to overthrow the sovereignty of env states; it is oentrary
to the Ivliey *lib has built up this republic eed would lead te a gate* of
nation-vtie trame boddase•
Notiesal banks themselves, particu urly tho smaller mos and those est.
sift large austere, would be exposed to competition of u destreottwe kind
against shich they are nee fairly well protested, if the provisions of Um
,nniiit Ell were emoted; far a breach of a large sational bank of another
city sigbt he epeeed next deer. ?be Oemmittee suggests eertain reetrictions
tut, if adopted, those restrictions osel4 sot prevent a nee fere of eompetities for national beaks in smaller cities, with the branch*. that are ilet up
possibly taking sway business from lentT-established sod sowed banks,
it is to bo resoubered that there are Jiversities ia esusgerial abilities
oeseg large eatiesal bemcs ao well as ia other fields of endeavor, and there
ie me assermese, and is the mature of things ems be oe 440Mace, that the
oily largo eatiesal beaks to errata brenekes will be Vim that are som,
servatiwely ead soundly agemiged. * *•* * *
13111131aLimmilikalks
sm opposing the part of the
Glass Dill relattag to bras& beeidairt the
ainority ammaliess of the Smote Osewittee es Sonkiag end %mew odds
"All thiegs ocusidered, the Morisse system has held up
Sere is a movement on foot to sestrol the
wonderfully val.
Of
basking isdastry of the !felted States by eentralisation*
late years this movement h*s been becoming mere widest* * Ser
bees one of the greatest estiwating
deal mystea of beeking
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Federal Reserve Bank of St. Louis
• I
t
footers ia making the United States the ontetmadiag osestr, that it
is today. Oar conskry is too largo. too widely divorelflodo to *spot sae banking system to be se versatile as to deal with se complex
a eitnation efficiently. The haarieen people are imeliviAllalistic and
so should bo oar banking ortreeture..• • ?he plootag of oar hooking
structure with the ism over-burdoned buresooroar la Wallington is in
Aires% violet's* et the priseiple of state rights.
,
10041
It is evident that Imp to the passe e of the Infaiden Act there never bad
bees any lisposition to alter the original esnooption of the national bask
gates as a unit aystam. Nwess the previsions of the Neraddsa Act allowed
oaly tetra-city broashes in sat* states as permit brook bodging moder their
own lows. The epeosties of additional offtoos within the Unite of the city
in which the parent teak is located is opt to be looked apes strictly as
branch hankie& Tt is a loofa tem* sod contains no *lemmata of danger to
the bankinc system of the esestry. ?he hemo.rity brsnek is simply a mane
of furnisibtag a oomwooloat sorviee to eastonars $ind gives 60 asthma b6.nts
&memo of eampotiag la eastemer accomWatiou with other bulks within the
mit,*
Stnto-Whiammail
It is in the broader applieatioa of the principle of bran* bssikkag
etato.wide areas that grave donors *ripe. A single bank eperatimaaanhor
of broaches in many rarts of a stet* is ta * position to ematrol the hmable
facilities of entire oenomnitiee and briNgreimeme oor4tition to the smaller
independent banks.
•* * *
•*•
•
commietritits0
C0941Pol
Proposed meesores for the extension of losnmib-btinkInc privileges te
national end state amber banks will hnve the effect of zaterially mmdmik•
elating the omit system of esntrol mat esamemosatly the indtviftalies ia
operation 'tie is fmadomostally odaptod to diversified cooditioms in tho
United States, Irma& balking Is monopolistic ia tendency, It furnishes,
the asses of concentrating the resources of a mombor of loeslities is the
hands of a few ladividuals, who have in their ommtrol the retardation or
the dowelopeont, as their tnterests dictate, of individual oommmaPloo
hamiases saterpriaes. It introduces absentee °wired**, free rime legal
remponstbflity, a.n1 an opportunity rnr the tmnting hmsdamoo to be
pride
somimined entirely in tlie intereste of rrofite to =tele SOMOMMOS4
* * ** * ** *
* * * * * * Oat it is in this loner sad sore desimble beeisses Oat
the eappetition of buss* banking aritiel efts. into °inflict with the
indOpeadont beaker. /Moe deevinds the tree* hook.,r c.n grant more rigidity
med more directly. The result Jo that the initependent beaker would be foveae
rradually to rely en the smiler and leas iesirable busies's or ultimately to
mm
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w. daftpimberammour
wat.Limummaywo
maw wtau ^0
Federal Reserve Bank of St. Louis
- 3** *** 4 * *
The neshership of the federal reserve system is eempand prodemismatly of
a large amber of inlividoal benking units umder separate menagememt„ situated
in all seething of the 'gentry. The strength end utility of lhe system for meeting
a wide rouge of diversified conditions depends on the maintaining ef a broad
membership eafi the eserdinatiem of videepreed individual intseosie. kgy substantial reftetion ef ibe sumber et separate national hawks emd state beaks in
the systems through eeneelidatios end amvereiem inte brandies, weld evideet4
reduce limitations ea diversified repreematetiom eed the voting power in sea
district. ?het resort te otate.vide brash boaking genii asseeivably have tbe
result of throwimg the effective emmtrel et the attire 'Tete* into the hands of
a relattvely few tetereets. *
*
*•* * * *••
Orono Bwocislit
Holding oemponies do mot olds% ender foder%1 statutes, as do the national
beaks and the federal raper,* Mike. Holding oemponies exist soder state lam.
leder their *after powers &111 (mated by tbo state' the, sir ona capital stook,
set slay in Makes natieeel emd elate, hot else in other arporatiems. Group
basking 00011,1 ehea a holding ampinny rrosseds to umpire lhe stook of a series
of beaks, outdeeting them to a general omstral direetion, en& as a heldimig
sempony in the pmblic *tility field aequires the stooks of operating ampenine
an4 subjeets then to a names direction*
A gmestima at awe arises if, thatever the .11arposes with elvish onletimg
heldimg eempemiee epereling bake molp have been organised, and whatever the
immediate hemsfite *grew have brought in eons areas, oimerehip sad oentrel
of lank seaters of the federal reserve erste* in oespetible with the heals of
the system—a series of indepemdent banke so osmed and nonaged tbst peesomal
responsibility oem be seemed.
•* * * * *•*•
Pifftculties of Aeaulation
The provisioes of the nese Bill moat that those are the inme difficulties
In regulating the holding oempeala in the banking fielded, van asommstered
with mob amponlee La ether field'. The Interstate Commoree flommingien has
nivesated legislation whish will gibe amesable to it bold's, aapemies swing
stinks le railroads. In the field of public utilities there are eutstamdiag
problems ef regviAttea
the state oonsissions. flanking is like enterprises
in the field of railroad transportation and in the public utility rtad, in
that it is rroperly subjected to regulatios by ;stale authority. Seek regale,
tion is smeesserily promised *pea respomeible mamagement and meassehip that
oan be readily identified end resehed. ?he intervestiou of a arperate dewiest
obanringtmih ownership anti menaimmemt, is In principle inconsistent with
adessnie MA proper regulation%
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Federal Reserve Bank of St. Louis
** *** * * * * *
4
4 4.
,I,HBALI.vadir
The differs's., latch appear eves in theft brief outlines of four groups
bring oat the eirssmstence that ea* has bees soubiled to meet the conditions
in its are** ror isstence, the group is the serthosotern state. Shows as
effort to guard against the effects of adverse oosditioas in ene or more of
the etatos, three* inelusiss of such a somber of states that it is obviously
hoped that adverse auditions will act exist is all at the same ties* ts
emit ease, Ito emneepilies is of strong cestral organizations ably aimed
with esasemed egpertmeee of the highest typo afforded ia the arse, tbio
not say advt.. use expert assisting**, bat
eestrea orgsnisatims
a dergeremairegr /sill be in its initial stages,
also finendial aids
mad until there are mmteemod lasidente, slob as in fast do not soma yet to
have beppesed, legislation Obeald net hamper tho benefits *la say be hrea;ht
to em area where beaktig stability iss leder current conditions, meet highly
clearable* Is otbarimmis, the alternatives wad seen to to either au
effwrt to present air beldiag eempeales in the bankiag fislit for go& V08001
as hes been suggested above, or freedom Aar the 410,010Piteat ef croup telking
in imp that sty greatly bessfit agrieultaral sod isdastrial areas which have
had troubles of a disastrous kisd Alb ebony issispeadmet bunks*
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
SOURCE:
241.414 - ASSESSMENT (1929 - 1950 State glember Bank Examination
(General Files)
*** * * ****
0
FEDERAL RESERVE BANK OF CHICAGO
250 South Labelle Street
May 15, 1929.
,.TBJF.CTs
Examination of Member Banks.
Federal Reserve Board
Washington, D. C.
Gentlemen:
Reference is made to the Board's letter of January 26,
X-6223, on the above subject.
In endeavoring to follow up our underatanoing of tht Board/e
views, as expressed in the letter above referred to, we have within the
past few maths made a number of examinetione for which *e have charged,
and I beg leave to report some of the reactiona which we have received
from member banks, as follows:
First:
Peoples Truat anid bavinaa Bank, Clinton. IQW
"We have your letter of Niay 6, referring to bill
from your bank to us in connection with the examination made by
your repreeentative in Februery. We are encloaing our draft on
your bank for t122.10 in payaent of the bill, which we do under
protest. We feel that under this regulation state banka are tieing
discriminated against ineemuch as we are required to pay for a
duplication of work."
Second:
State Savingss 804k. Missoqg irmi;e1T e
"I have had a report from the 6tate bavinga Bank,
Missouri Valley, Iowa, that they have been charged an examination fele
for examination made
a representative of the Federal Reserve
Bank with the State Bank Examiner. Wish you would let me know if
it is the intention of the department to make a charge for assisting
tbhe State Department in examinations. As a matter of fact, I do
not see the need of a Federal Examiner at all unless the member
bank ia a borrower from the kederal Reserve. Kindly write me about
this in detail and oblige.
Ver:: truly yours,
(Signed) W. T. McEvoy, President.'
It appears thet Mr. McEvoy, although writing on the stationery
of the 4ondamin Savings Bank, is interested also in the Etate baying*
Bank of Missouri Valley, Iowa.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
)
j
-
Federal Reserve Board.
Aay 13, 1929
Third: 149ndamin Savimis 4#nk, Vondamin, Iowa
"We feel that even the examination is an unne
cessary
act when the member bank is not borrowing and has
no intention of
borrowing, and we will refuse to beer any addition
al expense. We take
this position on the grounds that we are receivin
g no benefits to be
compared in any way with the loss to our profits
through a connection
with the Pederal Res,rve bystem.
"Weuld you kindly give us the information
as to the
proper procedure to withdraw from the System.
You no doubt require
a special form of resolution by the board of
directors for such action.
/our promptness will be apprecieted, as we do
not wish to be embarrass&
by having an examiner call when it is our inte
ntion te refrain from
paying the unnecessary expenee of hie examinat
ion.
Sincerely yours,
(Signed) P. J. Morrow, Cashier."
The Peoples Trust and ;;avings Bonk, Clinton, Iowa,
bac for
some time been rated by us Nrn, or fourth claw
:. It wee not borrowing
of ue at the Use of examinetion. Our anelysis
of the report of examination
was recently forwarded to the Board, together
with our recap showing in
detail the reeults of the examination.
The btate E''avinfe Bank, Missouri Velley, Iowa, has
for e long
time been rated by us as an "A", or third °las
e bank. Although it was not
borrowing of us et the time of last examination
ane had not been a frequent
borrower, we believed that the reeults of the
laot previous examinetion
justified oar going into the inetitution. At thet
time, an October V, 1928,
the showing wae
locsee $9,000, doubtful $12,000, slow #14:1:000,
while
the bank hed a capitel of $50,000, and eurzaus
and profits of $14,400. That
report of examinetion also showed real estete owned
$51,400, with prior
encumbrance of $25,400, with 135,000 addition
al cerried in loans which had
the eppearance of ersatually becoming "other
reel estate% It hed ale() real
estate loans of $760500, of which #51,300 were
junior Ilene Eubject to
prior liens of #127,000, and concurrent lien
s of tia,000, with the comment
aade that line6 in general are fromen and
over-extended. It ei)peered also
thet the President of the bank had En exceseiv
e loan, hie pEper being
criticised and claeeified es slow.
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Federal Reserve Bank of St. Louis
Very truly youre,
(5) W. A. Beath
Federal Rese.rve egent
SOURCE:
241.414 - ALLISS4ENT (1929 - 1930 State Aember Bank
Examinetion
(General Files)
FEDERAL RESERVE BANK OF PHILADELPHIA
THIEL DIbTRICT
February 1, 1929
FEDETAL RESERVE BOARD,
Washington, D. C.
Lear birs:
Your letter of Januer::
1-6223 subject Exe.mination of
member banks" - was duly received. We note thet you
expreee confidence in the re:)orte of the Comptroller of the Cunen
e; end feel
justified in relying upon them for information eLi to
the concition of
netional baneeal aleo thet. the nate reports of exemin
etione cen 1:e
relied upon in the greet majority of csee to fuenis
h the !_nformetion
necessery to the Agente. We reeret to efey that, baced
upon eur experience, we do not feel thet the reports. wl-e:c we receiv
e from en;
of the supervisor;' autnorities tive ua all the le,formetion
rhich le
concider we should' htve, regarding the condition of our
member bemks,
to enable up to comply with Sections 4 and 21 of the Federe
l Reserve
Act. Thip exderiehce ie eupportec by the informttion in aer
fils.
* -r‹ * * * * *
We heve worked out a vers satisfactory plan of cooper:Alen
with
the btate benking depertments, which we feel gives In the inform
ation
neceseery to determine whether or not we can safely grent
the applications
of btate member banks for rediecount, and els° to furnis
h the Board with
the informetion it might demand concerning the condition of
such hunke.
If we follow out one euggestion of your letter, then, in caee
we erf not
satisfied with the examinotione the btete depertmente mske,
we would have
to abandon our present prectice of cooperation with them,
and make complete
examin-tions ourselvep, thie would add very greatly to
the expense of our
member banks end we would not know sufficiently more about
the banks to
justify that great additional expense.
(We know that it is not the practice of State examin
ers, in the
C\course of an examinEtion, to see whether or net the
requirementa of
the Fe&ral Reserve Act, the reguletions of the Federa
l Req3.rve Board and
\ conditions of membership are beir4 complied
with, and quite a bit of the
time of our examiners ie spent in checking
such matters) also we have feund
that very few of the Stete examiners are able
to compute accurately the
reserve required of State member banks under the Federa
l Reserve Act.
We feel it should be realized that the btate
bank examiners are not in the
least interested in seeing that the terms of the Federa
l Reserve Act etc. are
complied with.)
* * * * ** *
(c) E.,L.
Yeaeral hesf.rve Agent
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ea CIO
0.1,e;
GENERAL FILES- 241.414 - ASSEELMENT (1929 - 1930 State Member Bank Examinetion
0
FEDERAL RESERVE BANK
OF CLEVELAND
Nerch 28, 1929
Federal Reserve Boerd,
Washington, D. C.
Gentlemen:
If I am correct, when the Department of Examination was orcanized
some ten years ego by order of the Federal Resarv6 Board, it wus done
with the idee. of coopersting with the state henkin‘ depPrtmentv, vthenever
such cooperation waa possible, to thf.? extent of seneing in 4ne ezuminer,
sometimes more if necessary, for the purpoce of detrmi;linL the thoroughness of examinatione conducted 14 the various, state departments and for
the purpose of eecertaininc the uae members were mtkinc of t:le!ir funds.
This was particularly pertinent when the member LLnk 7ieF: horrewthi; from
ua. In the eerly ettempto to set up #hie contect with 'Jur ste.4c mcmber
banks, I think it wao true thet aeoh of the otetu bankini; dArtmentr in
our district felt thc. we were attemptinE to injoct ourselves, in a supervisory capacity. This feeling was overcome, however, and I believe the
relations since heve been regarded aC mutually beneficial. During that
time a ca4pk,i6n for state mosbers
we_del end the cueetioa
arcee
ac to Whether or not the.l.' would be subject to examinatione end whether
or not edditionel cost would be imposed upon theA. The:i were told in
each instance, I believe, thLt, while .411 meaers of tho byatem thej
were subject to eyaminction, no cher6ers would be ude except in cc-ees
where e complete exeninetion was coueidered necesrsry. In our hietory
tlapre e,;:p.earkl to be no reco.1-d of this havng been done. We heve msee
rpecil investUetione of banks where the cost was asseeeee to the member
bank.
Reerding the present status of our etate eepartremte of exsmieetions I believe Obi° has improved, although it is fn. from sl-titfactory in
I\ ay opinion. At leest our relations with thn depurtment ere aatisfactory
and for the met pert quite eney to msintain. Pennelvbnia has a splendid
ane thorouch-working department of eraminotion. The depertmonte of West
Virginia hnd Kentucky, in which states we have very few stzlte member beaky,
,)
are
far below standard. It appears to me thet it is up to each Federal
,
C . ,
Reserve Nenk to establish end maintain relations to the best poesible
'
(
if
Avantace.‘ In general, while our reletions with sll ste:te banking depart- "Il
ments are cordial, the decree of cooperation which we 'enure is not ell that
t' could be desired.)
C:111
/
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
tit
Sincerely,
(S) Geo. DeCamp
Federal Reserve Agent
SOURCE: 241.414 - ASSESSMENT (1929-1932) State Member Bank
Examinttion
(General Files)
0
FEDERAL RESERVE
Of
BANK
BOSTON
March 15, 1929
Hon. Roy A. Young, Governor,
Federal Beeerve Board,
Washington, L. C.
Deur Governor Young:
* * *Now the anly question that would ariec is in such examinetions
where we have one or two men sit in to follow the cherecter of the
examinetion and to secure certain information and records that ere not
covered by. the examination of the State Depertment. Az an exemple,
we accept in Connecticut end Nessachusetts the exominetion of the &tete
authoritiee but always have one or two men eit in with the &tete examiners,
the number varying with the size of the bank. For instance, if the
lAate authorities in examining the Old Colony Trust Comp,:ny of Boston
utilized the servicee of some fifty or sixty men from the State
Lepartment, we would have two men sit in with the examinttion, and, RE
I sAd before, these two men are only procuring information and date. for our
own examining depsrtnent, end, although most of this informntion might
be procured et the ttate House, it is much easier and more satisfactory. to
obtain this at the time of the exeminetion, while at the same time there
men cen acqueint themeelvee with the manner in which the entire examination
is being conducted. In the case of a small out-of-town trust compeny, only
one man is sentibr that purpoee from our exemining department, whereas
the State authorities will probably have from five to six men.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Yours ver
truly,
(S) Frederic H. Curtiee
Federal Reserve Agent
SOURCE:
E41.414 - ASSESSMENT (1929-1932) State Member Bank Examination
(Ceneral Files)
0
FEDERAL RESERVE
OF BOSTON
BANK
Februbr., 26, 19E9
Hon. Charles S. Hamlin,
Chairmen, District No. 1,
Federal Reserve Board,
Washington,
C.
Dear air.
Hiaill14
I think you know, from the very first I have realized the
Board's responsib
ty unOer the Federal Reserve Act for chz.rgo for
these examIniAiam: ave ch:-rged practically always where the oaus :J• the
0
examlnLtion fell upon Au: ,:.xamininz department. c,Much of the rork that
our examiners _I-e, called Jpon to do Is real4 to see- that the examination ie conducted in a satiaactory manner by the &tate examiners and
procuring records of such examinations for our own credit filel end
it will be rather difficult to junti4 a charge for work of th e
character. Again, In some of the States banks are already chz,rged for
tle2 exLmination by,their Ctate sxaminers, End In other Etatet they nrc
slA, so that it would seem to 3E that this sight be a factor to be taken
into consider&tion when the fbeetion of chero is considered.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
* * Yr *
Yours very truly,
(S) Frederic H. Curtiss
Federal Reserve Agent.
•
SOURCE:
241.414 - ASSESSMENT (1935 - date) btate aember Bank Examination
(General Files)
0
FEDERAL
OF
RESERVE BANK
BOSTON
July 16, 1935
Hon. Charles S. Hamlin
Federal Reserve Board
Washington, D.C.
Dear a- ir. Hamlin:
* * * Some of the Federal Reserve Banks, I understand, have waived
charges for examinations accepting the report of the State Examiners and
only making socalled credit examinations which they claim furnish them
with the necessary information. I do not believe, however, that these
credit ex8minations give as satisfactory a picture of a bank's condition
as a fall examination such as we have given our banks during the past six
months.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Yours very truly
(Signed) Frederic H. Curtiss
Federal Reserve Agent
eftletra
*ISO,
1
SOURCE:
241.414 - AbSESSMENT (195Z - 1954) State Member Bank Exaen
ation
(General Files)
2emorandum to the Board from Div. of Exam, dated July 14,
19E4, re
Report of the Foderal Reserve Agents' Committee on
Uniform Examination Charges.- E. F. Leonard
Page Z
r)
iN
/
In the Boston district, rather unusual circumstances
account for
the relatively large costs collected. The Banking
Department of Rhode
Island makes no charge for eyaminations of State
banks, is small and not
equipped to examine the larger institutions. The
examiners for the Federal
Reserve Bank, therefore, assume responsibility
for the examinations of the
large state member banks in Rhode Island and charg
e for the costs of the
examinations. The Banking Department of the
State of Aaine makee no direct
charge for the examinations, and the exeminers
for the Federal Reserve Bank
assume responsibility for the credit work in
the examinations made jointly
with the state examiners, end ERserve bank charg
je for th, cost of such
examinations. * * *
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
''• (1,
SOURCE: 241.414 - ASSESSMENT (1935-1954) State Member Bank Examination
(General Files)
noorpts from copy of letter to Ars John S. Wood, St. Louis, from Mr.
Wm. W. Boxton, Richmond, under date of June 14, 1954
I received your letter of gay 21, 1954, wit, reference to uniform
fees to be charged by Federal Reserve Banks for examinations made by them
of State member banks, which hae not been replied to earlier because of
the press of other matters.
/s1
There is a large and important question which detervee very mirefta
and serious considerations( Federal Reserve Banks are vitally intereeted
in th condition of the bankt of the country, especially member banks. The
Comptroller of V:le Currency is charged with the duty of properly rupervising National banks, but :tate banks are under the supervieion of
forty-eight different State authorities Which are without uniform lava
and which are not equal in standard of supervision.
In stay States the
supervision MI ie very ineffective. State member banke receive lest:
supervision from State authorities than do non-members, because Federal
Reserve Banks are expected to take the lead in the supervision of State
members.;
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3Ga
SOURCE:
241.414 - ASSESSMENT (1933-1934) State Member Bank Examination
(General Files)
Letter to Board from R. L. Austin, Chmn of the Bd and FRA at Philadelphia,
dated July 25, 1934
Pages 3-4
In our opinion, the operation of a fee basis for the assessment of
the chaxges tr examinations either encourages the making of hasty, incomplete examinations, or fails to impose on the examined banks the actual
cost of conducting satisfactory examinations, esulting in a departmental
deficit to be absorbed by all banks or met from the proceeds of general
taxation. Therefore, as forty-three states either base their exEmination
charges on fees or make no charge whatever, and as the fee charged in
ci,most instances is obviously inadequate to support the proper type of
examinations, we would assume that there exists in the federal Reserve
Districts embracing those states a rather wide latitude for increased
examination costs without subjecting the member banks to expenses which
could fairly be regarded as burdensome.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
********
OW
SOURCE:
241.414 - ASSESSMENT (1933-1934) State
lember Bank Examination
(General Files)
Excerpts from copy of letter to Mr. John S. Wood, St. Louis, from Mr.
Wm. W. Hoxton, Richmond, under date of June 14, 1K4
\ yThe States in this District charEe as much for examinations as they
are permitted by law to charge, and they have not the funds to enable them
to obtain and hold the services of the better examiners, nor can they in
most cases get the authority of the legislatures to increase the charges,
because the banks object to the increased fees and their influence is felt
in the legislative halls. Even if increased fees could be obtained by the
State Departments, it is not at all certain that the supervision would be
greatly improved.
ci believe the State banks are paying for all they are getting in
the way of supervision, and to them the fees seem large. If we should
charge for our participation in these examinations, they would be paying two
fees for each examination, which would not seem right. I realize that when
we participate with the State examiners we do more of the work than the State
men do, but we get results, and that is what we should strive for.)
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Federal Reserve Bank of St. Louis
•
r'
REPORT OF E. W. SWANSON, covering trip through Wisconsin, beginning
Sept. 11, 1956. Following counties visited: St. Croix, Dunn,
Chippewa, Pierce, Eau Claire, and Trempealeau. (Sub. with
Mr. Peyton's letter of 9-17-36)
Page 1
The schedule of minimum service charges ordered by the Wisconsin
Banking Department received favorable comment from most of the bankers.
The schedule ordered adopted by the Banking Department takes effect
according to counties, and I was told the effective date is not uniform.
The schedule is already in effect in most counties, although the date
has been placed as October 1 in some places. Most of the banks already
have similar schedules in operation, but the order by the Banking Department will force banks that have been chiseling to make the charges.
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Federal Reserve Bank of St. Louis
81_8
Peyton's Answer, 2-26-35, to X-9115
In File 327.-3
*********
9.
B. Examination of Banks
1. It would be desirable to centralize the control of examination of banks in the hands of a Naticnal committee. This
Examining Committee would consist of one representative each
from the Reconstruction Finance Corporation, the Federal Reserve Board, the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, who, together with four men
elected by the National Association of Bank Supervisors of the
United States, would elect one additional member. The Examining Committee should control and make all examinations
of banks in the United States, all represented organizations
to be allowed to use -these examinations as they deemed fit;
this Committee to formulate all procedure and oversee the
work.
2. In view of the fact that the Federal Reserve Board grants
trust powers, the Federal Reserve Board should have the
power to take away trust powers, and this power should cover
both National and State Member banks, the natural corollary
to which would be that the Federal Reserve Board, through
the Federal Reserve examining agency, should make examinations of National as well as State trust companies.
C.
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Federal Reserve Bank of St. Louis
Other Relations with Commercial Banks
1.( The Federal Reserve Board should alter the form of published
- bank statement in use by member banks so that such statements
would give the actual present appraised values of assets, and
so that the titles of assets would give the public a clearer
idea of just what classes of assets are being carried by the
bank such as pledged assets, second mortgages and contracts,
and defaulted bonds.)
4. The Federal Deposit Insurance Corporation should charge for
its examinations so that the non-member banks will have no
advantage over the State member banks in this matter if we
begin charging for our examinations.
5. Regulation
should be changed to avoid the conflict with
Regulation Q by eliminating the provision that certain ti,Le
deposits must be classified as demand deposits within thirty
days of maturity. The amount involved for reserve puruoses
as to each bank is comparatively small. The change would
eliminate much confusion and expense incident to the reserve
calculations, maintenance of records, etc., in country banks.
This is one of the most irritating minor reguletions and
causes a great M8SS of corrective correspondence. * * * * *
4'
.42,63
- 26. Bankers are burdened with the preparation of too many reports.
For instance, a State Member bank is required to report its
earnings and dividends to the Federal Reserve Bank, to the
State supervising authorities, to the Federal Income Tex department, and the State Income Tax department. While the
banker must necessarily file all such reports, it would seem
that the Federal Reserve Board might make arrangements with
all supervising authorities for the adoption of a uniform set
of figures with reference to earnings and dividends. In this
way, the banker would be required to compile only one set of
figures. In this connection, it limuld seem proper to change
from two semi-annual earnings and dividends reports to one
annual renort for both National and State banks. The semiannual figures are almost never used except in combinations
to provide figures for the full calendar year.
7.
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Federal Reserve Bank of St. Louis
Called reports are unnecessarily detailed and contain several
schedules which are probably never used. We suggest that the
present form be modified to eliminate unnecessary schedules,
and that these long forms be required only twice a year. For
the intervening two calls, banks should be allowed to prepare
only the short form for publication. Supervising authorities
with two complete called reports and two examinations for each
bank, annually, would have sufficient information for administrative purposes.
***** * * * * * * **
SOURCE: REPORT OF H. C. TIMBERLAKE--dwring visit through western and
southern South Dakota, July 10-:0, 1956 (submitted with Mr.
Peyton's letter of 7-50-56
Page 14
While all of the banks visited were FDIC members, some of them
find it difficult to see any definite advantage of such membership. One
banker said that no one had hod enough funds since 1953 to make depoeit
insurance necessary. Another said that FDIC membership may do some good
but that the necessary reports increased the amount of clerical work in
the office to such an extent thnt he didn't know whether the benefits were
worthwhile. He suggested that the utAly computation of deposits be
eliminated and that FDIC name 6 (or even 11 miscellaneoua dates throughout the year to be averaged in order to determine the net deposit average
for assessment purposes.
South Dakota laws permit the establishment of branches under certain
conditions but as yet no stLte banks have been authorized to establish the.
White Lake iv a bvnkless town et present and several nearby banks are considering the establishment of a branch or moving there. Some of the stute
bankers feel that some of the exeminers &re too insistent on liquidEtion
and others who are "liquidation-minded" are surprised at loan recommendations
that other examiners make. One banker whose loan limit is t1,500 refused to
extent a tk,200 loan on 200 heed of cattle for six month:: while the examiners
were at his institution, and they told him thLt was the best lozn on his
books. The banker felt thr_t if feed purchLses became necessary, the loan
would soon become excessive, so told his customer he woulc carry the
balance if he would reduce to 100 hetd, but if not, he woule have to
obtain hie funds elsewhere. The Louth Dekota Superintendent of Banks used
the "standard call report form" for the first time for the June 50 call
much to the delight of many bankers who hLd previously complianed at the
multiplicity of reports. On the invitation of bupt. Strain, I attended a
session of the Guaranty Fund Commission at Rapid City which gave me a
very clear conception of the close attention th.7..t is being paid to some of
the weaker banks.
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Federal Reserve Bank of St. Louis
773
SOURCE:
Report of H. C. Timberlake, covering parts of Minnesota and
North Dakota, during June 5-16, 1936, (Wb. with Mr. Peytonti
letter to Bd. of 7-7-M)
Pave
Most bankers thet belong to the Fric are highly appreciative
of the benefits they have received, one of them saying that if we had
hod FDIC in 1915, we would never heve hpe the banking dirarters of 19r,035. Anotner banker felt that the FDIC examiners were giving him a liberal
bank should be run while a third felt thr,t the FDIC
education in how
examiners were Id little unreasonable in their classifications, stating
that for the lest five examinations, the balence in hir "Trusteed Assets' aw
count %,as less than the amount classed "doubtful" Lt. the preceding examination! (The :Aate Banking Department is said to be only rJ "rubbpr stemp" forA\
the }Ili. but the bankers of the stAe are thankful that the dely.rtment hes
not embarked on a "chartf-r more hanks et,mpLifirn" ruch ,s they notice in
minnesota.)
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Federal Reserve Bank of St. Louis
1'16
\MI
SOURCE:
4.
MINUTES OF FED. RES. AGENTS' CONFERENCE-Wash. May 1934 (Confidential)
EXAMINATION, SUPERVISION, AND REGULATION. (Ir. Wood led discussion.)
(17)
Topic 4-A. Critical examination vs. constructive aid in correction and management.
The following statement prepared by Mr. Wood was read and adopted as
the sense of the conference:
nAll examinations should be constructive. As to whether they should
be critical depends upon a definition of terms. The word 'critical' is
defined in several ways, and different dictionaries give different primary
meanings. Examiners should not be captious nor censoriaus, which is one
definition of critical. Another definition of the word involves the
exercise of careful judgment. The latter sort of critical examination is
necessary before really constructive suggestions can be made to the bank
managements. An examination can not be made in this sense, nor can an
examination be made that is constructive in any sense, unless the examiner,
in the language of one dictionary defining critical, is 'skilled in careful
judgment.'
"Some examiners of ability are inclined to be too fault-finding in
their r8lations with bank managements. 'his impairs their ability to correct
conditions that are subject to the right type of criticism, and unless such
examiners can correct their tendencies to captiousness, they cannot, in the
highest sense, be useful to Federal Reserve Agents.
"If a management is fundamentally sound, but lacks experience along
certain lines of banking, supervising authorities may be of value in offering
constructive suggestions. Even to good managements, suggestions can be
offered that are helpful. To have rendered a constructive service of this
type gives a feeling of satisfaction that is one of the greatest compensations
that comes to a supervisor.
"We had, however, best face several facts: (1) That we cannot operate
nor can we supervise the daily operations of member banks; we can merely give
sound, constructive advice when opportunity affords. (2) That we can not
offer constructive suggestions unless we have examiners who possess ability,
experience and a constructive viewpoint that will enable them to discover and
report facts on which suggestions may be based. (3) That regardless of the
ability of the examiner or the Federal heserve Agent, they cannot make an
efficient management out of a bad or weak management. Of course, every effort
should be made, in such cases, both by the examiner and the Federal heserve
Agent, to be helpful. The eventual correction, however, must come through a
good management to supplant a bad or inefficient management."
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Federal Reserve Bank of St. Louis
.11
14;„::
-2-
d . Wood (contd.)
(20)
Topic 4-D. Policy in appraisal and depreciation of bank buildings.
The following statement of Mr. Wood was read and made a part of the
record:
"The objective in the appraisal of a bank building is to ascertain the
real value of the property. The policy of depreciation should be to charge it
down to a value which, in case of liquidation, would enable depositors to
receive in cash the amount at which the building is shown in publiehed statements. In accomplishing this result, all factors in the situation should be
considered, and the result achieved with as little real hardship to the bank
as is possible.
"In arriving at the real value of the building, it is important that a
current written appraisal of the property should be ottained. It is advisable,
if possible, to have the api,TaiEal made by a disinterested p;,.rt
:
,
- who has a
sound 1- lowledge of local values.
"The reite at which the depreciation is to be made should be determined
in the light of all the facts in the case. Sympathetic consideration
is
frequently due the management. The objective should 1-,e to arrive ,A
an actuel
cash carrying value at as early a date asal the conditions will warrant.
Unless the building is carried at an obviously high figure, a depreciation of
annually has been agreed upon. In a ruml.er of cti.7cr, llowevcr, the carrying
-vL,luc has been so high that a greater rate of depreciation has been found
necessary.
"In cases of banks reorganizing, we have endeavored to take the bank
building in at a value approximating its present real worth."
(22)
Topic 4-F. Cooperation in neceEsary corrections with clearing
house associations which have eliminated examination division.
In the consideration of this topic it was pointed out that the responsibilities of the kederal Reserve Agent in regard to the member banks are not
lessened by their memberships in the clearing house associations. While
it is
desirable to cooperate with the clearing houses in effecting necessary corrections, no inforilation regarding the condition of a member bank should be
divulged unlesE properly authorized in accordance with Section 22 of
the
Federal Reserve Act.
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Federal Reserve Bank of St. Louis
5. TRUST DEPARTMENT EXAMINPTION AND SUPERVISION. (Mr. Stevens led discussion.)
(25)
Mr. Stevens emphasized the desirability of a highly trained trust
specialist on the staff of each Federal Reserve Agent rho is able to report
on the legal responsibilities, procedure, and management of trust departments.
The Federal Reserve Agents stated that they are addressing themselves to the
task of obtaining competent trust examiners to examine tbe trust departments
of member State banks, and expressed the view that it would be exceedingly
helpful if similar action were taken by the State banking departments and the
Comptroller's office.
Mr. Stevens stated that he had been interviewed by the President and
another member of the Executive Council of the Trust Section of the American
Bankers Association, which at a recent meeting had expressed great interest
in this new activity of the Federal Reserve Agents and offered its complete
cooperation. It also ventured to suggest the wisdom of a chief trust examiner
in the office at Washington of the Chief Examiner of the Board, in order that
trust examinations and standards of practice might be coordinated. This
suggestion was respectfully referred to the Iederal Reserve Board for its
consideration.
The question of trust examinations was later 6iscussed with the
Comptroller of the Currency when he met with the conference. He assured the
conference that his department vas moving to engage proper trust examiners for
national banks, but would, in the meantime and thereafter, welcome all cooperation from such examiners in the Federal Reserve Banks.
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Federal Reserve Bank of St. Louis
MUTE: —325. - CONFENCF 5-7-S4 (FRAgents)---,GenerEl File
RESPONSIBILITIES ARISING FROM THE REQUIREMENTS OF SECTION 50 OF THE BANKING
i,CT OF Dn. - Mr. Wood (iAtsched to Air. Morrill's memo. of 5-10-54)
PPSe
If tIv.. banki_nc• burinur in the future is to be continued on a
sound tvsis,- if bank feilures are to be eliminated, it iE my opinion
that the Comptroller anti Federal Reeerve Agents muet regard seriously
their duticz in canncti,
.)n Tith Section 50 of the Bankine Act of 19F5.
A bank is RE stronE and can not long remain any stronger than its
maw,Eement.
ak per5cnncl c.71
ct7.1-7 774' the m&n4eaent of a
strmg bank, and if permitted to remain in Charge, oen soon convert the
strong bank Into a wetA on-. Orl:' by
.atau:st vizil rice- m tLic
of rupervising authorities, and by the most vigorous disetwrge of thiir
duties, cLn improper mRnrgnmPnt be eliminated. from bcnks.
After
rather hre:-6 exprince in bank supervision, it
my
definite opinion th,,,t bank supervision is cffective only in the
gree
in which it can produne good bank manttgement. All of the advice, all of
the criticiam,
C11 of the
ae.F of vAipe-rvienE authcritiAT have,
in my exneriene, never r;41ted. 1_71 makinp,
glo• banker out of m inefficient or bad banker. The only hope, in the case of bad management,
is to acr'llplish the remmr-.1 of the officerr or directorr e!o tr responrAble
for the bad management.
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Federal Reserve Bank of St. Louis
* *
10*
* * *
°‘;55
SOURCE:
MINUTES OF FED. RES. AGENTE' CONFERENCE-Waeh
. Aay 1954 (Confidential)
4. F1AVINATION, SUPERVISION, AND REGULATION. (Mr.
Wood led discussion.)
*
* *
(18)
Topic 4-B. Crtticiame anc. corrections to be conei
dered direct with
bank or through Etate euthorities.
Nr. Wood reed the following statement, which was
adopted:
"Lettere of criticism or correction should be
written directly to the
banks. Relations with ;etate aupervielne auteoritic
e eeould be close and
cordial. There shculd. be whole-hearted cooperatio
n #t all times. State
supervisors, however, canna fssirle be teeeete,1
to aieume our responsibilitee.
("Prior to June 16, 1953, there might have
been some just eleation as to la
the extent, if any, to whiea we eho'eld exercise super
vieion. With the passage I
of the Bankine Act of 1953, however, we are charg
ed rith certein reeponsibilities thet reeuire us to exerciee direct ead
defitite supervisory relations
with State member bauke. Whether we like it or
not, we are sin the army now. 1/
)
"Of course, ve must be careful to refrain from
invedini the field of
State superviaors. Thie is not difficult, used
in soberly all cases 3tate
authorities tire; really eled to have the benef
it of our thorough examinations.
"The report of examination should accurately
and fairly discloee the
condition ef the bunk examined, end recit
e in e. conetructive wee, all Items of
criticism. The letter of the Federal Reserve
Agent to the director? should
aleo set out, in a constructive wey, comments.
on corrections thet need to be
made. The bank management should be requested
to advise the Federel Reserve
Agent directly in respect to the corrections mede,
or to be merle, or to
furniah him with a copy of the letter to
the Stete supervising authority, containine euch informetion. in neerl ellenaes,
the menegemente report direct
to the Federal Reserve Agents."
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Federal Reserve Bank of St. Louis
t;
SOURCE: ---325. - CONFERENCE
5-7-34 (FRAgents)___General File
RESPONSIBILITIES ARISING FROM THE REQUIREMENTS OF SECTION 30
OF THE BANKING
ACT OF 1933. - Mr. Wood (Attached to Mr. Morrill's memo. of
5-10-34)
Page 2
If the banking business in the future is to be continued on a
sound basis,- if bank failures are to be eliminated, it is my opinion
that the Comptroller and Federal heserve Agents must regard serious
ly
their duties in connection with Section 30 of the Banking Act of
1933.
A bank is as stronL and can not long remain any stronger than
its
management. A weak personnel can take charge of the managem
ent of a
strong bank, and if permitted to remain in charge, can soon convert
the
strong bank into a weak one. Only by the utmost vigilance on
the part
of supervising authorities, and by the most vigorous discharge of
their
duties, can improper managements be eliminated.from banks.
After a rather broad experience in bank supervision, it is
my
definite opinion that bank supervision is effective only in
the degree
in which it can produce good bank management. All of the
advice, all of
the criticism, and all of the demands of supervising authori
ties have,
in my experience, never resulted in making a goo6 banker
out of an inEfficient or bad banker. The only hope, in the case of bad
management,
is to accomplish the removal of the officers or directo
rs who are responsible
for the bad management.
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Federal Reserve Bank of St. Louis
52
SOURCE:
MINUTES OF FED.RES. AGENTS' CONFERENCE -Wash. Aug. 1933 (Conficential)
Page 4 (?)-Pages not numbered
Pake 5 "
(io)
Topic 3. Responsibility of Federal Reserve Agents under new
Banking Act, particularly under Sections 3 and 30: (a) supervision,
(1) coordination with other supervision; (b) examination of trust
departments.
"(a) Supervision - "Under Section 3 of the new Banking Act, each
Federal reserve bank is required to keep itself informed of
the loans and investments of its member banks with a viev.
to ascertaining whether undue use is being made of bank
credit for the speculative carrying of or trsding in securities,
real estate, or commodities, or for any other purpose inconsistent with the maintenance of sound credit conditions. * * *
The Chairman of the Federal reserve bank shall report to the
Federal Reserve Board any undue use of bank credit by any member
bank, together with his recommendation."
"It therefore becomes incumbent on the chairman t.:1 keep in the very
closest touch with the investment policy of each member bank ES it pertains
to liquidity and diversity of assets carried. The chairman and the other
officers of the Federal reserve banks should be ir a position to advise
member banks on general credit policies to be followed. There should be
the closest contact between the examining authorities, State, national and
officials of the Federal reserve banks. Careful analysis of each report
of an examination of each bank should be made showing percentages of each class
of investment as they affect such banks' liquidity. Criticisms or suggestionr
should be taken up with the officials of the member bank in question by the
chairman or officers of the Federal reserve bank.
"Closest information should be gathered as to the character of management of each member bank, the stock control and financial responsibility of
its directors.
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Federal Reserve Bank of St. Louis
0110
f 44Z5
SOURCE:
MINUTES OF FED. RES. AGENTS' CONFERENCE-Wash. Aug. 1933 (Confidential)
Page 5 (?)---Pages not numbered
(10)
Topic 3. Responsibility of Federal Reserve Agents under new
Banking Act, particularly under Sections 3 and 30: (a) Supervision,
(1) coordination with other supervision; (b) examination of trust
departments.
*** **** *
\
"(b) Coordination with Other Supervision -(There should be the
closest contect and coopertftion between the Federal Reserve Agent's department and the Federal reserve bank, with the national bank exRminer, State
supervisors, representatives of the Reconstruction Finance Corporation and
representatives of the other Government agencies.)
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,
Federal Reserve Bank of St. Louis
* * * * * * * * * X-
iro2 A
7
SOURCE:
MINUTES OF FED. RES. AGENTS' CONFERENCE-Wash. Nov. 1932 (Confidential)
Page 9 (?)---Pages not numbered
CURRENT PROBLEMS IN RELATION TO MElaTER BANKS.
(27)
Topic 4-A. Uniform policy to be followed by State and
National examiners in the handling of the various types of bank
assets including the classification of bond depreciation in State
banks.-Messrs. Case, Wood and Stevens.
Attention was called to the Federal Reserve Board's letter of January
14, 1932, which, in keeping with the Comptroller's instructions of December 161
1931, to national bank exEminers, stated in part as follows:
"The Board believes that, in making examinations of State member
banks and in analyzing reports of exaninations of these institutions made by
State authorities, it would be desirable for the Federal reserve banks to set
forth the entire amounts of depreciation on securitiEs, grouped according to
the rating or issues. The amounts of depreciation on stocks and on defaulted
bonds only should be shown as losses."
Inquiries of those present revealed that some of the SUct,e banking
departments are not following the Comptroller's classification. However,
the
Federal Reserve Agents are endeavoring to effect uniformity.
10
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Federal Reserve Bank of St. Louis
1C,93
SOURCE:
MINUTES OF FED. RES. AGENTS' CONFERENChellash. Nov. 19E::. (Conficential)
Pages 11-U (?)---Pages not numberec.
CURieENT PROBLLAS IN i:ELATION TO IEIT;E BANKS
* * ** ***
(32)
Topic 4-F. Relations between Federal reserve banks end national
and Stete examining depertments. - gr. Ltevene.
Topic 4-G. Fxaminations by iederal reeerve bank exeminere vs.
subsequent continoini pereouel cello e4 euch repreeentetives of
the Federal reeerve bank in the nature of aezietence in adjusting
unsatisfactory coaditieas &lee endeevarint, eo coxrect erroxs of
management. - Mr. 3tevens.
The above two topica were coneiderec together.
folloring commentes
Mr. btevens mede the
"It ie ebvious thEt the Federal reserve banke, occupying c position of
sponsorship for their membere, should maintain cloee and friendly relations
with the supervieing eutheritiee, both 6tute end national, =Leer wnose auspicee
the examinations of these banks are made. Wo have tried not to put oureelvey
in a position where we could be criticized for ovel.riding ehe euteurity of the
supervising department* and our first approach es to corrective measuree ie always throug, the depertment 1:.zelf. Yie heve fouud 'sleet the depurtments ere
reedy end willing to give us information ae to wuht meaeuree they are taking
ane. to welcome our coopermtien. In ceeteir, :AkaLfeb tirey eeee to be willing for
us to ge direct to the banks urging our views tib to whet ehould be done in many
insteneee.
"by its very nature an examination ie critical in its eceence. Indeed,
under present day conditions, an examinetion end report to the management and
a to the board of directors in the nature oi criticisme too often euet leed to
Ttheir discouragement and lose of moraie, et e time *hen they are weging a hard
e
fight to exirt. It seema to me that it ie importent that we in the Federal
,
reserve banks should follow up corrective meetsures in 6 conetructive end helpful way. We ehould show thet the eponeorship of the Federal reserve bank means
friendly end helpful interest in their difficulties, rather than mere1-2 h
criticism of their actions.
"I have instructed our examinere from time to time between examinetions
to make personal calls on bulks in uneetisfactory condition, and if advieable
to call in the officere end directors from time to time with a view of helping
them work out tneir problems."
In the discussion of theee subjects, attention wee called to the Federal
heserve Boardle Regulation ii, which incacatee that Federal reserve examinere
ehall act with the examinetion staff of the Stete, and to the board's letter of „.. r..,,
\ ft) July keE s 1930, X-6665, which stated among other thinges "If thie supervision
0-k!
is not conducted by State authorities, the Federal Ieserve Agent is directed to
\,'(
' (1) teke such action as in his opinion will discharge the responsibilitiee of the Boerd,
/f
/S/
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Federal Reserve Bank of St. Louis
•
SCHEDULE H
4---etotAt
(Sections 112, 113).
Return of the liabilities and assets of the
19
on the
__________day of
Liabilities.
1. Votes in circulation
2. Deposits by and balances due to Dominion
Government
by and balances due to provincial
Deposits
3.
governments
4. Advances under the Finance Act
5. Deposits by the public, payable on demurIC.,
in Canada
6. Deposits by the taablic, payable after notice
or on a fixed day, in Canada
7. De,Dosits elsewhere than in Canada
8. Deosi-U 'y and balances due to other banks
in Canada
9. Deposits by and balances due to banks and
banking correspondents in the United
Kingdom
10. Deposits by and balances due to banks and
banking corresondents elsewhere than
in Canada and the United Kingdom
11. Loans from other banks in Canada, secured,
including bills re-discounted
12. Bills payable
13. Letters of creait outstanding
14. Liabilities to the public not included under
foregoing heads
15. Dividends declared and unpaid
16. Rest or Reserve Fund
17. Capital paid up
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Federal Reserve Bank of St. Louis
Assets.
1. Gold and coin
In Canada
Elsewhere
Dominion notes
Notes of other banks
United States and other foreign currencies
Cheques on other banks
Deposits Ivith and balances due by other
banks in Canada
7. Due by banks and banking correslondents
in the United Kingdom
8. Due b:7 banks and banking corres2ondents
elsewhere than in Canada ancl the
United Kingdom
2.
3.
4.
5.
6.
Bank
•
-2-
9. Loans to other banks in Canada, secured,
including bills re-discounted
10. Dominion and provincial government direct
and guaranteed securities (maturing
within two years), not exceed4.ng market
value
11. Other Dominion and provincial government
direct and guaranteed securities, not
exceeding market value
12. Canadian municipal securities, not exceeding market value
securities other than Canadian,
Public
73.
exceeding
market value
not
debentuaes
and stocks, not
bonds,
14. Other
market
value
exceeding
1E. Call and short (not exceeding thirty days)
loans in Canada on stocks, debentures,
bonds and other securities, of a sufficient marketable value to cover
1C. Call and short (not exceeding thirty days)
loans elsewhere than in Canada on stocks,
debentures, bonds and other securities,
of a sufficient marketable value to
covur
17. Other current loans and discounts in CanadD I
estimated loss orovided for
]8. Other current loans and discounts elsewhere
than in Canada, estimated loss provided
for
19. Loans to the Government of Canada
20. Loans to provincial governments
21. Loans to cities, towns, municipalities
and school districts
22. Yon-current loans, estimated loss provided
for
23. Real estate other than bank premises
24. Mortgages on real estate sold by the bank
25. Bank premises, at not more than cost, less
amounts (if any) written off
26. Liabilities of customers under letters of
credit as per contra
27. Deposit with the Minister of Finance for
the security of note circulation
28. Deposit in the central gold reserves
29. Shares of and loans to controlled companies
IC). Other assets not included under the foregoing heads
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Federal Reserve Bank of St. Louis
*3*
•
Capital authorized
Capital subscribed
per centum
Rate per annum of last dividend declared
Aggregate amount of loans to directors and firms of
which they are partners, and loans for which they
are guarantors,f
Average amount of gold and coin held during the month,
Average amount of Dominion notes held during the
month,$
Greatest amount of notes of t'ie bank in circulation
at any time during the month,$
Branch and Agency returns used in the preparation of
the foregoing and antedating the last juridical day
of the month aforesaid are as follows:-
Branch or Agency.
Date of such return.
I declare that the above return is correct according to the
books of the bank.
E. F.
Chief Accountant, (or Acting Chief
Accountant, as the cse may be).
We declare that the foregoing return is to the best of our
knowledge and belief correct, and shows truly and clear4
the financial position of the bank, as required by sections
one hundred and twelve and one hundred and thirteen of the
Bank Act; and we further declare that the Bank has never,
at any time during the period to which the said return
relates, held in Dominion notes less than forty per centum
of the cash reserves which it has in Canada.
(Place)
this
day of
19...
A.B.,
President, (Vice-President, or Director
acting as Ptesident, as the case
ma: be).
Cope,
General Manager, (or other principal
officer, as the case may be).
R.S.,c.12,Sch.G,am.
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Federal Reserve Bank of St. Louis
•./
SOURCE:
THE CANADA YEAR BOOK-1934-35
CHAPTER XXII.--CURRENCY AND BANKING; LOAN AND TRUST COMPANIES
Pau 961
The revision of 1900 (effective 1901) recognized the Canadian
Bankers' Association as an agency in the supervision and control of
certain activities of the banks. It was charged, under the Treasury
Board, with the responsibility of supervising the printing and
distribution of notes to the banks and their issue and destruction;
also with control over clearing houses end the appointment of curators
to supervise the affairs of suspended banks. The amended Act also included provisions permitting one bank to sell its assets to another.* *
At the fourth revision of the Bank Act of 1915 provision war
made for an audit of each bank's affairs by auditors appointed by the
shareholders. There was also provision for the establishment of Central
Gold Reserves in which banks might deposit gold or Dominion notes for the
purpose of issuinE additional notes of their own there-against. Annual
reports to the Minister of the fair market value of real and immovable
property held by the banks for their own use were required. * * *
lc> ‘k
The fifth revision of 1923 (13-14 Geo. V, c. 32) resulted in
numerous important changes. The qualifications of provisional directors
were re-defined, while provision was made for keeping records of attendance
at directors' meetings and bring them to the notice of shareholders. Annual
and monthly statements were given further attention and more complete
returns required, including statemcnts of controlled compenies in the
names of which any part of a bank's operstions were carried on. Other or
special returns were to be made if called for by the Minister. Two auditors
were now to be appointed by the shareholders instead of one, end the
qualifications, duties and responsibilities of auditors were more clearly
defined. The personal liability of directors in case of distribution of
profits in excess of legal limits was also more definitely expressed.
Regulations regarding loans were amended and advbnces to any officer or
clerk of a bank could not, in any circumstances, exceed t10,000. Registration of security for loans under Sec. 88 was provided for. It became
necessary for guarantee and pension funds to be invested in trustee
securities. The punishment of directors and other bank officials for
making false statements of a bank's position was provided for in Sec. 153.
In 1924, as a result of the failure of the Home Bank of CenAda, provision
was made for periodical examination of the chartered banks by an InspectorGeneral of Banks, who was to be an officer of the Department of Finance.
The sixth revision of the Bank Act was postponed from 1933 to 1934
(c. 24), for adaptation to the establishment of the new Bank of Canada,
and most of the alterations were to provide for the relations of the chartered banks with the Bank of Canada when the latter should be organized and
authorized to commence business. The dhartered banks were then to carry a
reserve (consisting of a deposit with or notes of the Bank of Canada)
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Federal Reserve Bank of St. Louis
-2-
The Canada Year Book-1934-35
amounting to at least 5 p.c. of their deposit liabilities in Canada, and
in addition to maintain adequate reserves for external liabilities. The
notes of the chartered banks were to be gradually replaced by those of
the Bank of Canada as the circulating medium in Canada. To this end notes
in circulation of chartered banks were not to exceed their unimpaired pa.7dup capital from the time the Bank of Canada commenced business and were to
be reduced by 5 p.c. per annum for five years from Jan. 1, 1956, and 10
p.c. per annum for five years from Jan. 1, 1941, so that at the end of ten years
they should not exceed 25 p.c. of the paid-up capital. At the same time, the
liability of shareholders under the double liability provision was limited to
that pooportion of the par value per share which the authorized note issue
at the time bore to the paid-up capital of the bank. Other important changes
in general provisions included: (1) the curator of a suspended bank was to
be appointed or removed by the Minister of Finance, instead of by the Canadian
Bankers' Association; and (2) the terms "bank", "banker" or "banking" could
not be applied to any activities in Canada except those of chartered banks or
approved savings banks; (3) a limitation of 5 p.c. of the paid-up capital
(instead of 10 p.c. as formerly) was placed on loans to directors, or any
firm, company or corporation in which the President, the General Manager or a
director is a partner or rhareholder, without the approval of two-thirds of
the directors present at a regular or special meeting called for the purpose;
(4) a director was prohibited from being present or voting et a meeting or the
Board when loans to himself or any firm, company or cort noration of which he is
a partner or director, are under consideration, an infraction of this
prohibition being attended by severe penalties as well as automatic disqualification of such director; (5) a bank was not permitted to allow its
name to appear, except as banker for receiving applications, upon any
prospectus or advertisement respecting the isaue of securities apart from
government or municipal issues and certain others of the specific type
mentioned in the Act; 03* changes were made to permit of loans under Section 88
against seed grain, binder twine and fertilizer; (7) a definite prohibition
was enacted against the charge of a higher rate of interest or discount than
7 p.c. in any part of Canada except the Territories, any violation of such
prohibition being attended by penalties against both the bank and the officer
responsible; (8) monthly returns were amplified for the purpose of securing a
clearer appreciation of the position of the banks, and certain additional
returns called for.
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Federal Reserve Bank of St. Louis
* *** * * * **
A Review of the Proceedings of the Williamstown
Institute of Politics; 1932 Sessions
(Journal of Canadian Bankers' Asso., Oct., 1932)
*********
American Banking
It was not only in its international field of action that American
finance was weighed in the balance and found wanting. Both American and
foreign speakers repeatedly referred to the inadequate banking system with
which the United States is burdened. Professor Gregory outlined some possible measures of reform. Although the security-issuing subsidiaries of
the biu American banks might have fulfilled a very valuable function, if
they had been managed differently, nevertheless experience had convinced
him that these subsidiaries ought to be abolished. He also hoped that, in
the future, the bankers would regard themselves as professional men rather
than highly competitive business men. CRegarding the structure of American
banking, the two most necessary changes appeared to Professor Gregory to be,
first, the unification of the system by means of the States revising their
banking legislation in line with the National Bank legislation of the
Federal Government. A first step in this direction would be the unification
of the various systems of inspection, since it is the more rigid inspection
requirements imposed upon the nationally dhartered banks and members of the
Federal Reserve System which keep many banks with State charters from joining
the system.) The second general line of reform which was recommended was the
extension of branch banking. This type of banking not only spreads risks, but
also attracts a better type of man into the field than cares to take part in
"unit banking" ventures whose capital may be only a few thousand dollars and
whose loans may all be tied up in a one-horse town. Unfortunately these
improvements depend upon legislation by the forty-eight states. It is not
likely, therefore, that they will be introduced with a rush. In the meanwhile the American banking system will remain as unco-ordinated and as
difficult to regulate as it stands today.
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Federal Reserve Bank of St. Louis
******* ***
588
•
Editorial Comment - The March of Events
Journal of the Canadian Bankers! Asso., April 1936
***
-;';-
* .: -X- *
The United States BankinK Crisis
President Roosevelt himself has already made clear that he will call
for fundamental changes in the United States banking system. It has been
apparent for many years that there existed definite structural weaknesses
which have resulted in inordinate numbers of bank failures whenever the
country aas subjected to economic pressure. The Federal Reserve System
itself constituted a great step forward but that alone could not remedy
the weaknesses of national bank legislation and particularly of the State
banking systems chartered under the most varied leas. Colonel Ayres of the
Clcveland Trust Company has pointed out three important weaknesses in the
United States banking system: In the first place, loans on real estate have
proved the undoing of very many banks, and such loans ought to be curbed,
if not prohibited, as they are in Canadian banking law. In the second
place, the twelve Federal Reserve banks loosely joined together by a Federal
Reserve Board, have not proved capable of presenting a united front to the
forces of panic and depression. Something rill probably have to be done to
give more unity to the Federal Reserve System, making each Federal Reserve
Bank something close to a branch of a single central bank. In the third place,
there is need for more unity in the entire banking structure. Colonel Ayres
does not go so far as to suggest specifically branch banking, but there is no
doubt that the United States will have to take a long step torard branch
banking if it is to strengthen its badly reakened system. One must remember,
of course, that to convert a united banking system into a branch banking
system in a short epace of time is an exceedingly difficult process and one
fraught with the greatest danger; mere amendment of the banking law, permitting
widespread branch banking, would probably unloose an orgy of competitive
speculation in bank purchases which would further weaken the system. Probably
a system of branch banking within each Federal Reserve district, with authority
given to some public body to approve not only all bank amalgamations, but also
the terms on which banks might be purchased and absorbed by others, rill be
necessary.
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Federal Reserve Bank of St. Louis
*********** *
764
•
C"The Present Working of the Canadian Banking System"
by J. A. McLeod, President, The Canadian Bankers' Association,
(Journal of the Canadian Bankers' Asso., Oct., 1933))
1
**********
There has been no failure of a Canadian bank during the past ten
years; and in the depression years the banks have been fortunately free
from confidence-destroying rumours and from runs. The stability of the
Canadian banking system (which stands in sharp contrast with the large
number of bank failures in the United States during recent years) may be
regarded as principally resting upon five features. These are: (a) The operation of the banking system under a single legislative authority;
(b) The freedom of the Canadian banker from the hampering influence of meticulous regulations in detail;
(c) The minimum of size and strength prescribed for Canadian
banks in The Bank Act;
(d) The systematic and progressive training of bank executives,
which is provided by promotion through the bank system; and
(e) The smooth and orderly distribution of banking funds according to local needs, which is also made possible by the
branch system.
** ********
The Supervision and Inspection of Branches by Head Office
******
FUrthermore, each branch is inspected annually (or more often, and
at uncertain intervals, if this is considered necessary); and the Inspection Report includes a list of all loans, small as well as large,
with brief comments by the bank inspector regarding the smaller loans,
and the manager's report regarding loans in excess of a stated amount.
The annual Inspection Reports, a bound volume, giving a complete
review of the business of each branch, is placed in the hands of the
Directors of the bank, as soon as it becomes available.
FUrthermore, the books maintained in Head Office are examined
annually, by auditors acting on behalf of the shareholders. The manner
of appointment of these auditors, and the procedure to be followed by
them, is prescribed in The Bank Act, Sections 53, 54 and 55.
The shareholders' auditors also examine balance sheets from the
branches (certified by the branch manager and his accountant), and in
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Federal Reserve Bank of St. Louis
763
•
2
addition, verify the cash at some of the larger branches. All investments
are either examined personally by the shareholders' auditors or (in cases
where this is not feasible) certificates of their existence are provided.
The shareholders' auditors also make careful inquiry into all of the larger
loans.
/1,
Besides the regularly prescribed examination by the shareholders!
auditors, provision is made by statute (in The Bank Act, Section 56) for
the regular inspection of the banks by the Inspector General of Banks.
a (This officer makes an examination annually of the books of the bank at -)l,:0
Head Office; and in addition makes his own investigation of the larger i
loans; reporting the results of his work to the Minister of Finance, by
whom he is appointed.)
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Federal Reserve Bank of St. Louis
Bank of Canada Act - July 1934
(An Act to incorporate the Bank of Canada)
* *** *
* * *
Reserve of Chartered Banks
'
47. (1) * * * * * * * * *
(2) For the purposes of this section, every chartered bank shall
make a return to the Bank to be signed by the chief accountant or acting
chief accountant and by the L;eneral manager or acting general manager of
such bank, showing the amount of its deposit liabilities within Canada and
also the amount of its deposit with the Bank and the amount of the notes
of the Bank held by such bank, at the end of each juridical day of the
month last preceding the date of the return, and showing for the month the
daily average amolnit of such deposit
and of its deposit tith
the Bank and of the notes of the Bank held by such bank. Such return shall
be delivered or transmitted to the Bank at the same time as the return to
the Minister, pursuant to section one hundred and ttelve of The Bank Act,
is transmitted or delivered.
* * * *******
(5) For the purpose of this section the Bank may authorize the
Inspector General of Banks or one of its own officers to make an inspection
of the books, accounts and documents of any chartered bank, and the
chartered bank shall give the Inspector General or such officer access to
the books, accounts and documents of the bank for such purpose, and if the
Inspector General or such offieer is obstructed or delayed in making an
inspection the chartered bank shall be guilty of an offence and liable on
summary conviction to a fine of one hundred dollars for each and every
day during which the obstruction or delay continues.
* ** * * *** * **
(7) Every bank incorporated under the Quebec Savings Banks Act
r5 shall maintain against its deposit liabilities such reserves in the form
of notes of the Bank or deposits with the Bank or a chartered Lank as may
be deemed to be sufficient by the Bank and shall furnish such information
as may be required by the Bank frozt time'to time to satisfy it that such
reserves are so maintained.
* g * *
* *
* * *
Audit
z V'*4
32. (1) For the purpose of auditing the affairs of the Bank, the
Minister shall appoint two auditors, eligible to be appointed as auditors
of a chartered bank, who shall continue to act as auditors until the first
annual general meeting.
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Federal Reserve Bank of St. Louis
589
•
- 2 -
(2) The shareholders at each annual general meeting shall appoint
two auditors, eligible to be appointed as auditors of a chartered bank,
but no person shall be eligible for appointment if he or any member of his
firm has been auditor for two successive years during the three next preceding years.
*********
(5) The Minister may from time to time require the auditors to
renort to him upon the adequacy of the procedure adopted by the Bank for
4 the protection of its creditors or shareholders and as to the sufficiency
of their own procedure in auditing the affairs of the Bank; and the
Minister may, at his discretion, enlarge or extend the scope of the
audit, or direct that any other procedure be established or that any
other examination be made by the auditors or by the Inspector-General
of Banks as the public interest may seem to require.
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Federal Reserve Bank of St. Louis
*** *** * ***
SOURCE: Ta FCONOMIST--Dominion of Canada 'Special Review-London JRAi lret 1904
Zama
VI/..-BANKING AND INSURANCE
Trends in Canadian Banking
by Prof. J. F. Parkinson
Following the sodel of the First Bank of the United States, the
original charter of the Bank of liontreal (1817) contained a prevision
forbidding the Bank to hold any real estate boyamd *hat was nesessary
for the conduct of ite business. The first lank Act, that of I871, applied
this provision to all banks by deogriog them the right to make advances
against the hypothecation of lend or toneveable property. It is of cuurse
a sere commonplace that legislation cannot guarantee banking liquidity.
If banks cannot lend on land there is nothing, for example, to prevent then
investing in municipal bonds, which are bk,sed in turn on inflated assessments.
In actual fact, however, there is no ret4on to believe that the banks have
suffered Nor serious looses Juring the depression because of their security
holdings.
'
%spite, therefore, the absence of any other important legislative
restrictions over the disposition of assets and reserves, the Camedian
banks have shown remarkable strength throughout the depressiom. They have
been able to withstood the deflation of collateral values without a singie
failure, although the Weyburn bec,Jrity Bank, purely western institution,
vas absorbed by the Imperial Bank in 1951.
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Federal Reserve Bank of St. Louis
762
•
/13
Tral
A return shall be made and sent by the bank to the Minister showing
1°0.the amount of it notes in circulation for each juridic. day during any
(ilaonth.
1#e'vh°
4-goi), Such
return shall be made up and sent within the first twenty-eight
days after the last day of the month next preceding and shall be accompanied
by declarations wh•ch shall be a part of the return and the return and such
declaration shall be in the form set forth in Schedule I to this Act, and
shall be signed by the chief accountant, and by the president or a vicepresident or the director then actLng as president, and by the general
manager or other principal officer next in authority in the management of
the affairs of the bank at the time at which the declaration is signed:
Provided, however, that the Governor in Council shall have power from time
to make such amendments and additions to the items re_uired to be
to
stt forth in the said bcheduie as he may deem expedient. (Page 35 Section 60)
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Federal Reserve Bank of St. Louis
qb
MEMORANDUM
It is interesting to note that the general statement of The Canadian
Bank of Commerce shows the following:
11.4‘../
9 3 cr
"Other bonds, debentures and stocks, not exceeding market
value .. a n
"Current loans and discounts in Canada, not otherwise included, estimated loss provided for . ."
"Bank premises at not more than cost, less amounts, if any,
written off .. ."
These captions with others of a similar nature indicate that the bank
shows its assets at figures presumably sound or conservative.
Section 113 of the 1924 bank act, subsection (4) is as follows:
"Notwithstanding anything in the last preceding section contained it shall not, except as to the chief
accountant or acting chief accountant of the bank, be
sufficient for the purposes of any return provided for or
required under the said section that such return agrees with
the books of the bank, but the return shall set forth the
true financial positigq_pf the bank on the lastjuridrcal
day of the month last preceding the date of the return according to the latest informatiaapossessed hy or reasonably
available to the officers or any of them who sign the return."
7-11-36
C.E.C.
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Federal Reserve Bank of St. Louis
546
•
d11--21.11/11.
MEMORANDUM
4._44..A,
With respect to
/4
4
'
4.
1 1441111
r`'
;1.
repeAtra-41112d-StatdaaikaitZ
The Bank Act provides as
follows:
"At every annual general meeting of the shareholders,
the outgoing directors shall submit a full and clear statement of the affairs of the bank, exhibiting, on the one part,
the liabilities of the bank, and, on the other part, the assets and resources thereof, and the statement shall be signed
by the general manager or other principal officer of the bank
next in authority in the management of the affairs of the bank
at the time at which the statement is signed, and shall be
signed on behalf of the board by the president or a vicepresident or any other two directors, neither of whom shall
be an officer of the bank.
()
"The statement shall, without restricting the generality
of the requirements of the next preceding subsection, include
and show, on the one part, the amount of the (here are listed
the items practically in the form and detail as shown in
Schedule H attached hereto, with the exception of the items
indicated by the double asterisk on Schedule h).
(NOTE: It is interesting to contrast the details called for
in these statements with similar details called for in the
United States. Note particularly the requirement that certain assets be stated at "not exceeding market value" and
"of a sufficient market value to cover" and "estimated loss
provided for". Note also that "shares of and loans to controlled companies" are not hidden in investments and loans
as is usually done in call statements in the United States.
4
) The Governor in
Council shall have
time to maie-such
power from time
amendments and
be set forth
to
additions to the
in the said
items recuired to
statement as he may
deem expedient.
by
of
of
in
"Any other or further particulars than those called for
subsections 2 and 3 of this section, which, in the opinion
the directors, are necessary to a full and clear statement
the affairs of the bank, shall also be included and shown
such statement.
"A profit and loss account for the financial year of the
bank next preceding the date of the annual general meeting
shall accompany the statement and be attached thereto, and
shall be signed on behalf of the board by the same persons
as are required by this section to sign the statement referred to.
"A copy of the statement and of the profit and loss
account, together with a copy of the minutes of the annual
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Federal Reserve Bank of St. Louis
803
4 Si
MEMORANDUM
61 4-4A._ ..t.t
.
A14 ,
With respect to repepts Ane_stalanammts The Bank Act provides as
follows:
"At every annual general meeting of the shareholders,
the outgoing directors shall submit a full and clear statement of the affairs of the bank, exhibiting, on the one part,
the liabilities of the bank, and, on the other part, the assets and resources thereof, and the statement shall be signed
by the general manager or other principal officer of the bank
next in authority in the management of the affairs of the bank
at the time at which the statement is signed, and shall be
signed on behalf of the board by the president or a vicepresident or any other two directors, neither of whom shall
be an officer of the bank.
"The statement shall, without restricting the generality
of the requirements of the next preceding subsection, include
and show, on the one part, the amount of the (here are listed
the items practically in the form and detail as shown in
Schedule H attached hereto, with the exception of the items
indicated by the double asterisk on Schedule h).
(NOTE: It is interesting to contrast the details called for
in these statements with similar details called for in the
United States. Note particularly the requirement that certain assets be stated at "not exceeding market value" and
"of a sufficient market value to cover" and "estimated loss
provided for". Note also that "shares of and loans to controlled companies" are not hidden in investments and loans
as is usually done in call statements in the United States.) I
(1-)
'Whenever a bank carries on any part of its operations
-) the name of a corporation controlled by such bank, then there
shall accompany the statement, a further statement showing the
assets and liabilities of each auch corporation, and the value
placed upon the bank's interest in the corporation.
4
)
by
of
of
in
"Any other or further particulars than those called for
subsections 2 and 3 of this section, which, in the opinion
the directors, are necessary to a full and clear statament
the affairs of the bank, shall also be included and shown
such statement.
"A profit and loss account for the financial year of the
bank next preceding the date of the annual general meeting
shall accompany the statement and be attached thereto, and
shall be signed on behalf of the board by the same persons
as are required by this section to sign the statement referred to.
"A copy of the statement and of the profit and loss
account, together with a copy of the minutes of the annual
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Federal Reserve Bank of St. Louis
803
general meeting, Ehall be sent within four weeks thereafter to
each shareholder at his last known post office address, as shown
by the books of the bank, and concurrently therewith a certified
copy of each of these shall be sent to the Minister.
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Federal Reserve Bank of St. Louis
.11 tft- =
"The bank shall, within the first 2(4-8- days of each month,
transmit or deliver to the Minister (of Finan e) a return in the
form set forth in Schedule H to this Act: S' Liar in on nt t
d
t w'th
d er
a e. o
jt
I
('-13Provided, however, that the Governor in Council shall have
power from time to time to make such amendments and additions to
' the said schedule as he may deem expedient.
"Such return shall exhibit the condition of the bank on the
last juri,dical date of the morlat
=
.7edin
i
tla-4A-40Z-tti
(NOTE: Provision is made for using older repor
for certain
branches in far distant points.)
C
"After the date on which the Bank of Canada is authorized
to commence business the bank shall transmit or deliver to the
Bank of Canada a copy of thc return required by subsection 1
hereof within the time prescribed thereby.
"The Minister may also call for any other or special returns from any bank, and may require that the bank shall transmit or deliver such other or special returns at monthly or other
prescribed periods, or whenever, in his judgment, they are necessary to afford a full and complete knowleye of its condition.
/
Itrikco
(
"Every return provided or requiredder the last preceding
section (112) shall be accompanied by declarations which shall
be a part of the return and the declarations shall be in the form
set forth in Schedule H to this Act, and shall be signed by the
Chief Accountant or by the Acting Chief Accountant, and by the
President, or Vice-President, or the director then acting as
president, and by the General Manager or other principal officer
of the bank next in authority in the management of the affairs
of the bank at the time at which the declaration is signed.
jrg
3
"The bank shall within thrity days after the annual general
meeting transmit or deliver to the Minister a return showing the
name and address of each director elected thrreat, together with
8 list of the bank's firms, companies and ccrporations of which
he is a director or partner, and the names of the president end
vice-president, and should any vacancy occur in the membership
of the board of directors or in the office of the president or
vice-president, the bank shall forthwith notify the Minister of
the name and address of the person by whom the vacancy has been
filled, together with a list of the banks, firms, companies and
corporations of which he is a director or partner.
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Federal Reserve Bank of St. Louis
.r
t
h L441
0)1
•
--4-
(4)
(-6
"Notwithstanding anything in the last preceding section (112)
contained it shall not, except as to the Chief Accountant or Acting Chief Accountant of the bank, be sufficient for the purposes
of any return provided for or required under the said section that
such return agrees with the books of the bank, but the returns shall
set forth the truefinancial position of the bank on the last juridical day of the month last preceding the date of the return according
to the latest information possessed by or reasonably available to
the officers or any of them who signed the return.
"For the purposes of any return provided or required under the
last preceding section, or for the purposes of any statement or balance sheet prepared
d issued by a bank, and shall not be included
amongst "current lo s", any loan in which respect of which (a) the
borrower has not fo a period of two years preceding the date of
such return, statem t or balance sheet, paid the interest thereon
at the rate agreed, n 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 steps or proceeding
for the purpose of realizing upon any security given by the borrower;
(c) the bank has commended 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 creditorson all 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.
"Any loan falling within the last preceding section may be included amongst current loans if the directors declare that after
due inquiry they have approved such loan as a current loan.
"Whenever a bank carries on any part of its operations in the
name of a corporation controlled by such bank, then uuch bank shall,
for the purpose of any return required under the last preceding section, transmit or deliver therewith a separate return, showing the
assets and liabilities of each such corporation, and the interest
of the bank in such corporation shall be shown separately in any return respecting the affairs of the bank.
(26.v1_77,7,
7 ection 101,
;
"If any copy of th stivtement or of the profit and loss account
submitted under Section(5+3- of this Act, which has not been signed
as required by that section,is issued, circulated or published, or
if any copy of such statement is issued, circulated or published without having a copy of the auditor's report attached thereto, the bank
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Federal Reserve Bank of St. Louis
-5-
and every director, general manager or other officer of the bank
who is knowlingly a party to the default shall he liable to a
fine not exceeding $250.
(Page 81 - Section 164)
"Every bank which neglects to transmit or deliver to the
Minister, within the first,20-8 days of any month, any monthly
ade up and sent in within the
ed to
return by this Act req
of the bank on the last
Oondition
e
exhibiting
days,
20-8
said
end signed in the man..,
receding,
la
month
the
juridical day of
incur a penrequired,fshall
ner and by the persons by this A
of such
expiration
the
after
alty of $50 for each and every day
time during which such neglect continues.
(Page 83)
I
o
/L
"Every bank which neglects to transmit or deliver to the
Minister within 30 days after the annual general meeting a return showing the namd`W address of each director elected thereat, together with a list'sf the banks, firms, companies and corporations of which he is a director,or partner or which neglects
to transmit or deliver within 30 dayt after the selection of a
person to fill a vacancy in the board of directors or in the office of a president or vice-presidentt e similar return respecting
such person,shall incur a penalty of $50 for each and every day
during which such neglect continues.
"Every president, vice-president, director, auditor, general manager, or other officer of the bank or trustee who knowingly prepares, signs, approves or concurs in any account, statement, return, report or document respecting the affairs of the
bank containing any false or deceptive statement, or any return
which does not set forth the true financial condition of the bank
including all the information required by Section 100-13 of this
Act, shall be gui]ty of an indictable offense punishable, unless
a greater punishment is in any case by law prescribed therefor,
by imprisonment for a term not exceeding five years.
(NOTE: In case such statements are negliKently prepared, etc.,
by such officers the penalty is not to exceed three years.)
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Federal Reserve Bank of St. Louis
•
NOTES BASED UPON STATEMENTS CONTAINED IN REPORT OF THE ROYAL COMMISSION
ON BANKING AND CURRENCY IN CANADA
P. 31
It has been estimated that the rate of turnover
of checking
accounts of individuals is roughly fifty times as great as savings
is paid upon savings accounts at a rate which is a
matter of common policy on the part of the banks. On May 1, 1935, the
rate was reduced to 21 per cent from 3 per cent at which it had stood
$\'for some thirty years. In addition to this, special rates are paid
upon certain deposits under agreement with the depositor.
PIOTE: This contrasts rather noticeably with the attempt on the part
of supervisory authorities in the U.S. to regulate minutely the
matter of interest payments.)
account.
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Federal Reserve Bank of St. Louis
Interest
600
•
MEMORANDUM
With respect to the
spection (comparable to our examination)
of banks in Canada, the Bank Act of 1954 provides as follows:
Coun41 on the recommendation
"The Governor
0 of the Minister (of Finance) shall appoint a person
'who in his opinion has had proper training and
experience who shall be charged with the performance
of duties hereinafter mentioned; and such person shall
be designated Inspector General of Banks, hereinafter
called the Inspector." (Page 28, section 56)
"..,NAkAThe Inspector shall hold office during good
behavior )put may be removed from office by the Governor
AkiNgLaci Counig41 for misbehavior or incapacity, inability, or
failure to perform his duties properly.
*
•
A.
A
".A.,,...The Inspector while holding office shall not
perform any service for compensation other than the
service rendered by him under the provisions of this
section.
"The Minister may appoint or employ on the recommendation of the Deputy Minister of Finance and the Inspector
such persons with training and experience and such
clerical assistance as may be deemed necessary to carry
out and give effect to the provisions of this section.
(7)
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Federal Reserve Bank of St. Louis
"Persons so appointed or employed shall receive ouch
salary or remuneration as may be fixed by the Minister.
("The Inspector, from time to time, but not less
frequently than once in each calendar year, shall make
or cause to be made, such examination and inquiry into
7
the affairs or business of each bank as he may deem to
be necessary or expedient, and for such purpose take
charge on the premises of the assets of the bank or any
portion thereof, if the need should arise, for the purpose
of satisfying himself that the provisions of this Act
having reference to the safety of the creditors and shareholders of each such bank are being duly observed and
that the bank is in a sound financial condition, and at
the conclusion of each such examination and inquiry shall
report thereon to the Minister.
(NOTE: The Inspector is given the right of access to the
books and accounts and may require information and
802
••••• F..-
explanations from the officers and directors and
may obtain evidence under oath, etc.)
"Whenever the Inspector is satisfied that a bank
is insolvent he shall report fully on the bank's
condition to the Minister, and the Minister may,
without waiting for the bank to suspend payment, in
specie, Dominion or Bank of Canada notes, of any of
its liabilitis-as they may accrue, forthwith appoint
in writing a curator to supervise the affairs of such
bank, and such appointment shall have the same effect
as if the bank had suspended payment in specie or
Dominion or Bank of Canada notes of any of its
liabilities as they may accrue.
ci '1_
Q
"The Inspector shall be paid a salary fixed by
the Governor4
Counhl on the recommendation of the
Minister.
"Provided an appropriation therefor has been made
by Parliament, all salaries, remuneration and other
expenses incidental to giving effect to this section
shall be paid out of the Consolidated Revenue Fund,
and the Consolidated Revenue Fund shall be recouped
after the end of each calendar year for such outlay
by an assessment upon the banks based upon the average
total assets of the banks, respectively, during the
year, as shown by the monthly returns made by the banks
to the Minister under section 112 of this Act, and such
assessment shall be paid by the banks.
"All persons appointed under this section shall be
officers of the Department of Finance, but the provisions
of the Civil Service Act shall not apply to such persons.
"Any bank which, or any director, president, general
manager or any officer of a bank who, directly or indirectly makes a loan or grant or gives any gratuity to
the Inspector or any other person appointed or employed
under section 56 of this Act, and the Inspector or any
such person who accepts or receives, directly or indirectly, any such loan, grant or gratuity, commits an
offense against this Act and is liable to the penalty
hereinafter provided, so far as applicable, in addition
to any punishment otherwise provided.
-7
/q_s
(16"
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Federal Reserve Bank of St. Louis
"The Inspector or any person appointed or employed
under section 56 of this Act who discloses to any person,
except the Minister and the Deputy Minister of Finance,
-3-
any information regarding a bank, its business or
affairs, commits an offense against this Act. "
(NOTE: Meaning "liable to a fine not exceeding
$1,000, or to imprisonment for a term not exceeding
5 years, or to both, in the discretion of the court.
. . .")
C.E.C.
8-7-36
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Federal Reserve Bank of St. Louis
•
(-)
The "Bank of Canada Act Amendment Act, 1936n, assented
to June 23,
1936, amends the "Bank of Canada Act" in several respec
ts, including:
"Section thirty-two of the said Act is repealed and the
following substituted therefor:-"1 32. (1) For the purpose of auditing the affairs of
the Bank, the Governor in Council shall, on the recommendation of the Minister, not later than January thirty-first
each year, appoint two auditors, eligible to be appointed
as auditors of a chartered bank, but no person shall be
eligible for appointment if he or any member of his firm
has been auditor for two successive years during the three
next preceding years.
"1(2) If any vacancy occurs in the office of auditor of
the Bank, notice thereof shall forthwith be given by the Bank
to the Minister who thereupon shall appoint some other
auditor eligible to be appointed as an auditor of a chartered
bank to serve until January thirty-first next following.
"1(3) No director or officer of the Bank and no member
of a firm of auditors of which a director is a member shall
be eligible for appointment as an auditor.
"1(4) The Minister may from time to time require the
auditors to rerort to him upon the adequacy of the procedure
adopted by the Bank for the protection of its creditors or
shareholders and as to the sufficiency of their own proced
ure
in auditing the affairs of the Bank; and the Minister may, at
his discretion, enlarge or extend the scope of the audit or
direct that any other yrocedure be established or that any
other examination be made by the auditors as the public interest may seem to require.
111(5) A copy of every report made by the auditors to
the Bank under this section shall be transmitted to the
Minister by the auditors at the same time as such report is
transmitted to the Bank."
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Federal Reserve Bank of St. Louis
•
NOTES BASED UPON STATEMENTS CONTAINED IN REPORT OF THE ROYAL COMMISSION
ON BANKING AND CURRENCY IN CANADA
P. 35
The Canadian Bankers Association(is the recognized medium for
A>
correlated measures on the part of the banks.
The origin of this
organization has no exact counterpart in other banking systems.
Its
declared objects were to "watch legislation and court decisions relating
to banking, to protect the interest of the contributories to the bank
circulation redemption fund, and generally to guard the interests of the
chartered banks; also to promote the education and efficiency of bank
officers by various means."
The association is chiefly concerned with
note circulation of the banks, the organization and operation of clearing
houses.
There is no attempt to formulate what in Great Britain or the
U.S. would be called "monetnry" or "banking policy", Each bank is
autonomous and determines its own policy, but policies and other matters
are discussed informally by the chief executive officers of the banks
at meetings of the association. )
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Federal Reserve Bank of St. Louis
598
•
MEMORANDUM
4
With respect to shareholders' laudit of the bank, the Bank
Act provides as follows:
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Federal Reserve Bank of St. Louis
"The affairs of the bank shall be audited by two
persons, residing in Canada, each one of whom shall
be an accountant who has for at least six years
preceding the date of his appointment, as hereinafter
provided, practiced his profession in Canada, and who
shall also be a member in good standing of an institute
or association of accountants incorporated under the
authority of the legislature of any province of Canada.
(NOTE: The law provides that each accountants' association shall furnish to the Minister and to the Canadian
Bankers Association on or before June 30 of each year
a list of all members of such association in good standing and qualified, as indicated above, and the Minister
not later than the 30th ofi?ptember may select from
such lists the persons who mabe eligible for appointments as auditors, and the names and other particulars
of persons so selected, or if no selection has been
made, then the names and other particulars of all of
the persons included in auch lists shall be inserted in
two successive issuLs of the Canada Gazette, who shall
be deemed qualified for appointment as auditors of the
bank.)
"The shareholders shall at each annual general meeting
appoint two persons, not members of the same firm, whose
names are included in the last published list, to audit the
affairs of the bank, but if the same two persons, or members
respectively of the same two firms, have been appointed for
two years in auccession to audit the affairs of any one bank,
one such person or any member of one such firm shall not be
again appointed to audit the affairs of such bank during the
period of two years next following the term for which he was
last a3pointed.
(NOTE: The annual report of the Canadian Bank of Commerce
as of November 30, 1935, contained a certificate by
auditors Shepherd of Peat, -Alarwick, Mitchell and Company and
McClelland of Price,Aaterhouse and Company, and on page 43
it was moved and seconded that Shepherd--same as above--and
Scott of Scott and Company be appointed to audit the affairs
of the bank until the next annual general meeting, indicating
that McClelland was not eligible under the two years rule,
or otherwise was not satisfactory.)
"If any vacancy should occur in the office of a bank, notice
thereof shall forthwith be given by the bank to the Minister,
who shall thereupon appoint some other person included in the published list for the year to serve
for the unexpired term of the person previously appointed.
(NOTE: The remuneration of auditors shall be fixed
by the shareholders.)
(`)
"The Minister may from time to time require that
the auditors of a bank shall report to him upon the
adequacy of the procedure adopted by the bank for the
safety of its creditors and shareholders, and as to
the sufficiency of their own procedure in auditing the
affairs of the bank; and the Minister may at his discretion
enlarge or extend the scope of the audit, or direct that
any other or particular examination be made or procedure
established in the particular case as the public interest
may seem to require.
-
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Federal Reserve Bank of St. Louis
"Every auditor of the bank shall have a right of
access to the books and accounts, cash, securities,
documents and vouchers of the bank, and shall be
entitled to require and receive from the directors and
officers of the bank such information and explanation
as may be necessary for the peiformanceof the duties
of the auditors.
0
"It shall be the duty of the auditors to report
individually or jointly as to them may seem fit to the
general manager and to the directors in writing any
transactions or conditions affecting the well-being of
the bank which are not satisfactory to them, and which
in their opinion require ratification, and without
restricting the generality of this requirement they
shall report specifically to the general manager and to
the directors from time to time upon any loans exceeding
1 per cent. of the paid-up capital of the bank which in
their judgment are inadequately secured, but this provision
shall not be construed to relieve any director from the
due and proper discharge of the duties of a director.
"The report shall be transmitted or delivered by the
auditors to the general manager at his office and to each
director at the last known postoffice address and the
said report shall be incorporated in the minutes of the
directors' meeting first following the receipt of said
report.
"A copy of all reports made by the auditors of a bank
to the general manager and to the directors under this
section shall be transmitted or delivered to the Minister
by the auditors at the same time as such reports are transmitted or delivered to the general manager and directors.
-3-
Q
03)
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Federal Reserve Bank of St. Louis
"The auditors shall make a report to the shareholders on the statement of the affairs of the bank
to be submitted by the directors to the shareholders
under section 53 of this Act during their tenure of
office.
"The report shall state (a) whether or not they
have obtained all of the information and explanations
they have required; (b) whether, in their opinion, the
transactions of the bank which have come under their
notice have been within the powers of the bank; (c)
whether, in their opinion, the statement referred to
in the report discloses the true condition of the bank;
and (d) whether the statement is as shown by the books
of the bank.
(NOTE: The auditors' certificate attached to the
general statement as of November 30, 1935, of the
Canadian Bank of Commerce covers practically verbatim
these points. It also stated,"we have checked the
cash and examined the securities and investments of
the bank at the chief office in Toronto and at certain
of the principal branches. . .")
"The auditors' report shall be attached to the statement submitted by the directors to the shareholder: under
section 50-3 of this Act, and the report shall be read
before the shareholders in the annual general meeting.
"Any further statement of the affairs of the bank
submitted by the directors to the shareholders under
section 54 of this Act shall be subject to audit and report,
and the report of the auditors thereon shall state (a)
whether or not they have obtained the information and
explanations they have required; and (b) whether, in their
opinion, such further statement discloses to the extent
thereof the true condition of the bank.
"The auditors' report shall be attached to the further
atatement referred to in the next preceding subsection,
and shall be read before the shareholders at the meeting
to which such further statement is submitted, and a copy
of the statement and report shall be mailed to each shareholder at his lLst known address.
"A person appointed under this section to audit the
affairs of a bank shall not during the term for which such
person is appointed accept any retainer or undertake any
employment on behalf of such bank other than that of auditor
hereunder; provided nothing herein contained shall prevent
such person from being retained or employtel to inquireinto
or deal with any situation arising out of or connected with
-4—
the financial position or affairs of any borrower
from or customer of the loknk. ..
"Ni
C.E.C.
8-7-36
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Federal Reserve Bank of St. Louis
"No person shall be appointed an auditor of a
bank if such person or any member of his firm is a
director or officer of such bank."
•
MEMORANDUM
The Bank Act (on Canada, 1934) page 14, states with reference
to a certificate required to be issued by the Treasury Board, approving
an increase of capital stock "(4) Nothing herein contained shall be construed
to prevent the Treasury Board from refusing to
issue such certificate if it thinks best so to do."
The clause "if it thinks best so to do" seems to give the
Treasury Board considerable discretionary authority.
There is no
tabulation of the things the Treasury Board must consider in this
connection.
On page 16 of the Bank Act, with respect to the required
certificate of the Treasury Board approving a reduction of capital,
there is contained the following provision:
"(5) Nothing herein contained shall be construed
to prevent the Treasury Board from refusing to
issue the certificate if it thinks best so to do."
The stating of the law in Canada in this manner seems to give
open-ended authority to act in a discretionary manner, leaving to the
Treasury Board the question of what matters it must consider in reaching
its conclusion.
This seems preferable to the American style of stating
that a board should be required to consider enumerated things.
C.E.C.
8-6-36
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Federal Reserve Bank of St. Louis
50-
MEMORANDUM
According to The Bank Act, the Treasury Board issues charters or
certificates for banks to begin business in Canada.
"No certificate shall be given by the T.easury Board
until it has been shown to the satisfaction of the Board,
by affidavit or otherwise, that all the requirelents of
this Act and of the special Act of incorporation of bank,
as to the subscriptions to the cardtal stock, the pAyment
of money by subscribers on account of their subscriptions,
the p4yment required to be made to the Minister, the
election of directors, de ,osit for security of note issue,
or other preliminaries, have been complied with, and that
the sum so paid is then held by the Minister, Ind unless
it appears to the Board that the expenses of incorporation
and organization are reasonable." (Page 7 Section 15)
A \\C4
"Khenever a sum not less than $500,000 of the caoital
stock of the bank has been bona fide subscribed, and payments in money on account thereof have been made by the
subscribers, the total of such payments making a sum not
less than $250,000, and as soon thereafter as the provisional directors have paid thereout to the Minister(of
finance) the sum of $250,000, the provisional directors
may, by public notice published 2or at least four weeks,
and by notice with postage prepaid mailed to the last
known address of each subscriber at least 10 days prior
to the date of such meeting, call a meeting of the subscribers to the said stock,
" (Page 6 Section 13)
"U7on the issue pf the certificate in manner hereinbefore provideL, the !ihistr:I' shall forthwith pay to the
bank the amount of money so de)osited with him as aforesaid, ii_thout interest, after deducting therefrom the sum
Df $5,000 required to be deposited under the provisions of
this Act for the securing of the notes issued by the bank."
(Page 8 Section 17)
Although The Bank Act contains various legal formaLities which must be
complied with before a bank can begin business in Canada, there do not appear
to be any investigations whIch the Treasury Board, the Minister, or the
Inspector General muA conduct prior to the issuance of the certificate to
begin business, relating to such matters as integrity of the organizers and
pr000sed management, economic necessity for the establishment of the bank,
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Federal Reserve Bank of St. Louis
591
-2-
the effect the bank will have upon other banks in competitive territory,
the sufficiency of the proposed caAtall and the number and location of
branches, etc.
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Federal Reserve Bank of St. Louis
•
MEMORANDUM
of shareThe report of the proceedings of the annual meeting
ary 14, 1936, at page 43
holders of The Canadian Bank of Commerce, Janu
ered accountants
contains a motion made and seconded that two chErt
audit the affairs of this
representing two companies "be appointed to
and that their remuneration
Bank until the next annual general meeting,
shall not exceed the sum of $25,000.
on November 30, 1935,
Page 47 of the report shows that the bank
and 13 branches "outside"
had 619 branches in 9 provinces of Canada,
Canada (totaling 632).
report showed total
The statement of the bank contained in this
ts showed that one controlled
assets of $629,000,0000 and other statemen
000, another $503,000,000, and
company had assets in excess of $27,000,
another $743,000.
two auditors representing
From these facts it is obvious that
make thorough and detailed audits of
two separate firms cannot afford to
and controlled companies for
the head office and all of the branches
$25,000.
r•-c, A,-A-•Jet4
at..R
"‘k il47 C4.0
/4
-t,t1"
fa,v,44-(A4_,t
C.E.C.
86-36 h,-2,.
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Federal Reserve Bank of St. Louis
(.441L•toteMAI
'L461
(att,v4 11•4 G-Ov-ttO Ct•'(
'LT i'r'VLV-4
‘4 0 ct,c4-qA;c4 ,t4-;v02
Al•-f-vs44
o,AAJL‘
•
)
'44
593
Patterson, in Canadian Bankina in 1952, stated:
"Canadian banks are now subjected to probably the
most comprehensive and efficient system of inspections
of any banking system in the world. These consist of
both internal and external inspections and audits.
"The external inspections are two in number, one
made by the shareholders' auditors and the other by
the Inspector-General of Banks, the latter a Government
officer.
"Bank acts prior to the 1913 revision made no
reference to or provision for any form of inspection
except that of note circulation, although for some
time the necessity for external supervision was the
subject of discussion. As far as the larger banks
were concerned the internal audit had been satisfactory,
due to the fact th8t the chief inspectors of these banks
were invariably men of high standing, generally on a par
in age and experience with their general managers and
prepared A all times to live up to their reputation aF
sound bankers."
The lack of necessity for external supervision was accounted for
largely as follows:
"A daily check by the manager and accountant of all
of the transactions and activities of their branch,
the taking over under joint control of all securities and
surplus cash in the day's transactions and the counting
of the teller's cash at irregular intervals.
"A comprehensive series of reports, daily, weekly and
monthly, according to their nature, submitted by each
branch which enable the Head Office to maintain a running
audit of the operations. In addition, all loans in excess
of the manager's discretionary limits must be submitted to
the Head Office for approval.
"The audit and inspectiOn of each branch at irregular
intervals and at least once a year, . . ."
In considering the question of external supervision,"The idea of
Government supervision was advocated by those who were admirers of the
systems of national and state bank examinations obtaining in the U.S."
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Federal Reserve Bank of St. Louis
"It is obvious, however, that even if these examinations were effective in the United States (which is very
much open to question),
the plan itself woule: not
.5is:7
591
be feasible in Canada on account of the branch
system. Furthermore, there is no doubt that the
government inspection of a bank is taken by the
public more in a way as a guarantee of solvency.
•
•
"With such supervision, therefore, would go a
great deal of responsibility for a bank failure,
and this responsibility the government was naturally
reluctant to assume.
,7\e.k(
"Another objection to government supervision was
the fact that the appointment of examiners would run
the risk of being occasionally based on political
expediency, rather than on expert knowledge and fitness
for the positions. The failure of government inspection
of national and state banks (evidently meaning in the U.S.)
in preventing bank mortalities no doubt contributed to
this opposition.
"The Canadian Bankers Association was also adverse
to assuming the responsibilit of inspection, as such
action would be considered tantamount to a guarantee
by the associated banks of the solvency of the individual
banks. . .
"A compromise, however, was arrived at in the
revision of the Bank Actin 1915, whereby provision was
made for the appointment of 'Shareholders' Auditors' . . .
The revision of the Bank Act in July, 1923, made certain
important changes in this section, but the suspension of
the Home Bank the month following was the immediete cause
of an amendment essented to on July 19, 1924, which provided
for the appointment by the government of an Inspector-Ceneral
of Banks with plenary powers.
"The Inspector is required to examine each bank at
least once in each calendar year and report his findings
to the Minister of Finance. He may take charge of the
bank when, in his opinion, such action iE necessary to
protect creditors and shareholders. . . . He receives
copies of all reports made by a bank's auditors to its
general manager or directors. . .
"The amendment is intended to provide for governmental
inspection of the banks and the quicker and the more
effective action by the Minister of Finance in the case
of a bank that is on the road to failure."
The Bank Act provides that "The shareholders of a branch shall, at
each annual meeting, appoint two auditors, not members of the same firm,
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Federal Reserve Bank of St. Louis
whose names are on the eligible list."
The law provides that institutes
or associations of accountants incorporated in some provinces of
Canada submit to the Minister of Finance and the Canadian Bankers
Association lists of their members who have practiced accountancy in
Canada for at least six years and from such lists the Minister may select
the persons eligible for appointment, or if he fails to select, all are
eligible.
The auditors are paid on a basis determined between them and the
shareholders.
The two auditors must represent different firms.
The
two auditors apparently determine the number and qualifications of their
assistants.
An auditor is not eligible for more than two years in
succellsion.
The lar specifys that certain matters be covered in the
auditors' reports and presupposes heavy responsibilities upon the auditors
for presenting all pertinent matters of importance.
In addition to the daily check by the manager and the accountant
of all of the transactions and activities of their branch, etc., and the
comprehensive series of reports,"At irregular intervals and at least once
a year every branch is visited by an inspector and his assistant from
Head Office and a thorough audit (evidently meaning inspection) of the
books and the assets of the office made."
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Federal Reserve Bank of St. Louis
"An inspection consists of two kinds of examinations,
namely, verification and valuation. The first is called
the audit or routine inspection, and consists of an audit
of all the books and a verification of the physical
existence of the assets of the branch, es well as the
correctness of the liEbilities. All routine matters are
carefully checked to see if Head Office inFtructions are
being conformed with.
wrhe first part of the inspection is made by a routine
inspector or, as he is sometimes called, audit officer,
who either accompanys or precedes the senior inspector,
with one or more assistants, according to the size of
the branch.
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Federal Reserve Bank of St. Louis
-4-
"The second phase or inspection proper is made
by a senior inspector, and consists of a thorough
analysis and valuation of the loans and other assets
of the branch. The senior inspector's particular
duty is to discuss with the manager the inspection
liability return with a vieA to obtaining a valuation,
as correct as possible, of the loans and securities
held by the branch. . . .
'The inspector follows the audit officer as soon as
the inspection report on liabilities is completed,
though in the case of small branches which have but
few loans, the liabilities can be discussed by the
audit officer or by correspondence, and a vicit from
an inspector, therefore, is not necessary."
•
Source:
The Bank Act (Canada) 1934
(1) Every. one is guilty of an offence and liale, ueen ceevictLon on
Ifindictment, to two years' imprisonment, or o a fine not exceeding two
thousand five hundred dollers, or to both, and, le)on sweeter: conviction, to
' imprisonment for six months, with or without hard labour, or to 1 fine not
exCeeding one hundred dollars, or both, who
.
/('
director, general menegers ein:,ger, or othee executive
(a) being
officer of .* bInk, corruptly accepts or obtains, or agrees
to accept or >Attempts to.obtain, from enz,, peraon fo2 hiaself
or for eny other pereon, any gift or coneider,tion as an
inducement or reward for doing or forbearing to do, or for
having done or forborne to do, any act relating to the bank's
business or affairs, or for showing or forbeueLng to ehow
feeour or diefavour to aey person with relation to the ITInkis
business or affairs; or
(b) corruptly givee or agreee to glve or offers any glft or consideration to any director, general manager, manage:, or
other execetive officer of a bank us en indecenent or reward
or consideretLon to sudh director, general meneger, manager,
or other executive officer of the bank, for do ng or for17earing to do, or for having done or forborne to do, eniT
act relating to the bankls business or affairs, or for showing or forbearing to show favour or disfavour to any person
with releton to the bank's business or effaIrs.
(2) In this section "consideration" includee valueble consideration
of lay kind. R.S.,c.12,s.1!)3,am. (Page 73 Section 133)
(2) If apy bank, either directly or indirectly lends money or mikes
advances in excess of five 2,r cent= of ite paid-up ca;itil to a director
of the bank or to any firm, company or corporation lei which the president,
general manager or e director of the bank is a pertner or sharenolder, es
the else may be, without the approvel of two-thirds of the . irectors present
at a regular meeting, or a meeting specially called for the yareeve, of the
board, such bank shall incar a penalty not exceeding five teoueend dollars.
(3) If any director of a bank Is present or votes at a meeting of the
}oard during the time when loans or Advances to himself or tny firm, coepely
or cor)oration of wh ch he is a partner or director ere under consideration
both the lane uld such director shell leacur penalties not exceeding fLve
thoueand dollars, and ouch director shall forthwith vacate 114.8 office of
director and shall not he eligible for election Is a director of a_ link , Ithin a period of five years efter the eate of the said meeting of the boero.
(4) (a) Any manager or other officer of a bank who lets
egent
for any insurence coepeny Of for any pereon In the elecing
of ineurence shall Incur a etnelty not eeceecEsig five hundred
dollere;
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Federal Reserve Bank of St. Louis
766
Source:
The Bank Act (C=da) 1954
(b) Any blnk wh;.ch exercises presure upon any
insurance for the securit of such Lank in
insurance agency shall incur for each such
not exceeding five hundred dollars. (Page
borrower to place
any particular
offence a penalty
81 Eect:_on 151)
(1) Every president, vice-president, director, auditor, general mAn!.ger
or other officer of the bank or trustee Who knowingly prepare„ signs, approve
or concurs in an:,' account, statement, return, re?ort or document respecting
the affairs of the ba!lk containing any false or deceptive statement, or any
return Which does not set forth the trle financial ?osition of the bank :Including all the information reuired by section one hundred and thirteen of
this Act, shall be guilty of an IndictaUe offense 7unishable, unless a
greater -Aunishment is in %iv case by law :prescribed therefor, by Imprisonment for a term not exceeding five years.
(2) Every 'r-esIdent, vice-pr,2eident, lAirector, auditor, gen-ral .ainAger
other
officer of the bank or trustee who negligently prepares, signs,
or
approves or concurs in any account, statenent, return, re)ort or docuent
respecting the affairs of the b.Le, containing any false or deceptve statement, or any return which does not set 'orth the true
,-)osition of
the ban,: inclwing all the informaton required by sectLon one hundred and
thirteen o: this Act, shall be guilt:, of an indictable offence )unishuble,
unless a greater )unishment is in any case by law ,rescribed therefor, by
imprtsonment for a ter not exceeding three years. it.S.,c.12,s.165.
(Page 84 Section 163)
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Federal Reserve Bank of St. Louis
8-a4
144A 6--/
'
('/
TZ
. .."'"
The stock, property, affairs and concerns of the bank shall be man‘ged
by a board of directors. (Page 10 Eection 19)
(1) Each director shall hold stock of the bank, of vh.ch stock he chill
1:,e the absolute and sole owner in 1!.s indivdual right And not as tr=tee
or in the right of another, on which not leas than
(a) three thousind dollars hAve been paid ua, when the laid-up
cadtll stock of the bank ts one millIon dollirs or less;
(b) four thousmci dollirs hive beer 7aid u), when the pxtd-up
capLtd stock of the bank is over one millIon dollars Ind
does not exceed three million dollars;
(c) five thouinci dollars have been paid ul, when the paid-up
ca,ital stock of the bank exceeds three mill'Lon dollArs.
(2) No person shall Le elected or continue to be a director unless he
holds stock, of .orhch he Is the owner as aforesatd, paid up to the alount
required by this Act, or such gre,ter amount As i6 required by Any by-law
in that behalf.
(3) A majority of the directors shall be natural born or nAtural;_zed
eubjects of His Majesty and domciled in CanAda. (Page 10 Secton 20)
(1) No dividend or bonus shall be declared so 36 to
caiital of the bank.
the )11d-up
(2) The directors who knowi:Igly and wilfully concur in the declaration
or making payatle of any dividend or bonus, whereby the paid-up cadtal of
the bank is impired, shall 1A3 joIntly and severally liable for the amount
of such divideno or bonus, as a debt due by them to the bank.
(3) No division of )rofits, either by way of dividemiL or bonus, or
toth combined, or in any other wv, exceeding the rate of eight per cent=
per =num, shall be mAde by the bank, unless, after making the same, the
bank has A rest or reserve fund, equal to at least tTi'rt:, pe: centum of Its
)ald-up oaaital after providing all the Apprcoriatione neceasary for ascertained and estimated losses.
(4) The directors who knowingly and wilfully concur In any division of
Jrofits exceeding the rate of eight per centum per annuo, unless after
k ..ng
the bane the bank has a rest or reserve rand eual to at least th . rty per
centum of Its ',.)atd-up ca:,Ital after making the appropriatiqns necessary to
be jointly And several4 liable for the amount so
provide 1:or losses,
the,a to the bank. (Page 31 Section 58)
divided, A6 a debt 2,tie
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Federal Reserve Bank of St. Louis
765
/2)
Psge 43, section 75 (Z)
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Federal Reserve Bank of St. Louis
"In no cbse shall a director of the bank be presen
t
or vote 6t a meeting of the .301,ard during the time vt- en
loans or adv.pnces to himself or any firm, company or
corporation of which he is E p6rtner or director are
under contideration; Out this subsection chall not
apidy to the consinerA:on of loiins or cOvances to
coriiorLtiont controlled by the bbnk, the sl-„ares of wtich,
Lxcept for quGlif)ing sbart, exit cancti by- the bank.
2c) Lane.ger or other officer of an bank aball uct cr
4gent for any iasurtmce comiAny or for any person in the
plbcini, of insurance, nor shbll bay bank exercise prersu
re
upon any borrower to pL.cc inburance for th security of
such butik in any ptxticul:r
.-4,cnc:,„ but nothinr
herc..:1; cuntzainfc rhaiJ. prevt-nt buch !di/4k frt4a requir'_nE
such inburance to be place& with an insurance company which
it ALE4 btaprove."
CANADA. - LAWS---Chap. 43: an Act to incorporate the Bank of Canada,
3 July 1934.
Page 15
27.
RESERVE OF CHARTERED BANKS.
******
(5) For the purpose of this section the Bank may authorize
the Inspector General of Banks or one of its own officers to make an
inspection of the books, accounts and documents of any chartered
bank, and the chartered bank shall give the Inspector General or such
officer access to the books, accounts and documents of the bank for such
purpose, and if the Inspector General or officer is obstructed or delayed
in making an inspection the chartered bank shall be guilty of an offence
and liable on summary conviction to a fine of one hundred doll/Rrs for
each and every day during which the obstruction or delay continues.
/Lik
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Federal Reserve Bank of St. Louis
I
r-f-/
jy,"-Y4 $140
3 14- Qp-1,1 )
/7
I
V
CANADIAN BANK ACT--24-25 GEORGE V.---Chap. 24, 28th June, 1954
Page 44
c
4311P. (1) The bank may acquire and hold real and immovable
property for its actual use and occupation and the management of its
business, and may sell or dispose of the same, and acquire other
property in its stead for the same purpose.
(,..) The bank shall annually, during the month of January,
transmit or deliver to the Minister a return showing in detail the
fair market value of its real and immovable property held at the
end of the preceding calendar year under this section either in its
own name or in the name of a trustee or of a corporation controlled
by the bank.
(3) Such return shall state separately each parcel of real
property held by the bank and as to each such parcel shall state
(a) the registered owner thereof, if the bank is not the
registered owner;
(b) the amount of any mortgage or hypotheque thereon,
and if more than one parcel is subject to the same
mortgage or hypotheque, the parcels subject to such
mortgage or hypotheque shall be segregated in such
return and identified therewith; and
(c) the extent, if any, to which each such parcel is not
held for the actual use and occupation of the bank;
and such return shall be signed by the chief accountant, and by the
president, or a vice-president, or the director then acting as
president, and by the general manager or other principal officer of
the bank next in authority in the management of the affairs of the
bank at the time at which the said return is made. R. S., c. 12, s. 78,
am.
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Federal Reserve Bank of St. Louis
(Penalty $50 per day - Sec. 156--C.E.C.)
_1
CANADIAN BiNK ACT---24-25 GEORGE V.---Chap- 24, 28th June, 1934
ag
159. Every bank which neglects to transmit or deliver to the
Minister, within thirty days after the close of any calendar year,
a
return, signed in the manner and by the persons and setting forth the
particulars by this Act required in that behalf, of all certified
cheques, drafts or bills of exchange issued by the bank to any person
and remaining unpaid for more than five years prior to the date of such
return, shall incur a penalty of fifty dollars for each and every day
during which such neglect continues R.S., c. 12, s. 159.
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Federal Reserve Bank of St. Louis
CANADIAN BANK ACT-=-24-25 GEORGE V.---Chap. 24,
28th June, 1934
P4ge 82
Every bank which neglects to transmit or deliver to
the Minister a semi-annual return as of the last juridical day of
the months of June and December in each year, giving such particulars
as may be prescribed by regulations made by the Treasury Board of the
interest and discount rates charged by the bank, such returns to be
made up and sent in within the first thirty days after the respective
juridical days aforesaid, and signed by the persons by this Act required,
shall incur a penalty of fifty dollars for each and every day after the
expiration of such time during which guch neglect continues. R.S., c. 12,
s. 157, am.
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Federal Reserve Bank of St. Louis
--elk:DIAN BANK ACT---24-25 GEORGE V.---Chap. 24,
28th June, 1934
Pages 83-84
__72M (1) Every bank which neglects to transmit or deliver to
. the Minister, within thirty days after the close of any calendar year,
a certified return, as by this Act required, showing
(a) the names of the shareholders of the bank on the
last day of such carehaiF7ii-ar, with their last known
post office addresses;
(b) the number of shares then held by such shareholders
respectively; and
(c) the amount, if any, remaining to be paid thereon, shall
incur a penalty of fifty dollars for each and every day
during which such neglect continues. R.S., c. 12, s. 160, am.
(2) Every bank which neglects
transmit or deliver to the Minister,
within the time prescribed by regulations of the Treasury Board, a certified
return showing the aaregate amount of all loans made by the Bank within
Canada
at a date to be specified by the Treasury Board, classified according to
industries and businesses, shall incur a penalty of fifty dollars for each
and every day during which such neglect continues.
(3) Every bank which neglects to transmit or deliver to the Minister
within thirty days after the annual general meeting a return showing the
name
and address of each director elected thereat, together with a list of the
banks,
firms, companies and corporations of which he is a director or partner,
or
which neglects to transmit or deliver within thirty days after the selection
of
a person to fill a vacancy in tne membership of the Board of directors or in
the office of president or vice-president, a similar return respecting such
person, shall incur a penalty of fift; dollars for each and every day during
which such neglect continues.
(4) Every bank which neglects to transmit or deliver to the Minister
within the time prescribed by the Treasury Board a certified return showing,
as to deposits by the public in Canada payable on demand and also deposits
payable after notice, the number and aggregate amount of such deposits in
each of the classifications by this Act required, at a date to be specified
by the Treasury Board, shall incur a penalty of fifty dollars for each and
every day during which such neglect continues.
z1401.1:- (1) Every bank which neglects to transmit or deliver to the
Minister, within thirty days after the close of any calendar year, a return,
signed in the manner and by the persons by this Act required, of all dividends
which have remaine.d unpaid for more than five years, and also of all amounts
or balances in respect of which no transactions have taken place, or upon
which no interest has been paid, during the five years prior to the date of
such return, and also of all certified cheques, drafts or bills of exchange
issued by the bank and remaining unpaid for more than five years prior to the
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Federal Reserve Bank of St. Louis
date of such return, as required by the provisions of this Act in
the several cases respectively mentioned, shall incur a penalty of
fifty dollars for each and every day during which such neglect continues.
(2) The said term of five years shall, in case of moneys deposited
for a fixed period, be reckoned from the date of the terminetion of such
fixed period. R.S., c. 12, s. 161.
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Federal Reserve Bank of St. Louis
CA.NADIA_W BANK ACS--_24-25 GEORGECISstp-,24, 28th June, 1934
Pages_N63-64
*
**
-44 If any change is
made in -the holder of the office of
Chief accountant or of general
mnnager, the Minister shall forthwith
\j
be notified of the n.ame of the person by whom the vacancy ha.s been
filled.
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Federal Reserve Bank of St. Louis
SOURCE:
CANADIAN BANKING--by E. L. Stewart Patterson (1932)
Chapter III--Legal Framework
Pages 33-34
Cash Reserve (Section 60)
The bank must hold in Dominion of Canada notes not less than
40 per cent, of the cash reserves which it has in Canada. Arrangements
for issuing Dominion notes in exchange for gold and for redeeming them
are made at the branch offices of the Department cf Finance, namely,
Toronto, Montreal, Halifax, St. John, Winnipeg, Victoria, Charlottetown,
Regina and Calgary.
This is the only reference to the cash reserve in the Act. It
is left to the judgment of the bankers themselves to mLintain a sound
liquid position and decide the percentage of reserve to liabilities.
Reserves
This clause was introduced into the Bank Act in the early days
of Confederstion and was frankly intended as a forced loan from the
h
banks. It has been retained at each subsequent revision, althoug the
reason for the clause has long since disappeared. Apart from t'ds
banks
condition it is left entirely to thL judgment of the individual
far has
so
nce
experie
the
and
s,
reserve
cash
own
themselves to fix their
on
ion
connect
this
in
ce
erferen
non-int
of
fully borne out the wisdom
cheques
and
notes
of
ion
redempt
daily
the part of the Government. The
to any
through the clearings all over Canada acts as a constant check
certain
a
below
reserve
its
tendency on the part of a bank to lower
limit.
of the
Banking conditions are so varied in the different sections
reserve
legal
fixed
a
country that it would be impossible to establish
ly affecting
i which would suit all conditions and seasons, without serious
compared
been
has
i the supply of loanable funds. A fixed legal reserve
great
disasteT,
a
of
to certain beds in a hospital which, on the occasion
that they must be
the superintendent refused permission to use, asserting
means that if
reserved for emergencies. To establish a legal reserve
\the reserve is ever used for the purpose it is intended for, the law is
broken and a bank becomes liable for severe penalties.
of
As a whole, past experience has demonstrated that the question
ual
banks
individ
to
the
left
safely
be
may
the amount of reserve maintained
themselves.
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Federal Reserve Bank of St. Louis
"67
•
SOURCE:
CANADIAN BANKING--by E. L. Stewart Patterson (1932)
Chapter IV--Analysis of Bank Statements
Page 40
Bank Statements
A useful and interesting feature of Canadian banking is the
publication by the Government every month of a detailed statement of
the position of each bank. The Bank Act requires the banks to furnish
the Government with monthly statements of their assets and liabilities,
and in addition to these an annual statement to the shareholders. The
latter differs only slightly from the monthly statements and is submitted to the shareholders at the annual general meeting, along with
the
profit and loss statement and the report of the auditors. * * *
'
7',/‘)
,
* * * * * *1/44
Page 54
(27) Shares of and Loans to Controlled Companies (.63%1: Some
of the banks rather tlan lock up capital in bank )remises arranLe with
a subsidibry company to purchase land and erect offices. On the
completion of the offices bonds are isuued amply secured by real estate.
Funds for interest and redemption are provided by the rent paid to the
company by the branch, which is sufficient to pay the interest and
ultimately retire the issue. The grenter part of the amount reresents
funds temporarily ndvanced while building is in progress. Most of these
companits have a substantial sur)lus although on the books of the bank the
stock is recorded at a nominal figure, generally one dollar.
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Federal Reserve Bank of St. Louis
769
•
SOURCE:
CANADIAN BANKING- by E. L. Stewart Patterson (1932)
Chapter I-Historical and Econimic Background
Page 7
4'N
* * * True, trying times and heavy losses were met time and
again, brut, with the exception of the authorized suspension in
1837, which was very reluctantly taken advantage of, the banks
not only remained solvent, but maintained the redemption of their
obligations in specie. Such satisfactory results, however, cannot
be ascribed to the quality of the then banking laws, so much as to
the common sense and judgment of the Canadian people themselves.
The majority of the banks were under the control, if not the actual
management, of Scotsman, who had a keen appreciation of the merits
of the banking system of their native land, and lost no op2ortunity
of perpetuating and extending "for the farmer and merchant the benefits
and stimulus of a system the worth of which Scotland's prosperity
could abundantly prove." These men, with their keen and analytical
minds, no doubt profited by the study of the past history of banking
in Canada and the United States. To such men the sound principles of
banking and finance advocated by Alexander Hamilton must have appealed with
great force, though he was a century in advance of his times.
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Federal Reserve Bank of St. Louis
770
•
k-
SOURCE:
THE CALIFORNIA BANKER—JUNE 1933
SOME THOUGHTS ON THE FUTURE OF AMERICAN BANKING—Albert C.
Agnew, Legal(
Adviser, Fed. Res. Bank, San Francisco
Page 193
MR. AGNEW: May I quote to you two paragraphs from an article
entitled "Why the Banks Collapsed", written by Dr. Bernhard Ostrolenk
and ,Jublished in the Aay issue of Current History? They will serve
fairly as a background for what
have to say:
"The exciting events of these weeks (during the recent crisis)
brought to a cuDnination forces long present in the American banking
system. Speculation, the first and greatest of these forces, time
and again in the history of the United States, has lured bankers to
their ruin. American bankers have never been able to distinguish
between commercial, investment and speculative loans. Although it is
a principle of sound banking in countricx, like EnLland, Scotland and
Canada that demand deposits in commercial banks should be loaned
exclusively for self-liquidating commercial transactions, commercial
bankers in the United States have always failed to confine their
activities within that field."
Dr. Ostrolenk(after reviewing the paroxysms through which our
financial structure passed during March and April, 1933, and the
extraordinary measures takei to save it from complete collapse, conclud
es
his article with this significant statement:
"thile the government sought speedily to repair the damage done
by the bankers, the problem of permanent banking reform remaine
d. . . .
The emission of credit, to be constant and sound, must be supervised
from
the st-ndpoint of tile public welfare rather than of private profit."
******* *
Page 196-197
More Effective Xxamjmation
Examiners should be required, under heavy penalties, to set forth
in examination reports a full description of all violati
ons of the law, and
all assets and liabilities subject to their criticism. Within
a limited
time after a report of examination hhs been submitted to the
board of directors, each director should be required to certify that the
report has been
read and the secretary of the bank to certify that a full
statement of all
assets criticized has been spread upon the minutes. Published reports
of the bank submitted ninety days following the report of examination should
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Federal Reserve Bank of St. Louis
0
.
1"'
01
Albert C. Agnew
Pages 196-197
be free of assets listed as bad and doubtful by the examiner.(To
avoid subjecting a bank to errors in classification of loans by
examiners, there should be created a board of appeal, to which the
bank could submit for final determination items criticized as bad
and doubtful, over which controversy had arisen between the examiner
and the bank's officers and directors._) It should be said in passing
that investigations of banks which have failed clearly indicate that
in many instances ultimate suspension was brought about by a failure
to eliminate, years before suspension, assets which had been constantly
criticized by examiners.
** ** * **
Relation of Size to Hazard
Nearly 80 per cent of the banks suspending during the eleven years
to 1931 had loans and investments of less than 500,000. Of
1921
from
having loans and investments of Z150,000 and under, 55 out of
banks
the
each 100 failed. The rate of failures declines as the size increases.
It has been demonstrated, speaking generally, that the small bank--under
000--cannot earn a living rate of return, cannot command competent
*50
'4+
management, and during times of stress provides a menace for the entire
banking structure. The minimum capital for commercial bankE, should be
raised to t100,000 or more for country communities, with proportionately
Idgher minima for cities. All existing institations chould be requirec'
capitEl to th,. rn(„1-ired minimum within a reteonable
to brin,;
time in the future, upon penalty of the forfeiture of their charters.
A bank, perhaps more than any other type of institution, must fortify
itself in periods of prosperity against periods of depression, and the
management is properly expected to strengthen its position in good years
in order to be prepared for the problems of lean years. Yet it has been
found that in the avalanche of failures recently occurring, in the great
majority of cases the trouble has been caused by the following: loans made
without adequate security and credit information or without proper regard
to moral risk; concentration of too large a proportion of loans in the same
industry or group of interests; lArge loans to officers and directors;
loaning of commercial deposits, payable upon demand, in nonlicuid and capital
commitments; and losses on bond accounts.
Need for Better Banking
These conditions arise, of course, from a number of cauFes, but in
my opinion the chief cause iv incompetent management. I have seen too many
instances of two banks opernting in the same community, with the same type
of investments available to each, with the same field of operations, one
eble to withstand the pressure of recent months and emerge successfully,
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Federal Reserve Bank of St. Louis
Albert C. Agnew
Oages 196-197
and the other going down under the first pressure, to believe that there
any primary cause other than lack of business judgment behind the
counter. No banker, be he honest, wilfully renders himself incapable
of realizing on assets to meet depositor demand, but many a banker has
so placed his institution through sheer ignorance of the primary
requisites of sound banking. It has always been a mystery to me why we
should require a certificate of qualification from our doctor, our lewyer,
our minister, yes, even our undertaker, but entrust our worldly goods to
the care of one whose immediate prior occupation may have been that of
shearing sheep and whoFe only qualification consists in an ability, with
others, to raise the small capital required to buy a bank charter. What
I have said leads to the suggestion that the law should provide that no
bank charter be granted until the examining authority, after careful and
personal investigation, is satisfied that the proposed management iE
thoroughly experienced in the business of banking, of good and successful
past record and unimpeachable integrity.
iF
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Federal Reserve Bank of St. Louis
•
On page 38 of the memorandum "Branch Banking in England", by the
Federal Reserve Committee on Branch, Group,and Chain Banking, it is stated:
"Under the law the joint stocR banks must publish statements of condition twice a year, but not much detail is
required. As a matter of practice these reports are usually
made as at about the end and the middle of the year.
On page 40:
"The balance sheet figures given above (refer to a consolidated statement as of December 31, 1930, published by
the London Economist, Banking Number, May 9, 1931) are as
of a certain day, but it has been the general belief for a
long time that most of the English banks have indulged in
rwindow dressing" on balance sheet page. ...
"Against this tendency to publish balance sheet to overestimate highly liquid items for a disposition to hide completely
a large body of assets. Some of these undisclosed assets relate
to bank premises which have been written down on published
balance sheets below their true worth, although some English
bankers have stated that their total commitments in office real
estate were higher than desirable. Conservktism causes the
banks to write off loans or investments. which, though partially
in doubt, may be covered in whole or in part."
Page 44:
"The London blearing banks publish monthly statements in
more detail than those published semiannually by all of the
joint stock banks which have been the basis of discussion in
the preceding paragraphs. . . The London Clearing House has 10
members (1) 9 of which are numbered among the joint stock banks
all
doing a general domestic business and these 9 have 95% of
Wales."
and
of the 16 joint stock banks of England
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Federal Reserve Bank of St. Louis
816
•
MEMORANDUM
The "Banking Law" of Puerto Rico, approved May 12, 1933, contains
the following:
'Section 39
P. 33
"One year after the approval of this Act, every foreign bank,
not including in this term and for these purposes, banks of the
United States of America, that is engaged in banking operations
in Puerto Rico, shall be obliged to retain in Puerto Rico, either
as loans or in cash an amount equal to the amount of its deposits
in Puerto Rico; and every deposit of money made in Puerto Rico
shall appear as such. The violation of this provision shall be
sufficient reason for the cancellation of its license."
Section 38
P. 30
"Every bank or foreign bank at present doing business in Puerto
Rico or that may hereafter be established in Puerto Rico shall
obtain from the Treasurer of Puerto Rico, on or before the thirtyfirst day of December of each calendar year, a special license
to do business in Puerto Rico during the succeeding calendar year,
upon payment of the corresponding quotas according to the following
schedule:"
Paid-in capital and reserve furr4
Over $1,000,000 shall pay
500,000 to 1,000,000
500,000
100,000 to
100,000
Less than
$250.00
200.00
100.00
50.00"
(Foreign banks doing business in Puerto Rico must pay $250.00)
Legal reserves are stipulated on page 14.
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Federal Reserve Bank of St. Louis
813
•
MEMORANDUM
The Riddle report on "Branch Banking in England" at page 9
contains the following:
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Federal Reserve Bank of St. Louis
"Statutory provisions in the banking codes of
this country with respect to the amount and agency for
carrying reserves against deposits, the minimum amount
of capital, limitations on loans to common interest,
provisions for the supervision and examination of banks
by publicly appointed officials are things wholly unknown in British law and practice. Moreover, the
surveillance by authorities of applications for bank
charters common in this country is unknown in England
where any persons meeting a few pro forma requirements
have the right to set up in the banking business."
At page 56, the report contains the following:
"The rigorous systems of audit used among the joint
stock banks also contributes to their safety and solvency.
There iB in the first place the internal auditing and
inspection by especially organized departments whose
representatives periodically check up on all branches
and activities. Part of the inspection system includes
the making of a variety of reports at stated intervals
by the branches to the head office.
("Corporation procedure in England for a long period
of time has placed much reliance in audits on behalf of
shareholders by accounting firms. As a result there has
developed a group of reputable and experienced accountantsl ,
whose audit and certification of the state of the companies'affairs
carries a high degree of moral responsibility as well as
the reputation for a conservative presentation of the facts.
The customary employment of these large accounting firms by
the shareholders of banks is an assurance to the depositor.
Joint stock companies must under the law be audited once a
once a year in this fashion and a former chairman of one
of the 'Big Five' has said: (1)
,No self-respecting bank could possibly face
anything less than an absolutely clean certificate
from its auditors; they have to lay down the conditions under which they are prepared to give it. In
short, the names of the auditors are the ultimate
guarantee to the public that a bank is being conducted
on sound lines.'" )
801
SOURCE:
THE CHANGING STRUCTURE OF AMERICAN BOXING—R. W. Goldschmidt
19155
Some
CHAPTLR XI
Suggestions for
Reform
rakes k51-52
4 4 * **
(It le, therefore, proposed that, ,s en essenti.J step in any
thorough plan of banking reform, all commercial bzLnkE in the Unite,„!
Statts be forced by ;#w to take out national charters within a period
of, say, three years.',1,2 Since all National Banks have to be members
of the Podeml Reserve ayste,J, no commercial bank will then be left
outside its arbit. The ?Were). Eeserve Board will thus automatically
bocome the ane and only centre of American banking policy and the National
Bank Act (in revised and enlarged form) the only stktutory basis of crmmercial banking.)
* *
*
it halts sometimes been contended that ouch a law w5uld be akeinst
the constitution. An elaborate opinion of the General Counsel of the
Federel Reeerve Board seems to hove established, however, that this is
not the csse. (See Federal, Reserve Bulletirt, March, 1955.)
ETha Raaking
Pet of Du trieb to achieve tais end in an indirect way,
which may well prove ineffective: it admits non-nenber banke to participateon in the depwit-ineumace scheme (see sub 8), but only until 1st
July,1956. Mon-member bankki have then eithcr to join the Federal Resfxve
System or to renounce the deposit ivarantee.
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Federal Reserve Bank of St. Louis
;61
1
t,_,
Proceed4_ngs of 3rnd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 193Z
* * * **** *
;it. E. Bristow (Virginia): Wh t lAr. Fulton said a mo.nent
might be valuable. If we don't let our state banks into the Federal
Reserve my guess is a great many will nationalize and generally, the
Federal Reserve would probably suit them better than go into the
national, and we need to go this far toward centralisation and stabilize
it there and maintain the state systez better. I disapprove o'.7 centralization in Washington. I think it has been shown it is not to our advantage to have thin 3 run from Washington. ) The Virginia banKs suffered
in their effort to reorganize because if they were borrowing froA the
R. F. C. they usually have three sets of authorities to cinsult: the
Fed,,
,ral Reserve, Comptroller's office and P. F. C. I am not on the
inside, I am talking as an outsider, and I believe if those ord-slizations
were decentralized and left the state and nLtional banks to the Federal
Reserve authorities, each district might have made better headway, -ee-- I
I am suggnsting the banks go into the Federal Reserve System and I feel
if they go that far and find it is a mistAe, and haven't gone into the
national system, they still hyve a step in reeerve. On the other hand,
if they go into the national system they /nye to atay there because
very few will change back to state non-member banks. / bclieve thererore, we are not making a mistake to let them into the Federal Reserve
System and try to retain as much of the state-rights -ts we can undnr
the existing (conomic conditions.(I present that suggestion to you
1
gentlemen--rathn. than join the national system tn have the 1-anks go
into the Federal Reserve 6ystes they still h-ve one mnre method in
reserve if they need to tske advanage of it.)
* * ** *** **
4
9
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Federal Reserve Bank of St. Louis
SOURCE:
BRANCH BANKING IN ENGLAND by Federal Reserve Committee on
Branch, Group, and Chain Banking
PaFes 37-38
*****
Responsibi.lity of Directors. - In the banking tradition and standards which have developed in England, the responsibility of directors has been
emphasized and the interests which those accepting bank directorships have
taken in their institutions has no doubt had its influence upon the solvency
record of English banks.
The Companies Act of 1908 held that the directors
are liable for loss due to wilful neglect or default or actual dishonesty:(2)
”. . . if they (the directors appear to the court not to have
acted as men with any ordinary degree of prudence would have
acted on their own behalf, they have been guilty of such negligence and misconduct as to make them liable to the company."
In 1929 this was made still stronger.(3)
"Subject as hereinafter provided, (4) any provision, whether
contained in the articles of a company or in any contract with
a company or otherwise, for exempting any director, manager or
officer of the company, or any person (rhether an officer of the
company or not) employed by the company as auditor from. or indemnifying him against, any liability which by virtue of any
rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he
may be guilty in relation to the company shall be void."
In 1903 a court said:(5)
11 . . Since the trial of the action, the 'Eight Hon.' Lord de
Morley, as he is described in the literature of the 'bank',
has written stating that, although managing director of the
advisory board, 'I do not tive instructions, nor am I responsible for the bank's management, that duty being placed entirely
in the hands of the general manager, who is appointeC or dismissed by the shareholders only, and to them responsible.'
The managing director of this concern cannot, however, divest
himself of his responsibility so easily. He hes lent his name
to the institution with the full knowledge of what that entails,
and it is useless for a person placed in his position to try to
evade the consequences of his action."
711- First Earl of Halsbury, Laws of FnFlend, Vo. 5, p. 232
(5) The Companies Act of 1929, Sir R.M.W. Chitty, The Complete Statutes of
Enklend, Classified and Annotated in Continuation of .Halsbury's Laws of
England . .
Vo1.21 pp. 873, 874
(4) In certain cases, not pertinent here, relief may be applied for--author.
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Federal Reserve Bank of St. Louis
819
(5) Economist (London) November 21, 1903, p. 1974
Nature of Assets. - The safety of banks rests in the last analysis
on the soundness of their assets and the suitability of these assets from the
viewpoint of the banks' liabilities.
For this retson, some analysis of the
balance sheets of the joint stock banks at various dates seems desirable.
The liabilities of the banks consist chiefly of deposits, mostly payable on
demand or notice of a few days only.
The commercial banking philosophy of
England holds that in order to meet such liabilities, banl assets must possess a high degree of liquidity, and should not be subject to broad fluctuations in value.
Short-term paper is favored to achiEve this end.
Under the law, the joint stock banks must publish statements of
condition twice a year, but not much rietail is required.
As a matter of
practice these reports are usually made as of about the end and the middle
of the year.
The Economist (London) has for years been publishing consoli-
dations of these balance sheets and as of the end of 1930 gives the figures
for the 16 joint stock banks as follows:
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Federal Reserve Bank of St. Louis
•
Proceedings of Und Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1933
***** ***
Marion Wasson (Arkansas): * * * * * * Right after the banking
holiday our state passed the Dictatcr Bill which gives the Bank Commissioner authority to do anything outside of first degree murder,
so the only question raised was on the double liability of the stock.
The R. F. C. raised some question as to whether it was right to issue
non-assessable preferred stock and this special session took care of
that, so we are all ready to go if the Governor goes with us.
Business conditions of course are not good; however, with the
price of cotton the way it is now we feel the state will be in a better
condition this fall.
J. S. Love (Mississippi): The new legislation he speaks of really
makes a dictator aut of the Bank Commissioner. He has more power than
any other Bank Commissioner in this room. He can remove the president
of a bank for any reason he might assume; he can remove the board of
directors. I really would like to have him enlarge on this. He has
a real law.
Marion_Wasson: I don't know whether there is anything more I can
say. Like Mr. Love says, we have authority to do anything we want to
do. re can remove the officers, fix salaries, take a bank over and
sell the assets without the consent of the stockholders and depositors,
write down the deposits and give depositors what we think they have in
it without the process of law. In fact, when we take a bank over they
can't even sue us; if you have a claim against the bank you can come
into court and talk to the Bank Commissioner--that is your day in court,
and if the Commissioner wants to Qonsider, all right, and if not, you
are through. I don't know of any special part of the act you had in
mind.
* * * * * * **
H. G. Wells (Indiana): * * * * * * * * *
We, too, have powers somewhat like Mr. Wasson. Under section 10
we can do anything in the supervising of our institutions. We can remove a board of directors and officers, we can set salaries--we are
doing that every day--we can do anything necessary for the preservation
of the solvency and safety of the banking and financial structure of
Indiana.
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Federal Reserve Bank of St. Louis
***** ***
I 3
Proceedings of 52nd Annual Convention
National Asso. of Supervisors of State Banks,
Chicago, September 1935
******
***
(Wm. D. Gordon (Pennsylvania): * * * * * * * * * *
(Without question, this particular idea of banking problems and
supchwision can be constructively re-enacted in the various sections
in this country an40 am going to move again that the President zone
these United States with respect to state banks and have a chairman
appointed to call together these banking superintendents in his
respective district, with a view of trying to standardize and make
uniform practices for common problems that can be solved in a like
manner. (Remember, one of the great arguments is that Washington will
have one system, one uniform plan. There are many reasons why we think
forty-eight states should have their own systems, but many times its
solution is a common one and it is fine for a man from one section to
exchange ideas from ten or twelve other sections. It is excellent to
have the solution of a problem in some states given to you, and when
the same problem is laid on your doorstep you will have the opinion
of others. I am merely mentioning that to you. I feel a great deal
of good can come from zoning the forty-eight states geographically
and see that like states get together.)
*******
**
H. H. pansen (Washington): I think we should act on the suggestion
of Dr. Gordon of zoning the states in groups. Just before coming to
this meeting I attended a meeting at San Francisco which was a conference of all supervisors of the Twelfth Federal Reserve District,
representatives of the R. F. C., and all officials of the Twelfth
District of the Federal Reserve attended the meeting. The meeting was
called by the Federal Reserve Bank, and I derived a great deal of
benefit from that meeting, the first one in the district. It would
apply to our district, the zoning to correspond to the Federal Reserve
District as we are dealing with the same public officials, Federal Reserve and R. F. C. )
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Federal Reserve Bank of St. Louis
***** *****
it rid-)
Statement of J. 1. McLeod,
President, Canadian Beakers A3130•,
Proceedings - 1955
Royal Commission on Banking mod Currency.
(Page 88)
* * * * * 4'
*
Besides the regularly prescribed examination by the shareholders'
auditors, provision is made by statute (in the 111,n1c Act, Section 56) for
the regular inspection of the banks by the Inspector General of Banks.
This officer makes an axamination annually of the books of the bank at
Read Ofrine; and in addition makes his own investigation of the larger
loans; reporting the results of his work to the Minister of Finance, by
whom he is appointed.
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Federal Reserve Bank of St. Louis
SOURCE:
ADDRES
ASSOCIATION NEWS BULLETIN -- Sayings Banks Association of
State of N.Y.,
October 16-17, 1938
OF HENRY R. KINSAX
Pue
But we must be at the same tine vigorous in our opposition
to an4 change which will affect adversely the intercsts of our
depositors. We are mutual institutions. Our only concern is for
the depositor and as long as we remeaber thi,t and apply intelligently
tioc principles we have spent our lives learning there is little that
can be written into the stetutes which can enhance our depositors'
welfare
It is up to us to protect him frost bad laws, but equally
it is our responsibility to assist in tae preparation and adoption
of every legal safeguard through whici. he may benefit.
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Federal Reserve Bank of St. Louis
Adolph S. Ochs of the New York Times
Address- 40th Annual Convention
Ner York State Rankers Aeso., June 1933
This is an unexpected honor imid pleasure. I live here in the summer
and I came over to hear the very excellent address by Mr. Berle that you
have lietened to. I find myself in accord with him almost on every point
that he made.
What particularly, more than anything else, imrresses me is the
responsibility that is attached to banking. It is a trust that is imposed
on you, and it should be regarded as a very sacred one. kr. Berle suggests
that other interests are promoted through the fact of being a controlling
owner in a bank, and that this should be strictly avoided. There is no
gainsaying the fact that while re have gone through a very serioue disturbance in business, no small contribution was made to that disturbance
by our ignoring the fundamental principles of sound banking.
I was brought up in a very small town, Chattanooga
'Tennessee, where
the president of the bank' at that time was looked upon as the oracle of
the torn. He was our guide, mr philosopher, our friend, if you went to
the in3titution with an enterprise that you wanted to promote, you could
be quite sure you would hear all of the objections that were poasible in
connection with that enterprise. He was ultra-conservative. He ras a
safeguard to the community. You could be sure that if you got hie en1rera
sent—that is, his aid and asaistance—you were pretty sound in what yea
were undertaking.
Th,t principle should prevail in all instances. It ras wholly departed from and notably so in the great banking institutions in New York
City. They were no longer institutions for the de. osit of money and for
the safeguarding of it, but they were promoting and encouraging all kinds
of enterprise. It seems nothing was too fantastic to apreal to thea.
A man came to me and said that I was saking a great sistate in the
conluct of my business, haring all my eggs in one basket. 'Why," he said,
"I can t :- tke your business and capitalize it end sake money. I can le&ve you
a very great interest, even ownership control."
Now that came fron a aan of standing in the financial world, and it
along thome lines that the banks were encouraging all kinds of profitable
enterprises--capitalizing then at a very large figure. There vas only one
inevitable result. It could not last. It eels impossible. It vas strange
that so many of our wise men were dragged into it. They juet simply could
not avoid it. It is my judgment that that wae caused by that fantastic plan
of financing that was encouraged by the bankers. Not only did they encourage
it in the enterprises of others, butt having exhausted the possibilities
that those onterprisee offered, they hegnn apeculating in their own enterpriaes. And there was that great speculation in bank stocks with the
disastrour result that you are all too familiar with.
WKE
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Federal Reserve Bank of St. Louis
fr;
-
-
/
( You will have to get back to the fundamental principle,
that a banking institution is a trust, an obligation resting
meat of it. It is also clothed with a public responsibility
interest, and therefore the Government has a right to h!tve a
in the management.
\11
and that IS
on the manage.
and a 7ublio
great voice
With reference to the methods whidh may be adopted, the remedies which
say be undertaken—they may not all be safe and sound, but I am cluite in
sympathy with the idea that we had better try something rather than
things drift as they have been doing in the past. The outlook seems to be
a little bit encourag:ing, but dons t be too sanguine. We have a lot of
hurdles to take, and I believe among them. and foremoet, is the banking
business. We have toget rid of rotten barking, of dishonest banking, of
speculative banking.(We must have our banking inetitutions of such a
character that when the depositor puts his money in the bank he rill feel
that there is assurance of safety. Re also wants to feel that when a
charter is granted to a bank, the state and nation has taken proper pre.
caution to see that it is in safe hands, and, furthermore, that they will
see that the examination of the bank is made more rigorous, that the public
i8 informed of the condition of the bank, and that the condition of the
bank is also the responsibility of the bank which you do business with.)
Take the Bank of the United States in Nov York, with its disastrous
failure. The banks in New York, the Clearinghouse, the Federal Reserve
Bank have to share a large cart of that responsibility. They were doing
an unsafe and unsound business and it was known to all the be.nks. But
still they eontinued to do business with it and allowed it to continue.
It coun have been stopped long before it got as far as it did.
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Federal Reserve Bank of St. Louis
* * * * * * **
t378
Fred Berger, V. P., Norristown-Penn Trust Co., Pa.
Speech - Pe. B. A.
Source: The Financial Age - May 1933.
*** * * * * * * **
Let us then briefly consider ju.7t a few of th. major mistakes whieh he.ve
been made by the managements of a great many of our banks.
Loan and Investment Policies
The managements of many banks have continued to assume increasing deposit
liabilities and those same managements have failed to analyse those liabilities
in order that correct loan and investment policies can be established.
Tha same bankers, however, in many instances, have made no provision for
their own to analyze their deposit liability so that they do not knoa whether
a large proportion of their deposits is subject to the decision of withdrawal
by a comparatively rew individuals, or whether their liabilities are widely
distributed insofar as individual average amounts 5re concerned and that, therePore, their investment policies could not possibly have been correctly organised
unless they happened to be fortunate.
Once having established the type of policy which should be adopted, then
consideration should be given to proper loaning and investment methods.
Secondary Rpserves
Loan Policiest All too often the tendency of directors seems to be to see
how many loans can be made locally because those directors seem to think that
people in the locality should be taken care of to the fullest extent and that
if any Nude remain, othE,r investments should be made. It is, of course, true
that our derositors should have the first right as borrowers, but it is just
as true and probably even more so that our depositors require e great deal
more protection than 4o our borrowers require their service.
Naturally, therefore, a bank should give very careful consideration not
only to the amount of its primary reserves over and above legal minimum reservps, but also to a substantial amount in secondary reserves, that amount,
of course, Aepending greatly on the type and character of the deposit liability.
Instsllment Mortga2s Pazaonts
The use of installment paymPnts on aortgage loans has been successfully
effected by some of our larger insurance compani.-15 with most satisfactory results. While admittedly it is a little more difficult of administration, there
policiPs could not ani should not be adopted
seems to be no reason why
banks are concerned, a minimum of such
commercial
by banks, aed insofar as
at any rate. If such lortgage
portfolios
mortgage loans should be in their
but
loans are made, not only eJould the appraisal of the property be considered,
should
charges
carrying
of
also the ability of the mortgagor to continue the 2ayment
receivp most careful c.:msider tion. * * * * *
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Federal Reserve Bank of St. Louis
138
Investment Policies: There seems to hsive been a tendency on the part of
too many boards of directors to consider investments from an income point of
view without thinking of the safety of principal, and, of couree, mach an income constleration hes been more or lees forced bemuse we hslte been paying
too high a rate of intereet on deposits. Where investments have been purchalsed
for high yields unfortunately both the high yields and a greater proportion of
the capital have dieappeared with results which many of us know all too well.
** *** * * * * * *
DVidend Payments
Is sasy territories all over the country during the period from 19P5 to
1929 banks not conservatively managed believed that they should distribute a
greater proportion of their earnings in dividends to stockholders. In fact
and, unfortunately, the policy became so widespread that the amount of dividend
rayments came to be ceneidered as a factor in the standing of a bank in the
community. Thus a good many banks which would have continued a conservative
policy were forced to Ancrease those dividends in order to *keep up with the
Jonesy with the result that in this country millione of dollars hove been eaid
in dividends which should have been added to reserves, and had they been added
to reserves, aur banking structure today would be much stronger.
It is to be hoped that in the future when diviiends are to be increased
ouch increases at first will be paid, where a bank already has established a
minimum dividend, aa extra dividends so that they can be withdrawn should the
average of earnings not be realised in a future period. As the average of
earnings gradually increases, the dividend rate r.aay be conservatively increased,
but a oonaistent and sizable reeerves for losses should be a policy established
by all banks. * * * * * *
4!Lrlk BUildiqes
During the same period mentioned before, 1024-29, there was also a
tendency on the part of directore all over the cauntry to feel that new bank
buildings were necessary merely becwuse in many instances some other bank also
built a bank building. Little thought ras given as to whether the bank which
built the first new building in the territory could afford to do et), and even
if it could, whether the other banks in following were financially in a
position to afford the luxury.•* * * * *
* * * * * * If a bank is paying high rentals, then the amount of those
rentals plus an estimated advantage in the new business value of a new bank
building ehould be offset against the loss of income Prom earning asset:5 transrormed Into a building pins-the carrying charges of that building. If present
costs plus the possible advantage of a new building in created confidence, etc.,
offset the lose in earning assets and carrying charges, then a building is
justified.
On the other hand, many banks have Invested their capital and portions of
their surplus and even, in some instances, a portion of depositors' funds in a
hank building. Such an action is obvionsly the result of mismanagement.
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Federal Reserve Bank of St. Louis
-5Cooperative Effort
ror some reason or other, bankers seem to find it difficult to cooperate
on problems which are mutual. There apparently seels to be a lack of confidence by bankers in each other, and one of the big questions which has
always beam in my mind is how those same bankers who cannot trust one another,
can justify their attempt to have their depositors have faith in them.
*** * ** * * * **
* * * * * * there is no doubt that the real solution of mutual banking
problems lies in the smaller unit of the county bankers associations, regional
clearing houses and local clearing houses.
Concerted Action on Mutual Problems
Because cooperation in the future will undoubtedly be one of the most
important vehicles for the return of banking to its former position in the
confidence of the public, it would seem that some consideration should here
be given to activities which a county bankers association, a regional clearing
house, or a local clearing house may properly undertake in order to bring
about concerted action on mutual banking problems and gradually build up the
faith of given communities in their banks.
The following are so.ae of the activities which regional clearing houses
and similar associutions have successfully adopted to the mutual benefit of
all of the members of their group:
Service Charges
1. Undoubtedly the banks of the country hre themselves responsible for
the larce volume of small nhecking accounts which they now are carrying, but,
nevertheless, it still follows that such checking accounts are carried at a
heavy cost to banking--a cost which banking at present and, 'or that .1:atter,
at any time, cannot afford. The public has been educeted to expect such
service and, therefore, education in the opposite direction is necessary. The
association or clearing house as such is in a position to effectively educate
the public in the territory which its members serve as to the value of checking
account services and by simplified methods show that a checking account below
a certain minimum cannot be operated at a profit and that, therefore, banks
must make a charge where proper balances are not carried. * * * * * *
Bank Chapters
2. It is through the regional clearing houses that the first move can be
made toward obtaining protective action against the indiscriminate granting
of bank charters. Each territory served by the sembers of such clearing houees
is properly represented in Congress and in the State Legislature and the
influence of the banks in those territories, if properly used, can undoubtedly
eliminate the granting of charters where additional banking services are not
needed.
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Federal Reserve Bank of St. Louis
- 4Lsizislative Matters
3. ,To4 nt action by regional clearing housea can be made much more effective
hy a regional clearing house or a county association because here again the
larger territory will have more effect on ite legislative representative and
is in a position to presont a concerted opinion on all matters of proposed
banking law which might adversely affect the business of banking.
Check Collections
4. By action of the regional clearing houses or county associations and,
in many instances, in cooperation with the Federal Reserve banks, direct
exchange of checks may be effectsd, thereby shortening by days the time needed
for the presentation and collection of checks. The net result is a benefit to
all depositors and an elimination of what is, in many territorials, a serious
problem--check kiting.
Interest Rate,
5. The cooperative consideration of the amount of interest paid on depoeits and the regulation of such *nterest rates, as well as the methods of
computation, are possible with resultant benefits not only to the member
banks of the association but to depositors, for if banks pay wore in interest
than they should, losses are bound to result which will affect all banking in
any given territory.
Cooperative Bank Advertising
6. There is no reason why the individual members of a regional clearing
house or county association should not advertise individually, and if they
are giving better services than their competitors, there is no reason why they
should not be more successful, but when it comes to a sIttter of education and
of the general reestabLishment of good-will and public confidence in banking,
then individual action by banks is of little value. Cooperative effort through
the regianal clearing house or county association has brought and will bring
the best resets.
Credit Buyvaup
7. The establishment of credit bureaus for the exchange of credit informam
tiem and the elimination of duplicate and multiple borrowing have been proven
successful in many sections of the country. There seems to be no reason why
the banks in a given community or territory should not be able to protect
themselves, by cooperation with one another, against indiscriminate and unscrupulous use of their borrowing facilities. The success of these credit
bureaus in many communities most certainly justifies their adoption by association effort throughout the country to the betterment of all banking.
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Federal Reserve Bank of St. Louis
*
* * * * * * ***
5
*
4 N.. 4 *1.
Let us realize also that no matter how carefully we legislate, either
nationally or within our State, or ow carefully we organi7e locally, one
factor cannot be regulated or organized and that is the human element in our
profession--good bankers. The successful bankers of the future must have a
thorough-going knowledge not only of banking laws but of bank management
theory and practice. That knowledge is available and is being imparted to
thousands of the future bankers of the country. Many %embers of our professio
n
who now have to do with the operation of banks must also provide themselves
with improved bank nanagement knowledge, but in addition we can look forward
with confidence to the future, "or there is a greater realization or the need
for education in bank management and thousands of our junior bankers are
obtaining it through the classes of the American Institute of Banking.
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Federal Reserve Bank of St. Louis
Fred Berger, V. P., Norristown-Penn Trust Co., Pa.
Speech - Pa. B. A.
Source: The Financial Age - May 1M.
** ** *** * *
*
Trust Activities
8. Our trust departments in many sections of the country are vieing with
ane another for a volume of trust business and in that cAkipetltion are taieng
business at mach ridiculous rates that undoubtedly as this business matures
they will find themselves in just the same position with regard to their trust
department activitiee as we now are with. regard to our mall balanee checking
accounts. The hue and cry which will be raised at that time could be entirely
eliminated by cooperative effort at the present time to establish minimum
rates below which no trust department would take trust business.
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Federal Reserve Bank of St. Louis
* * * * ****** *
/
Fred Berger, V. P., Norristown-Penn Trust Co., Pa.
Speech - Pa. B. A.
Source: The Financial Age - May 193!.
** * * * * *
* * *
Examinations
9. No matter how efficiently the State Banking Departments and the
national bank examiners make thpir pxwo'nations, there is always lacking in
any given territory a complete picture of the condition of the banks in th8t
locality. Clearing h3use exaainations have proven 'lost effective in providing a means whereby all of the members of an esnociation may be assured
that as long as the clearing house examiner is making efficient examinations
and is not reporting to a clearing house committee any danger spots, all of
the members of the association are properly managed and are in a sound
financial conAition.
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Federal Reserve Bank of St. Louis
* **** * * * * * **
SOURCE:
ANNUAL REPORT ON BANES OF DEPOSIT & DISCOUNT, ETC. — N.Y. 19Z5F
Page 39 (Banking Board Resolutions)
Senate Bill Introductory No. 68, Print lo, 68, referrec, to in the
foregoinii resolutiont, reade 68 follows:
5_ a
(nc!) 490—s, Merger or sale of asoets of banks and trust companis
in unsafe condition. If any bnnk or trust company is conducting
its businesF in an unsafe manner, or is in an unorDund or unsafe
condition to transact its business, or cannot with nafety and expe—
diency continue its business, so thnt the superIntendent is suthorized to take possession thereof under the provisions of sectton fiftyseven, and if, in the opinlon of the superintendent, the public
interest will be furthered by an immediate merer of such corpo—
ration into another corporation, or an imAi.diate sale of its assets
in whole or in part to a_nothr corporation, the mercer or sale is
authorized FS follows:
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Federal Reserve Bank of St. Louis
1 22
SOURCE:
ANNUAL REPORT ON BARU Ok DEPOSIT &
riscom, ETC. -
N.Y. 1985
(Benking Board)
COILERCIPL BANKS-EMERGENCY MEASURES
Despite the importance of institutions organized to essemble
small savings, it must be recognized the.t. the comeercial bank is
the centerpiece of our credit structure. New bank aredit comes
into being largely ae e consequence of the lendinc and investine
activities of commercial banks, and it is thie credit which constitutes the country's principal exchenge media. It is this credit
which becomes the income of the wage earners and other cleeeee
who utilize eevings inetitutions tb depositories for their savings.
Any obstacle to the free flow of commerciel bank oredit must
inevitably affect the condition of all types of hankine. inetitutions.
There are not many powere of the Banking Bosrd which may be
directly employed to erevent undesirable expansions and contractions in the total outstandini volume of commercial bank credit.
One such power wee bestowed upon the Board, however, at the
date of its inception, end thet le to regulate the method and etendards "for tie valuation of the aesets" of institutione under the
supervieion of the benking department. In the exercise of this
power the Board has striven to av id the narrow definitions of
asset valuee that otherwise might heve been emtployed in such a
way as to interfere with the normal flow of bank credit.
After the declaration of a bank holiday by the Governor of thie
State in the early part of illerch, other occasions trose for the
encouragement by the Board of devices to stem the tide of panic
contrection. When it appeared probable thtt there might be general reliance throughout the country upon scrip es an emerge:10y
currency, the Board foresaw the danger thet much of this scrip
might not circulate beyond the confines of reEtricted arees. At
ite meeting of March 6, 19BE, the Board edopted the fol:owimg
resolution: "Resolved, Met the Banking Board reeoumends
that the &tate be prep red, in the event thet the National Government does not take care of the situation, to provide for aome
medium to circulate as currency throueh the State at lerg* .
.
By resolution of March 6, 1953, the Bocrd approved the iesuance
of an authorisation certificate to "The Emergency Cortificet Corporation of New Tork." Fortunttely, the provisions of the Bank
Conservation Act have thue far at leamt evoided the necessite of
th; functioning of this cor)oration.
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Federal Reserve Bank of St. Louis
Address by Robert Batton, Chairman,
Indiana Commission for Financial Institutions
37th Annual Convention, Indiana Bankers Asso., June 1953
(The Hoosier Banker, July 1953)
***** ***
At the outset, let it be said that one of the chief defects in our
banking system 11-.8 found its source in the prevelent'idea among many
bankers that banks should be operated primarily for the profit of the
stockholders and officers. Most of the evils which have grown up and
made themselves manifest in the past in this business have been due to
this misconception of the true function of a bank.
The new Department of Financial Institutions, I am sure, feels that
the first duty of a bank is to furnish a safe place for the deposit of
money. The second, a free flow of credit facilities in the community
served by the bank made available by the reservoir of funds so deposited.
Any profit accruing from the rendition of these services is merely incidental. In other words, so far as the depositors are concerned, we
feel that there exists a definite trust relationship between them and
the bank, the guarding and enforcement of which, within the provisions
of the act, will be of primary concern to the department. Let there be
no slightest doubt on this scoret To any banker who is not in entire
sympathy with this idea, we would suggest thht now is the accepted
time for you to get out of the banking business; a continuance therein
with any different idea as the mainspring of your banking activities
will only serve to bring swift disaster to you and to yaur institution.
As incidental to this principle and policy let me say that the
department will in the future look with favor upon the selection by the
shareholders of these institutions of directors and officers who not
only have a substantial financial investment in the institution, but
also who have a substantial financial responsibility in addition. We
will eertainly frown upon the choice of directors and officers who
have neither, and whose principal concern is the mere livelihood
furnished by a joh in the bankt We regard such an interest as anything
but conducive of that sense of trust responsibility which we intend to
foster and develop in the future relations between such institutions and
their depositors. Do not expect in the future to organize or to continue the operation of a bank merely for the rurr.ose of furnishing a
blacksmith or a barber or what not with a soft job. Such a policy only
serves to spoil a goal blacksmith or a good barber and it will not be
permittedt
Also, as incidental to this 'este principle, I want to say something about the payment of excessive interest rates on deposits. One
of the principal reasons why many banks in the recent crisis found
themselves without any cushion of reserves to take care of
depreciation
in their bond accounts and in their mortgage loans, was to be found in
the fact that for years they had been paying excessive rates
of interest
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Federal Reserve Bank of St. Louis
- 2on deposits! There is slme indication that Federal legislation will to
some measure take care of this situation. But, whether it does or not,
you say be sure that the department will regulate this matter in the
Puture so 'is to fully protect conservative banking from this form of
cut-throat competition! * * * * * * * The intangibles tax of
of one
per cent., the current demand for liquidity, the difficulty of finding
acceptable liquid investments carrying anything sore than very meager
interest rates, and many other factors all conspire to create this
situation. * * * * * * * Even without Federal legislation, we have
some reason to believe that the National banking authorities will oooperate with us in the effort to keep these interest rates within
reasonable limits.
k
The department will regard the sec -md function just outlined, as a
duty to promote and foster the freest possible flow of credit in the
community served by the institation. Only thus can this great state
continue to ievelop and thus fulfill its destiny! Only thus can there
be any hope or expectation of a profitable operation of the institution!
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Federal Reserve Bank of St. Louis
**** * * * **
Address of W. A. Collings, Pres.,
Indiana Bankers Ass°.
37th Annual Convention, Indiana Bankers Asso., June 1933
(The Hoosier Banker, July 1933)
/
** * * * ** * * * *
There is also one provision in our new state banking eode which T
deem worthy of special emphasis, mot because it is more important than
others, but becuse I am inclined to think its possibilities have not
been sufficiently estimated.
I refer to ,Fiction 39 of the ?inancial Institutions Act Whioh per(/'''
sits the Ranking Departm,
)nt to assign examiners from the regular force
,
N ,
, . to regional clearing houses which may be organized.
?his provision overcomes what has been heretofore one of the almost
insuperable barriers tn attempting to set 117 such clearing houses.
You who have WA experience with county credit bureaus well know
that the service to members is frequently insufficient for your banks
situated near the cc/unty line, and extending its business aren into
two or more counties. The regi..)nal clearing house removes this
difficulty and Indeed by co-operation seems to provide for state-wide
observation.
It is our opinion that this opportunity for wide dissemination of
sound banking practices and closer co-operation in banking activities
should not be overlooked.
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Federal Reserve Bank of St. Louis
******* ** **
;25
SOURCE:
THE CALIIORNIA BANKER—JUNE 1935
SOME THOUGHTS ON TIT FUTURE OF AMERICAN BANKING--by Albert C. Agnew,
Legal Adviser, Fed. Fes. Bank, San Francisco
Pagre 194
I do not play in the realm of speculation when I say to you
that this dual system of control has led inevitably to a much less
rigorous superviEory policy on the part of both State and national
authorities than if but one system existed. Fear of having a benk
leave one system for the other has, without queetion, deterred many
an official from administering a much needed rebuke for poor management
or violation of law.
Page
195-196
_Wier Safeguards Needed
But the unification of commerciel banking under one system of
control and supervision and the complete segregetion of commerciel
and savings banking will not alone suffice. The experience of the
past has, I believe, indicated theneed for many other reforms and
safeguards, some of the more important of which are provided, in so
far as national banks and Federal Reserve member banks are concerned,
by the bill sponsored by Senator Claes of Virginia end now pending in
Congress. The salutary proviEions of this bill are no doubt familiar
to you all andwill not be reviewed here. The fact, however, that the
provisions of this federal law will, if enacted, apply only to national
banks and the small percentage of State institutions which have
voluntarily become members of the Federal Reserve System emphasizes, I
believe, the importance and necessity for uniform statutory control of
all commercial banking, State and national, heretofore suggested.
Other thoughtscc the future of American banking suggest themselves.
The germ of one of these was contained in the amendment to the Aational
Bank Act, suggested in 1895 but never adopted, empowering the Comptroller
of the Currency, after hearing, to remove officers and directors of
national banks for gross mismanagement or violation of law. To me, one
of the most futile things in the world is the examiner's report calling
the attention of the authorities to gross misconduct or inattention on
the part of bnnk officers, to violations of law or imprudent policies,
which report is filed in the erchives and there allowed to remain until
thenext examination or until the bank's earlier demise.
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Federal Reserve Bank of St. Louis
**
*
**** **
; I)
Albert C. Agnew
Pages 195-196 (contd.)
The examining authority should bE empowered, after providing
a full and fair hearing, to remove summari1y any officer or director
found guilty of gross negligence, a breach of duty or dishonesty.
Banking is a public trust and there iE no room in it for the negligent,
the incompetent or the dishonest.
The supervisory and examining authority for banks should be
placed clearly beyond the pale of politics or political pressure. The
examining force should be of the highest caliber, should be well compensated and should be appointed for life or e considerable term of years.
(The law should require that published reports of tondition be
made frequently ana in greatest detail; that the total of all loans
overdue six months or more be reported as non-current and that a detailed
statement be made of all bank borrowings.)
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Federal Reserve Bank of St. Louis
** * *****
SOUECE:
THE CALIFORNIA BANKER--JUNF 1933
SOMF THOUGHTS ON THE FUTURE OF AMERICAN BANKING--by Albert C. Agnew,
Legal Adviser, Fed. Res. Bank, San Francisco
Page 194
* ** * ****
This competition leads also to inadequate banking law, From
the establishment of the national banking system in 1863 to the present
time, successive Comptrollers of the Ourrency have asked Congress for
amendments to the National Bank Act to increase the supervisory control
and enable the imposition of heavier penalties for violations of law.
Thus, it was recommended by the first Comptroller that the law provide
that the failure of a national bank be declared prima facie fraudulent
and that the officers and directors be made personally responsible unless,
upon investigation, it was found that the bank's affairs had been honestly
administered. In 1887 it was proposed that penaltiEs be imposed for
making loans contrary to law; in 1895 that the Comptroller be authorized,
with the approval of the E'Jecretary of the Treasury and after hearing, to
remove officers or directors for mismanagement or violation of law; in
1914 that the Comptroller be authorized to impose fines for violations
of law or regulations; and in 1931, that a board, consisting of the
Secretary of the Treasury, the Comptroller and the Governor of the Federal
Reserve Board, be empowered to remove officers for continual violations of
law or the pursuit of unsound practices. Fear of crippling the popularity
of the national systex. has, I believe, been the principal deterrent
to the adoption of any of these measures.
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Federal Reserve Bank of St. Louis
*********
181
•
SOURCE:
THE CALIFORNIA BANKER--JUNE 1933
ADDRESS OF THE PRESIDENT--J. F. Sullivan, Jr.
Page 184
Loaning Against Bank Stocks
One of the primary laws in sound banking practice is that loans
must be based on good credit judgment and not dictated by bank directors
or officers for their personal benefit. Recent disclosures of a sensational nature have focused the spotlight of public censure upon flagrant
abuses of this cut;tom, end this circumstance hus given birth to a recommendation that there should be enacted federal legislation more strictly
to regulate bank loans. Laws, however deteiled and stringent, can never
colyletely control every banking practice,and it ib still possible to run
a good bank with a dec,:ree of latitude left to good manegeucnt.
czn
never be a substitute for sound judgment end approved procedure. I would
personally go much further than this recommendation and urge that banks
should not make loans against unlisted bank stocks. Banking capitel
supposedly is supplied by stockholders out of their own funds, and not furnished indirectly by bank deposits loaned against collateral of that class.
This may be regarded as an extremely radical viewpoint, but in my opinion
it is in the interests of conservative banking and I submit it for your
more deliberate consideration.
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Federal Reserve Bank of St. Louis
The California Banker--June 1933
SOME THOUGHTS ON THE FUTURE OF AMERICAN BANKING--by Albert C. Agnew,
Legal Adviser, Fed. Res. Bk., San Francisco
Page 1.95
* * *The only question is, will the bankers take the leadership
in this reform, providing it with the necessary checks and safeguards which
their experience would suggest, or will the housecleaning be left to those
whose inspiration arises from bitterness for what has passed and whose
chief qualification is a determintition for something radically different.
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Federal Reserve Bank of St. Louis
The California Banker--June 19Z3
COMPETITION, COOPERATION OR CONTROL--addresa by Paul F. Cadman,
Associate Prof. of Economics, U. of Calif.
ht.g.ty 209-210
/sse
Why Not Banker& Exchanges?
In some respects it is unfortunate that there are not bankers'
exchanges whoae members would submit voluntarily to the control and
regulation of the group. Such control from within the profeEsion would
be fer better than a political control from without. It is immediately
argued that the business is too intimate, personal, end competitive
to submit to exchange regulations. Such has not been the case with
stock brokers. Theire is perhaps the most competitive bueinesa in the
financial field, but exchange nembers nevertheless submit to inveetigation
and enalyais which no other businese in the country would endure. What
has been the result? The smallest percentege of failure in this present
depreasion which eny business has suffered. In the New York Stock Exchange,
with thirteen hundred members, less than ten failures; in the San Francisco
Stock Exchange, with over sevent members, only two failures. To press this
analogy further: the relations between stock brokers and client:, are as
intimate ae those between banker and client, yet the Ethics and Business
Conduct committeea of the major exchangee examine such relations in detail,
criticize, restrict and, if necessary, penalize. Furthermore, one of the
moet rigid regulations of the stock exchange is the uniform commiesion rule.
In only the rarest of instances may a commission be split with a nonmember
and under no circumstances can a member ever cut a commission for a client.
The language of the commiaeion rule is so inclusive and exact that no
violation is possible. If stockbrokers were to compete by rate cutting as
banks now compete by interest-rate inducements, the majority of brokerage
houses would be bankrupt in less than a decade.
Perhaps a bankers' exchange is too radical an idea. Banking is an
exceedingly coneervative profession and in some respects a very eelfsatisfied one. It will not take many years of operation in the red, however, to shake this complacency. ClearinE houses could easily function as
exchangee 8nd could, under member consent, extend the control which they
already exerciee. But if this is too advanced a proposal, then consideration
should be given to other existing agencieE. Local, State, and national
banking associations are well establiehed. Few trade associatione have such
excellent organizetion. The committees and secreteries of the State and
national associations have done excellent work in research and have aerved
admirably in an advisory capacity. Publications have been, particularly
in recent years, informatory and stimulating. Conventions have been numerous,
well planned, entertaining, and 8S far as it is possible for any American convocation to be serious, they have devoted a goodly numberof their seseions
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Federal Reserve Bank of St. Louis
Paul F. Cadman
Pages W9-210 (contd.)
to real business for the good of the profession. The
accomplishments of
the A. I. B. are so noteworthy as to place that orEanization
at the head
of a11 institutions of its kind.
But the associations are lacking in legislative and executive
authority.
No doubt there is good reason why they have not had these powers
; perhaps
they never will have them. There is, however, in these establ
ished groups
an invaluable basis for a cooperative effort. The machinery
exists; only
the vision to recognize the need and the will to plan are
lacking. But as
the years of apathy and indifference pass, the trend lines are
writing their
impersonal warnings; rising costs and falling inconte. These
two destroyers
have too often taken their toll and have headed many major
industries into
the secular decline which ends in elimination.
This iE the moment supreme for a cooperative effort:
Controlling
legislation is as yet only in draft form. The Federal
Government would
gladly be relieved of the necessity of administering
the nation's banking
activities. Once a specific bank program crystallizes in
legislation it
will bind like a vise. Business is stagnete and funds
are abundant, hence
the impetus to unfair competitive practices is slight, althou
gh many persist
under the sheer force of custom—the habit of getting
deposits by any and
all methods. The red ink has begun to appear in bank balanc
e sheets. The
public is inured to changes in traditional behavior.
The Administration
has officially announced its intention to recognize
reasonable trade agreements. All of the signs are in conjunction.
The banking business cannot afford to invite hampering and restri
cting
control. Our Canadian neighbors have shown U8 that a good
system can run
efficiently with almost no regulation--far less than we
now have or anticipate.
** *
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Federal Reserve Bank of St. Louis
The California Banker--June 1933
CAUSES OF THE RECENT BANKING CRISIS ANT SUGGESTIONS FOE THEIR AVOIDAN
CE
IN TFE FUTURE--ADDEFSE by Alden Anderson, Pres., Capital
Nat. Bank, Sacramento
PaRe 257
We had to lean over backwards for fear of doing something that
might injuriously afff,ct them. We are juet as interested--every bank
is--in having every other bank sound as we are in our own institution
functioning properly.
This is a time when we must look forward and work together.
Professor Cadman could have told you very much more what was in his
mind
than he publicly expressed. If the bankers don't do theee things,
somebody else is going to do it, because we must have safe and
sound
banks for the transaction of business.
U. S. Bankiny,in the Past
Ahy have we lagged behind in our general banking situation? First:
We have independent banking laws in each of the forty-eight States.
If all
States had as good laws and enforcement as California it would
not be so
bad, but California is one of the very best and some States have
but
little more than the name of bank law and regulLtion. This diversity of
banking laws and practice we have always had with us. Then our people
have
been led to believe, mostly from the political angle, that concentrated
power with money was dangerous to the rights and liberties of the people.
The first United States Bank was legislated out of existence and after
a
few years the second United States Bank was denied a renewal of its
charter.
History shows that commercially those banks functioned well for those
times,
but the management Aas supposed to have been too much interested in
politic
s.
**
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Federal Reserve Bank of St. Louis
The California Banker--June 1933
BANKING ON THE GOVERNMENT—address by Lane D. Webber, Vice Pres.,
First Nat. Trust & Svgs. Bank, San Diego
Paze 262
By the guaranteeing or insuring of bank deposits the public
understands and intends that the Federal Government shall assure
the depositors of all banks that their moneys shall be continuously
available on demand, and obligate itself to that end. Such an
obligation is, of course, beyond the financial ability of our government. The sum involved is so stupendous as to defy the strength of
any government.
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Federal Reserve Bank of St. Louis
The California Banker--June 1933
QUALIFICATIONS OF TOMORROW'S BANKER—address by E. V. Krick, Vice-Pres.
and Cashier American Trust Co., San FranciEco
'Daus 270-71
* * *Uncontrolled competition will give place to practical
cooperation. The undesirable traits that have been brought to the
fore will, we hope, disappear Lnd perhaps again ye may see bankers
aE a class reinstated in public esteem.
Tomorrow's banker includes bank officials, directors an6 all
others connected with banks rho are in any way responsible for the
funds entrusted to them by the public. The nttitude of the public
in regard to this responsibilit,y has reached such a stage thAt
perhaps in the not-far distant future bankers will be licensed or
accredited as are doctors, lawyers, engineers and other professional
people. This should be welcomed by bankers, and it is a question
whether the time has not come when they themselves should provide
for this, and erect such barriers as will prevent undesirables from
entering or remaining in the profession.
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Federal Reserve Bank of St. Louis
•
"Historical Outline of Banking Legislation
in Canada" - by J. A. McLeod, President,
The Canadian Bankers' Association
(Journal of the Canadian Bankers' Asso., Oct., 1933)
*** ** * * * **
Chief among the features of that revision (1915) was the provision
made for a shareholders' audit. This legislation followed the lines of
similar provisions in the English Joint Stock Companies Act, and is
still in force and operative (see section 55 of the Bank Act).
* **** * ****
Additions were made to the shareholders' audit provisions of 1913.
Under the amending legislation two auditors for each bank instead of a
possible one only are required. The bank can have only one permanent
auditor and the other auditor has to be changed every two years. An
important addition made to the duties of the auditors requires them to
report to directors, individually or jointly, transactions or conditions
which are not satisfactory to them (see subsection 5 of section 55 of
the Bank Act).
The form of the monthly return--a return in some form or other to
the Government has been a feature of banking legislation practically
from the beginning--was aubject to some modification. Certain classes
of loans mentioned in the legislation were to be excluded under certain
conditions from the "Current Loan" column of the monthly return to the
Minister of Finance. This return is to be made to the Minister of
Finance by each bank every month, and Schedule G appended to the Bank
Act as it now exists gives particulars of the present requirement (see
section 113 subsection 5 of the Bank Act).
** * * ** * * * * *
The closing of the doors of the Home Bank of Canada on the 6th of
August, 1923, resulted in the enactment of the provisions regarding
inspection which became law at the 1924 Session of Parliament. Under
the enactment of that year, authority was given to the Government on
the recommendation of the Minister of Finance to appoint an Inspector
General of Banks, who should be an officer of the Department of Finance
and be paid by the Government. At least once a year the Inspector
General is to make, or cause to be made, such examination and enquiry
into the affairs of each bank as he may deem necessary and expedient.
At the conclusion of each examination the Inspector General is to report thereon to the Minister. If the Inspector General should be satisfied that a bank is insolvent, he is to report fully on the bank's condition to the Minister and the Minister may, without waiting for the
bank to suspend payment, request the association to appoint a curator
to assume control and supervise the affairs of the bank until such time
as the bank either resumes business or a liquidator is appointed.
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Federal Reserve Bank of St. Louis
e.,
760
- 2Under this legislation an Inspector General of Banks has been appointed,
and has since performed the duties of his office in accordance with the
requirements of the legislation (see section 56 of the Bank Act).
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Federal Reserve Bank of St. Louis
* * * * * ***** **
•
"The Future of American Banking" - Address by A. A. Berle, Jr.,
Professor of Corporation Finance at Columbia University
40th Annual Convention, New York State Bankers Asso., June 1933
The Need of a Mobile Mechanism for Common Action
In the last analysis, what is needed perhaps most of all is some
mechanism by which we can get centralized concerted action among all the
units throughout the country. It is simply absurd that a group of banks
in one Dart of the state, let us say, can undertake to grant loans in
order to enlarge (let us assume for the sake of argument), the paper business in that particular portion of the state, when another group of banks
has discovered that there should be only limited credit for the paper
business, because the paper business is already in top-heavy condition.
Yet that situation has happened over and over again. Equally, if and
when a situation arises when credit can be handled on more or less long
term basis, and thereby a situation may be saved, it is merely absurd to
leave any single bank in a position where it can precipitate a crisis or
an unnecessary bankruptcy because it declines to enter a cooperative
agreement.
To some extent organizations were jerry-rigged during the past crisis
and to some extent they are likely to survive, but there should be a way
in which this combined control of money can be made available for the
services of a given community. It should not lie at the mercy of the conclusions of any special group.
r
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Federal Reserve Bank of St. Louis
ELT
i‘.50
IV
Proceedings of 52nd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1955
** *** *** *
H. W. Koenekg (Kansas): * * * * *
***
We have 555 banks in Kansas with capital of less than $25,000. More
than that number (I am not in a position to give the exact figures) could
not qualify for membership in the Federal Reserve. I just finished a
survey of the bank capital structure in Kansas for the Federal Reserve
Board last Saturday and Sunday, as to the capital required to place the
banks in Kansas in a position to qualify for membership in the Federal
Reserve System and find it will take better than $10,000,000 in new
capital to take out the slow paper, losses on real estate, depreciation
on bonds, etc., and build the capital structure to the required amount.
We estimated abaut $2,500,000 of the $10,000,000 could be obtained
locally and the balance would have to be furnished by the R. F. C. I
don't know why the Federal Reserve Board is asking for this information.
Te got a very urgent call from the Federal Reserve Bank of the district
and they wanted it by Monday morning. In Kansas we have been rather
reluctant in giving information to the Federal Peserve and the R. F. C.
as to the condition of the banks in Kansas, feeling we are not permitted
to do so under the law. We have given them information, I wouldn't say
we have refused them information, but we have not given information in
detail as to location and name of the bank.
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Federal Reserve Bank of St. Louis
******
**
IrigiO
Address of Governor John S. Fisher (Pennsylvania)
Proceedings of 32nd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1953
******
**
One of the weaknesses which has developed--that is the criss-crossing
of one authority with another. It seems to me this committee (if I may
be bold to make a suggestion) ought to bring attention to Washington, and
particularly the Senators and Representatives, for concentration and
unification of authority to deal with these closed banks, and until you
can get that with the right kind of ability back of it and the right
viewpoint, the whole banking system of the country is going to have more
or less friction and delay in getting restoration.
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Federal Reserve Bank of St. Louis
** *** *****
1(141
•
Proceedings of 32nd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1933
H. W. Koeneke (Kansas):
**********
In Kansas we now have a Governor who is opposed to politics in
banking and a bill will be submitted to the legislature which will be
called in special session in October, which he hopes will eliminate the
supervision of banks from politics. He proposes to appoint a board of
seven: four of these must be executives of state banks and three engaged in other lawful occupation. This board would have absolute control and power over the supervision of banks, hire and fire the superintendent of banks; they must approve the employment of assistants,
examiners, attorneys, etc. They are appointed for from one to four
years, and as a member's term expires the balance of the board sends •
three names to the Governor and the Governor must select one name from
that list. In other words, they re-elect themselves. We believe that,
in theory and practice, in time it will permit us to build a state
banking structure in Kansas which will stand any kind of depreciation
which might come. We don't want to do this without the assistance of
the Federal Reserve Bank. We want our state banks--those who desire
to become members of the Federal Reserve, to do so, but we do want
the Federal Reserve Bank to change its policy on local loans. It
seems they frown on anything that sounds like a local loan. This is
the reason we want to take care of these little banks in the community--the farmer and small town merchant. ,
•
**********
f
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ica2
Discussion Following Address by Senator Vandenberg
32nd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1933
** * * * * * * *
Wm. D. Gordon (Pennsylvania): * * * * * * * * * *
CI received word from the Federal Reserve Board about two months
ago that they desired me to certify for a member bank in the state and
Federal Reserve System, so the bank might borrow under Section B, and I
replied and said: "Why should I certify?" and they said the board in
Washington had decided it no longer ras a member bank. I said: "After
the banking holiday in March you announced the list of banks, members of
the Federal Reserve, which meant to the public that the bank was certified
and licensed to open with the approval of the Federal Reserve system."
Three weeks ago, when I refused to certify, I received a letter that,
after due deliberation, the Federal Reserve in Washington had determined
this bank was no longer a member of the Federal Reserve and must qualify
under Section B. They said that due to a merger the bank had made with
another bank, it had become disqualified. I found the merger of this
particular trust company took place in November, 1932. It took the
Federal Reserve system up to two weeks ago, after certifying to the
public, to find out that a merger in 1952 now disbars membership. I am
simply pointing aut what can happen from a yardstick used in Washington,
where we are helpless. Every man, including Mr. Broderick of New York,
attempted to iron things out, unsuccessfully, so I have a bank now in
my lap as a non—member after they announced on March llth it was a
member bank.
ffirtip;•„-
*********
It had been an inactive matter from November, 1932, until recently,
and they consistently resurrect a reason for excluding a bank from member—
ship and getting us in trouble. There is a certain formula in the Federal
Reserve rules with respect to that, but what I object is to wait from
1932 until after examination is made and the bank certified as automatically
going in as a member bank. We are helplessly on the side—lines. I have
written a protest to every authority in Washington and received no reply.
It could ruin that bank, the people might misconstrue their attitude and
think it was being pushed out of the system.)
If we learn the story after the rules are prescribed we are of no
avail as bank commissioners, and we aren't trying to dictate. They did
not dare try to open the banks in the forty—eight states after the
holiday with the knowledge in Washington, but went to the State Capitols
where we were living day and night during the crisis, and they were
satisfied to take our conclusion. Unfortunately, that, at the present
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Federal Reserve Bank of St. Louis
1C019.
-2time, Is being overlooked and since only Federal members are lily-white
pure--and
put up money on the non-members against the members,
because we all have state non-member banks, and I know of many in
Pennsylvania, that could absolutely pass any test the Federal can pass,
but they must be certified and they must be examined. The Senator
certainly voiced our sentiments and has shown us we are on the right
road, but I am not going to sit by.
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Federal Reserve Bank of St. Louis
***
*****
4M
!Primary Steps for Banking Reform'
by Thomas W. Lemont, of J. P. Morgan & Co.
Paper presemted at the meeting of
the Academy of Political Science,
January, 1933.
(Proceedings of the Academy of Political Science, Vol. XV)
the Federal Reserve System we have a thoroughly
* * * * * Today
scientific and sound foundation. But the System's scope is not yet broad
enough, and the ills which the community hP.s suffered in the last three
years show clearly enough how mueh still remains to be remedied.
* * * * * Tet what our averege citizen very naturally fella to understand is why, if the Federal Reeprve has such manirest virtues, it is
unable to prevent the terrific crop of banking failures which the country
has witnessed in the last decade--and especially in the last two years.
** * * *
Figures of Bank Failures
In that period (1921-1931) there have been total hank failures
aggregating 9,285, with deposits: thus tied up or in part dissipated of
*4,`"18,000,000. Of this total only 1,898 banks were members of the
Federal Rsoorve and almost four and a half times as many, namely 7,587
banks, were outside the gystem. In the years 1930-1931 alone the bank
failures totaled 3,643, and here nein the prorortion of non-member to
member banks was almost as four and a half to one. It ehould be added
that the most of these failures were or small banks, with extremely
limited capital. Therefore, one should not be misled by these figures,
the
bad as they are, into thinking th-t ziore than a small percentage
country's banking resources was ever tied up in failure.
* * * * * The supervision which the Federal Reserve Banks are alas
to exercise over member banks is of course limited. But aver son-mobor
banks the Federal Reserve has no oontrol whatsoever. These nomoosiber
banks are without exception 'tato institutions, subject. te greatly varying degrees and kinds of legislative requirements and of administrative
supervision. So that it is no wonder that objective atudents of our
hankimg system are bewildered and declare it--despite the existence of
the lodoral Reserve--to be no system at all.
* * * * * It is a noteworthy fact that, in number, ninety per cent
of the banks which failed in the decade of 1921-19n were located in
rural communities, subject to all the viciesitules of crop failures, or
of the expansion and deflation of business 'hoome;" without any of the
protection affOrded by a parent institution fortified with ample capital
experienced men.
awl managed
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=NV
The Question of BrOMOWIMOkiMe
* * * * * *•*
Almost all the failures early this year of small eubarban banks around
Chicago, mad almost all the resultant threats to the general banking situation, could have been avoided if it had not been for the fact that the
Illinois statutes permit no bronch-banking of any kinA within the limits
of the state. It was quite impossible under the law for the large Chicago
banks to attempt to serve, through branches, the important suburbs around
the city. The lessons of such a situation must be glaringly obvious to
the whole country. Despite the development of successftl chain-banking
in a few mattered instances, there is no present effective methol under
the law by which stromg institutions in our leading financial centres can
extend the benefit of their ample reaerves, their experience and ordinarily
careful management to the weaker banks in the outlying districts.
** * * * ** *
Forty-nine Different Sets of Laws
Our chief difficulty, then, 88 must be seen, has clearly been, not
lack of more extended state control, but rather failure of organisation
&Ild coordination. I halm already spoken of the confusion resulting from
our varying Federal and state banking laws. In banking, our eaantry has
forty-nine different sovereign. And, as mmmy portions long ago pointed
out, a constant state of competition existe astussa the Comptroller of
the Currency at lashington and the forty-eight Benking AMporintendents
of our forty-eight states. Zech eme of these forty-nine officials is
desirous of having as many institutisas as peesible registered under his
jurisdiction. The consequence is that, because of this competition,
laxity creeps in.
The competitiou as amomg tbe various systems has not been such as
to make banking requirements sore eennervative but to nake them more
liberal. A promotion not of better banking bet of poorer banking has
bees the inevitable result. This competition bas not only found ex,
preesion in liberalisation of the respective legislative recuirements
governing the various benking systems, but it has els° resulted, as I
say, in administrative laxity in granting charters and in providing
adequate supervision of the conduct of banks.
Thousands of BAnks Lack Proper Safeguards
is to methods of curing our trouble*, Congress can spend bansdreds
of thousands of dollars in new hearing* and pilblish volume* of testimony.
But it need have no hope of ever coming to the root of the evil until
it realises that no banking system can function ader:ustely when it
comprehends within it only a limited portion of the banking community.
Today sixty per cent in number of the country's banks are outside the
strong Federal Reserve System, and this sixty per cent comprises a
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Federal Reserve Bank of St. Louis
- 3total in banking remoureme of aver tir,000,000,000. These lesser banking
institutions--whose aggregate reseercps nre teverthelees so nonsidertble-are unable or unwilling to come urOer the rules of the Federal Reserve
System. Thus they lack its restriettons end its safeguards. And the
almost unbridled license which these small banke in some states apparently
heve outside the Pederel Reserve System tempts them frequently, as the
sad record hcs proved, to folly and disaster.
The fact is that, despite the melandholy ammber of eliminations that
have taken place, the country has today far too Emmy banks. Our banking
units should on the average be far larger tYen they are today. The mall,
institalions Ohould be merged so as to glin thm normal
stability, diversity, esememy and assessment of the larger eoncerns.
One reason for the ,-eakness of the mmall interior bank is thnt its
overhead expenses are proportionately toe blowy. The bank ts tempted to
pay too high rates of interest in order to attraet deposits. These little
local banks have, because of the rarid growth of InIstnems unite, of oommunications and of motor transeort, been left in a backwater where the
better business passes them by. These up-country institutions have no
opportunity to diversify and average their risks. If general conditions
affect their investments unfavorably, the sane conditions aro likely to
involve them in serious losses from their localised loans, and at the
same time disastrous deposit rithdrawals. Moreover, fsr too many of
these meek sad unsheltered, interior bnnks laves been managed by ins",
perienced persoas desiring the satisfaction of becoming 'benkerse.
Teo Vital Changes Neceseery
"y
I repeat what nany others have already pointed out, namely, that
(no thorengh-goi_ng banking reforms can be brought ebnut until two vital
'
1r changes have been ascomplished. The first is to bring all the commercial \\'
banks of the country, small as well as large, unler the single aegis of
the 'federal Reserve System.) The second is to establish sensible provisions for regional braneh-banking, the geographical limits for each
region to be firstaly worked out and regulated. Then we Should have
something worth talking about. Sada reforms, brought about gradually,
ought to bests to yield to the country some metsure of banking stebility.
There are many phases of the banking situation that of course I
have not atteapted to touch upon. From even this brief review, believer,
it must be apparent that the developmemt of lAnking in America has boos
ans reached its end.
a gradual process of evolution which has by no m,
Each of the banking crises to 'which I have alluded h,J.e taught the emmmunity some one lesson, but ea& new disastrr bee revealed a fresh meekalms to be remedied. indeed, basking development in this country has
been a slow and painful growth. MO pilgrim!s progreee could have been
more arduous or log:set with treater pitfalls.
The Trust that ie Reposed in the Present Slates
The proposition to bring all the commercial banks of the country
into the Irederal Reserve System ham sometimes been opposed on the
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Federal Reserve Bank of St. Louis
-4allegvtion that tho Ireton had alreely proved itself to be a Woney Trust',
and that ite authority sised be curtailed rather than extended. As to
inch criticism it nay be fair to point out that, if the System had astmally
proved iteolf to be emything in the nature of a money trmt, it Imo eorktaialy a benevolent ead **operative me; for the reeord which I hem meted
shows that depositors in the beaks end truat essommies that mere members
of the Systole lore enoreembi bemefited by anda essierihin amd that
within the Myetemp—with its ears ead mfegmards--they emjered somparative
immity frem difficulty as sompared vith depositors in the busking unite
Which had foiled te take advemtege of its etremsth.
The objeot of banking logislatioa is not to give anoints's' to, or
to im,nose pemalties upon, banks or beakers. It la to provide Ike public
with sat'e limey and oredit, end safe depositaries of their fends* In the
modern world bank eheck dram swims* honk deposits circulate as omen
and the geld reserves of the Fokral leserve Banks are the bees upon
which rest not only the Federal 'Merv, notes issued by thm lrederal Reserve %mks, but the 3e-osite of the member beaks end of mommimenber banks
as well, also the checks that circulate agaiast these de-osits. After
the Civil tiro state bank motes, *blob had had seek a deplorable record
of repudiation, were taxed out of eil940140 amd motional bank motes sahstituted in our currmay eyetem. The rotors wee inceeplete, boreauee it
dealt only with one side of the benk's function, the note-ismimg power.
It tid not deal with tbe ether side of the banking Ticturit, the timer to
I
receive **sits *Leh eiremlatt is the form 0' chocks and which,
say, are supported epos the sem geld base held by the 'Camel Reserve
Banks. We mast oone to regard a beaklike +Shorter not &41 a privilege eonfermi ups. a Chosen few, or upem an unseleeted may, in order that they
uay ask* maw with other people's mewl bet as a public trust, and in
that ammo, mud in that seam only, ao a mew trust. it is the plain
4uty of the emmaity to me to it that the interest of the American
people in the safety of their deporits, sod of the whole mantry in the
sufficiemey and sommdmeme of our banking system, should be put before
the *postal interest •r emy bank or banker, great or small.
lhe Seem of the Fqtderal Reserve System
Tbie hope for program towards reel orderlimme end stability lies,
es it sleep does is these setters, in an aroused and intelligent public
opimion„ end in constant eta* lor the experts of methods to strengthen
the Federal Swerve System. le pewees of intelligens*, etedying the
vorkinv vf this gristem4 ean have failed to be impressed with the
immeasurable benefits which it has brought to American imdestry and ommm.
mem. It is hard, too, to me hew the Goverment could ever have
Serried on ite war and post-war ftmemeimg without the new System. 'tithed, it, inflatiem on an almottt diemetrous scAle (witness the memples
ef the Merepese esentries) might loll hsvo been resorted to. Its the
midst of the distress three. Ai* portions of the banking oommity
have bees passim' km those last few years, the constructive emempliebments of our Federal asserve Banks may base teem emmemhat leet sight of.
Yet without the reemerges mod the prudent, farsighted handling of those
institutions our plight mold have been incalcuLably worse thme it has
boon. All twelve of them have been like isles of safety, hailers of
reftge ta the midst of a violist storm.
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Federal Reserve Bank of St. Louis
711'
Sat 1110 point oat one receat development e the rederal ReBerve System
*at ban already proved of immense importance.
to rebruary of 1SrP,
the Syetem still lr-cked, under the lew, certain powir,
" thrtt it needed to
render its scope of operatillitaore elastic and pr3cticable. Such powers
the central banks of other ementries have always possessed. Through the
provisions of the Glsss-Steagal law, passed early in 1915P, somewhat
similar poTers were provided for the rederal Reserve System. Under these
the Mystem now has the authority to buttress the credit situation where
there is the greatest need. Already these extended powers have enabled
the System to lighten immeasurably the burdens of the community.
Ailed by thp provisions of this Act the Federal Reserve Banks have
ror the last six months been pursuing with wisdom emd vigor a so-called
epos market policy, which has already proved itself to be a groat factor
in arresting the headlong deflation of credit and prices mhich was beeamiag se disastrous.
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Federal Reserve Bank of St. Louis
** * * * ***
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Federal Reserve Bank of St. Louis
SOURCE*
PROCEEDINGS OF MISSOURI BANKERS ASSOCII.TION--May 17-18-19, 19:5-5
YOE VALUE RECLIVEL--addrecs by Leon gcCord
Page 117
Just now the banker is being told thst be must guarantee
deposits. Aaybe it is that the people have so lost confidence
in you until it will be necessary to so safeguard the deposits
froz now on. Don't permit this to impress you that it will
absolve you from responsibility. If deposits are guhranteed, then
an army of checkers will hound you frrqs day to lay. The will peep
into your vest pocket. You will become a rubber stamp, and tske
orders from some little, bilious, undernourished clerk who eats
figures instead of breakfast food. rhen things go wrong in the
United '4.vates, we try to cure it by anottFT lam. If tat oars
clutter Ur 4 crost street, Wfs gut up Nio U Turns." That means that,
for the reason tilz:t a few of the cur Grivere are road hogs, we just
punisia the whole driving world. We try to cure our ills by lecislation.
'4 12
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Federal Reserve Bank of St. Louis
•
SOURCE: PROCEEDINGS OF dISSOMI BANKER:, ASEOCIATION--Nay 17-18-19, 14M3
THE NAT IN AND OW/L.-address bg lax B. /Saha
Peke 89
Once again you are knockitu at the portals of history. Oat
of tilt: wreckage of the bankint 3.usiness of the peat tnere has to
be an ideal system in which we can all have confidenoe in the fature.
That is that going to be? We do not know but taere are distinct
trends of thought that are crystallizing in this country. What of
it? Probably there is going to be onc kiad of beak eeposit instead
of three or faur, some national f2rm of banking more or less akin
to tne nutional banking system. rrobably in the end all beaks ere
going to be members of the /ederal Reserve i:/ystem. Probably you are
going to have seme fore of branch breaking, stete-wide, or less in
those states that allow branches for their own banks, but with the
definite ineurance that the only principal branch is the main branch
and theiother branches gnat pay; if they do not pay they mast simply
degenerste lute officee for tht- convenience of the neighborhood.
There is beginning to dawn ia thc minas of bankers that they
eau run their bnks in socl-, a way Chet evel%, note they take is
subject to a loan at the federal Eeaerve 3ank, an6 ht any time they
can sky, "I sm liquid all the time." It is probable that all of the
forms of banking, other than depoeit banking and truet banking and
savings benking, will he set off to themselves as an entirely separate
institution. It is probable that supervision of banks will be stricter
and thet in tne end there will be just one kind instead of three, as
you have them nom, and thet the ofliciels o . bankti must be beyond :suspicion in the Adam
SOURCE:
THE CHANGING STRUCTURE OT AMERICAN BANKING--R. W. Goldschmidt
1933
CHAPTER XI
Some buggestions for Reform
Page 252
LThis will at the same time do away with the triplication of
bank examinations, examiners, and reports as it exists now, the
Comptroller of the Currency and his examiners taking care of National 0
Banks, the examiners of the iederal Reserve Board probing into the
books of part of the state member banks, and the various State Banking
Commissioners with their staff examining the State Banks and Trust
Companies. In this way the banks as well as the authorities will be
spared a lot of unnecessary work, a uniformity of reporting will be
introduced, wkich may at last make statistics about all banks in the
United States more than an objcct of conjecture--what they are now-and the whole process of bank examination will be increased in
efficiency. The examining force of each Federal Reserve District ought
to be closely attached to the Reserve Bank in question, whereas the Division
of Bank Examinations within the Federal Reserve Board should be confined to
laying down the general rules to be followed and to assembling and publishing
the statistical results of the examiners' work (in this direction much more
could be done than is done no% without appreciable increase in expense or
trouble), refraining, however, from any detail or routine work. The office
of the Comptroller of the Currency, already somewhat out of place since
the advent of the Federal Reserve System, which in reality is the authority
that controls the currency, would of course, have to be abolished.)
Page 256
The regulation of branch banking has presented great difficulties
so long as there were forty-nine different authorities to legislate on the
subject. A unification of the banking system would, at last, open a way
for a considered line of policy here too. As things are, an appropriz-te
change of legislation pertaining to the (now) National Banks alone would
be nearly sufficient to bring about the desired results.
Pages 268-69
7. REGULATION OF INTEREST RATES ON DEPOSITS?
The Banking Act of 1933 has introduced another novel feature into
American banking legislation: the regultion of interest rates on deposits.
Sec. llb prohibits payment by member banks of interest on deposits reirtiVe
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Federal Reserve Bank of St. Louis
The Changing Structure of American Banking
R. W. Goldschmidt
Pages 268-69 (Chapter XI contd.)
on demand "directly or indirectly by any device", and charges the Federal
Reserve Board with fixing interest ratcs on time deposits.
The prohibition of interest on demand deposits might be interpreted
as an acknowledgement of the money quality of those deposits as opposed
to
the capital quality which time deposits share with other long-term
claims,
and can therefore be regarded as sound in principle.' It
will, however,
entail important changes in the American banking structure, ftot all of
which
are desirable.
Page 274
A repeal of the deposit guarantee scheme of the Banking Act of 1955
is, unfortumtely, very improbable for political reasons.(The case
for
a thorough reform of the American banking system, however, is not
weakened e'
but strengthened thereby, it being now more important as well for the
sound\
banks as for the Treasury, which will have to make good an appreciabl
e
part of the losses suffered by the Deposit Corporation, to see
that unsound
banking and bank failures are avoided. Having weakened the responsibility
of the individual bank management by introducing the guarantee,
more
reliance and emphasis will have to be placed on banking legislation and
bank supervision.)
1
As a matter of fact, the introduction of this prohibition was
probably due less to considerations of this sort than to bankers'
fears of not being able to square their accounts at the present lor
levels of earnings, coupled with the impossibility of reaching a
voluntary agreement curtailing rates paid on deposits.
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Federal Reserve Bank of St. Louis
"The Structure of the Banking System'
by Pierre Jay, Chairman, Fiduciary Trust Co. of N. Y.
Paper presented at the meeting of
the Aeademy of Political Science,
January, 1955.
(Proeeedings of the Academy of Political Science, Vol. XV)
** ** * ***
Over every individual bank stands a supervisor, national or state,
to endeavor to enforee the law and correct abuses.
Back of the entire structure stands the Federal Reserve System, a
cooperative organisatiea of the senber banks, to provide enrrency and •
aeons of rediscounttag paper, spa Authorised to exercise eertain rights
et supervision over its asihere.
**** * ***
Causes cf Tailprp. From the best informatiln obtainable concerning
the baek failures of this eleven-year period, two general observations
ley be made:.
First, the vast majority of then 'ere due to mismanagement reflected principally in over-lending, in exploitation by officers and directors *ad in some disregard of legal restrictions. The present moogenie depression, following closely on that of 1920-21, has, of course,
had an important influeace, and the great reduction of all values has
rendered booking difficult for every beak. But the mprorters of unit
banking cennet point to the depression as an alibi, since thousanis of
capab4 neseged beaks in all parte of the country have stood its strain
and renained stress and solid. Nor Jees depreciation in bond values
appear to hsve been em isportant element is actual failures except where
inferior securitiee hed been purchased for their high yield, particularly
by banks paying high interest rates for saving, denosits.
The second observation is that about 80 per cent of the failures
were those of very small local beaks, having loans and investments of
less than $500,000 *Koh. Banks se small as this are relatively expensive to operate. Their profits are negligible. They eannet pay for
experienced eanageneat, even if it were locally available. Neroover,
automobiles, geed reads an1 the general tendency towards business concentration are adding to their difficulties by taking b....liking business
to larger places.
If asommassmemt me the principal cause of failures, it seems fair
that the failure er beak supervision to correct it shisnld also be asAped ammo secondary share in the responsibility for what has occurred.
On the ether band, I believe, though of course it cannot be proved, that
the sopervioery organisations, both national and state, have never bees
so strong as in the pArt decade. But in assigning a share of the
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Federal Reserve Bank of St. Louis
116
responsibility to supervision, it must be borne in mind that neither
banking laws nor bank supervision OMR ever perform the positive function
of assuring sound bask momagenent. lank supervisors do not manage banke
and, at best, they can only perform the negative function of criticising,
after the fact, the loans and investments vhish book managers have made;
and only by extreme measures, which the lams Delfts' permit, can they
make their criticisms effective if bank officers and directors are not
eooperattve. In fairness to bank supervision as an effective element in
the banking structure, it should also be observed that under our socalled *dual system', partly national banks and partly state hanks, there
has been a growing tendency towards essopetitive relaxation of legal restrictions on banking; and towards competitive granting ef &artery,
often without due regard to the experiase of applicants and to existing
banking facilities; thereby creating over-benked pledge and unsound
banking competition. In addition, the eese vith fehich a national bank,
if criticised too severely, can convert itself into a state hank, or
vice versa--a process which wary supervisor naturally likes to avoid-has further tended towards lees strict aupervision.
More broadly, however, recent banking failures have emphasised two
inherent weaknesses of the unit looal bank. First, that it is too much
affiliated by local proeperity or adversity, particularly in places where
there is a single interest, agriculturaJ or industrial. Adecuate
diversification of portfolio is lacking; there are too many eggs in one
basket. Second, that the smaller the place, the less bank officers are
likely to apply the perspective of general credit oonditioes to their
local credit problems or to reali7e the necessity of a substantial
element of linuidity in the portfoliSia That some city bank officers
have also been equally short-sighted deee not alter the ease.
4enedies. The various reeedies which have been suggested for this
situation center about two proposals: (1) greater unification; (2)
widespread branch banking.
(1) Qreater Ibification. The most authoritative proposal for
greater unificatiSa in the banking structure is that which the Federal
Beeerve Board umouivously made to the banking oommittees of Congress
on March 29, 19i2, as follows: "It ahead be recognised that effective
sapervision of banking in this couatry bas bees seriously hampered by
the competition between ember and nosomeaber books and that the
establishment of a unified system of honking under national supervision
is essential to fundamental banking reform.'
There can be no doubt that the proposal of the teilierri Illneerre
Board, if it could be brought &bent, would be an impertent step in
advance. There are today about 6,085 national banks mod 11,520 etate
banks (other than mutual savings banks). All state balks with sufficient eapital have had the option for many years of either comforting
into national banks or of joining the Federal Resarve System. It is
°brims, therefore, that unification of a banking structure 'hoe'
roots go far back 1st° our history could be brought about callY
force. re have already twice exerted such force--first whoa the
National Bank ict VOW pealed; and second, when the Federal %serve
System was created.. Ina eSsomplished its immediate objective, but
neither has prevested beak failures.
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Federal Reserve Bank of St. Louis
- 5It should also be observed thrA unificution within the framevork
of the National Bank Act would not reach the great mass of small state
banks which now have insufficient ca it,
.1 to qualify as national banka.
Their number would be farther increased if the minimum capital of
national banks were increased from tP51000 to 00,000 as the banking
bill nov before Congress proposes. Yet these very small state banks,
as already indicated, are the source of most of our bank failures.
Clearly, there would be advantages in unification under national
supervision. It would remove pieeemt comnetition between n3tional and
state authorities resulting in lowered legal restrictions, less strict
supervision and lower standards in granting new ch,Irters. Nevertheless
it appears to me not to go really to the root of the trouble. For, as
already imdicated, supervision is largely negative and ,,xerted after the
fact. Deem the rroposal of the balking bill to permit the Federal Reserve board to remove offiaers and directors of banks vhich engage in
unsafe or unsound practices does not provide safe and sound officerF or
directors to take their place. 'What is really mseded is something
positive, namely better bank management. The small banks, I am eonvinced, can neither find nor afford better management except through
a &lunge in the bankine structure which will permit them to be operated
as branches of a larger benk.
(P) Widespread Branch Banking. This leads directly to the second
proposed remedy for the recent flood of bank failures, namely widespread brand' banking. This in itself would doubtless bring about,
evolution, an inrortant meeemre of unification. A
not by force bet
large bank with bemmehee could hardly afford not to be a member of the
Federal Reserve System4 Moreover, the unification would probably occur
largely vithin the framework of the national banking system, since
only the National Bank Act is capable of permitting branches freely to
cross state lines unless, indeed, such Federal branch legislation
should stimulate some of the states to offer reciprocal branch bank
courtesies among themselves.
Advanteage, 2f.1000eread Branch 1344kLigs (1) It would offer to
small communities,* vell as large saes, the banking cervices of institutions sufficiently large to be able to hire competent and experienced management.
(2) The portfolios in whieh the deposits of small oonmunities would
be invested vonld be diversified imatead of mainly local; and under &ay
relsonably conservative memegmmemt they should also have a substantial
element of liquidity.
(3) In addition to preeemt outside supervision, the branches mai
to continuous internal supervision. This 'would be really
subject
be
authoritative sepervision became* it would have power instantly to ohmage
local management wherever it was proving unsatisfactory. Read-office
control over the larger loans Should tend to check over-extensions of
local credit, which have proved to be as ruimons for local borrowers as
for local banks. And head-office purchase of eoeurities should be more
expert and conservative.
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Federal Reserve Bank of St. Louis
-4(4) Branches could be opened tentatively in small places and later
withdrawn 17 tbey 7,roved unprofitable. Under unit banking, each small
local b.mks, once established, seldom withdraw except by failure.
Objections to Willppread Bra:10 Banking: (1) The trnditiomal
American prejudice—one may almost say fetish--in favor of the administratioa by local bankers of local deposits and credits, and against
allowing a distant banker to say when and how -Judo a local man may
borrow.
(P) The fear that local deposits may be dradned awny and loaned in
larger cities.
These I believe are the objections uenally advanced, and they are
closely allied. In theory there is much to be said for both of then.
In actual experience, however, theylargely disappear. * * * * * * * * *
In the main, however, banks with branches, like unit banks, are in
busimeme te make money; rates for local credits are nearly always
kigher them money zerket rates; and the fastest way a branch can grow
end teeeme profitable is br making all the gpod local loans it cam.
a larger eapital, the branch can misled larger
Miresorm, basked
individual credits. this the Local bank, and it can draw se the head
office for additional hinds when local credit requirements axceed local
deposits.
(!) There is this further objection--that if a bank with say one
hundred branches were to fail, every one of its offiPes woull close,
whereas if each of its offices were a local bank, probably a fewer
number of then would fail. This, to my mind, is the one fundamental
objection to branch bulking over a ride area. There is, of course, no
may of assuring sound essiktelnent for all banks having widespread
breaches. But to ihrtsk fres branch banking because of this risk is
te yield to , counsel of despair. Both Great Britain and Cassia, where,
as mith us, deposit banking prevails, have had failures of Wake
branches. Rut the percentage of their resources involved hes tees se
much less than in our unit bank failures that the answer to this
objection is reasonably satisfactory. * * * * * * *
Ziperience shows that the lending and supervisory organizations
which banks doing extensive brsnch banking have to maintain and ean
afford to maintain contribute powerftlly in themselves towards careful
management, while the wide area covered brin7s diversification of risk.
* * * * * * * * Many groups and chains have been formed awaiting
the necessary authority to convert into brEnohes; the course of events
has greatly veekased the opposition of the smaller unit banks; and the
banking committees of Congress have intro4uced a bill providing that a
national bask may estr.blish branches within its own state and fifty
miles beyond its borders. Thus, as a remedy for the obvious weakneemes
of unit banking, me appear likely soon to embark upon branch banking
side by aide with unit basking. If and 'hen we take this fundamental
step towards a far-readbing demo im aur banking structure, it seems
important that we should take the step not tentatively or half-heartedly
but fully convinced of its desirability as a national policy designed
to afford better protection to deposits.
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Federal Reserve Bank of St. Louis
Conditiono of &ACM'S. Like many other supporters of unit banking,
I have been foreed by recent events to change my vieve, and I now re.
gar0 branch banking as the only fundamental resets for the demonstrated
weaknesses of unit temkimg, particulrly in the smaller places. But to
become an effective instrument of national policy branch banking should
be permitted to develop under conditions most tivorable to its SUCCP198.
These conditions involve questions of: (1) area; (2) supfaavision; (3)
competition with unit banks.
(1) Area. Under the banking bill, a national bank may establish
branches anywhere within the limits of its own state and within contiguous territory fifty miles autside. This provision, line a
tremendous step in advance, still savors of half-heartedmeee. If ve are
willing to go this far, we might better recognise at the oetset that
state lines are usually political rather than economic; and that we Shall
soon have to amend the las. to permit branches over more natural trade
areas, as ex4emptroller Pole reeemtly recommended. To Shut our branch
banking up in forty-eight separate compartments as if it Imre something
we feared, is to imore the experience of all the other countries of
the world Ohere, as far as I know, there is no territorial restriction.
This do€!s not :seen that I would contemplate for the Uaited States, even
for the distant future, braneh banking *hi& covered the entire country.
Distance and sectional feelinga are agsamet it; proper diversification
does not riruire it; and obviously there mmet be 80%0 limits. But
surely all will agree that a state—plus fifty miles—will in many cases
prove a limitation that has elements of =Bareness. In states overrender it diffiwhelmingly agricultural, for example, state lines
diversified
banking--a
cult to attain that fundamental re,712isite of branch
2ortfolio. The limits, it seems to me, should be sufficiently wide, and
more than thin, sufficiently elastic, to permit of sound diversification.
The twelve *Federal Reserve Districts approximate natural trade arems, in
spite of some arbitmariness, and they appear to me to be the most
practicable limits iithin ihich to 'Pork. But the Federal Reserve Board,
which wader the proposed bill is to authorise all branches, should, it
Some te 441, be empowered to allow branches to overstep district lines
doom amosseary to cover trade arlps or to 4ssure diversification. * * * *
(2) Supervisiop. Widespread branch banking intrortudes into the
structure the possibility not of more bank failures, but of larger and
mere serious* failures. The banking bill wisely 7)rovides that the
estibliatnent of every brandh shall be subject to the approval of the
lidera' Reserve Board. This places both properly and squarely upon the
Beard ood the Federal Reedrve Banks the primary responsibility for the
sound development of brandh banking. It seems important that they
should also have authority to prevent week state institutions vith
brandhes from becoming members of the Reserve System by conversion into
or consolidation with national banks. Whether the branch banking institutions visith are peraitted to develop shall Ito strong and mimed or
cross section of existisig unit bank somigsmost
shall merely represent
* 'Wird
,
depends, tn the main, upon the standards which tabs Federal 111101
ruthlonSiess
and
sets up as a guide for its action, and the rigidity
Whose past
with which it declines to authorise brandbes for
sibeed be no
record and policies have not been sound and safe.
plaoe in branch banking for officere or directors who moOk to operate
banks in their own selfish interest. And there is no question that the
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Federal Reserve Bank of St. Louis
-6public is in a Itood to give full support to ruthlessness exerted in the
public interest.
The supervision of these larger institutions will bring heavier
responsibilities te their Sapervisors. But on the other hand, with
fewer units to supervise, sore concentrated attention can be gives; aad
the ability of those larFer institutions, both to find an,i to pmy for
good managers, should remove one of the present difficulties ia the
supervision of small loal banks.
A second element in the development of branch banking ie the speed
with which it proceeds: and it is possible that here again the Federal
Reserve Board may be able to exercise a restraining influence. Proner
organisations to eamage branch banking systems cannot be developed
overnight. Some unsatisfactory situations would be likely to occur if
a competitive scramble for branches, such as has reeently taken place
in certain areas, should be repeated over the country as a 'thole.
Fortunxtely the present difficult period favors moderation in the
speed of establishing branches.
A third factor, with which no natiomml or stPte yupervisor has
able to cope, but with which it is to be hoped the Federal
teen
pet
Reserve Board may find a way to deal, is the competitive paying of
high rates of interest on deposits, particularly savings deposits.
rthere not controlled by clearing house or other arrangementr, these
rates have quite generally led directly to the purchase of inferior
bonds with high coupons, among which, on the law of averages, the
mortality is high.
t B#110. The initial establishment
(!) Competition with Lo 1
along the lines of least ?existence
of branches will doubtless p
by absorbing local unit banks. limy strong local beaks, however, may
decline to become branches and the question will them arise whether a
larger instituticil Should be permitted to rut a bras& in such places.
Ibile the size of the place will have a bearimi Se the decision,
Oboald like to express a purely persomal vise that as sentiment in
small places will naturally favor tho locn1 book, the willingnesa of a
strong well-managed bank to mmintain a brands alongside the local bank
Should at least be an important oresamption in favor of granting the
applicatione * * * * * * * * Provided a bank has good management, it
Should, in gosoral, be allowed to bring its services and advantages to
those place* ohere its managers think they can profitably operate.
This closing thought serves to emphasise ey beliaf that changes
in the banking structure should be approached primarily fro. the standpoint of safety of depoeits rather than from the standpoint of amount
of credit to be extended locally. Too often in the p.st the latter
has appeared to be the prilary objective of b,Inking legislation. Pith
f011 veessaition of the faet that loans crelite deposits, ve shall be
es sere ground, nevertheless, if we raraphrase the familiar English
adept and sqy, !Get us take care of the derosits end the loans will
take sere of themselves..
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Federal Reserve Bank of St. Louis
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 25, 1935
Address of the Pres., L. A. Andrew VP., First Bank & Trust Co., Ottumwa, Iowa
P. 56
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 justice. 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 chartere--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."
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Federal Reserve Bank of St. Louis
********
,
SOURCE:
ASSOCIATION OF RESERVE CITY BANKERS—Commission on Banking Law
and Practice
Bulletin #1--July 1937:
Page 2
FUNDA.4ENTAL NiLD6
In a speech ae President of the American Bankers AssociatieS
at Atlantic City am Mpy 19th, our fellow member, Francis H. Sims,
summed u,„-; the fundamental requirements of banking reform as follows*
'Fewer benks, more adeeuetely capitalized, better supervised
and better managed, standardization of laws ,nd methods, greater
and more intelligent cooperation between governmunt and banking,
better understanding by the public of its joint responsibility in
maintaining banking solvency and efficiency--these are the primary needs of banking reform which should be given first consideration and be the foundation of our banking systea of the
future.'
In the legislation recently enacted most of these problems remained untouched, as is freely admitted by the framers of the so-called
Glass Bill who, in their report to the Senate (No. 77, Calendar No. 79)
used the following language:
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Federal Reserve Bank of St. Louis
"The Committee carried on an -Actensive correspondence and received numerous suggestions, recommendations and other presentations of argument or evidence. * * * It found, however, that
public opinion was in an indeterminate condition on the whole
'abject, and felt that immedietk emergencies were 60 great thtt it
completely comprehensive
was wise to defer the preparation of
system, such as had
banking
measure for the reconstruction of our
been urged by some responsible men."
:Nr.)
SOURCE:
AbbOCIATION OF MERV. CITY BANKERS—Commission on Banking Law
and Practice
Bulletin Ne. k
July "i.4, Intk
?ate 8
In view of the fact flirt the strong banks of the countr:, th(
Federal Reserve Board, the Treesury Department ant. Li wide section of
public opinion was oppoeed to the guaianty plan, why did it peps? Your
Commission auggests theeolloeing line of thoughts A faulty banking
system was responsible. As neerly as we can appraiee the opinion ef
the man on the street, it is something like this. Reknows thet a bank
charter cannot be obtained except from a Government aEency. He knows
thet when the sign "Bank" is gut over a door that a Governnent agency hse
endorsed thet establishment and permitted it to accept deposits from any
men or woman who may choose to enter. It is
further fact, that the
averag,_ snail depositor hte no besis for discriainating between a safe
bank and an unsafe bank. If we were to provide him with e stetement of
thebank and all the supporting documente he would still be unable to form
a correct judgnent aa to the sefety of the institution in question. When,
in theee circumstances, thowands of banks close, involving henvy loaves
to depoeitors, th, average man feels thet a severe injustice has been
perpetrated. A manle savings are almost ae important to him ns life itself,
and if, through no fault of his own, hie deposits are lost, he cannot be
expected to do otherwise teen raise e clamor ageinet this injustice. It
is a public menace like unsafe grade crossings, or fire hazard, or reckless
automobile driving, from which the small depoeitor has a right to expect
protection from those in authority. From millione of men and women in this
situetion e demend hes arisen thht their deposite should be protected. As
long es bank failures are permitted to continue, thie demenes will exista it
is our bel.ef thet in meeting this demand present legielation has gone
o
far. It attempts to protect the deposits of the wealthy lean and the lerge
corporation, and ef tne Government itself, which are in t position to choose
eound benks and who are not entitled to tench protection. But this does not
alter that the system hee been faulty and has been the cause of great losses
and deep human misery.
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Federal Reserve Bank of St. Louis
28
SOURCE:
ASSOCIATION OF RESERVE CITY BANKERS—COMMISSION ON BANKING LAW
AND PRACTICE
Bulletin No. 2
July 24, 1953
Pages 11-12
Of course your Commission has a solemn recognition of the
fact that a banker's primary duty is to conserve the funds of his
depositors and to protect the trustswhich have been committed to his
charge. As a last resort after every reasonable effort has been
made within the System to prevent the operation of a plan which would
weaken or destroy a bank, the officers and stockholders always have
their
the alternatives of withdrawing from tne System or of liquidating
we
that
es
indicat
sense
common
that
us
institution. But it seems to
the
of
study
A
ency.
conting
e
possibl
are a long way from any such
operation of the State systems indicates that in most instances the
guaranty plans which were universally proved to be unsound, did not,
in fact, ruin the banks. What happened was that the guaranty funds
became insolvent and after a certain number of assessments upon the
banks, they simply refused to pay further assessments. At that point
y
the common sense of tne community prevailed, and the guarant systems
that any
surmise
to
were abolished by law. It seems idle at this time
y system
l
group of reasonable men are going to permit a nationa guarant
which under
to be carried to the point of weakening the very institutions
that threats
feel
we
events,
all
At
it.
support
tp
the plan are called upon
a later
at
banks
of
group
or
bank
any
If
place.
of withdrawal are out of
At the
ge.
privile
their
is
that
te,
liquida
time choose to withdraw, or ta
s
a
vigorou
in
unite
to
be
to
seem
present time, the proper course would
as
law
present
the
in
changes
such
and constructive effort to bring about
upon.
agree
the soundest minds in the country can
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Federal Reserve Bank of St. Louis
•
,
SOURCE:
ASEOCIATION OF RESERVF CITY BANKERS*--Commission on Banking Law
and Practice
Bulletin #1--July 1933
Pag_e 6
4. What steps can be taken to establish an adequate system of
National, Federal Reserve, Clearing House, and State examination?
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Federal Reserve Bank of St. Louis
rak us0
0. *
SOURCE:
THE CALIFORNIA BANKER—JUNI 195!
BANKING ON THE GOVERNMENT—address by Lane D. Neboer, Vice-Pres.
First Nat. Trust & Svgs. Bank, San Diego
Page K1
seems to be almost univereally conceded thst we should not
have as man-i kinds of banks, banking laws anci supervision as there
are States in tilt Union, in addition to the federal system. If each
State iE to retain jurisdiction over the function of banking, it is
said it should be only over certain types, or else all StLte banks should
be subjected to federal superintenoence. National control over commerciel
banking ie urged with more insistence and, perhaps, greater logic. To
"(1
whetever extent the several States retain their riEhts in this regard,
they should enact and rigidly enforce a uniform banking law, based upon
andhsrmonized perfectly with national baneing legislation. That would
be an isprovement at least to the point that there would be but ns many
kinds of b,nking regulstione he there fire kinds of banks--two, National
and Etate. All these banks should be under some federal supervision
(certainly in so far SE commercial transactions are concerned), either
throuch compulsory membership in the Federal Reserve System or immediate
responsibility to the Comptroller of the Currency, or both. Joint supervision by the Federal and Stat governments might be a possible but
doubtful substitute. This concurrent jurisdiction should result in a wise
reEtraint upon the charterin6 of new banks, which is admittedly necessary.
Those States refusing to submit to some plats of unified bankine maj bring
practical business impotence to their banks.)
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Federal Reserve Bank of St. Louis
SOURCE:
THE CALIFORNIA bAlaxBre-JUNL 196t
SONE ThUXIIITS ON THL FUTURE OE itIFFICAN '.:41AINC,--by Albert C. Agnew
Legal Adviser, ked. hes. Bank, ::,an Francisco
Page la
** *******
Cauital Loan Abuses
The post-mortea examini,.tion conducte° on a failed ocamercial
oank usually discloses a generous aupply or capital loons which, in
C£4;e51 are inferior in quality to tLobe held by competing life
insursnce cowpani;As, building anc loan associations and savings banks.
In countries where there exists a commercial bankink tradition, it is
not with
a fundamental principlf. ttPt oepoolts pEyabie on demand
ssfety be locked up in capital and long-term commitmente. I suggeet,
tnen, for your consideration, the inclusion in Gide imaginary bank code
r-lich vs are drafting a provision prohibiting commercial bankr from
lending on real estats or otaer fiited and nonliquid capital assets
and fros accepting sit security or owning is the same exec-A in satisfaction of louus vonich would otherwise be losses.
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Federal Reserve Bank of St. Louis
,
,
er"
SOURCE:
THE TARHERL BANKER - N.C. BANKERS ASSOCIATION PROCEEDINGS
OCTOBER 1955
RECENT BANKING LEGISLATION - by Hon. Henry B. Steagall
Pa.ges 64-65
* * * Bank deposits depend upon confidence in banks. We must
relieve depositors from the fear of banks and bankers must be
relieved from the fear of depositors storming the doors of the
banks demanding cash for their deposits.
GLASS-STEAGALL ACT
The Banking Act of 1933, popularly called the Glass-Steagall Bill,
is designed to strengthen our banking structure, to establish adequate
capital requirement, to eliminate dangerous and unsound practices, to
provide for more stringent examination and regulation, to confine
banks of deposit to legitimate activity and to separate them from affiliates or other organizations, which have resulted in discredit and
loss of public confidence and to protect the rights of depositors.
The act prevents the unsound practice of paying competitive rates of
interest to procure the concentration of funds in certain centers encouraging investments in stock market operations and speculation, and
depriving communities of normal funds for use in legitimate trade and
industry. The measure relieves stockholders In national banks from the
hazard of contingent assessment upon capital stock to replace losses incident
to bad management. The new provision should have a beneficial effect in
aiding the reorganization of banks in localities where banking facilities
have been swept away.
The former law has never produced the results expected. The record
shows that only 17 per cent of such liabilities has been collected and
this mostly from those who should be the last to suffer loss. Those in
active control as a rule, are unable to respond or foresee the day of
evil and hide themselves. The provision has resulted in much hardship
upon stockholders who in many instances invested in bank stock out of
community spirit and who were without responsibility for management.
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•
SOURCE:
BANKING,-Journal of the ABA--October 1933
Page 27
THE AMERICAN BANKING SYSTEM
The demand for stricter regulation of the banking business is based
upon a premise that is wholly felse,--namely, that the cure for too much
political supervision is more political supervision. The belief exists,
even among men of balanced views, that the banking system of the United
States failed. This is not true. It was the political authority over
banking that failed; and the view that bankers "should have done something
about it" is held only by persons who are not in a position to know what they
are talking about.
Bankers havebeen criticized for refusing frankly to accept blame
for the shortcomings of the banking system. The truth is that most bankers
blame themselves too much. The "banking system" of the country did not
grant charters to thousands of unnecessary banks. Moreover, it should be
evident to anyone that if bankers had been given an effective voice in the
matter, they would not have chosen to increase competition to the point
where there was no longer any reasonable profit in the business.
It is by no means true that all the banks which failed since the war
belonged in the category of unnecessary institutions. niany of them were
well managed by officers of unquestioned integrity and ability. But there
were more banks than banking business. Failures in banking beget failures
and such is the character of the business that a sound bank can be dragged
down quickly by the wrong kind of competition.
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Federal Reserve Bank of St. Louis
kj;
4Address by President Robert C. Clark,
Commissioner of Banking & Insurance, Vermont
32nd Annual Convention,
National Asso. of Supervisors of State Banks
Chicago, September 1933
* * ** *****
* * * * * But the tremendous deflation in values which has taken
place since 1929, affecting every class of property, has brought a
final crisis. Values of all investments held by our banks have been
radically reduced. Just how much, no man knows. For there is no free
and active market for securities nor is there available to the
borrower normal facilities for refinancing if the bank calls for pay—
ment. But there are certain assets which can be appraised with a fair
degree of confidence. These must be made the basis for the free and
unhampered future operations of our banks. The first fundamental
objective before us, then, is the thorough analysis of the assets of
each bank and the readjustment of its liabilities so that its deposit
liability will be secured by investments of unquestioned soundness and
adequate liquidity. In making these analyses the judgment of examiners
will always be a great factor.(But there should be a well—defined
standard of valuations which could be used by representatives of both
the Comptroller and of the several state supervising authorities.
Undoubtedly every supervisor and the Comptroller has a concrete basis
of analysis. I would like to see a special committee appointed to
draft a code of fundamental principles of valuation for presentation
to this Convention before we adjourn. If adopted, we would then have
a uniform standard for the guidance of all supervising authorities.
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Federal Reserve Bank of St. Louis
*********
V72
ot
_
Proceedings of 32nd Annual Convention
National Asso. of Supervisors of State Banks
Chicago, September 1933
** *******
H. W. Koeneke (Kansas): * * * * * * * * *
We have a Governor in Kansas who is, by way of introduction, the
only Republican Governor west of the Mississippi River and perhaps
further east than that. Nevertheless, even though he is a Republican,
he is a man who has the courage to fight for what he thinks is right.
He is interested, heart and soul, in the battle of the state banks and
the state banking system. He has gone so far as to call a special
session of the legislature, at which was presented a banking bill which
took the supervision of state banks entirely out of politics and
placed it in the hands of a board which is dominated by a state banker,
the majority members state bankers and the others in lawful occupation.
In fact, the bill gees so far as to give the board authority to almost
make the laws: they issue rules and regulations which are mandatory on
the part of the bank, remove officers, directors, and what not.
try to give you more information about this bill tomorrow.
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Federal Reserve Bank of St. Louis
*********
11'73
SOURCE:
THE GUARANTY OF BANK DEPOSITS--A report of the Commission on
Banking Law and Practice, Association of Res. City bankers
Chicago, Nov. 1933----Bulletin No. 3.
Pae
The tendency of a guaranty plan will be to nurture these unprofitable units and keep them going temporarily in the knowledge
that upon failure the losses can be shifted to other banks. Because
the depositors are protected, a bank which cannot justify its
existence economically might continue to operate and accumulate losses.
&uch banks are a constant menace to the system as a whole.
Page 42 --Sat. Evening Post, leading editorial, Aug. 9, 1924.
**** **
"Whatever depositories receive the public's money, whether for
/banking or investment, should be rigorously and minutely regulated and
supervised. Any ability which government may possesF to detect, root
out and punish fraud can find its normal exercise in this field_t/iBut
if freedom of choice on the public's part is to be deadened, if government
attempts to supply the integrity, experience, ability and responsibility
without which any financial knstitution is a hollow sham, only failure and
disaster are to be expected."
I
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Federal Reserve Bank of St. Louis
;
P. 0
i 2
SOURCE:
BANKING-Journal of the ABA--October 1933
Pages 56-7
BANKING SUPERVISION BY THE STATFS
Out of the depression and its repercussions upon the banking system
of the nation have come in recent months many far-reaching changes in the
laws surrounding the activities of the departments char6ed with supervision of state banks and trust companies.
In some states
powers. Others have
completely, while in
with the supervisory
the commissioners have been clothed with dictatorial
gone to the opposite extreme and abolished the office
yet others advisory boards have been formed to work
officials.
California hes empowered its superintendent to regulate interest rstes
paid by banks. Connecticut has given its bank commissioner authority not
only to regulate but to "instruct" banks, to modify audit reouirements and to
veto the sale of one bank to another. Iowa increased its superintendent's
power by allowing him to take possession of any state banking institution,
without insolvency proceedings to protect debtors and creditors. New Hampshire
gave its bank commissioner authority to remove any officer, trustee or director
who has ignored a previous warning in writing to the effect that he has been
operating contrary to the rules of sound banking.
BROADENED POWERS
New Jersey legislation allows the commissioner to approve immediately
and without notice the establishment and maintenance of branches in home
counties in cases where the entire assets of a bank in liquidation are purchased by the bank applying for a branch. New Mexico and North Carolina
allow their commissioners to approve loans in excess of prescribed limitations to meet emergencies, North Carolina restricting such loans to a
period not to exceed 120 days when fully secured. Arkansas and West
Virginia have clothed their commissioners with dictatorial powers.
Other states, however, are seeking for a remedy for supervision problems
not in the extension of commissionerb' powers, but by the establishment of
boards, committees and cormidssions, in some cases to supplant, in others to
supplement, the work of the former delegated authorities.
tisconsin is a notable example of drastic change. In this state, the
offices of banking commissioner and deputy commissioner have been abolished
and a three-member banking commission brought into being, appointed to overlapping six-year terms by the tovernor wita the consent of the senate. The
acts of the commission, whose authoriti includes the right to remove any bank
officer or director, are subject to a banking review board. The commission is
expressly authorized to establish uniform savings rules which should be adopted
by all coamercial banks and trust companies.
Delaware has created a board of bank incorporation, of whin the bank commissioner is chairman and the secretary of state and attorney general ex-officio
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Federal Reserve Bank of St. Louis
701
Banking--October 1933
Banking Supervision by the States,pp.56-7 (contd.)
members, to pass upon all bank charters and to issue any necess
ary amendments.
THE INDIANA PLAN
Indiana, by its Financial Institutions Act, has set up a depart
ment
of financial institutions. This provides for a commission
of five persons,
one of whom must have tested banking experience, under whose
jurisdiction a
division devoted to banks and trust companies shall functi
on. Its authority
includes mergers and consolidations, conversion into nation
al banks, the
opening of branches and control over affiliates and holdin
g companies.
South Carolina has abolished the office of state
bank examiner and
vested plenary powers and control over all banks
in the hands of the governor,
who may authorize a state board of bank control
to set up a new examination
department, assess charges and take over all record
s.
New legislation in Vermont provides for the creation
of an advisory
board and lodges with the governor power to declar
e a banking holiday and to
work out the plan for operating under restrictions
resulting therefrom.
It is evident from the above that the predom
inant trend is in favor of
enlargement of departmental discretionary powers
.
State legislators have been no more immune to the effect
s of criticism
of banking than have the members of the House and
Senate in Washington, and
their activities in the field of banking law will
probably continue until the
turn in tie business cycle diverts attention to
other objects.
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Federal Reserve Bank of St. Louis
Address by R. A. M.cKinley, Director,
Indiana Department of Financial Institutions
37th Annual Convention, Indiana Bankers Asso., June 1933
(The Hoosier Banker, July 1933)
********
Many of you have read the rerort of the Study Commission for
Financial Institutions. If some of you have not done so, let me strongly
urge that you order a copy at once and read it carefully and thoroughly.
Those of you who are familiar with it will recall that the rer,ort
listed eight trends in the reformation of the supervision of financial
institutions in the United States. These trends as given by the report
are as follows:
First-- "The removal of supervision from partisan political control."
(t,
(In his connection the announced policy of this administration is that
positions in the department imi7ediately concerned with the supervision
of banks is accordingly divided between two leading political parties.
Our tentative plans are that there shall be ten examiners and ten
assistants to be one-half Republicans and a like number of Democrats.
In this matter the administration has kept the faith.))
Second-- "Lengthened and more assured term of office for the chief
executive of the supervisory department." (The carrying out of the
literal intent of this recommendation is impossible under the circumstances wherein the governorship of the state changes every four years.
It is to be hoped that efficient administration will be recognized by
executives, but this is not always to be expected.)
Third-- "Enlarged authority for the department in the examination
and guidance of financial institutions." (This is amply provided for
in the powers referred to elsewhere in my remarks, and there is little
doubt that as much power has been given as is needed in any emergency.
In this, also, we have kept the faith.)
Fourth-- "Give to the department wider discretionary powers in the
granting of charters." (It appears that nothing could be asked to
further safeguard the granting of charters than is contained in the
provisions of the act relating thereto. In this matter, also, we expect
to keep the faith.)
Fifth-- "Placing the liquidation of closed financial institutions
in the hands of the supervisory department instead of the hands of receivers." (All closed financial institutions, after July 1st, will be
under the direct charge, consideration and control of the department.
Therefore, after July 1st, there will never be a receiver for a state
financial institution in Indiana. It is sincerely hoped that results
will justify this responsibility and in years to come we can say that
in this also we have kept the faith.)
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Federal Reserve Bank of St. Louis
44
- 2Sixth-- "Increased security of tenure for the personnel of the department to attract those of greatest capabilities to the field." (An
earnest and honest effort is being made by the present Allinistration
to retain the most capable examiners serving previous to this time. So
7\ far as it is consistent with present conditions, it is the hope of the
administration tint substantial inducements can be offered to those
A \
demonstrating ample fitness for their duties in order to be continued
//\//
in these services. It is much to be desired that this policy will be
followed by future authorities. At least, for our part in this, 7:e have
kept the faith.)
Seventh-- "Recogaition of the fact that Clearing House co-operation
has achieved remarkable results in promoting stability and adequate
management of financial institutions and that, consequently, the
fullest co-operation between these institutions and state supervisory
machinery should be promoted."
Eignth-- "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."
The new law attempts to create the machinery which makes possible
the realization in Indiana of these trends. In our plans we are not
content merely to utilize the machinery given to us by the letter of
the new law, but we are attempting also to live up to its spirit as well.
**** * * ** **
The first meeting of the Commission for Financial Institutions
was held in the office of the Bank Commissioner on May 25th, 1933. * * *
****** * * **
One of the first major acts of the Commission at this meeting was
to create a new division to be known as the Statistical and Research
Division. * * * *
*** *** ****
The law gave the Commission power to create this new Division of
Statistics and Research, and the report of the Study Commission for
Financial Institutions strongly recommends that such a division be
created. Tith such a division functioning, our Department will have
the facilities for continuing contacts with the aencies of research
in our field, such as the Technical and Research Staff of the Federal
Reserve Board, the Comptroller of Currency, the various Federal Reserve
Banks, the National Associations of the Banks and of Building and Loans,
bureaus of business research and leading financial economists in the
United States, and others. Such contacts will insure that our new
department will have advantage of any sound progressive ideas that
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Federal Reserve Bank of St. Louis
- 3arise in regard to state regulations of financial institutions. This
division, moreover, will be able to make continuing surveys of methods
and forms used by other departments and to make studies of cost and
earning records within our financial institutims, which should prove
of great assistance to bank executives. With the division's help, it is
hoped that the department will be able to devise some realistic approach to the problem presented by the bond portfolios in our open and
in our closed banks. It is a conceded fact that if this Department had
been created ten years ago it might easily have saved the banks of Indiana
at least t10,000,000.00. In this division, manned as it will be by a
very small staff of expert technicians, will come the annual job of
completely auditing the expenditures of the department as a basis for
ascertaining data to be used by the commission in the fixing of fees.
This division will 'lave many othar duties including special work for
the building and loans and petty loans, and in addition will have charge
of
the necessary checking of records of examination reports and
A
statistical work in the office of the department, part of which has
heretofore been carried on, but much of which, although absolutely
essential to comprehensive examination and control, has been impossible
because of inadequate office personnel.
********
* * * * * * The new code which takes effect July 1st is the first
banking code in the United States, or anywhere else for that matter,
that gives to the department in charge of supervision the right to cooperate with regional clearing house associations that may be organized
by the bankers of a given region. * * * * * * *
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Federal Reserve Bank of St. Louis
***** ***
Address by Charles T. Fisher, Jr., Director, R.F.O.
Proceedings of the 34th Annual Convention
National Association of Supervisors of State Banks
Atlanta, November 1935
********
It is a duty of supervising authorities, in my opinion, to watch the
income and outgo of a bank as closely as the investment of its funds, and
it is here that you people have your responsibility of not only protection of depositors and shareholders, but of the education of many
bankers themselves.
State banking departments and other aupervising authorities have
devoted much time to the physical examination of bank assets and have
criticized at length the investment program of many bankers. Only in
a few cases do I knoA Ahere they have interested the-iselves in banking
operations and been of assistance to bankers in working out operating
problems.
Many bankers, some probably through no fault of their own, have had
no opportunity to keep pace with improved bank operations, whereas it
is the duty of the supervising authorities and their staffs at all times
to be abreast of the latest methods. A bank efficiently operated is
usually a sound one, and one Those operations are conducted in a haphazard manner has a portfolio usually of low grade.
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Federal Reserve Bank of St. Louis
*********
•
SOURCE:
THE MISSISSIPPI BANKER--JUNE 1955
PRESIDENT'S ANNUAL ADDRESS, Before the Mississippi Bankers Convention
May 23, 1953, at Jackson, Mississippi, G. M. McWilliams, Pres.
Page 5
While we need in both State and Federal banking laws some
revision and changes to further safeguard the depositor and stockholder, we are convinced that the greatest security to the banking
resources of the nation is stricter supervision and better, stronger
and more intelligent management by trained and experienced officers
and directors.
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Federal Reserve Bank of St. Louis
•
Francis H. Sisson, V. P., Guaranty Trust Co., N. Y.
Speech - Annual Convention, Pa. B. A., May 1933.
Source: The Financial Age, May 1933.
***** ** ***
Largely because of this fact, public distrust in banking the past three
years grew far out of proportion to any basis of reason. Public policy and
sound banking both demand that henceforth there should be no room for dishonesty or incompetency to exercise any appreciable influence in banking any-I/where. While to a certain degree bad faith and bad management enter the
human factor in all types of business, their effects in banking should be
surrounded by such special safeguards as to render them no longer an effectual
factor in causing bank failures.
Improve Government Supervision
The respnnsibility for bringing this desired condition about, however,
cannot rest upon the bankers alone, for the means to accomplish it are not
wholly in the hands of the bankers.
There are two other e9sential elements.
One is the -luality of government supervision over banking. (Since in this
country we rely so greatly upon the device of public supervision, it is
axiomatic that unless it is of the highest order in safeguarding the public
interest, it may actually weaken the structure by creating a sense of false
security.) Supervision should render bad banking impossible, but it has failed
to do so. There was no lack of supervision by presumably the highest type of
bank supervisors in every one of the instances of questionable banking that
has shocked the attention of the country during the past three years. We, therefore, believe that a thorough reorganization, consolidation and strengthening
of the bank supervisional field in this country is called for if the people are
to be expected to rely on it to the fullest extent for the protection of their
interests.
** *** * *****
The fundamental needs of banking reform are so obvious that they should
Fewer banks, more
not be obscured with palliatives of this character.
managed,
standardization
adequately capitalized, better supervised and better
cooperation
between Governof laws and methods, greater and more intelligent
ment and banking, better understanding by the public of its joint responsibility
in maintaining banking solvency and efficiency--these are the primary needs of
banking reform which should be given first consideration and be the foundhtion
of our banking system of the future. For such a system no guaranty of deposits
would be necessary and the del-ositors1 interests would be fully protected. No
considerations of political expediency can warrant Congress in avoiding these
essential steps in reform by shifting the burden of an inadequate system upon
the sound banks and taxing the stockholders and depositors of good banks to
cover the errors and losses of the unsound.
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Federal Reserve Bank of St. Louis
•
"The Banking Act of 1933"
Address by G. Tracy Vought of Messrs. White & Case, New York
40th Annual Convention, New York State Bankers Asso., June 1933
The Federal Reserve Board unfortunately has become subject to governmental domination--in fact, it has become little more than a bureau in the
executive branch. This legislation makes the Federal Reserve Banks and
the member banks increasingly subject to the Federal Reserve Board. Thus
our central banking system and the members come more closely under political
control.
The member banks are subjected to unwise restrictions. For instance,
in the directorate. They are practically forbidden the benefits of
security bankers' knowledge and advice on their boards. They are just as
%much entitled to it--and so are their depositors and stockholders--as they
are to the judgment and wisdom of the merchant or the manufacturer.
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Federal Reserve Bank of St. Louis
7
Address of Willis H. Sargent, Chairman,
Committee on Banks of the Assembly of New York State
40th Annual Convention, New York State Bankers Asso., June 1933
**********
Let me say here one word about the Banking Board, because it is typical
of something that I want to call to your attention. You will remember the
terrific argument that went on in the papers in the winter of 1932 with regard to the advantages and disadvantages, the advisability and the inadvisability of having either a mandatory or advisory board in the Banking
Department.
I want to say to you that at no time during the present incumbent's
period in office have I personally had any doubt with regard to him. And
I am sure that the general verdict would be entirely the same. Therefore,
it wasn't with regard to checking the Superintendent that I was so strongly
for the Banking Board. I was strong for it because I felt that in this
complex situation in which we were finding ourselves in the last year or
two, no one man, no matter how well versed, how intelligent, how painstaking,
how conscientious he might be, could possibly handle the situation the way
an ordinary board of directors could, when all of those people were equally
well-informed with regard to the rroblems immediately affecting the
particular industry which, in this case, was the banking industry in this
state.
So it was, first of all, to uphold the hands of the Superintendent,
and secondly, to act as a further means of liaison between him and his
deputies and the banking institutions that we passed the Banking Board Bill.
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Federal Reserve Bank of St. Louis
*** *******
(r)
•
"The Regional Clearinghouse Movement"
Address by William K. Payne, Chairman,
National Bank of Auburn, New York
40th Annual Convention, New York State Bankers Asso., June 1933.
********
A Member: Mr. Payne, do you find any restrictions are placed upon
the members of these organizations?
Mr. Payne: When you organize your Association and agree to abide
by the rules, you have a full-fledged clearinghouse, but you have no
rules. Rules are adopted only as they seem necessary. If you find that
in a given community there is a problem of banking on which you are not
getting uniform action, it is brought to a meeting of the clearinghouse.
If, after discussion, the sentiment of the community is that there should
be a uniform practice on the subject, a rule is adopted, but until then
there are no rules. When one is adopted, it is up to the clearinghouse
committee to see that it is carried out.
If there is any persistent violation of that rule, a meeting of the
clearinghouse is called and a discussion had. If the violEtion is a
just one, it undoubtedly would be taken care of. If a pPrson persists
in not playing ball, pressure is put on him to convince him of the
reasonableness of the rule, and to do as he has agreed to do. If he
doesn't do it then, some steps are taken to force him to do it.
Dr. Anderson:
speak of?
Mr. Payne, what are the powers of coercion you
Mr. Payne: Well, the bowers of coercion are penalties such as fines
that can be imposed by the collective action of the membership. Of
course, those penalties are more or less of a threat. I don't believe
any association can long continue successfully on a mere penalty. The
greatest power of enforcement is the success of the work, the confidence
engendered among the banks, learning that a cooperative effort and good
banking on the part of all banks in the community are for the best
interest of every bank. And that is what these associations are working
out.
After the banks once get used to it, and see the advantages of the
thing, they do it voluntarily. Now, of course, the final penalty would
be dismissal from the association and no bank, I believe, which expects
to carry on in a community that has a well organized clearinghouse in
successful operation can afford to have it stated to the public that its
methods of banking are so ill-advised and so loosely carried on that all
the other banks in that community feel that it is not worthy longer to
associate with them.
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Federal Reserve Bank of St. Louis
********
(13
Report of the Committee on State Legislation
40th Annual Convention, New York State Bankers Asso., June 1935
(Chester R. Dewey, First Citizens Bank & Trust Co., Utica, N.Y.)
** ********
The emergency legislation submitted to and passed by the Legislature
on March 7, 1933, completely overshadows in importance any of the
individual propositions theretofore considered by the Committee. This
legislation in effect declared the existence of a public emergency and
gave power to the Banking Board to suspend by 2/3rds' vote of its
members any provision of the Banking Law, in whole or in part, and also
conferred upon such Board the power to adopt, rescind, alter, and amend
rules and regulations inconsistent with and in contravention of any law
for the purpose of safeguarding the interest of depositors and stockholders; to prescribe and regulate methods of doing business by banking
corporations, and to prescribe what shall be considered a safe or unsafe
condition. By the terms of the act, which was promptly approved by the
Governor, the period of emergency extends until the Legislature may by
joint resolution terminate the same, or until the Governor shall proclaim
the termination of the emergency if the Legislature shall not be in
session.
**********
A bill recommended by the Superintendent for several years provides
that directors' examinations may be made once in each six months' period
of each calendar year instead of in specified months as heretofore, and
also that one of such examinations may be omitted where a bank or trust
company is a member of the Federal Reserve System and the NPW York
Clearing House Association. This was approved by your Committee, was
passed and is now a part of the Banking Law.
**********
Several bills were introduced to ameliorate the condition brought
about by the terms of the Present law which makes public officers
personally responsible for the safety of deposits in banks. Your committee approved that class of bills, such as the Patrie Bill, which
saught to remedy this condition by providing that where deposits are
made on the approval of the board or body having jurisdiction over the
public officer making the deposits, in banks designated by such board or
body, the public officer is relieved thereby from personal responsibility
in case of failure of the depository.
Your Committee disapproved that class of bills, such as the Reoux and
Wallace Bills, which attempted to achieve the same result by providing
that such deposits should be collateralized or secured by a surety bond,
on the ground that it is unwise to extend further the scope of preferred
or secured deposits in banks. All bills of both these classes, except
strictly local bills, were vetoed by the Governor.
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Federal Reserve Bank of St. Louis
**********
"The Future of American Banking" - Address by A. A. Berle, Jr.,
Professor of Corporation Finance at Columbia University
40th Annual Convention, New York State Bankers Asso., June 1933
****** * * *
**
'
*I would suggest that for the time being, every effort be made
to work wader the Glass-Steagall Act. But while doing that, I trust you
may arrange to evolve among yourselves a group which can sit down and
formulate a program of legislation which you think will meet the needs of
the situation. Think broadly and not personally, because the individual
interest to-day must be subordinated to the overwhelming national interest.
Our first concern must be that the country shall not commit suicide.
I am inclined tothink that other banking groups will do likewise.
And I am inclined to hope that out of that kind of discussion we may
reach a solution which may keep us, at least for a good many years, out
of the apparent chaos in which our banking structure now is. We began
Aith an individual system. We continued with a duplex system, paralleling
national and state banks. We became aware of the tremendous insecurity
of that edifice, and we have now piled a third one on it, banking insurance under the Glass-Steagall 11(.t. But we have not yet tackled the
main issue. This is to find a means by which we can weld the entire
scheae into a siggle unit--a system where the strength of one is the
strength of all, instead of a system where the weakness of one is the
weakness of all; where the central control is at all times in thoroughly
responsible hands; where local interests are nevertheless preserved,
but under which a national policy is possible, presumably through the
agency of our already developed Federal Reserve System. And under it
the banker must be always and only a banker, a trustee for the community.
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Federal Reserve Bank of St. Louis
** *******
"The Regional Clearinghouse Movement"
Address by William K. Payne, Chairman,
Naticnal Bank of Auburn, New York
40th Annual Convention, New York State Bankers Asso., June 1933.
********
Mindful of the fact that unsound banking operations on the part of any
of its competitors will not only be harmful to the community and all of
its banks, but that the losses incurred by reason of such practices will
have to be made good out of the deposit insurance fund contributed by all
the banks, the clearinghouse will have both the will and the power to insist on high standards of bank management. Under such an organization,
unprofitably high interest rates on deposits, and on public funds, would
not be long maintained, unkno7n duplicate borrowings would bc prevented,
new bank charters to inexperienced men desiring to adventure into the
banking field would be more readily prevented, end, in general, a long
list of unwise practices which no individual bank likes alone to stand
out against for fear of incurring ill will, would, by the cooperative
action of the groups, be easily controlled. The chief strength of the
movement will come, however, through a spirit of mutual confidence,
understanding and good-will, which is inevitably engendered when a group
of strong men work side by side for their mutual benefit and for the
well-being of their community.
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Federal Reserve Bank of St. Louis
* *** ****
••
SOURCE:
ANNUAL REPORT ON BANKE OF DEPOSIT & DISCOUNT, ETC. - N.Y. 1933
Vage 14 (Savings Banks)
Consideration should also be given to utilizing this institution as
a medium through which its members may accomplish an effective
fornof self-supervision. There are a number of trends and
practices which should have the serious and constant attention of
the savings banks. One which deserves careful study is the
tendency of some institutions to become depositaries for investment
funds rather than for savings. It is true that 88 per cent of their
depositors have balances of $2,500 or less, indicating that the
majority of the public use them for the purpose which they were
intended to serve. It is also true, that 4.3 per cent of the depositors
having balances of t5,000 or more own 33 per cent of the total
deposits, a fact which indicates that a portion of deposits are
not savings in the true sense and are therefore apt to be withdrawn
as soon as business investments are more attractive. If money of
this character is to be accepted by institutions which are intended
primarily as depositaries for savingsl -then deposits should be segregated into classes of "time" and "demand", and those which are
included in the "time" aid class should not be permitted to be withdrawn except after notice and the expiration of a fixed period of
time. Deposits subject to withdrawal on demand should bear a
substantially lower rate of interest than those included in the
"time" category, since it would be necessary to keep them invested
in Government bonds or similar investments, instead of in assets
of non-liquid character.
Page 42 (Banking Board hesolutions)
27.
WHEREAS, This Banking Board has been authorized by the
Legislature for the durEtion of the presently existing emergency
to suspend provisions of the Banking Law and to make rules end
regulations inconsibtent with law for various specified purposes
as set forth in chapter 41 of the Laws of 1933, now, therefore,.be it
RESOLVED, That all corporations organized under end pursuant
to the Banking 'Jaw are authorized to invest in and hold the bonds
of Home Owners' Loan Corporation.
Adopted July 25, 1933.
28.
WHEREAS, This Board has been authorized by the Legislature,
during this period of emergency, to enact rules and regulations
which shall have the effect of law, and
* * x
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Federal Reserve Bank of St. Louis
2-
Annual Report on Banks of Deposit & Discount, etc. - N.Y. 1933
Page 43
29.
WHEREAS, Thie Board has been authorized by the 1,egislature
for the duration of the presently existing emergency to suspend
provisions of the Banking Law and to make rules and reguletions
inconsistent with law for various specified purposes as set forth
in chapter 41 of the !laws of 1933, now, therefore, be it
RESOLVED, That no State bank, trust company or private banker
shall after November 30, 1933, except on any presently existing
contracts, pay more than 3 per cent interest on any time, thrift
or savings deposits, and no savings bank shall pay a dividend at a
rate in excess of 3 per cent per ennum, except that the Superintendent of Banks may permit a savings bank which proves to the
satisfaction of the Superintendent that its assets, surplus, guarantee fund, liquid position, earning power and other factors justify
the payment of a higher rate, in which event such higher rate
shall be fixed with the consent and the approval of the ,_uperintendent of Banks.
Adopted September 14, 1933.
Page 46
RESOLVED, That the Superintendent is hereby authorized to omit
examination of such persons or corporations to the extent that he
may find such omissions to be necessary in order to utilize the
examining staff of the Banking Department in aiding banks, trust
companies and savings banks to qualify for insurance in the
temporary fund of the xederal Deposit Insurance Corporation.
Any provision of section 39 or of any other section of the Banking
Law inconsistent herewith is hereby suspended.
Adopted November 16, 193F—
PaEe 73 (Amendments Passed During Regular ,,ession)
Senate Int. 3
Senate Print 3-155
This act amends .
5ection 61 of the Banking Law to provide that
where the Euperintendent has taken possession of an institution,
he can permit it to resume business, pursuant to such conditions
he may impose by an agreement with the directors, subject to the
requirement that the amount to be made available to depositors
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Federal Reserve Bank of St. Louis
8S
3-
Annual Report on Banks of Deposit & Discount, etc. - N.Y. 1933
Page 73 (contd.)
upon reopening is not to exceed 80% of the assets which the
Superintendent finds to be sound and lists for that purpose.
Pa_ge 75
Senate Int. 1281
6enate Print 1374
This act amends subdivision 4 of Section 144 of the Banking
Law to permit the Superintendent to accept a statement of financiEl
condition of a foreign banking corporation applying for a license
as of a date within 120 days prior to such application, in cases
where the Superintendent finds such acceptance to be necessary and
expedient.
Page 77 (Proposals for Amendment to the Banking
Enactment)
aw which Failed of
Senate Int. 79
Senate Print 79
Proposed to emend Section 56 of the Banking Law to permit the
Superintendent Aith the approval of the BankinE Board to effect
the removal of officers or directors of banking institutions for
violations of the Banking Law or the continuance of unsafe
practices.
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Federal Reserve Bank of St. Louis
SOURCE:
26th ANNUAL REPORT OF DIVISION OF BANKS - STATE OFCHIO
December 31, 1933
Pakt 8
THE BANKER'S RESPONSIBILITY
4E. if -A-
Important emergency legislation to meet the unpredictable conditions caused by the banking upheaval of last Spring, was enacted by the
General Assembly this year, and a large number of proposed amendments to cure fundamental defects in existing banking laws will be submitted and recommended to that body for enactment during the coming
year.
While unquestionably the enactment into law of this elaborate
program of amendments will be a potential factor in ushering in the new
ere of banking now under way, promising much for the public welfare
through the strengthening of the banking structure, the future soundness
of all banks should not be deemed to be dependent wholly upon good
banking laws.
The banker himself, undubitably, has a part to play in this connection. Devolving upon him is a most important responsibility--the
duty of making a conscientious effort to comply with not only the letter
but also the spirit of the law designed to safeguard the interests of the
depositing public and shareholders, and to place banking on the highest
plane possible.
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Federal Reserve Bank of St. Louis
Lta3
•
SOURCE:
26th ANNUAL REPORT OF DIVISION OF BANKS -- STATE OF OHIO
December 31, 1933
Pagp 10BANKING ADVISORY BOARD
*
*
*
*
*
Broad powers are vested in the board,as follows:
(1) To advise with and make recommendations to the superintendent of banks on any and all questions pertaining to the issuance of
or refusal to issue certificates entitling banking corporations to be foria"
and to commence business.
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Federal Reserve Bank of St. Louis
G3
•
SOURCE:
ANNUAL REPORT OF DEPARTMENT OF BANKING OF THE
STATE OF INDIANA - June 30, 1933
Page 1
The department of Banking came into existence on September 30, 1920,
and, under the Act of March 7, 1919, took over from the Auditor of
State the supervision of all state banks, private banks, savings banks,
trust companies, building and loan associations and all licensed lenders
of money under what is known as the Petty Loan Act. The department
ceased to exist on July 1, 1933, on which date the supervision of all
such institutions was taken over by the Department of Financial Institutions.
The powers of the Department of Banking were limited by statute
in such a manner that the bank commissioner had little or no authority
over the affairs of any institution unless the institution was in an
insolvent or failing condition. Furthermore, the activities of the department were limited by budget restrictions, expenditures being paid
out of the state's general fund. The department of Financial Institutions will be free from such limitations, due to the broad powers conferred upon it by law and due to the creation of a special Financial
Institutions fund. * * * *
tri
LIA,45
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Federal Reserve Bank of St. Louis
P
e
•
SOURCE:
REPORT ON BANKS OF DEPOSIT & DISCOUNT, ETC.- N.Y. 1933
Page 5_
In addition to the advantages which we have a right to expect
from uniform supervision, all institutions upon becoming members
of the Federal Reserve System must comply with the Federal
Reserve Act. This means that practices of recent years which were
responsible for bringing criticism upon the banking business must
cease or be kept within the bounds prescribed by the Banking Act
of 1933. Under that Act, the securities selling business must be
divorced from commercial banking; large, unwieldy boards of
directors are no longer authorized, deposits are forbidden to be
invested in stocks; and officers and directors who are guilty of
persistent violations of law or of unsound practices are subject to
removal from office.
Page 25 (Banking Board)
Other problems in the field of savings bank operations that have
received the attention of the Banking Board have been the
following:
(a) Effecting such reductions in dividend rates paid depositors
as are consistent with the changed economic and financial situation
and as are necessary to eliminate unfair competition.
(b) The modification of certain competitive practices such as
engaging in expensive methods of securing new business, which
do not strengthen the aggregate situation.
(c) Encouraging savings banks to make further progress in
confining deposits to those of a true thrift character.
To accomplish results, the Board has preferred to minimize
the application of its emergency powers. Wherever practically
possible it las preferred to depend upon the cooperative efforts
of those upon whom the banks themselves have vested responsibility.
Spontaneous attempts of bankers to strengthen their own situation represents too fine a movement to be wrecked by premature
bureaucratic activity.
L-Ao
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Federal Reserve Bank of St. Louis
58
SOURCE:
;_6th ANNUAL REPORT OF DIVISION OF BANKS - STATE OF OHIO
December 31, 1933
Page 10
BANKING ADVISORY BOARD
The character of service already rendered by Ohio's new Banking
Advisory Board has demonstrated the wisdom of the legislature in
providing by law for its creation. It consists of seven members, the
superintendent of banks being a member and its chairman and executive
head. The SiX other members are appointed by the governor. The law
specifies that of the members of such board first appointed, two shall be
designated by the governor to serve until February 1. 1934, two until
February 1, 1935, and two until February 1, 1956. After the second
Monday in Janmry in the year 1934 and each year thereafter the t-overnor
shall appoint two members, each of whom shall serve for a term of three
years commencing on the first day of February, and until hiE successor
shall be appointed and qualified. In the case of a vacancy in the office
of any such member, the governor shall appint his successor for the
unexpired term. Of the six appointive members of the banking advisory board, at least three shall have had banking experience in a bank
organized and transacting business under the laws of the state of Ohio,
one from each of the following groups, to be determined according to
the total resources of such banks as shown by the report of resources,
assets and liabilities last received by the superintendent of banks prior
to the making of any a,pointments, to-wit:
Group one, all in excess of five million dollars;
Group two, all in excess of one million dollars and not exceeding
five million dollars;
Group three, all not exceeding one million dollars.
kNeither the superintendent of banks nor a member of the advisory
board shall be liable or held liable in any civil orcriminal suit, action
or proceeding for any mistake or error of judgment or discretion in any
action taken or omitted by him in good faith.
(k) To advise and recommend methods and standards to be used
in making examinations of banks.
(3) To propose methods and standards for the valuation of assets
of banks.
(4) To define what constitutes an emergency warranting a transfer
of assets and liabilities from one bank to another bank or banks as provided in the last paragraph of section 710-66 of the General Code.
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Federal Reserve Bank of St. Louis
o\
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26th Annual heport -State of Ohio-Dec. 31, 1933 (contd.)
Page 11
(6) To consider and make recommendations upon any matter
which the superintendent of banks may submit to it for recommendation, and pass upon and determine any matter which he shall submit to
it for determination.
(7) To submit to the governor amendments to the banking laws
of this state when it deems desirable.
(8) To exercise such other powers and discharge such other duties
as may be vested in or imposed upon it by law.
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Federal Reserve Bank of St. Louis
•
SCUECE:
Report of Banks cf Depceit
Discc.-unt, etc., N.Y. 19Z2
Pare 6
LW°
recommend the establishment of strong regional clearing
house associations in this Etate, believing that if properly cenducted, these voluntary membership associations can establish and
enforce better banking methods, safe investment and loan policies,
a high cede of ethics, and also held to weed out incompetent bank
officials, more effectively than can be dune under the present
powers of governmental agencies)
s9
Pages6 and
A. We recommend that the law be amended in the follcwing
respects:
(10) To change the period during which directors' examinations may be made to provide for such examinations at
least once in each six months period.
* * * * *
12) At the present time it is net practical to put inte
operation e law requiring the segregation of thrift accounts
in commercial banks. The law, however, should be amended
to permit the Banking Board te impose such a requirement
under such terms and at such times as it decides to be proper.
Page 15
BANKING BOARD
The Banking Board was organized and assumed its duties on
May 11, 19Z2. Since that date, it has met twenty-two times at one
and two-week intervals. The excellent record of attendance at all
meetinEs bespeaks of itself the willingness of the members to give
unstintingly of their time to the problems which come before them.
Acting in an advisory capacity, the Board, on numerous occasions, has already proven its helpfulness to the office of the Superintendent of Banks. Assuming it is provided with proper means of
enforcement, it should become equally important in establishing
rules and regulations to promoLe sound methods of banking.
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Federal Reserve Bank of St. Louis
59
•
SOURCE:
Report of Banks of Deposit & Discount, etc., N.Y. 1932
-2-
iages16 and 17
Rules and Regulations
Under Section 10a of the Banking Law, the Banking Board is
given the duty to make, alter and amend rules and regulations not
inconsistent with law for the purpose of regulating the safe and
proper practice of the corporations and persons coming within the
provisions of the Banking Law.
* * * * But, if the ruling should be of the second type, the
problem of enforcement becomes perplexing. For the Act provides
that the rules and regulations, not inconsistent with law, enacted by
the Banking Board, shall be "enforced by the Superintendent, and the
employees of the Department." But the sole method of enforcement
which is vested in the Superintendent in respect to any such "rules and
regulations" is the cancellation of the po%er to do business of certain
corporations, or an immediate closing down of others. Obviously,
many provisions which might be enacted into rules and regulations for
safe and proper banking practice would in no way warrant enforcement by such radical and extreme treatment.
We believe the Legislature should further consider the means
of enforcement, if any,to accompany rules and regulations of the
Banking lioard. We have no specific recommendation to make,
but through analogy with other statutes, we mention in passing
the following additional devices which mieht be considered as
enforcement measures: fines, penalties under penal statutes,tem,
porary suspension of institutions, publicity, or removal of officers,
directors, trustees or other employees.
Irrespective of the methods to be employed in enforcing rules
and regulations, we also call to the attention of the Legislature the
problem that underlies the method of enactment of such rules, to
the end that proper and due notice be given to interested parties
in advance of enactment, and that a proper machinery of appeal
be established by law. Due advance notice and procedure on appeal
must be considered in relation to the particular method of enforcement which the Legislature might provide.
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Federal Reserve Bank of St. Louis
•
SOURCE:
Report of Banks of Deposit & Discount, etc., N.Y. 1932
-3-
Page 46
PROPOSED AMENDMENTS WHICH HAVE BECOME LAWS
Senate Int. 21.
Senate Print 21.
This bill amended the Banking Law to create Sections 10a and
10b, providing for a Banking Board of nine members, with powers
to make rules and regulations for the purpose of defining what are
proper banking methods and also with power to pass on applications for charters of banking institutions. All the members of the
Board are appointed by the Governor. By operation of law, the
Superintendent of Banks is chairman. Four of the members are
reouired to have banking experience and provision is made whereby
banks, trust companies and savings banks may make recomlendations to the Governor for the appointment of the meabers required
to have such experience.
Page 47
PROPOSALS FOR AMENDMENT TO THE BANKING LAW WHICH FAILED
OF ENACTMENT
*
*
*
*
*
*
*
*
*
*
*
Senate Int. 104
Senate Print 107
/4'>/
Proposed to amend Section 56 of the Banking Law to permit
the
Superintendent to require appraisals of real properties in which
banking institutions have a financial interest.
Senate Int. 105
Senate Print 108
Proposed to amend Section 56 of the Banking Law to provide
that banking institutions charge off doubtful assets upon
direction
of the Superintendent, unless any such recommendation is disapproved by vote of the board of directors.
Page 48
Senate Int. 109
Senate Print 112-1659
Proposed to amend Sections 107 and 189 of the Banking
Law
to limit the aggregate investment in bank
premises which may be
made by a bank or trust company.
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Federal Reserve Bank of St. Louis
•
SOUFCE:. FePort of Banks of Deposit & Discount, etc., N.Y. 19F
-4-
Page 65
Assembly Print 135--Stock Investment of Trust Companies:
The Board might properly regulate the investment of banks
and trust companies in stocks on the basis of safe and sound
practice, with the additional feature that with the control of
the stock investment exclusively within the Banking Board
flexibility of regulation will be provided. Were this bill to be
passed by the Legislature, such an act would become fixed End
fixed regulations of banking practices are in the main undesirable. The Board could make this ruling flexible not only as
to the percentage to be invested in common and preferred
stocks, but also as to the length of time laid down to obtain
conformity.
Assembly Print 126--Charge-offs:
It is cl-,,arly apparent that this is really one of the effective
sources of control by the Banking Board. Safe end sound
practice requires to some extent that the community be
informed of the true condition of the institution. How far
the Board may wish to go is a matter which they must decide
after serious consideration of the facts. The Board should be
warned that they must give full consideration to the proper
time and occasion for establishing any such rule.
Assembly Print 125--Furnish appraisals of Real Estate:
It is clearly within the province of the Board to pass a regulation whereby the Superintendent may demand appraisals of
real estate in conformity with the provisions of this bill. The
question of selecting appraisers will always, of course, be
difficult to deal with and how far the Board may wish to go in
the forming of fixed regulations is a matter which they should
consider carefully.
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Federal Reserve Bank of St. Louis
SOURCE: *Rel5ort of Banks of Deposit & Discount, etc., N.Y. 1932
-5-
Page 66
Assembly Print 130--Examinations by Directors:
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Federal Reserve Bank of St. Louis
The Board is powerless to change the statutory provisions
as to the specified times for examinations but as to the further
provisions of the bill, involving the duty of directors to review
completely all loans, the Board could pass a proper ruling in
that respect. Such ruling, moreover, could be flexible to the
extent of modifying from time to time theone thousEne dollar minimum referred to in the bill.
SOURCE:
AMERICAN ECONOMIC RFVIIN, VOL. 22 (1932)
BANK FAILURES IN THE UNITEL STAM--Nalter E. Spahr, N.Y. Universit;
peRe 214 thru 246
inetructive as well as interesting to note thet in
It
Clamodn, by impy of contrast, bank failures appear to have very little
relation to commercial failures. The remarkably few failures which
have taken place in that country indicate that the branch banking
aystam there is much better qualified to resist the strain of business
fluctuations than our system of unit banking is able to withet,,nd the
effects of busineas fluctuations in this oountry. Her business
fluctuations are not as severe as ours and one contributing factor
must be found in the fact thA her banks are able to stand by and
assist business in times of need. It my be noted, also, thf,t bank
failures are almost unknown in England, although, Obe boo ber business
fluctuations. It would sneer, therefore, that a floadmmental explanation
of the causes of bank failures in this country is to be found, partly at
least, in the nature of our banking structure.
Conclusions derived from the stegtiltiAls a bank failureq.
Before
proceeding to a further analysis of the causes, problens, and possible
correctives of bank failures, it may be helpful to summarise the essential
conclusions at which we have arrived after an analysis of our statistical
data:
(1) The heaviest failures, absolutely end relatively, are among
the state banks; (2) the failures are greatest among banks with small
capitalization; (3) they are heaviest in small towns and villages; (4)
they are heaviest among banks outside the Federal Reserve system; (5) t
have been unifornly heavier than failures of commercial enterprises since
1920 but not duling tbo period 189E-1920; (6) they accompt-my very closely
the rise and fall in mommereib failures usually reaching the peak at
the same time; (7) they are not omll caused by business recessions but
onstribmte to unsound business manditions; and (8) they are more
pronounced than in any other spowntry in the world even in fairly normal
amd prosperous times, which would seem to indicate that there ere some
fundamental and organic defects in ..)ur banking structure that require
correction.
An Analssis 9f the cause:: of baqk failureg. If the preceding conclusions are correctly deduced from the available statistical evidence, it
would seem that logic compels us to attach the problem of increasint
bank failures by examining what appear to be the most outstanding aad
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Federal Reserve Bank of St. Louis
115
-2-
fundamental defecta of our banking structure which have contributed
to the prevent unhappy situation, as well as those factors, thet lie
outside the field of hankies*
We shall consider the prObleme emd posaible correctives under
the following main headss
I. The defects inherent in the organic otructure of our
comaercial banks and hankies system.
2. Those due to the ieedesteete eastrol of our credit etructure
by the Federal Misery* system which, is turn, result froa two limitations,
(2) thoae inherent in the structure of the federal Beserve gystea, and
(b) the inability or reluctance of the Reservc authorities to devise and
apply adequate principles of credit control.
5. Those causes lying outside the banking field.
1. Defects; Werent to the organic structure of our commercial
banks and banklaa orates. (a) We have an unnecessary and an unwise
division of our sammercial banks into national and state banks with
forty-nine legislative bodies regulating and granting special privileges
to their respective banks. For a long time state banke received
privileges not accorded natiemml banks; then the national banking law
was liberalised to place metlemal banks on an equality with state banks,
with the result that this sempetitive liberalisation of beak laws hes led
us to permit the creatiom of amsound basks and the indulgence of uneound
banking practices. Such a system, with its forty-nine different
jurisdictional authorities and forty...mine sets of laws, by its very nature
involves lack of uniformity in legislation, in standards of banking, in
rate. of progress, end in eupervision. These conditions have been permitted
to prevail for no better reason than as a concession to historical precedent
and the doctrine of states' rights. Commercial banking is, and cannot be
anything else than, interstate in nature and, as h result, there is no
logical baeis an which to defend the present classification of our banks
tato both national and state with the preatiling lack of uniformity in
beaks and banking practices.
(h) We have too many bamkaaaeepecially too new smell banks. The
statistics; of the failures place this contention beyoed dispute. Coapetitive liberalisation of our various state and national laws has been primarily responsible for this situatioa. The lenience on the part of aur law
makers doubtless; has bees due to the prewelenck ef the doctrine of laissea
faire in matters relatimg to business eaterprise. As a part of this same
doctrine, each community has desired its bank end, preferably, more
than one bank in order to secure the full fruits of the coapetitive system.
?he aecuring of oae or more local banks was facilitated by the low capital requiremeats and the ease with which the laws permitted the charterLag of banks. Nearly heir of the banking resources of the wintry are in
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Federal Reserve Bank of St. Louis
MIN
-5-
the hands of 1 per cent of our bunks (250 in our metropolitan centers),
the other half being spread thinly among the other 99 per cent. Twentyfour banks, national and state, in New York City alone have a capitalisation almost equal to that 9f 20,008 country banks situatbd tn towns of
10,000 population or leas.*
(e) (Too Luny basks are outside the Federal Reserve system with
/k
,
,
the result that the %serve authorities are not in a position to regulate
or aid thea. The usfortunate aspects resulting fron thie situation reveal xt tt
themselves in a striking manner during crises like those of 1980 and 1929. NI
Of the 6967 national and etate banks which failed during the &made, 85
per cent were nonmember nnd 17 per cent member banks. The lesasm to be
drawr from this evidence should be obvious.)
(d) Small unit banks often do not or cannot eecure the proper diversification of their portfolios due to the fact, perhaas, thst this, are in
cow/unities in whisk a fee crops or industrial activities predominate and
provide them with aa undue proportion of paper of a certain type, with
the reeult that the welfare of the bank depends almoat entirely upon the
prosoerity of the local commomity. Furthermore, with the increased use
of the automobile amd other moans of commemication, muds of the inportant
buniness of local communities has gone to the larger ousters with the
raeult that small town banks tend to hold only the unimportant local busi!lass.
(e) It appears that the proportion of peper eligible for rediecount
with the Federal Reserve banks iv too small for the safety of the commercial benke in timee of stress. * * *
(f) Closely related to this situation is the fact that during recent
years commercial banks have been steadily increasing the proportiom of
compered with the proportion
their resources given over to laveatments
*** These figures show that commercial
going into loans and
banke are shifting more sad more from the financing of commercial transactions and are devoting an increasing proportion of their resources to
the financing of fixed capital. There changing proportions contributed
to the lack of liquidity in the resources of commercial banks and
probably reveal a eontributing factor to the increased number of bank
fnilures. This shensing proportion has an even greater significance
when coneidered in connection with the small unit bemhs which inveet
auch a lsrge proportion of their reeonrces in local aortgages. Table II
will show somethime of the tread.
(g) Directly associated with the question of the increased proportion
of investments and loane on investment paper snd mortgsges by commercial banks are thoee questions relating to the increased number of investment and other sos-commercial banking affiliates which have been attached
a**
to commercial banks, particularly in metropolitan centers, in recent yeers.
It was reported that when the Bank of the United Statea, in New York City,
failed, it had about fifty affiliates with relationships so involved that
it is doubtful if they could be disentangled.
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Federal Reserve Bank of St. Louis
(5) HeRrings on Branch, Chain, and Group Banking, Vol. I, Pt. I,
pp.22-2S)
-^
(h) Another factor which has contributed to the weahmning of
our comnercial banking structure hes been the steady increase in the
proportion of tine as against demand deposits. Oa the basis of the
average percentges for the years 1919-25, we find that deeemd deposit,
amounted to 50 per cent, and time deposits to 82.5 per cent, of the
earning assets of the somber bank* of this country, 'bile, on June SO.
1930, denied deposits amounted to 52 per cent and tine deposits to 58
per oent of the earning essete. Against these tine deposits, which have
increased absolutely and relatively during recent years, a reserve of
only 8 per cent is held deapite the fact that the cash derived fro& theft
time deposite is tret,ted like tne sash received from demand deposits
against which a much higher reserve must be kept. This situation hal
presented an inviting, although deagerous, oppertmnity to commeraial,
banks. It hps been inviting to sonmercial beaks bagasse it tuiokboos
more profitable for them to expand their loess end inveetmemMe and reap
Ereater profits. It has been a dangeroue factor fnr the banks since
they have been led into making loans and investments of a type not
appropriate for banke engaged in a savings banking business, sad ale°
in t:le fact that their renerve ratio against genuine demand liabilities
has tended to fall below that required tgainst such liabilities. From
the point of view of the awing* depositor, the situation Ills bt,.en
fandamentally bad, although he has received eone conveniences not afforded
by the genuine swings banks. Ls most instances be hes been able to with_eften, if not
,
draw his tine deposits without prior notice, and Ott41
usually, his eeneercial bank hes been more oonveniently located than the
hotteVer, ib the fact tiaat
,
acarest savings bunk. Against these eervices,
restrwes and
his deposits huve not been ane are not properly seemed
investments as well as the fact that in the event of a run on a bank thc
time depositor Gan be made to gait at least thirt days to prevent his
claims while hie funds are being paid over the counter to meet the claims
of the denaad depositors. If the interests of depositors are to be considered seriously in connectLon with bank failures, and if the siall
saver is to be given the pmder protection due hilt, them here is anothrr
proble% which needs study and correction.
(i) The uhit costs in our great multitude of small banks are
relatively high and the met returns are very low. The prevalense of
ostentatious buildings and equipuant is no small factor in this eituation.
An analysis by the comptroller of the currency of bank earnings showed
Wet a large proc)ortios of the banks outside of metropolitan venters
were not earning sseogb to iustify their existence. This was tree even
in such relatively prosperese years as 1926, 194, mad 1927. In 1927
nearly 966 national beaks sere operating at 8 loss, and an additional
2000 were earning less than 5 per cent. This co,44itntod about 88 per
cent of all national banks in the United 6Utea.k4) /be situation among
the st&te banks was even verso.
(j) Another defect of our unit balking system, eapecially of our
small bunks, ie found in the poor management which generally character-
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Federal Reserve Bank of St. Louis
(4) Hearings on Branch, Chain, & Group Banking, Vol. I, Pt. I,
p. 5.)
111
•
-5isee thea.
gemeral, the officers are of am inferior sort. Perhaps
the eambier, amid a few others in the bask, hao hed some formal
training
in bookies prsOodure and principles, but the training of this
president
and other* responsible for running the bank has probably been
along
different lines. The leading citisen in mot communities usually hopes
to complete and polish off his business career, whether he be the
succeesful grocer or butcher, by becomimg the president of the local
bank. This phenomenon is a traditional and a peculiar characteristic
of American life. Such men ordinarily are individualists sad resist
co-operatioa. They ars typical Omall-towo men, often called herd-headed
business men and the backbone of our natioa. In the proper genie of the
term, however, they lommally are not bomkero. They may know something of
the technique of bankimg but little of its fundamental end
ferinsachial
principles. They aro not well acquainted with the literature aa bombing,
witn the tendenciee, current problems, and possible solutionu which should
be of interest to them. The, resist the collecting mad filing of data
on locel cud more general basiness emnditiame which affect their book;
they resist modernising methods; they oftem permit Oomtiment to play too
large a part in the making of local loens; the direetorates usually are
filled with local business men who know little about booking anc often
are iadiffereat regardimg the bank's affairs. kveryome, of Norse,
recognises that there are memy fine exceptions to these gemeralisations;
nevertheless sober reflectieo must ispress one with the gemeral accuracy
of the picture amd with the fact that the type of assessment characterizing
a large part of our mmit bankint system is ma imperttnt factor in bank
failures. For example, the comptroller of the carremoy, in analysing the
causes of the failures of the national banks in charge of receivers on
October 51, 1950, listeci them as follows: (5)
Pen seat
A. Incompetent mmmegememt...
OOO
SO
B. Dishonestyvvv......................*****.............. 111
C. Local financial depression fres agricultural or
industrial disastar.......
SO
D. Receiver eppointed to levy and collect stock aspeosmoot Gaviria' deficiency in value of aseets soli... 5
E. Temporary Omspeosion.
1
* * * *•
•
•
•
(k) Finally, we may anation the fact that the problem of imadequate
bank supervision is still with us. Due frequently to the youth and
relative inexperience of gamy of our bank examiners, it becomes a fairly
simple matter for sharp bask officers to outwit then. Usually the staffs
of exanimere sac of examination departments are imedoquate mod pearly
paid. The great number of failures is evidence of the feet that they are
amble to cope with the situation. In addition, we home the problems
ariaimg from the conflict of authority, if not a total lack of authority,
with reopect to the examination of chain end group balks and the amp
banking holding com?anies that are sometimes a part of these systole.
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Federal Reserve Bank of St. Louis
(5) Annual Report of the Comptroller of the Oarrency
(Dec. 1, 1953), pp.507-521.
le also still find difficulties in the way of quick and effective
action on the ?art of the comptroller of tht eurrenc- in correctint,
unsound banking practices due to bad management on the oart of officers and directors of banks.
2. Iged,ivate cqptul of credit by cur /*oral Reserve authorities.
Another fundamental explanation of our phenomenal number of bank failuree
is to be found in the inadequate control of credit, with particular
reference to the business eycle, which characterizes our Federal Reserve
system. This is due to the limitations planed upon the pneribilitiee of
credit control because of the structural characteristics of the Reserve
systeal and to the inability or lack of ability of those in charge to
devise the principles and mechanism that are effective within the limits
which the structure of the system permits. * * *
Chow amount of credit in use which is beyond tht control of the
Federfil Reserve authorities, and yet affects business conditions and the
price level, is sufficient to upset their best laid plans. le only need
mention thE tremendous ampunt of credit used in the stock market, the
‹- N-1
Loan
credit
to
\V
the
Farm
too
me,
Federal
system to extend
capacity of
farmers, ant the various other nom-eommerciel bankanc s:iste,.-x- and eaterprig's lying outside the Reeerve system tc a;:?reciete the significamee
of this problem in the question of credit control.'
(II
Recognising, however, these organic limitations iaheremt in the
nature of the heserve syatea, it is believed that much mere could be done
than his beam done to control crtdit in the intereat of price level
stability. * * *
* * * Regerdless of the present state of individual opinion aa
these points, the fact must be appareat to all that since the inauguration
of the Federal boserve systevi we have witnessed the gr.-at-eat flasteatime
in the price level and the greatest number of bank failuree for the years
involved that this country ha* ever sem. From these facts the lees=
murt be cleer that the system is uot misting present-day demasis preperly and that some well-considered corrections should be ssalist.
5. Souses
largely outsid% jig
banking
•
fickle•
•
•*•
*•
•*•*
If we are to attellpt to correct the etructural defects of omr commercial banking system, the evidence would seem to indicate that all eonsercial honks should be brought within the Federal Reserve system if
it is to exercise genuine control over ennmsreiel credit, perform ite other
filestieme properly, and provide the proper aid and protection to coomerelal banks. Furthermore, since cossercial banking is interstate in
natures it appears pmeterable to convert all commercial benks into na-
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Federal Reserve Bank of St. Louis
-7-
tienal benkr, leaving for the state bmmkr the revinve bank and trust
company basin's? in ro far ea porsible, although it woule not ste.r. advisable tn demy there fancttons to national semmercitl beaks also, aince
there would be a great number of places in which there would be no
savings banks and trust coaAnios to provide the neeessary rervices to
the people. The ryuestions of states' rights and constitutional limitutiona
do not present insurmoustable difficulties. Ohms a business bteamso interstate in nature or becomes an instrumentality vital to the free nevoment
of interstate commerce, the businev: is national in character and should
be brought eider national jurisdiction. In such csres the statk-s haw- no
rights thet demand protection since the public well-being ie at stake.
As to tbe eonstitutional espect of the question, it is cuito doubtful
whether there ere any conetitmtional difficulties involved. * *
A further argument in fevor of nvtionalisimg all segmental benkr
upon
rests
thf, feet thet it is hardly rational to sweet mush programs
and certainly not usifors progress, by waiting fer flartr-nime different legislative bodies to agree upon and pass sound and progresaive legislation.
A fundamental purpore of the Federal Reserve system las to provide us
with a natiemal policy and system but it cannot be mode effective with the
present organisation of our commercial booking strusture. We ean accomplish these things through a natiinal law. ilmniness eyeles aro national in scope es are the prOblems of credit oomtrol; commeree is interstate and imtermational ia nature; the problems of a proper reeerve atruetare are netiemal end even intonational in their ramifications, ane such
qmestinns son be dealt with adequately only by a governmental body with
the proper jurisdictional authority. It is an interesting fact that while
OarefUl reflection rhould have nomvinced as long ago that a natio' mast
have • national commercial benkimg systela and policy, since this Is eaesatial to national well-being, Ile have continued to permit a scattered
type of basking with tho accompegyinf diffusiom of authority that has
made an effective national policy impossible. Too mash democrtcy in
bookie( has beim a devastating factor in our economic life.
It appears also that branch banking should be provided for in order
to amble tufts to secure the proper divercity in their pertfolioe; to
eliminate the problems mew ansociated with small unit bmmkimg; to provide
adequate oftpLtalimatiem so that the banks can engage, art say in local
fimmiscing, thick' today is often beyond the capacity of the %sisal bank,
but la a wider time of commercial fimaneimg; to immure a better grade
of management; mod to elimimate some of the demon ammresseelated with
chain ane group Making. It seem logical. also, for auk branch banking
to be es wide as the Federal iteeerve distriete, if met mmttem-wide,
order to secure proper diversificrtimas am4 the other virimee that appose
to accompany well-organised brow bmiktmg. Under mush a mystes„ brealb
offices could and should be spume Ihere a unit benk could not exiat
profitably and without danger to the community. It is interertinf to
eensider the fact that while we are willing to permit our large bitnks to
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Federal Reserve Bank of St. Louis
zit!: •
establish branches in the far corners of the world, we have been un,Janine to permit them to establish branch..s within the cotistry despite
the feet thet about 40 per cent of oul trade is nbtional rEth(r thsn
international sad deepite the fact that we eould regulate domestic
branches more effectively the,n the foreign.
In so far ae unit banking continu,s, the minimum capitAlizetion
limits should be raised.
Jk)'\
Stddy should be given to the queftion of the proportion of rediscountable paper which member beaks should hold as well at to the
proportione of other tylles of paper, especially invstm(nt snd mortgage
paper, which might be included with safety in their portfolios. In e
similar manner, study might be given profitably to the possibility of
devising a scheme for incre6sing the margin of collateral required ae
security for loans when the price level is rising.
appebrs to be considerable laerit in the proposals made
There
to aid, through the creation of central aaortgage rediscount banks, thf.
various institutions which hold reLl este.te mortgtge paper.
Unce good central banking appeals t%) dogemd upon the m(Antenance
of lic,uidity, extreme care should be taken la admitting eny new type of
paper to the portfolios of the heterve bank, tbich aight impair this
liquidity. The attempt to give f.; central banking system wide powers of
credit control seems to conflict et certain points wit the attempt to
maintain its liquidity.
Non-commercial banking affilittes doubtles6 ahould be brought under
strict control of and be examined t the proper commercial banking
authorities, if, tweed, they should not be severed from eommercial
banking institutions. Cereful consideration rrould be given also to the
possibilities of placing strict limits upon the total amount of lot,nv
coTamerciai banks soy mike tc their affiliattx in the event the: are not
i,evered from the semmercial banks.
Tine deposits, especially those of a thrift or savings nature, should
be under the mmme reetrictiome 0.6 tu investaent as eLvings deposits in
savings banks and tbe reeource* segregated, or the reserves against these
deposits should be the same as against dame_ deposits. Perhaps an
effective combination of both ideas could be devised.
tvery reasonable step should be taken to improve the s3,t.tem of bank
reports, examinations, and methods of &Ailing with recalcitrant bank
directors and officers. Until a tnorough overhauling of our commerciel
banking structure is effected, the Comptroller's. Office should be given
authority to examine ant exact reports from evcri unit in the chain
and group banking systems which are interst,te la character or in whieh
a national bank is one of the units.
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Federal Reserve Bank of St. Louis
-9-
Hops Should be taken to remove all obstacles to control which are inherent im the etructure of the Federal Pererve system, end which now
hamper omr Reserve authorities.
That our banking system is out of joint and in need of overheuling
seems clear. It ie also well under:.tood thet out of every bueinese crisis
CO2V denende for revision of our banking laws. It is a nmtional habit
despite the feet thtt we knee we alreedy heve our bankers in legal etrait,jackets when compered with the freedom given to brnkers in rach a country
as Yngland. Nevertheless, this seems to be the only feasible way to
correct ezieting defects, sines we cennot afford to perpetuate aur system
of little unit banke, witt its sentsur bankers, witt ite inability to
cope with modern business probleme satiefaetorily, mnd with its tremendous Dumber of bank failures which have caused unmeasured lorees and
untold misery for millions of depositors, borrowers, stockholders, officers, and directors, who htve striven valiantly to eccumulate a little
surplus which eill afford then sesurity in the evening time of their lives.
The Comptroller of the Currency, before the Ourrency Committee of the
House of Representatives inveetigating group, chain, and branch bunking,
painted the picture vividly when km said (in February, 1933): 'There is
no more distressing sight than a group of citizens, men and women, clamorimg before the clotted doors of a bank bewailing the loes of their savings.
These losses fall upon the best and most substential citizens in the
community and many of them never recover their previous financial condition. Multiply this local event by nearly 6,000 and scatter it throughout
the greet ngricultural states of the Union and the magnitude of its effects
reaches astounding proportians.
sit is eetimated thnt 7,264,957 depositors have contributed to the
great total of more then S1,7°0,0001000 of deposits in failed banks during
the pest mime years end that no lesg than 114,300 ehareholders have suffered
losses through these suspensions." 0) * * *
Tae tragedies of depositors and others todey, in u country that is
eappeeed to know eomething about how to devise laws to protect the needy
against unsound social institutions and devices, are a sufficient answer in
themselves to tnose who insist thet the laws do not need revision. It is
certaimay high time thet those interested in the welfere of the depositors,
the common mnn and women, end the public in general--and this seams the
legielators, the press, the sociel soientists, and those outsbeadtpg beakers
who see the bunking business in its proper setting--should joim bawls at die
all things poeeible to correct preeent defects so thet the losses smd
tragediet which characterize our present banking ystes, vill speeday and
definitely becomc eventa of history without ,)robability of POOMMOMOO.
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Federal Reserve Bank of St. Louis
(6) Vol.
Pt. I, pp. 13-14.
VII
DISCUSSION: Frederick A.. Bradford—
In Professor Spahroa analysis of the causes of bank failures,
I feel that he has failed sufficient14 to distinguish between those
causes which are of far-reaching importance and those which are of
minor or sommiory sip:Meanie. Thus, in the discussion of the
defects which are inharoat in the organic structure of our commercial
hanks and banking system, no partimular stress is laid ea any one or
more of the *loves defects desnribed, yet it seams apparent to me
that the poor quality of tho nomagemat, of the smaller banks especially,
ig Of outatandin* significance, while tha variety of juriadictiams Under
which our banks operate, the exceallive number of banka, amid, in seme
etate6, the inferior bread of bank supervision, are also nor, important
than the other seven defects. If those neationed could be remedied, the
others would largely take care of themselves. I have little sympathy,
for example, with the notion that it is impamaible for a bank in a macrop resSon to diversify its besinass. War maul amassmast such a
bank would insist on holding a fair proportion of its samwrces in *pea
market paper and high-grade, marketable beads, while amnfiaing its local
loans to the very best risks. I also question the increpae in investments,
per se, as a legitimate ovum of bank failures. 8. long as the inveetaenta
are in local mortgages, the bunk does not, it is trues stramgthen its
position, but probably mahmo it. Investment in high-grade, marketable
eecwrities, however, sorely by helping to attain diversification, would
have tended to decrease rather than to increase the number of small
gauntry bank failures during the period prior to 1930. Finally, although
I an quite aware of the danger of investment affiliates of commercial
banks, I an not convinced that they have played any great part im the
reosat debacle of bank failures, except in the case of the Bank of the
United States.
Inadequate control of credit by the Federal Reserve authorities-Protases, Spahr's second major cause of bank failures--seeme to me to
beve bees somewhat overemphasised. * * *
nth regard to the passible serrectives of the umaatiefactory banksituatim
la this ematry, it moms to me thet peraisaive branch
SMO
booking Oa a rather wide scale mod higher eapital requirements for mit
alas are more empodisat than the ether themes which Professor Spahr has
SOlgested and 'sold probably soopro the dasired results. I nev,a
,tire of
"rioting Hartley tither* to the effort that °good banking is produced, not
by good laws, but by good bankers.* Shen the beakers of this country,
taken in the aggregate, learn that their first duty is to their depositors,
not their borrowers, sad that no loan or investment which jeopardises the
safety of their &gainers' funds it juatifi,A, there will be comparatively
few failures, ihateme. the booking lave may be.
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Federal Reserve Bank of St. Louis
Thoerntically, the smallest unit banks oan be soundly run, but often,
in practise. they are net. It woeld
desirable. therefore te
permit brew* booking amd to raise the minima empital requirseieste
for emit bloke as the meet prebablp amd expedient methods ef eeemrimg
by legislation the type of bank menagement 'high is essential to a
goed bookie' sYstsa.
16.18.111.1110Sees if ve imeiet that basks should be able to weather mmy sort
of coma/them that eemee. it is ealy fair te them es it is to ether members
of our seememic segenisatiem that aemed old effective mmehmmiame be devised
for the eisiglisatiee ef byelaw at beme and that the ellemeet intermatiemal
financisl eemseperetien be festered to the sad that extermal disturbameee
may be reamed to a minima.
I quite agree with the tee papers, however, tint even with a stable
economic emviremment oar banking ',sten needs eonsidereble improvement.
le most net. hemevor, fell to worshipping meshamiame soh as laws.
regulations. tad external supervision. The only dependable methed for
ashiewies better banking is to develop better hashers. Saud books are
net neeemparily member hanks. national banks. bremeh beaks. er large
beaks. Shen all of the sets of the present hamkimg tragedy have been
mattes it vill be found that me type er wets* of bashing was free froa
the reekleemmese, greed, atupidity. amid dishonesty midi* have been present
ta the misting situation. It gene without swift that a bank with larger
rename, mere eareful eipervisios. greater opportunity to diversify
risks, amd ability to semmmad better ememserial Wait, ether things beim'
equal. will be better' able to loather stem bat eves emit mm instituttea
will subject the stmehholders sad petrels. te heavy lessee vale's it is
viaeXy and hesestly memaged. The ability. eemeervatiaso amd highly developed
sense ef stewardship of the baglieb banks are ambling them to weather woo.
perturbed etorme even mere violent than emr ema beaks are emeemmileeimg.
Shills there is mmeh to be ssid for a single national astern of banks
the ease is not quite ee ame-sided as Dr. bpsbr would have um believe* le
have already dumped upon the 'antral goverammat so mew of our local
problem* that it is usable to grapple with them effeeikvely. Sale ease
ef ear state laws amd supervision wattage are mot quite up Ur the standards
of the notional system I have found that the plass upen which beakieg is
dame in soy given emennaity Is pretty mash the ere for natimmal aad state
beaks. The exists's. et a dmal oyster hes permitted better adeptaties te
legal seeds sad, through the iaterehemge of ideas. has resalted in greater
progress. As has bees the saes with etate-wide kremeh booking. eme state.
Californias has served as the laboratory withal% the whole semmtri having
hem embject to the neeessity of experimeatimg with a aew type of basking
streetere.
I quite agree with Sirs Spahr that the small bank should be eliminated,
branch banking he given a semmehat freer head. that stricter, as well am
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Federal Reserve Bank of St. Louis
-12-
more acientifieally devised, rogulations be made with respect to loans,
deposits and reserves, mod that * better type of supervision bol provided.
It is still desirable to emphasise the fact, however, thf,t the best of
regulations and the ablest of supervision will not make our banks failureproof in the face of stupid anc dishonest mamagement.
Dr. SpahrIe insistence that every commercial bank should belong to
the Federal Reserve mystem meets witn my approval provided he confin-a the
term "beak" to those institutions that are commercial in fact as well
as in mace. Aany of these banks that are still outside of the system do
so small a volume of ommmorcial banking as scarcely to warrant Reserve
bank membership.
As for the stricter roguktion of the investment departments and
investment affiliates of banks, I would go a step further and insist that
unless thie type of financial service can be rendered without bringing
distrist upon the whole institution it might bettor be dsaied to mar banks.
The department store idea in finance is in itself a thoronghly comnendable
one and I woe no fundenestal reason for denying to either qualified national or *tato institutions the right to engage in the whole gamut of
financial services, provided that a uniformly high standard is maintained
in every departatent.
My conclusion is that we should perfect our banking laws emd the quality
of supervision to the highest degree but thet we should regard these as omly
of minor importance in our quest for a failure-proof banking system. ?his
latter condition we cannot achieve until we have placed only good bankers
ia chfirge of all of our banking institutions.
AWL BILL"—
* * * I thiak that the present maggested Onmges in
reserve requirements of banks, however helpful they may be, mom st best
be omly a temporary relief. They are ettempts to cure only one port of
a diseased bed,
'ahem probably the entire systole needs medical attention.
Professor Sparta paper on bank failures builds a very strums ease for
bask reform. It is likely that we shall pull thramgh this prement
depreesion in a year or so mmd shall then feel that emr boakimg system
not so bed after all. %sever, the record of the past tem years vill stane,
es a mosament to costly smperimentation. *e have mitneased the inadequacy
of omr banking laws to meet national emergeneios.
an well aware that,
as has boos pointed out, banking laws do not make good banking, rlut that
good honking is attributable to tbe bankers themselves. Yet we hrIve
drawn imp for the bankers elaborate codes which would attempt to net strict
limits on the bankers. That these limits have been overstepped is common
knowledge. The one paramouat object to be desired in any bankina system
is sdegmate and safe baskimg. It is hard to conceive how this can be
achieved with forty-eight different experiment stations, each with its
own individual la7s, 4111 we have in this country. I am in accord with
Profesoor Spabrea onstention that a system of branch banking is a solution.
I do not believe that branch banking is a panacea, yet I feel that it would
provide a united front which might offer an opportunity for uniformity of
control. Banking, as now carried oa, is essemtially interstate in
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Federal Reserve Bank of St. Louis
-15character. *e have been altogether too individual
istic aw uncooperative in this business, ns is witnessed in
practically every banking
community of the entire country. I feel that
the price which is now
being paid is altogether too high for a perpe
tuation and sontinustinn
of our present costly system. * * *
HOWARD H. PRESTON.--
* * * It is true, however, t',E Professor Bell has
so abIy brought
out in his analysis of the nature and classifica
tion of beak deposits,
that time deposite are by no means homogeneous.
A send amgrogstion
law should limit the protection to savings accounts
and Mhemld not
include all clauses of time deposits, which may
include large capital
accounts. Sore than twenty ycars of experience have
earelmeed the
public and moet bankers in California end Orego
n of the Advantages of
segregation even when handicapped by unsatisfac
tory classification of
accomite.
The propossl to bring ell commercial banks under
netionn1 sontrol
is not new, but was brought into prominence some
months ago Oen
advoosted by Owen P. Yammg before the Senate
Committee sa asehieg emd
Currency. It must be admitted thnt Greshan's law
hte operated la the
field of banking. There has been open to banke
rs the choice of two
codes under which they might operate their banke
. Too often they hav
chosen the one with lower capital requiremen
ts or looser supervision.
Our ovc,rt&inkd condition in many stater can be
attributed to layity in
laws and the competition far ambers under
two systems. Against this
must be set the gaine from t developmen
ts? point of view of eyperimentation
and freedcm from wynopelistic control of benki
ng resources.
If le camemelle that Congress has the power to
eitabli&h a single booking
eystem, we nest still recognize that aueh straw
must be threshed before
cuch a far-rerching proposal eam bestow the
law of the land. Meantime, as
s practical proposition, it Seems most desir
sblf to move in the direction
of t single syetem through standardization
of stete banking legislation
and supervision. * * *
Existing banking codes in the eeven atate compr
s
ising the Twelfth
Federal Peserve Dietrict pre berely e ouert
er of s century old. The same
cnndition, with modificetion„ is typical gener
ally. In recent yecre the
trend of stste legislation ane supervision has been
toward decidedly higher
standards. The old competitive spirit has
disoppeered. In its stead we
f°ind co-operation with the comptroller's department
t desire te bring
the laws up to the best ettndards of the natia
mal bemilag att. In thc
matter of car,ital alone, states have adopted the minim
um requirements of
the mtinnal law.
In my own state of Washington the past decade has witne
ssed a
distinct trend toward co-ordination of banking polic
y. Perhaps mere real
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Federal Reserve Bank of St. Louis
-14-
progrees mmy be made by concentrating oar energy upon bringing alp
tho standard of state banking than in looking toward tae Ideal bmt
sememhet distint and mSeertain goal of a single national system of
eommercial banking.
Professor Spahr's proposal for branch banking deserves smppert.
Moreover, we should establieh a mAionel policy upon branch and group
banking. The leiesiden Act in eubstance aeclared against interoemematy
branch banking emd left our national beaks subject to state legislation
in the establiShient of city branches. The result is thi..t in ow
cities where breach banking is illegal, 04., Seattle, gremp banking
has becohte tke deament form. It is gemerally coneeded that brameh
banking goad be mere sommemic if permitted. Tie result of the presemt
laws is to give us group*, many of whicn are equivalent to brunches.
It is inevi4able, however, that the agricultural sections of the
United Ltates and Canada will have a larger number of banking offices.
Despite the widening of the trade area by improved roads and the use of
the automobile, the small towu is still the center of business and
social life to a large proportion of our rural population. Geneda, today,
has almost double the number oi tv,nking officee per capita that we balm
in the United States. 4 branch bank ean be maintained far mere
economically than un incepenoent bank. This points to brameies ee a
method of providing banking services to small towns. Some states, e.g.,
Immo have already authorized branch 92anklete--branches say la teems
where no independent bank is iu operation4
While recognizink, the extension of branch banking La inevitable and
desirable, an anhaysis of the recent past seggeots that we must proceed
with caution. Branch and group systems imve been thrown together too
rapidly. Systeme have been extended faster than the units could be
integrated. Life-long unit beakers leave been tempted by high prices for
their banks and higher salaries than they beee dared to pe:. theneelves to
become purt of a pimp or branch votes. la they oannot vd,;ust overnight to the new order of things.
Today we any find branch systena loaded with heavy overhead, controlleo by abeentee oemere, unablc to unify and co-ordinLte We management
and owatione. The umbiag over of a system of unit banking into branch
banking will bring in its train grave problems. It will recuirc decades,
not years, to acoonplish it successfully.
Sooner or later Congress sast decide a national policy leizzaing
braneh and group banking. 2be inforaation obtained at the WO and 1931
begrime of the House emd Meseta Committees will soon be supplemented
by tie findinga of the Federal Reserve Board's Committee OR Branch, Group,
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Federal Reserve Bank of St. Louis
and ChrAin bunking. Tith this and other available information a sand
policy el- ould be formnleited. Tn tha formulatioa of this polioy bankers
mut assist, but not dictate. Senator Glass has said that all of the
opposition to branch banking has come fres beaters and bankers' organisations.
4,, 1
Perhaps the firet branch banking Question to settle is tho area
over thieh a beak may exten4 its branches. City branches should be
alleged universally vi0out regr.rd to leitste law. The droan of nationwide branch Walking is over. Probably the firet step should be te
limit branches to ctrte limes or entiguese territory. Trace area
foesible if the trade seem is nerrowk; defined at first.
branches may
In anby event, branch expension should be subject to restrictioa amid
control.
Group banking should be brought strictly under the supervition of
the comptroller where tny !saber f the group is a stational bank. Soundly managed groups add strength. The evil* et unsound asmagement have
been demonstrated in such group& .1s the Bankers' Holding Corporation of
beEttle, or the Caldwell group of Nashville. Theee experiences
demonstrated thFt group amberahip vay be AL disastrous liability to a
successful local bulk drawn into wenk or speculAive company through
group affiliation.
Finally, I would wee heartily with CI, 2revimis speakers who have
stressed mamagement as
solution of bank failures. Thousands of mit
banke haws smceessfully weathered the storm ane stripes of 1930 and IOU
yoare whose wholesale failures have brought conOemnatioa upon our present
system. At the sans tisk, poorly-administorod brrne and group systems
have gems down meitl- disastrous reruns.
*hanged benking structure &lose,
therefore, would not be a gmaraatee of stability.
*•* *•*
The state banking deportment in Washingtom has adopted a general
policy of fouler and straws? beaks. (The majority of small banks were
state chartered.) Workin imuiltructively upoa this polio'', the department has boos able to complete ealy three intsmsnmsasitor vergers. It
would not be a serious hardship is sissy mare cases to merge banks so thet
they would be limited to trade areas of sufficient size to support a
bank adequately.
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SOURCE3
THE CALIFORNIA BANKER--JUNT7 19E2
EXECUTIVE MEETING OF TRUST SECTION—John Veenhuyzen, Vice-Pres.,
Security-First Nat,. Bk. of Los Angeles,
Retiring Munn, of Trust Lection
Page ;,50
It is to be regretted that we have to record the feet that
during the year one bank with a trust department went into receivership, becauee of impeired public conficience caused by the unfortunate
acceptance and administration of b few trusts which have proven
financially disastrous to very large numbers of persons.
The remedy for this will be found only by closer cooperetion and
association of trust officers in this State, by' membership in this
Trust Section and in local group meetings, and by education of the
staffs and employees of trust departments in all fiduciary mattere.
Much good can be accomplished by more extensive and frequent examination
anc supervision of truet departments by Federal and State authorities,
and particularly if such examinations are conducted by persons specially
trained for such purpose.
This receivership of a closed bank with a trust department has
already demonstrated that there
a leek of a clear description of
the powers ox such receiver in dealing with the truste and their besets
so suddenly thrust into hie care and management. Hoping that no further
instance aay ever again occur which will give need to cheetion these
powers, it would, nevertheless, be well for this Section to give etudy
and attention thereto solely as a matter of preparedness.
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11 51
-
Hearings before the Subcommittee of the Committee
on Banking and Currency of the House on H. R. (10241) 11362
i March and April, 1932
Statement of Gordon L. Groover. Vice Pres„ Citiens Southern Natianal Bank,
pavaanah, Ge.4 an6 Past Pres._, Georgia Banlme_ApitaskAim.
Mr. Groover. Dom in Georgia, the trouble with banks down there is
the men who are raaning them made loans that they ought not to have made;
but why did they make them? They loaned it to people who 'ere trying to
develop their communities. These banke that failed, I do notthink the ateck
market busted them; they just loaned to Tom, Dick, and Harry in their
neighborhoods, and when things went crosswise a little bit they could not
collect it in. Those people ;lit it in cottonseed-oil mills and all sorts of
things, and they oould not collect; in other words, the money was loaned to
people that probably could aot, or at any rate would not, -ay it back when
they promised to pay it back.
**** * *
*
*
Mr. Ransom. Mr. Chairman, I would like to exprass this taought, because
I know all three of us have it, and we have liscussed it azong ourselves: We
honestly believe that the passage of this bill would have tae effect of
greatly increasing bank failures, aad therefore ',arose a heavier burden than
you gentlemen ever contemplated when you made it up.
Mr. Groover. I think the record shows that wherever guarantee*, particularly of bank deposits, have been tried, and it has been tried a long, long
time aga--yau remember your old friend, John D. walker, was very much in
favor of it-Mr. Brand. He is an old man, hut he ie not a very good friend of mine.
Mr. 0-oover. They believed in guaranteeing the bank del-.osits then, ana
I think that every State that has ever tried it has been unfortunate-The Chairman. Regardless of whether it is a success or failure in those
States, where a few bankers in ane State, dependent uaon one prop, attempted
to marry that burden--you would not insist, of course, that that would
determine the question of the ability of the Federal reserve system to
maintain a guarantee plan, would you?
Mr. Groover. I think, sir, it would tend to wild-cat banking, beoause
I think it would make mea careless; and another thing, I do not believe that
;Tou can make business Pandamentally safe, except by providing name means, a
Government bank or otherwise, to save the losses that they have. If you are
going to have a fundamenta:ly eounj business, it has got to be run on fundamentally sound principles.
The Chairman. Well, of course, you, I suaaose, agree that the present
system has proved unsuccessful and disastrous, would you not?
Mr. Groover. During the past two years, but we have -The Chairman. Let me ask you this question --
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Federal Reserve Bank of St. Louis
4..
Statement of Gordon L. Groover, Vice Pres., Citizens Southern Nati-nal Rank,
(ConirTSavannah, Ga., and Past Pres., Georgia Bankersi Association.
Mr. Groover. We have passed through a period that no human being had
ever been through before. There is not a man but what has taken a pretty
severe licking as to what he is worth, and I do not much care what it is
invested in, either.
The Chairman. Let me ask you this, in that connection: Are you in
favor of leaving the banking system of the country where it is, accepting
it as the beet we can do; and if not, have you any changes that you would
recommend?
Mr. Groover. I have no chlnge to recommend. I think that we might
tighten it up some. I think that is what is needed.
The Chairman.
In what wayl
Mr. Groover. Wait a minute. I have not studied it enough tc say a
particular thing, but that is what you gentlemen, who live put long hours
in studying the proosition--that is what I would like to see you work out.
Make it tight, and let us have business solvent, rather than make the good
fellows put up something to pay the losses.
***
* 4 * * **
Mr. Groover. I do not mind telling you that I am in favor of branch
very
banking, unier certain restrictions. I think it ought to be worked
carefully, however. I am in favor of branch banking, under certain restrictions, but what I want them to do is to tighten up, and give us a law that
rill make the principle of banking sound, rather than give us a law that
will tax the good bankers to pay the losses which are the result of unsound
banking.
******* ***
Mr. Stevenson. When you come and ,sk us to do it, what more can we do?
We have got a heavy i-,enalty for any violations; we have got the most rigid
law for the Inspection and checking up and examination, and the fellow who
is going wrong, if he overdraws his account--if an officer of a bhnk overdraws his account, and does not put the check on the books at once, they
will indict him.
Mr. Groover. I know that.
Mr. Stevenson. They sent a young fellow to the renitentiary from my
district who overdrew his account and held it out three days, until he got a
settlement which was coming to him -Mr. Groover. He is a bad fellow, is he not?
Mr. Stevenson. No, sir; this was a man, a teller, and they put him in
the penitentiary.
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3
Statement of Gordon,L. Groover/01 Vice PrestA Citizens Southarn National Ban
Savannah._ Ga.. and Fast Pres.. Georgia Bankers0 AssociatIon.
Contld
Mr. Groover. He is not livinx up to the banking law, however.
Mr. Stevenson. They rut him in the penitentiary, and the judge
apologized to him for sentencing him, aryl told him that he did not feel
that he was guilty of anything wrong, but it was in violation of the law.
That is a sample of how rigid the banking law is; yet we had a couple of
national bankers in my town that got away with the e;pital stock and
surplus and nearly all of the deposits of a national bank.
Mr. Groover. And you want me to pay for that.
Mr. Stevenson. No; I do not want you to pay for that; but I say that
you can not take the weakness out of human nature, but we c,in make a regulation to-day, and to-morrow they will find some way to get around it. You
just want us to do something about tightening the thing up. I h_ve been on
this committee 16 years, and I would like to have a concrete example as to
what particular way we can tighten it up.
*********
Mr. Groover. I have been in it all of my lire, and going to stay in it.
I believe that the guarantee of bank deposits rill have exactly the opposite
effect of what you people hope it will have. I believe that, honestly. I
have felt that aqything on earth that we could do to install into the 1 ,nkers
of America a higher ideal e banking, and if re c-al do that, I am heartily in
favor of it, but I believe that you are just going to tear down the work
that has been accomplished probably better to-day than ever, and a lot of
these banks that are failing, are failing because of conditioas in general.
There is one in Palmersville that closed up a few days ago, awl that bank
was officered by as high a type man as there is in the world, but he had
his loads of stuff that he could not realize on, and his deposits were payable
on demand.
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Resolutions Committee Report
36th Anima Convention, Indiana Bankers Asso., May 1952
(The Hoosier Banker, June 1952)
* * * * * * ***
Operating Policies
WHEREAS, Bank earnInFs at the best are continuinp, at low ebb with
no immediate 2rospect of an upward trend; and,
WHEREAS, The ITPservation of a sound position for mr banks makes
it imperative thr.t we have a sufficient margin of net earninf-s to protect the increase,3 credit hazards which ere inevitable in times melt as
these;
NOW, THERTFORT, nF IT P7rOLVT,D, That re reaffirm the stand already
taken by aar Association that the maximum rate to be paid on time deposits should not be in excess of three per cent;
BE IT rURTHER RFSOLVED, That we urge upon our membership the
importance of aa aecurate knowledge of their operAing costs and the
establishment of reasoeablp ellargee for services rendered.
*** * 4 4 * * *
Guarantee of Bank Deposits
7HEPEAS, Periods of upset economic conditions such as that through
which we are now passing make the problem of the iebtor-cre6itor relationship more acute, thus involving a limited number of banks in the neoessity of having to suspend eurrent payments to deposito-s; and,
WHEREAS, There always springs up at euch times a popular demand fir
guarantee of bank deposits; and
WHEREAS, A number of States have enacted laws to this end; and the
subsequent experience in these States has been without exception disastrous:
and,
rHEREAS, In the very nNture or the case it 7:i:its bad bnnking at a
preeium and good banking at a discount; and,
rHEREAS, In the last analysis, barring unforeseeable oatastrophies,
the success or failure of banking operations lies in the management
fctor, and tke management can not be legislated into banking institutions
NOW, THEREFORE, BE IT RESOLVED, That it be the sense of this Association thttt we are opposed to the principle involved in the izmrantes of
bank deposits in any form;
BE IT FURTHER RESOLVED, That in our judgment tke ealf seesd legislative approach to our banking problem is:
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Federal Reserve Bank of St. Louis
131
(a) To provide such restrictive legislation as will enable our supervising authorities to curb unwise banking policies and to eliminate dishonest banking rractices,
! cdequate personnel to insure
(b) To provide adequate funas 7u1.
intelligent supervision by our bF,nking authorities, and,
(c) To reire a high degree of ascrimInntion in the issuance of
tank charters, thus avoiding overhanked conditions on the one hand and
insuring naffinient patronage on the other, to justify a safe and conservative operating policy.
WEEMS, The Beconstruction !finance Corporation Act mid the GlassSteagall Act, Which vere enacted as emergency measures to reinforce
the financial structure of our country during a perloi of temporary
stress have already demonstrated their efficacy; and,
MIMEO, In our opinion the success of these two acts render
':aJAinz legislation rur.,erflnans; and,
further temporniy ,
',11EREAS, Any tanking lc,gislation intended to be permanent in
character should be appreached with a degree of delibevItion, impossible
before the adjournment of the present Congress;
NOW, THERTFORI, SE IT RFSOLVED, That this Association favors the
postponement of any farther Federal banking legislation until a later
session of Congress;
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SOURCE:
AhW YORK STATE BAAKERS ASSOCIATION - 1932
REPORT OF COMMITTEE ON REGIONAL CLEARING HOUSES
Therefore, *ill you bear with me while I read this paragraph
from the President's speech on the subjrct last January:
"I would recommeno", seys President Baker, "the establishment of fifteen or more regional kroups or clearing house
aseocietions which woulc cover the entire stete. If the
clearing of cnecke can be expedited through these groupe,
there ie value in cocetituting them as cleering house
aesocietions, for their mechanical moefUlness will term
to keep them alive and will be an every-day reason for
their exietence during tints when there are few real
problems to be dealt with. These associhtions should have
their own rules and regulhtions but their constitutione and
by-laws should be similer so that there will be uniformity
of purpose and equality of standards. The affairs of these
associtions should be in the hands of comTitteee elected by
the members, who would agree to abide by their decisions. The
aasocietions should have the power to examine the members end
require periodic reports as to their financiel condition. They
might maintein complete credit fileE for the use of their
members covering the borrowinga in the territory and could
made investigations of cAmsercial paper nemes. Detailed inform,tion in regerd to securities could be assembled, and a general
service maintained to aseist the members in the opevAion of
their bond account. I as reth. r of the opinion thet the State
Banking Department and tho Comptroller of the Currency would
be willing to assign examiners permanently to these associatione
which would result in the closest kind of cooperetion. As you
know, the Americen Bankers Associftion haa been working on this
idea for some time, but you may not know Viet it hes been in succesaful operation in several states in the Middle Weet and that
thet banks report most satisfactory results. The expenses are
smell. What each contributes is infinitesimal compared to what
it gains. * * *
*
*
*
Pagee 114-15
You gentlemen will see that this involves a rather long-time
program'. it cen't be done too hastily. There must be a very
broad foundetion laid and I believe thet at the present Use more
than at almost any other time, when our aethod of benkinE is so
thoroughly under attack, and when we must all acknowledge that
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Federal Reserve Bank of St. Louis
20
New Iork &tate Bankers Association-1952 (contd.)
Pages 114-15 (contd.)
our method of banking hat, broken down iore thhn ever before,
if we measure i-, by the number of failures and the proportion
of failures we htve had, the bank rs should orkanize themselves for constructive work along these lines of bank mant‘gement and bank co-operbtion.
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SOUPCE:
MENNIAL }WORT OF THE BANK COVISEIONER OF THli: STATE OF KANFAS-Sept. 1, 1932
Fake 5
(I Fish to express my Gincere appreciation and cratitude for
the cooperation I have received from you as governor of the
state during your tam of office and most sincerely appreciate
your attitude of keeping thc Banking Department free from
politics.
SOURCE;
STATF OF OHIO
E5th ANNUAL REPORT OF THE DIVISION OF BANKS
BANKS
OF
DIV.
DEPARTMFNT OF COMMERCE,
December 31, 193E
faze 9
VARIOUS LEGISLATrVE MEASUREL
Another important legislative proposal which will be before the
General Assembly for consideration will be one to double the minimum
capital of banks. The enactment of this measure would inereaee the
minimum capital from ‘i25,000 to .50,000. Duch action would be instruaental in reducing the number of banks, with the resultant effect
of etrengthening the remaining banks. Duch a change undoubtedly
would be a big factor in reducing bank closings. Another proposal which
it is expected will be submitted, will be one clothing the Superintendent
rporaof Banks with authority to investigate and examine affiliated
considerhas
been
There
themselves.
tions of banks ats well aE the banks
of
of
legislation
favor
nationel
in
able sentiaent throughout the Nation
for
Statee
may
provide
the
United
such a nature, and the Congres: of
such a regulation,
118
"4
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE NORTH AMERICAN REVIEW--1932
JULY--DEC.
ARE BANKERS INTELLIGENT?
by
George E. Anderson
The course of this depression makes it a very pertinent question
Pages 345-346
There seems to be no question of the changed status of the
average banker. Not many years ago he was, disregarding sex in
metaphors, the queen bee in the community hive. About him revolved
all sorts of community activities from church sociables to the
building of the new plow factory. On his good will and assistance
depended all new enterprises. To him came all the secrets of the
local business world. He controlled the destinies of the church,
the local chamber of commerce, Kiwanis, Rotary, the country club
and all the what-nots of his home town. Through such and many other
influences he enjoyed an enviable social position. He was a power in
politics because, from knowledge thus gained, he knew which strings to
pull and how to pull them to shape the destinies of his city, county and
State. He bossed the city through local business connections. He
bossed the country through farm loans and rural business connections.
The attraction of State government deposits often led him to dip heavily
into the larger affairs of the commonwealth with no mean auccess. In
him, according to the prevailing opinion of his contemporaries, lay all
the business widsom of the ages. At all events he controlled the purse
strings.
It would be going too far to say that all this has changed. Many
bankers still enjoy the powers and privileges enumerated. Perhaps in a large
majority of communities the banker is still the king. pin in the local works.
Many bankers, like many banks, have passed through tfte changing fortunes
of the past few years and have emerged greater, stronger, more authoritative
than ever. On an average, however, things have changed considerably. There
is no longer the same prestige in the banker's position; his authority is
not quite so obvious. Experiences of the past three years have demonstrated
that financial idols in metropolitan money centres have feet of clay. They
have made mistakes which have cost themselves and the country much. The
local banker, too, has made mistakes—ghastly, calamitous. Some of them
have been such as to paralyze whole communities, embarrassing, when they
have not ruined, thousands of people at one fell swoop. The aggregate
reaults of these mistakes are overwhelming. There are certainly many
reasons why the average banker has lost his power and hia prestige in his
community--many reasons and all good.
It is unnecessary, of course, to rub salt in the banker's wounds.
For the sake of argument, howaver, it is necessary to remind him and ourselves that in the past ten years one-third of the nation's banking
institutions have closed their doors involuntarily. That in itself has
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4
rl
4• •
Are Bankers Intelligent?--George E. Anderson
good points. There were too many banks, especinlly too many small,
weak ones. A large number of them should never have been born. Unfortunately these bank suspensions have involved something more than
the banks and the bankers. They have tied up billions of dollars in
deposits, have embarrassed literally millions of depositors and thousands
of communities, working ruin on the business marl, the wage earner, the
widow, the orphan and, of course, upon the banker himself in a preeminent
degree. Thousands of bankers have lost everything they had in the world,
including only too often that honor which men prize above rubies.
It would seem to a person of ordinary intelligence that in view
of such a state of things the banker would be the first to do something
about it. That presumption is erroneous. The banker has not only done
nothing about it but he has prevented any one else doing anything about
it. Every one familiar with the subject recognizes the difficulty of
bank reform. Changing the form or substance of the banking system of a
nation of a hundred and twenty million people, resting upon a conplicated
body of laws built up not only in the nation itself but also in eac% of
forty-eight putative sovereizn States, ir not
7everthelass, after
years of observytion and exper-!ence, the authorities in Washineton have
evolved certain ideas of progressive reform to which they have sought to
give reality. Among these may be named branch banking, which would enable
strong banks to supplant weak local banks in rural communities; increased
powers of supervision for the Comptroller of the Currency; a higher limit
for minimum capital in small banks; membership of all banks in the Federal
Reserve system and more strict control of member banks within that system;
and the separation of savings and commercial banks where the two are
combined in one institution as is co generally the case at present. Above
all is the matter of the control of credit and the elimination of all weak
and troublesome small State banks and the establishment of a unified system
for the whole country under some form of national supervision and control.
It may be admitted thst no one of these reforms would afford immediate
relief from the present acute situation; any one or all of them would require
time for beneficent results; probably all of them would not result in a
perfect system; but any one of them would have indicated some progress toward betterment.
Has the banker advocated any of these reforms? He has not. Branch
banking has been opposed by practically every small bank in the country-and many large ones. Increased supervisory power for the Comptroller has
been bitterly resented by nearly every national tank as an invasion of its
prerogatives although under the present law the Comptroller can not even
enforce existing statutes against recalcitrant bankers short of moving for
the forfeiture of their chartera. Small banks refuse to increase their
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Federal Reserve Bank of St. Louis
-5—
Are Bankers Intelligent?--George E. Anderson
capital although admittedly their very existence from day to day is
often endangered by the inadequacy of their working funds. Insteed
of increasing membership in the Federal Reserve the number of member
banks is decressing. Small banks claim that they can not afford to put
more money into their business or become members of the Federal Reserve-too poor to do business safely but quite willing to play with other
people's money at other people's risk. Commercial banks refuse to part
with their savings departments lest they lose deposits, although they
recognize that they are a constant threat to their liquidity. In short,
not a single measure of bank reform has been proposed by dominant banking
interests; not a single measure of such reform proposed by others have they
accepted.
Although the Comptroller of the Currency, the Federal Reserve Board,
the Senate Committee on Banking and Currency and at least a large minority
of the House Committee on the same subject are agreed that no adequate
control of credit and no safe banking system can exist in this country
except under a unified system of banking under national control, probably
ninety-nine one-hundredths of the twelve thausand State banks now doing
business are ready to faint with horror at the idea. Having certain
advantages in the possession of State charters—mostly in the way of
loose control and the privilege of unsafe banking practice--they do not
propose to give them up, coelum ruat; and then some.
Herein, indeed, is the milk in the cocoanut: short-sighted and inordinate selfishness on the part of the dominant element in American banking.
First of all there II, the desire of the average small torn banker, doing
business under a State charter, to retain an unfair—and unsafe—advantage
over a rival, usually a national bank. His national bank rival insists upon
the right to meet competition by practices eaually unfair and unsafe. In
this rivalry each is equally ready to defy the law, if any, which would
prevent unsound banking. Under this rivalry each insists upon the right
to control his bank notwithstanding law, public policy, or the good of the
general public. Admitting that many of their practices are unsound--and
results demonstrate that they are unsound whether it is admitted or not-they hope some way or other to get by in so doing--drifting, drifting,
drifting in a leaky boat in a boisterous sea with a rocky shore ahead of
them strewn with the wreckage of ten thousand banks destroyed in ten years.
Then there is the matter of jobs--just plain, everyday jobs. If all
hearts were open, all desires known and no secrets hid, how many bankers
would be found opposing branch banking, for example, for fear that branch
banking or bank mergers would swallow up their own positions? How many
bank officers have unwillingly followed unsafe banking practices at the
behest of interests which control jobs in the bank? How many bankers have
lost their property, their positions in their communities, their honor,
their all and the all of many of their depositors in a vain effort merely
to hold their jobs? How many big frogs in little puddles have risked everything for themselves and their clients for fear of becoming small frogs in
big puddles?
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Federal Reserve Bank of St. Louis
-4-
Are Bankers Intelligent?--George E. Anderson
Consider the narrow-minded, parochial outlook of the great
majority of small town bankers which only too many of their large
town colleagues are by way of aharing if not exceeding. How many of
the average run of bankers operate their institutions ae parte of the
greet national credit and financial system which they undoubtedly
are whether 60 recognized or not? How many of them have the vision to
see, beyond the limits of their own little bailiwicks, the larger
movements in trade, finance and industry which in reality mark the
success or failure of their own operations?
Of couree too much must not be expected of bankers any more than
from any other class of citizenry. Bankers are quite human; most of
them, in fact, rather ordinarily human. In evaluatirE replies to such
questions as the above, due regard must be had for the weaknesses and
foibles of human nature in every walk of life, in every country and in
every age. Were most of us in bankers' shoea, it is quite probable that
we would be found doing exactly what the banker i6 now doing. Pleading
the foiblea and weaknesses of human nature, however, is no justification
for a continuation of a state of things which threatens the well-being of
a nation; nor can any amount of explanation as to why th3nEs are as they
are furnish a satisfactory excuse for their being so. Moreover, if
bankers were actually profiting by a continuance of present conditions,
the explanation might be more convincing. On the whole it is probable
that no clasa of people suffers more from the present state of American
banking than Americen bankers themselves.
The fact is that a continuation of present banking methods under the
existing anomalous system or lack of system is of advantage to no one in
the long run. Everybody, in the long run, would be better off under a
unified, safe, national system. Such being the case ane is led to inquire
how and why things are allowed to go on as they have been going. Can
bankers eee what is to their own best interest? To put the Question
bluntly, are bankers intelligent? The long course of banking disastera in
the past ten years, the vast majority of which have had no connection whatever with business depression, renders the question less impertinent than
might at first appear. On the whole, perhaps, we may conclude that the
banker is intelligent, but this conclusion is predicated upon the condition
that he change his views of things and his way of thinking and be right
quick about it. There can no longer be any question that there is something
radically wrong with the American banking system which, judging by the experience of other countries, intelligence can locate and correct.
It would seem to be the part of intelligence on the part of the
average banker to see to it, for his own peace of mind, for the sake of
his own investments, his own reputation, his own job, not to mention his
duty to the public, that present evils are corrected; and to sacrifice, if
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Are Bankers Intelligent?--George E. Anderson
need be, small present interests for larger end more permanent interes
ts.
Present reluctance on the part of the bankers of the United States to
accept
bank reform not only threatens the soundness of American finances and
the
well—being of every man, woman and child in the country but also stands
as a monumental exemplification of a crass lack of appreciation of their
own position. Bank reform will come promptly when bankers agree to
it.
The best measure of bank intelligence at the present time is an intelli
gent
appreciation of the fact that the regime of irresponsible picayune banking
must be done away with if the banking fraternity is not to suffer the
consequences of the wrath of a long suffering, outraged and no longer
patient people.
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•
SOURCE:
TH1 CALIFORNIA BANKER—JUNE 1932
OUR BANKING SYSTEM ON TRIAL—by Frank P. Bennett, Jr., Editor U.S.
Investor, Boston
Fakes 293-294
Guarantx of Deposits Not the Solution
But guaranty of deposits is not the correct method of
relieving my client from the indictment which has dragged our
banking system once more before the bar of public opinion. Let
that be the sentence meted out to our banking system, and the system
must inevitably be haled again before this same bar a few years
hence, for having once more dealt unfairly with the American people.
The woes that will occur under guaranty of deposits are fairly to
be compared with the woes that have occurred under existing conditions.
I shall not use much of the time of this audience in exposing the
evil possibilities of deposit guaranty plans. The idea underlying
them is plausible enough. So long as guaranty plans are exposed only
to the tests of the inventor's laboratory, they indicate only, their
alluring features. It is only when they meet the tests of real life
that they reveal their weaknesses. Eight states, beginning with
Oklahoma in 1907, and including your own stete for a season, have
given the guaranty idea as fair a trial as even its own earnest
advocates could expect. Not one of these states has been satisfied
with the results. How could they be, when the plan is in reality an
effort to apply the insurance idea without including the most fundamental
of insurance principles, the intelligent selection of risks? Only in
Utopia can insurance succeed if it turns its back squarely upon the most
fundamental lesson which insurance companies have /earned from their
hundreds of years of actual experience. Guaranty plans assume the
existence of a millennium, when the whole despairing world unites in
testifying that the millennium is still far away.
We object to legislation that undertakes the guaranty of bank
deposits for several vital reasons. First of all, we are certain that
any Federal Euaranty plan will break down as surely as each of the eiEht
state plans broke down in its turn. We havc not yet devised the method
by which unworthy men can be prevented from obtaining bank charters.
Certainly the mere requirement of a $50,000 minimum for capital offers
no difficult hurdle to the unworthy applicant. As a matter of fact, the
glittering opportunities for private profit which deposit guaranty plans
dangle before the eyes of the unworthy banker will cause him to move heavan
and earth to get a charter. The experience in Oklahoma proves that he can
usually get a charter without enlisting any of the heavenly forces or very
much of earth's best in hiE behalf.
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Federal Reserve Bank of St. Louis
731_
Frank P. Bennett, Jr.
Pages 29Z-L94 (contd.)
Guaranty Plan a Tool of Unworthy Men
We huve likewise failed thus far to evolve any scheme for bank
superviEion which can be counted on to oust unworthy men from control
of existing banks as soon as their unworthiness is discovered. Gain
the confidence of Comptroller of the Currency or of any State Bank
Superintendent, and hear hiE intimate confession of his inability to
purge this bank or that of certain men whose incompetence or cupidity
seems to forecast unpleasant consequences for the bank sooner or later.
The national or state supervisor has power to remove such men only
when they have engaged in actually criminal conduct, and that rarely
happens until ruin of the bank is inevitable. Unable to keep the
unworthy man out of banking, unable to oust him until he has brought
the bank close to ruin, we are equally unable to prevent him from capitalizing the guaranty plan for his own personal advantage. The guaranty
plan in its very nature authorizes depositors to throw caution to the
winds. They no longer need exercise any care in the selection of their
bank. They need never inquire whether their bank is manned with honest
and capable executives or is engaged in furtherirgthe private ventures
of an unscrupulous group of men. They can laugh at rumors that their
bank is suffering from heavy losses, since they know that such losses
can never lay burdens on their own shoulders. So, they no longer
exercise such knowledge as they do have in the selection of banks that
are well managed and deserve to succeed but carry their funds instead
to tanks whose location is convenient, whose quarters are attractive,
whose clerks are agreeable, whose advertising is entertaining and alluring, and whose interest rate offers the highest reward.
are
Brutal aB/some of the results of our present rule of Caveat Emptor,
that rule does divert the main stream of bank deposits into institutions
most worthy of handling them. The unworthy banker can rarely build up
lErge resources for his institution. But under the guaranty plan, the unworthy banker has every prospect of gaining quite as large a volume of
business as the most capable banker can obtain. The only possible outcome
for a plan that puts a premium on unworthiness, as the guaranty plan does,
is disaster. The discontent of the eight states with their venture into
guaranty of bank deposits indicates clearly enough what will be the
experience of our Federal government if it shall force a similar plan upon
our banking system.
Bank Management Eeform
I am firmly of the opinion, however, that the program for lifting
bank management to the higher plane must be far more virile than any program
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Federal Reserve Bank of St. Louis
7
Frank P. Bennett, Jr.
Pages 293-294 (contd.)
thus far suggested. Here is a system of 22,000 separate banks, each
manned by its own executives and directors. Each is in the main a
self-governing unit, owing some fealty to laws and to state or Federal
regulation, but each shaping its own conduct for the most part in the
light of its OAD experience and its own self-interest. To expect these
22,000 groups of men to take fire from the eloquence of an occasional
speaker at bankers' conventions, or even from form letters and pamphlets,
however skillfully composed, that drift into the 22,000 banks like flotsam
and jetsam on the incoming tide of mail, is too sublime a bit of faith
for a world so matter-of-fact as our own. * * * The alternative acceptable
to the public must be more virile than a plan seeking by mere argument
to overcome the inertia of 22,000 self-governing corporations and to
induce them to adopt new methods that to the country banker's eye seem
expensive and otherwise burdensome. Probably the correct response of
the American banking system, to the indictment now brought by the grand
jury of public opinion against it, iE for bankers to unite in lifting our
bank examinations to a muci, higher level of efficiency.
Weaknesses in Our Examination System
(The great parade of 9285 bank failures in the eleven years recently
ended is just as much of an indictment of our present scheme of bank
examinations as of our banking system itself. Something is lacking in this
method we have for searching out the weaknesses of our banks and of reC; storing them to complete soundness once more. Almost anybody can suggest
tk
i
one fault or more in the prevent scheme;its failure to produce the right
sort of bank commissioners or to keep the right sort when such are obtained;
the pitifully small pay for examiners which ends in driving the best men
back after a brief time to private employment once more; the interference
of political factors in the naming of the examining staff; the application
of political or other pressure to prevent drastic steps by the examining
(N)
force to strengthen ailing banks, the unreadiness of other banks at times
i\rS\()
to join with the commissioner in constructive plans for the relief of
troubled situations. The length of this array of just criticisms of our
bank supervision, as at present constituted, indicates clearly enough that
the time has come for bank men generally to undertake the reform of bank
supervision as a major responsibility. Unless they do provide the American
people with examinations of a higher order, capable of discovering weaknesses
within banks more promptly and then of applying adequate measures for the
restoration of ailing banks to sound health, the political representatives
of the American people are likely to take the problem of better banking
into their own less skillful hands. Wounded in pride and pocket alike, by
the 9285 bank failures and the huge losses which these failures have in the
aggregate produced, our people are not likely to remain
inactive if they
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Federal Reserve Bank of St. Louis
-4-
Frank P.
Page 295
ennett, Jr.
contd.)
find bankers indisposed ,to seek out and find the changes that our
banking system requires._,
The Task is to APPlY Correctives
There is good ground for believing that to lift our bank supervision to a higher level of efficiency is going to call for a measure
of self-sacrifice on the part of bank men themselves. The really
effective cure for present evils involves something more than better
pay and more secure tenure of office for bank commissioners and their
staffs. The weakness of present supervision is not an inability to
discover the wrong kind of men in bank management or the trend toward
bad banking, or the actual presence of undesirable paper. Where supervision fails is in dealing with these conditions after it discovers
them. The course adopted by the state commissioner sometimes lacks
courage and vision, sometimes lacks judgment. Even the exceptionally
good commissioner, which a few of our states sometimes have, cannot
drive unworthy men out of banking or compel them to mend their ways,
except he discovers positively criminal acts or unless he finds the
capital of the bank actually impaired. In the earlier stages his
recommendstions have little more force with banks headed in the wrong
direction than just so much grandmotherly advice. The prestige of his
office is not sufficient to bring erring banks into correct ways, particulurly when his advice runs counter to the selfish interest of the
offending bankers or wounds the pride of honest but untrained directors
by appearing to question their judgment. From some source or other we
must inject into bank examinations a better method for following up the
discoveries of exeminers end for purging banks of unworthy and incompetent men and of policies end investments that are making these
banks weak. That source is the banking profession, and the method
we must inject into bank examinations is one involving public-spirited
service on the part of representative bank men themselves.
O
uch representstives, including in their turn the most capable
heads of different banks, can supply the trained judgment for dealing
effectively with what examiners discover and their prestige will be
sufficient to enforce their decisions quite without addition to our penal
statutes relative to banking. How long do you think an unworthy bank
management will persist in its errors if a board of representetive bank
men call upon it to mend its ways? How much headway do you think
political pressure in behalf of the erring bank would make with such a
board? Under such supervision, weaknesses within banks would be effectively dealt with in their early stages and would rarely reach the serious
state that can end only in failure. In those rare cases when failure
did become imminent, what group of men would be more likely than this to
work out constructive plans for having the weak hank absorbed ID:r another
and the losses to the public by actual failure thus prevented?
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-5-
Frank P. Bennett, Jr.
Page 295 (contd.)
A Plan
All Ready at Hand
There is nothing chimerical about thiF idea. It is at the
heart of the new law of New York creating a bank board of eight,
half of them nominated by the banks themselves, with broad powers
over bank examinations and applications for new charters. It is
the essence of the new laws of Massachusetts creating central
boards for savings banks end for building and loan associations, all
of the members chosen by the banks themselves. Both states have
recognized the need for conscriptinE representative bank men into
the public service, if better bank supervision is to be obtained. The
clearing house examinations that have accomplished so much in our large
cities are examples of the same idea.)
O
bey realize that we have applied the old mercantile principle
of Caveat Emptor too unfeelingly to the depositor in our banking
institutions. Let him care for himself? Why, how can he care for
himself? How can the average artisan or clerk or housewife or small
shop keeper know enough about the inside of a bank to choose his savings,li fk
depository with proper care? How under ordinary circumstances can even / -51
the man of larger affairs know that his bank is all that it should be?
The perfectly potent fact is laid bare by these inquiries that somebody
must assume a larger measure of guardianship over the American bank
depositor than is at present exercised.1
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*Where Banks Do Not Fail* - by Horace F. Pomeroy, New York
(Journal of the Canadian Bankers' Asso., July 1932)
*** *** * * *
A most distinctive feature of the Canadian banking practice is that in
the case of insolvency the notes of the bank are the first lien on its
!cared by the Bank Circulation Redemption Fund to which
aseets, and furthter s,
all banks subscribe on the basis of 5% of their average circulation not
covered by gold or Dominion notes deposited in the central gold reserves
established in 1913. This is forward looking bank legislation, and illuminates the fact of Canada's almost total lack of bank failures.
Up to 1923, following the failure of the Hose Bank, banks,balance
sheets were audited and certified only by public chartered accoumtmmts.
Investigations after the failure of the Home Bank clearly indicated that
the chartered accountant who certified their balance sheet vas incompetent
and apparently had been chosen on this account. The failure produced such
widespread repercussions that the Government obliFated itself to pay a
certain proportion of the deposits. To lessen tbe likelihood of such a
situation as was found in the Rome Bank arising again, the Government by
legislation made provision for the appointment of an Insnector-General of
Banks.
Through co-operation and supervision by the Dominion Goverament,
through the medium of periodic returns and the regulation of note issues
and reserves, a progressive move toward efficiency and a high degree of
safety is secured. * * * * *
** ***** * * *
How vital, them, becomes the efficiency of a banking system and the
integrity of a bank's pereemmel; the degree of seriousness with which a
member of a banes board of directors regards his trust! In Canada the
qualifications of
director are defined and reeords of attendance at
board meetings kept and braught to the attention of the bank's shareholders.
*** * *** * **
But the secret of Canada's basking soundness lies not only in the
branch bank idea, but more in the method of training its men for
positions in them so that as they progress aDd the tiae comes for executive decisions, they may have the experience necessary to decide wisely
and promptly.
ihen
bottom, a
manifest,
office to
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a young man gets a Joh in a Canadian bank he starts at the
clerk. If intelligence, faithfulness and general ability are
he is moved up step by step. He 13 then seat from the home
the branch, say in Edmonton. Ftom there, after a few years,
759•Cci
- 2he nay be transferred to Vancouver; from there maybe to St. John; from
there bask again to Calgary, and so on. Re acquires an intimate knowledge
of Oanadat and fiaally reaches the hone office again as an executive, say
assistant manager, then manager, genaral manager, vice president, president. This arocedure is aot practised hy a few banks. It is true of all
of them.
How valuable this man now becomest In some Canadian locality, the
question or a loan cones up. ?he executive knows the conditions of that
locality traugh first hand intim*** Umowledge; he probably knows
personally the heads of the basia0110 Making the loan. if it be granted
it is a good bet that the borrower Imo jastified in seeking it and it
will be paid.
In stressing some of the advantages of the branch banking eystem,
a Canadian bank accountant recently said:
Concentration of the surplus funds of Canada through the systea of
branch banking makes for the equitable distribution of the loanable funds
of the nation, with the remit that aoney is taken from the communities
where business does not require Its use, and it is loaned where needed
through the efficient local bank managers, under the skilled guidance of
the nature and tried judgment of the head office officials, who at all
times ars matching the pulse of the nation's buniness. These things have
helped to an insytinable degree the development of eanada, where the
people of the new onnunnitiee can borrow at the same interest rates as
those of relative financial standing in the business centres.
As practised in Canatia branch banking means distrihution of the
loaning and earning risks not only to all parts of the nation, but to
foreign countries of good possibilities, vhich h s resulted not only
in that highly prised diversification, bat in the expansion of the
nation's export trade as well.
The co-operation, ,400d aanagement, aad sRfety of depositors which
are mentioned as highly desirable, are all attained in Canada, through
the branch banking system and through The Canadian Beakers. Association.
Their effects 4re patent in the solidity of our banking institutions in
this time of worldwide eloomomic stress.
* * * 4• * * * * * *
Canadian bank stocks are regarded in Canada as prime investments,
and are widely held by people of both large and small means for income
return. ?his is evidenced by the fact that In the past fifteen yelrs
more than 60 per cent. of the total issues of Canadian batiks have been
Wald within Canada. Due to the character of investment buying in Canadian
beak stocks, ani the fact that practically all dhares are owned outright,
their market is unually ver-stable.
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During the past few years the desirability of Canadian bank stocks
as an investment has beeps* mo-r.e fully aprreciated by United States investors, and the large number of American Shareholders is constantly increasing.
Canadian secilrities repreMent on,. of the soundest forms of invest-lent. They hvve back of them not only one of the soundest banking eystems
of the world, but they have beek of them as well a people of marked
integrity, notably free from pretense and notably industrious and saving.
Whether this state of affairs is inspired and fostered by the confidence
and -lental security with virhich Canallans regard thelr ban4s is not claimed
here, but it might well be so.
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Federal Reserve Bank of St. Louis
* * ** * * * ***
t-i--1
SOURCE:
THE OHIO BANKER - JULY 1932
WE MUST REBUILD THE BANKING BUSINESS BUT WE MUST HAVE A NEW PLAN -- by Craig
B. Hazlewood, Vice Pres. of First National Bank of Chicago, and
Past President of the A.B.A.
Page 27
***
*****
* * * the Glass Bill before Congress, there is a provision for
the examination and supervision of bank affiliates. We, as bankers,
0 know this to be sound. In fact, the Executive Council of the A.B.A.,
\ at its Old Point Comfort meeting two years ago, approved a resolution
‘ which I offered, reading as follows:
%
"We approve and favor the examination by constituted authorities
of all investment, security and bank stock holding companies in which
member banks' capital or deposit funds are invested."
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THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 22, 1932
State Banks and Their Important Field of bervice--by L. A. Andrew, VP.,
First Bank & Trust Co., Ottumwa, Iowa
Page. 52
* * * The supervision of banks, whether National or State,
will never be what it should be until the supervising authority and
machinery is taken out of politics entirely. For instance, the Comptroller
of the Currency should be appointed by some non-political board such as
the Advisory Council of the Federal Reserve Board, without being confirmed by the Senate. If there is any necessary confirmation by the
United States Senate and State Senates, it ties up the office in a
political way, even if the appointment is non-political. Bank supervision should be on a basis of efficiency with no political ties whatsoever
and the supervision will never be thoroughly satisfactory until this is
done.)
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'7119
•
Address by S. L. Cantley, Missouri Commissioner of Finance
36th Annual Convention, Indiana Bankers Asso., May, 1932
(The Hoosier Banker, June, 1932)
**** ****
I take it to be conceded that banks, both state and national, the
business barometers, the mediums through which commerce must clear and
the lighthouses for many an adventurer upon the sea of finance, have
failed in part to measure up to the confidence imposed in them. There
are many contributing causes, but in my ludgment, impractical and inefficient laws, purporting to regulate the business of banking, are the
principal source of weakness. Very few states had laws sufficient
within themselves to permit of proper control. Most states made it
compulsory on state banking departments to grant charters to all who
applied, regardless of the need for a bank or the fitness of the applicants for the management of a bank. The uncontrolled and practically
unlimited licensing of banks, both state and national, therefore, became the sand upon which we builded. This provided positions for
incompetent bankers and set up thousands of job, spite, church, school,
borrower and every conceivable type of banks organized for selfish
reasons, destructive in their inception and failures when chartered.
They came at a most propitious time to accomplish thetr work of destruction rather than building for and perpetuating an orderly and
stable development. We began building roads and automobiles which, in
turn, unfolded panoramic illusions to millions of people who judged
by appearance rather than by substance. Otters had made fortunes in
new ventures through speculation so why shouldn't they, but they
needed credit. Flushed with apparent prosperity as were the wildcat
banks of by-gone days, aur bankers unguardedly loaned too liberally.
The World War came along at exactly the right time to complete the
ruin, and, while very largely responsible, offers the most plausible
excuse for the results of what had already begun. Inflation is the
most fertile soil for transitory and superficial growth and we had it
beyond the Biblical sixty or a hundred-fold.
Deflation followed; sale values, never real, declined precipitously;
the waters subsided; the ignis fatuus of the Quagmire no longer shone and
the smaller, weaker and inexperienced were exposed, in fact, left to die.
Proper management would have done much to save us from destruction, but
under such conditions, was impossible. Supervision might have more
generally controlled but it lacked power. Supervising officials could
criticise and recommend but about the only actual power they had was to
close banks and that is destructive rather than constructive. Criticisms
innumerable were made, recommendations as numerous were offered but, in
many cases, they were like the seed sown, little of which fell upon good
ground and bore fruit. * * * * * * *
****** * *
We must have a fourriation upon which to build and that foundation
is law. Te have entirely too much law but not the right kind. There
is too much law in business but not enough business in law, just as
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r's-3
there is too much politics in government and not enough government in
politics. The doctrine of individual liberty, or the right to do about
what one pleases end when and where regardless of the rights of others,
is someti-es dangerously exaggerated in a democracy such as ours. I am,
therefore, mindful of the fact that what I am about to say may be so
radical as to arouse a storm of opposition, but even that may be worthwhile. The legal restrictions which I will suggest are based entirely
upon my experience of nine years with the banking department of Missouri
and some of them are in effect in your State so I am nor told.
********
1. I would have double liability on stockholders of all banks,
with the additional par value liability paid up at the time of organization and invested in United States Government bonds as a reserve, the
earnings of which up to seventy-five per cent. to be paid to the contributing stockholder and the remaining twenty-five per cent. to be
used to pay expenses and to go into the general earnings of the bank.
At the present time and with present banks I would advise cutting down
or eliminating entirely dividends until such time as investments in
general become more profitable. Stockholders should be pleased to have
present carital investments preserved and be willing to waive dividends.
This is fundamental to a general business recovery and is vital to banks
in particular.
2. I rould reouire a minimum capital of $25,000.00 with the provision that no dividends be paid by any existing bank with less capital,
until such time as the capital assets eoual the minimum capital reouired
and then pass the earnings to a permanent increase of capital stock.
3. I believe banks should be placed in two well defined but distinct
classes, namely, commercial bans and savin;7s banks, but making it possible
for one bank to operate a comnercial department and a savings department,
entirely distinct and separate in every detail. This latter provision is
to take care of small communities which cannot afford more than one bank.
4. I believe commercial banks or the commercial department of a
dual ban'; should receive only demand deposits upon which they v.ould not
be permitted to pay interest or prefer derositors by a pledge of assets.
If rublic funds under control of public officials, as custodians of such
funds, Tere carried in this department and collateral was recuired, have
them set up as a special deposit and so shown on all Iublished statements.
These funds should be invested in restricted securities arproved at the
time of acceptance by the letting officials. The published statement
should show this fact and also of what these securities consist. Such
deposits should be predicated entirely upon the investments so made and
should in no wise jeopardize the interests of general creditors of the
bank.
5. I would have the savings banks, or savings department of a dual
bank, accept only time and savings accounts upon which liberal time
limits for withdrawal are to be imposed. The savin,P:s and time deposits
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Federal Reserve Bank of St. Louis
are not to be loaned but are to be invested in United States Government
bonds and in municipal bonds of the highest type, limited perhaps to state,
city and school bonds of municipalities in A-1 standing and, in any event,
to direct obligations based upon general advalorem taxes for redemption.
I would positively forbid investing the funds of any bank, savings or
commercial, in any other tyre of bonds. Let individuals and institutions
absorb the floatation of all other types of securities and bury their losses
with themselves so that they will have no one else to blame. Most of these
securities are not now and never %ere proper investments for banks of deposit. They depend generally upon earnings and that is speculative.
6. I would either divorce entirely investment affiliates from banks
or subject them to the supervision of state and national banking departments.
7. I would seriously consider having savings banks and savings departments pay dividends rather than interest, pro-rated from earnings on
auch prescribed investments on a fifty-fifty gross basis, the depositor
getting half of the gross earnings and the bank the remainder. This,
under present conditions, would operate to the advantage of the greeter
number of banks since they do not now retain half of the gross for themselves, because of unprofitable rates paid on derosits.
8.(I would substitute for the present annual examination by a committee of stockholders an annual audit by apnroved accountants who are,
in addition, practical bankers.)
9. I would give to banks fiduciary powers but the proceeds of any
estate or beneficiary of any kind to be properly and safely regulated as
to investments and entirely segregated as a general liability of the
bank.
For Commercial Banks, Mr. Cantley proposed the following:
1. A maximum loan limit of ten per cent. of capital and surplus
to any individual, firm or corporation, direct and indirect, should be
imposed. (Indiana now has approximately this legal protection.)
2. Present legal reserve ratios should be maintained and an
additional equivalent if not a greater sum invested in United States
Government bonds, State or City, under the same restrictions governing
the investments of savings banks, for a secondary reserve.
3. These restrictions on bank investment would provide an outlet
certain for the higher type of securities and tend to stabili7e prices
thus minimizing loFses to banks by reason of possible forced sale.
4. Restrict the maximum amount of any one type of loans that may
be carried uuch as real estate loans, commercial paper, call loans,
chatteled loans, etc.
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Federal Reserve Bank of St. Louis
4
5. Either refuse entirely loans to officers and/or directors of
banks or so restrict them as to protect the bank beyond a doubt. In
seven years in the business of aupervising bank activities, covering a
period of the gre-test bank mortality and the most destructive depression we havP ever experienced, I have known of very few failures
where the officers and directors were not borrowing, directly or indirectly, from the bank. In nearly every failure inside lines were
heavy and this, in a large sense, disqualifies an officer from intelligently passing upon other credits.
6. There should be far more rigid requirements to qualify as a
bank director and much more drastic regulation of their duties. Too
many directors and even officers have been mere figureheads in bank
management. They can know the value of the bank's assets and it is
their moral and legal duty to know.
7. Have uniform type of report of officers to directors at
regular meetings as to minimum of information to be conveyed. Make
them really something worthwhile.
8. Require discount committees and require them to be active.
9. Limit the amount of dividend to be paid to the maximum legal
interest rate in the State. All other net earnings to be held in reserve, unless and until distribution of auch earnings were authorized
by State or Federal supervising authorities.
10. °lake some form of clearing house or credit bureaus comlulsory
in defined territories. I have never changed my mind a particle about
the value of organized co-operation in banking. It is the chief argument for branch banking and is even more valuable to the unit banker.)
11. In the case of real estate loans, limit to first mortgage
loans of not over forty per cent., based upon conservative and disinterested appraisal, a written report of which, signed by the appraisers, bearing date and supporting data for the figures approved,
together with a new and like appraisal ror each time renewed, to be
filed, and make compulsory the filing of an abstract of title showin
merchantable title under all conditions. Permit the Government to
enlarge upon the activities of Federal Farm Loan Banks and finance
farm mortgage loans largely.
12. Place a percentage limit on eublic funds accepted for deposit
under any condition. The present method of placing public furOs on the
auction block is wrong and should be prohibited.
13. Remove unlisted bank stocks from a fixed dividend to a
dividend earned basis. Trying to plug or maintain markets for unlisted
stocks on a fixed or artificial rasis, in my judgment, is fundamentally
unsound.
14. Banks should iml.ose service and activity charges as nearly
uniform as possible. A considerable part of the earnings should come
from these :and other by-products.
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Federal Reserve Bank of St. Louis
So much for banks. What about banking departments?
1. Take the department out of politics entirely and give it
authority to enforce needed regulations. At present it can only recommend that corrections be made. Banking is a quasi-public business, so
closely akin to public utilities that I am not altogether convinced
but what it might be so classed and so regulated, but in any event, it
even more directly affects the rublic zelfare.
_
q)
2. Liquidate closed banks through the department altogether. It
would be far less expensive, especially as to legal fees, and would
make for greater efficiency in bank licuidation.
********
* * * * * * * Guaranty laws are fundamentally unsound and for that
reason have proven a failure wherever tried, and insuring deposits,
through the medium of ,r,ledging of assets or by surety bonds, is neither
feasible nor practical. It, therefore, resolves itself into good
banking and, in view of past experiences, the best can be expected
only through the medium of greater legal restrictions and greater
individual and administrative responsibility. These things cannot and
should not come in a day. To attempt them hastily and injudiciously
would spell disaster. Conditions will not permit.
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Federal Reserve Bank of St. Louis
********
SOURCE:
THE TARHEEL BANKER -- JUNE 1932 (Proceedings N.C. Bankers
Association)
TROUBLES AND REMEDIES--by John M. Miller, Jr., Pres., First & Merchants
National Bank, Richmond
Pages 91-92
There is one thing that has not been referred to in any of our
discussions for the last year or two on bank management. We have
advocated liquid banks. We have talked about the distribution of
assets, securities, etc., but we have failed to refer to the
desirability of a proper distribution of liabilities. Perhaps this
is going to shock some of you but many banks have experienced trouble
from this cause, namely, big deposits in a few accounts, public accounts
in particular.
Banks have striven for large deposits from the state, counties, and
cities. They had to secure them by surety bonds or other collateral.
The collateral frequently was bought on a high market. The losses on
the collateral freeuently have been heavy. In many cases the surety
comDanies have canceled those bonds. Those large deposits, too often
loaned on slow paper, neIer should have been loaned that way; rather
should tney have been loaned on short-time, liquid assets, at low rates
if necessary. Kee,) this thought well in mind and avoia embarrassment
in the future.
Another thing is that many of us overcrop ourselves on slow borrowers
know
and seldom have easy money for highgrade new accounts. Lome of us
to
hard
working
are
that, having learned it from experience, and others
correct it.
Still another thing we should do is to insist upon improved bank
supervision. What Mr. Wood has said about Mr. Gurney Hood, your Bank
Coanissioner, is right--you do have a splendid Commissioner--but improvements can be made. The Comptroller's examinations are excellent but can
and should be improved. We must be required to operate better banks.
But what are we going to do about the management? That is where the
main trouble lies. "There is no substitute for good management."
Bankers occasionally talk about ,banking as a profession. Holy ,ilose...!
If there is anything that is not a profession it is banking. (Laughter.)
What does it require? Any Study? No. Anyone can be an officer of a
bank if he is popular enough to get himself elected. Does it require an
examination? No. Does it require a license? No.
If you want to practice law you are reouired to take a 'our-year law
course, after a college or university education. You must pass an
examination. You must be licensed before you are turned loose on the
public. They turn loose some who are not worthy but at least the
(1 ,1 '
;
authorities go through the formal reouirements. (Laughter.)
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Federal Reserve Bank of St. Louis
•
SOUhCE:
THE TARINTL BANKER—JUNE 1932 (Proceedings N.C. Bankers
Association)
BANK MANAGEMENT-by Vmrd H. Wood, Pres., American Trust Company, Charlotte
Page 74
* * *** *****
My own thought is that the best and most effective solution for
incompetent and unsound banking methods, is stricter and more
competent bank supervision, both state and national. I feel that
the banks, as well as the public, would be better off if some satisfactory plan could be worked out where all commercial banking in this
country would be under one control and supervision. My own experience
in banking over a long period of years has convinced me, especially
in the last three years, that I did not know nearly as much about banking as I ought to have known and thought I knew. I have made mistakes
and feel that this meeting here today should be an occasion for exchanging
ideas, which I feel should result in benefit to me os a banker.
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Federal Reserve Bank of St. Louis
ema
11161
SOURCE:
Report of Banks of Deposit & Discount, etc., N.Y. 1932
Page 45
The investigation, conducted by examiners of the Banking Department designated by the Superintendent, has resulted in ascertaining the cause of the collapse, in bringing criminal prosecution
to bear upon those responsible, and in the making of certain changes
in the examination procedure of the Banking Department, referred
to in our previous Annual Reports. The need for new legislation
also presented itself, and, accordingly, recommendations were made
in the form of proposed amendments to the Banking Law, some of
which were adopted by the Legislature in 1930.
It was disclosed that forgery in al3 of its ramifications was the
chief manner by which defalcation was accomplished. Many notes
appearing in the names of prominent individuals of good credit
standing proved upon investigation to be skillful forgeries. Falsificetion of bank recorde played an important part in hiding the
defalcation, * * * * *
)#-‘
t'4)
t
Lad
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Federal Reserve Bank of St. Louis
•
SOURCE:
NEW YORK STATE BANKERS ASSOCIATION - 1932
EXTENSION OF THE CLEARING HOUSE PRINCIPLE - Address by W. A.
McDonnell,
Executive Vice Pres., Bankers Tr. Co., Little Rock, Ark.
Pagse 132-33
The extension of that principle ("Clearing House Principle")
logically involves the organization and operation of regional
clearing houses. If a principle is sound, it should be extended.
If it has tended to bring about better banking practices and
fewer bank failures in cities, then it should be made available
to banks in rural districts and small towns.
That the principle is sound and that it has brought about
better banking, I do not think that anyone will deny. It is
needless to recite the evidence. I need simply point out to
you that during the past eleven years, out of 8231 bank failures
in this country, 91 per cent of them were in small towns or
rural districts. Of course the fact that less than ten per cent
were in towns with a population of 25,000 or more was due to
some extent, possibly a large extent, to the fact that banks in
those cities were larger, were more adequately capitalized and
had larger reserves to take up the losses of depressions.
I think, however, that it was not due wholly to that. I
think it was due to some extent at least to the fact that banks
in cities were banded together in clearing house associations.
* *
Pag
135
I personally know so many clearing houses, so many regional
clearing houses whose members have contented themselves with the
adoption of a schedule of service charges and an agreement on
rates of interest to be paid on interest bearing deposits. Others
have added the credit bureau which Mr. Seaver mentioned a while ago,
a most valuable function, to eliminate duplicate borrowing and to
stimulate the building up of proper credit files.
Of course you people in the East probably for many years have
had proper credit files. It would surprise you to know how
haphazard the average country bank out there in that great basin
which lies between the Alleghenies and the Rockies is in going
about lending its money and trying to get it back.
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Federal Reserve Bank of St. Louis
"73
•
-2-
New York State Bankers Association - 1932
Address by W. A. McDonnell (contd.)
Page 136-37
The other regional clearing houses have performed these
functions and have gone many steps further. The regional
examiners, bank budgeting, co-operative advertising, the handling of local tax matters, bidding on public funds, these and
many other functions are being performed today by regional
clearing houses of this country just as they lie within the
scope of the city clearing houses.
In my state last year we divided it up into twelve districts,
end in each of them we organized a regional clearing house.
The banks in the cities joined in with the banks of the rural
districts in each regional district. Then the Good Management
Committee of our Association drew up a code, which I consider
one of the best that I have ever seen, a code of sound banking
practices. It was not a code of high-flown phrases and bluebird stories. It was a code of sound banking practices, and it
was adopted by practically every bank in the state, at least
by the banks composing the regional clearing houses.
* * * Of course I do not think that the city clearing house or
the regional clearing houFe in their present form constitute
the ultimate answer to the banking problems of the nation. I
do think they constitute the starting point in the evolution
of a system which_will be better than our present system.
THE WAY OUT - Address by henry I. Harriman, Pres., Chamber of
Commerce of the U.S., Washington, D.C.
Trade Associations
Pages 238-39
I look forward to a great increase in the power and authority
of Trade Associations and, through trade conference agreements,
to the establishment of fair conditions under which competitive
business can be carried on. Trade associations should adopt their
own rules and regulations for just trade conditions subject only
to some governmental board acting as an umpire to see that the
regulations are fair not only to the members of the trade but
to the
public.
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Federal Reserve Bank of St. Louis
-
NEW YORK STATE BANKERS ASSOCIATION - 1932
Pages 238-39 (contd.)
Address by Henry I. Harriman
By regulations I do not mean merely rules which will obvia
te
fraud and the selling of goods in one market at a loss
and at
a gain in another. I conceive that trade associations
will
consider problems such as a fair minimum wage, fair hours
of
labor, the prohibition of the selling of goods below
cost, the
establishment of healthful conditions of labor withi
n the
industry, increase in plant capacity and the creation
of
reserves for accident, sickness, old age and unemp
loyment.
Such rules and regulations once eistablished witli gover
nmental
approval (and with the richt of court appear) shoul
d become
binding upon and enforceable against all members of
the trade.
In sports we have established rules that have
taken much of
the brutality out of the game. Boxing is not less
sporty since
brass knuckes and loaded gm gloves have been
forbidden, and
football is not less interesting to tne millions
since foul
tackles have been abolished. Will competition
be less effective
and business less profitable if rules are esta'Aishe
d, binding
upon all in a given trade or industry, which insur
e a fair deal
for the laborer, for the investor and for the
members of the
industry, be they large or small? Thus will self
-regulation
largely take the place of public regulation and
governmental
interference with business be minimized.
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Federal Reserve Bank of St. Louis
•
SOURCE: BIENNIAL REPORT OF THE BANK COMMISSIONER OF THE STATE OF KANSAS-Sept. 1, 1952
Page 3
It is my belief that the Banking Department is well organized.
Our office force is very efficient and our exPminers are seasoned
men, and with the assistance of my associates we have endeavored
to be helpful to the banks within the state of Kansas by giving them
the most careful and conscientious supervision and by encouraging
them to put into effect more efficient management and to operate
along more conservative lines.
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Federal Reserve Bank of St. Louis
f;9
•
r-9-
SOURCE:
25th ANNUAL REPORT OF THE DIVISION OF BANKS - STATE OF OHIO
DEPARTMINT OF COMMERCE, DIV. OF BANKS
December 31, 1932
Pa_ge 9
PROPOSED ADVISORY BOARD
The supervisory powers of the Superintendent of Banks will undoubtedly be amplified at the next session of the General Assembly
to make for more effective supervision and better banking standards.
To aid the Superintendent to meet the numerous grave and perplexing
problems which may arise, especially in cycles such as the present,
it is proposed to create an Advisory Board of seven members, at least
three to represent banks operating under the laws of the State, with
laymen of outstanding ability being included in the personnel. The
Board will be authorized to advise with the Superintendent of Banks
relative to the granting of charters; to recommend methods and
standards for the examination of banks and for the valuation of their
assets; to define emergency situations under which quick consolidations
could be arranged without the consent of stockholders; to suggest
amendments to the State Banking Code, and to consider any matter
submitted to it by the Superintendent of Banks.
V for
)FRASER
Digitized
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Federal Reserve Bank of St. Louis
•
SOURCE:
ECONOMIC CONDITIONS, GOVERNMENTAL FINANCE, U.S. SECUhITIES
(The Nat. City Bank of N.Y.)
Pages 5-6--(Jan. 1931)
CLEARING HOUSE REGULATION
A period of bank failures always raises anew the question how
the banking business may be more effectively supervised and regulated.
We do not think there is any good basis for criticism of tne administraVon
of the banking department of the State of New York in the past year. It
has been under the hand of an experienced banker, but he has had to deal
with conditions which developed beforehis time and his task has been uncommonly perplexing. .ioreover, regulation by law 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 best 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.
Clearing House regulation, like every other form of effective organization,has been a development in response to conditions, and some of the most
effective features are of comparatively recent adoption, but it has become
one of the most important features of banking in the United States.
The first Clearing Hause Association in this country was established
in New York City in 1853, the primary purpose being simply to clear the
checks which the meJibers received on each other. However, the benefits of
banking organization for conference and cooperation in the maintenance of
sound policies had been urged lone before. In 1831 Albert Gallatin, one of
the ablest financiers and statesmen this country ever produced, publicly
urged that the most effective influence for the maintenance of sound credit
policies would flow from banking organization. He referred to the example
of the London Clearing House and suggested the establishment of a like organization in 4ew York. Then, as ever since, there were bankers who preferred
to make their own policius unhindered, and have no obligations to the general
situation, but after the Association was organized, and the habit of conference
was formed, the scope and importance of Clearing House activities steadily
increased.
One of the occasions which accomplished much in developing the policy
of cooperation through the Clearing House was an emergency created by the
election of Abraham Lincoln to the presidency in 1860. His election was
taken in some sections as meaning that civil war was impending, and business
relations between the North and South were sharply affected. Credit %as
paralyzed, the banks of New York suffered heavy withdrawals, particularly
by Southern patrons, and faced the apparent necessity of either forcing a
drastic reduction of loans or of suspending specie payments.
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Federal Reserve Bank of St. Louis
1E17
-2-
rages 5-6 (contd.)
Jan. 1931
In this emergency the Clearing House devised the system of
Clearing House Loan Certificates, repeatedly used afterward as a
means of settling the balances arising between the member banks, and
eventually as emergenc
: currency. The effect in the instance named
was to consolidate the resources of the member banks, afford greater
freedom in making loans andinspire tne public with confidence. One of
the resolutions adopted at this time read as follows:
Resolved, Thb.t in order to accomplish the purpose set
this agreement the specie belonging to the associated
be considered and treated as a common fund for mutual
protection, and the Committee shall have the power to
the same by assessment or otherwise.
forth in
banks shall
aid an6
equalize
This was a long step in banking cooperation at the time, and witn
this experience the Clearing House became a powerful support to the national
government during the civil war. Again, in 1873, in the crisis which resulted
from the war inflation, in 1E-,93, in 1907 and in other crises the Clearing
House took similar action. In 1907 nearly the entire country went to what
was called a "Clearing House basis." The reason for clearing house certificates
then was that practically no means existed for rapidly increasing the supply
of currency. The circulation of Clearing House certificates throughout the
country in 1907 educated the public to the need for a ready and safe method
of creating lawful currency, and led to the establishment of the Federal Reserve banks. Until the iederal heserve Act was passed the voluntary Clearing
House Associations constituted the only safeguard tne business of the country
had against the paralysis of credit resulting from time to time from financial
crises. The Clearing Houses demonstrated the principles of the Reserve system.
CLEARING
HOUSE
EXAMINATIONS
There were numerous instances during these years of bank failures among
members of the Clearing ilouses of New York and other cities. individual
banks would become involved in losses through bad management, and their
condition would develop as a surprise to their fellow-members of the Clearing
House. Each time the question would arise, whether to carry the bank through
its troubles, for which theother members were in no way responsible, or let
it fail, with the resulting losses, alarin and reflection upon the banking
business generally.
Sometimes one course was followed and sometimes tne
other.
From this recurrine experience finally developed one of the most important
safeguards of the banking situation, the system of Clearing House examinations.
This system was first adopted in Chicago, and the developments which led to
it were described some years ago by an eminent Chicago banker so succinctly
that we reproduce them here:
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Federal Reserve Bank of St. Louis
-3-
Pages 5-6 (contd.)
Jan. 1951
On a Saturday in December, 1905, the Clearing House Committee was
confronted witn a serious condition of affairs, involving the fate of
three banks that were under the control of one management--a national
bank, a savings bank and a trust company--all of which were in serious
difficulty.
After sessions covering the good part of two days the Clearing House
Committee on Sunday realized the importance of calling together all
of the members of the Clearing House Association, and at two o'clock
Monday morning the Clearing House banks of Chicago agreed to pay off
the depositors of those three institutions. The Clearing House banks
took over the assets and assumed the task of paying about V0,000,000,
so that all of the depositors were paid on londay morning, or at least
as soon as they presented their books tney got their money.
The Clearing House banks assumed the payment of tnis large sum of
money in order to avert a general disturbance which might ultimately
involve the entire business community. The member banks that assumed
this obligation will never be repaid in full.
The members of the Chicago Clearing House accepted that experience as
teaching them the importance of having trustworthy knowledge through their
own examinations of the condition of every fellow-member in their organization
If the failure of onemember might be so important that the Association as a who
could better afford to assume its obligations, they concluded that thereafter
it shou/d be one of the conditions of membership that each member would subm't
to examination from time to time under the supervision of the Association.
The New York Clearing House Association followed the Chicago Association
in adopting the system, and there have been no failures among the members of
either of these associations since the system of Clearing house examinations
was adopted.
This examination of course is not a substitute for the examinations
conducted by the National and State banking authorities, but additional to
them. The Clearing House examinatons occur at least once a year, and may
occur at any time.
A former Comptroller of the Currency has said of the Clearing House
examinations that they are "infinitely superior to Ltate or Federal examinations",
because of the better knowledge which the supervising authority has of individual
credits. An official examiner of either the national or state systems, coming
into a city to make an examination, is not free to discuss with rival bankers
the character of paper which he finds in an institution he is examining, but
the Clearing house Committee which is supervising an examination has all sources
of information open to it.
The chief gain, however, from the system of Clearing
House examinations is
in the basis of confidence which it affords for
united Clearing House action.
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Federal Reserve Bank of St. Louis
-4-
Pages 5-6 (contd.)
'Ian. 1931
When the body now takes action to support any of its members, it is an
informed action. The element of surprise is practically eliminated.
aioreover, knowledge that the Clearing house is thus informed obviously
is assuring to the public.
The number of Clearing House Associations in the United States as given
by the last report of the Comptroller of the Currency is 244, which shows that
the system reaches to all cities of considerable size and practically covers
the country. The system of Clearing House examinations is considered too expensive
for the smaller Associations to maintain but about 30 Associations in the larger
cities are maintaining it. The country would be better served with fewer banks
and a general extension of the system of Clearing house examinations to include
even county associations in the rural districts. It is a far more practical
system of protection than the guaranty of deposits.
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Federal Reserve Bank of St. Louis
** ** ** **
SJIMCL:
18th ANNUAI, REPORT, FED. RES. BOARD-1931
Paken kla—k20
RECOMMENDATION:, OF THk ITDERAL ADVISOR/ COUNCIL
FFBRUAtY 17,
TOPIC No. 1.--Bank Failures and Beak Exezinetions.
fiecommendation.--The Federal Pdvisory Council believes that bank
failures in recent times balm been largely due to a change in economic
anu social conditions.
In many instances the isinimum capitalization required of banks
has not been a sufficient protection to the depositors. The Jifficulties
which banks halp: encountered chn not be traced entirely to a deficiency
in our banking and examination systems. The law now gives sufficient
power anci authority for an adequate examiwtion. Improvements in examina—
tions undoubtedly can end should be made.
There should be imposed -Twin the Yedt,ral reserve banks the require—
- starnts and
ment to keep themselves inforylW of the quality of the inv.2
loi,ns and the policy of the 1,,A*cement of all liember bankv.
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Federal Reserve Bank of St. Louis
i7rik
Committee on Banking
Chamber of Commerce of the United States
Preliminary Material - Meeting in Chicago
October 31, 1931
* * * * * ***
CHVBFR COMITNIFNTS
(This is a statelent of all present commitments of the
Chamber concerning (A) National Bhnking Syetem, and
(R) Federal Reserve System.
Banking,System
A.
1. "A national bank should be permitted, under regulation
of the Comptroller of the Currency, to have branches
within its oTn city if a state bank in the same city
is permitted to hrve branches." (The Committee recoamendation favored "intra-city branches." The Board of
Directors has ruled that this commitment is in favor of
brandhes in contiguous territory where, as a matter of
fact, the corporate city and its contiguous territory
are embraced in an area commonly known no a "T.etropolitan area," that is, one which taken as a whole constitutes a single commercial community."
Comment: The law was changed to permit intra-city branches, but not to
permit branches in contiguous territory. This commitment, therefore, is applicable to rresent discussions of branch banking.
2.
"National banks should be given indetermin2te ch2rters
subject to for'eiture for cause and termination at the
will of Corvrress."
Comment:
3.
This was adopted in law.
"National banks should be suthorized to deal in investment securities on a basis not inconsistent with the
generally recognized principles of sound banking practice."
The statutes were changed to leglize :efinitely the dealing
Comment
in investaent securities under regulations .)rescribed by the Comptro11,7T.
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Federal Reserve Bank of St. Louis
* *******
pace%
elb
)
-v
rhe
"ev,s1
r) -I, Et
ti
.1 .4 r-
g
Pruicisco
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Federal Reserve Bank of St. Louis
..", Pres.,
5hblualt BInk,
Wal
Tohn
Boston,
Chrm. of Board,
T.Lternatiort41 Acceptance Bank,
40 Wall St., Nell York, N.
David M. Goodrich, Ohra. of 800.r
The B. F. Goodrich Co.,
250 Park Ave., New York,
Y.
&Daard A. Loeb, Chairman,
Tra,lesPen'a Ndtional Bank &
rhilaielphid,
(Trust Co.
Alba B. Johnson,
1523. Packard Builling,
Philadelphia, Pa.
x. M. B11,-iwin, Pres.,
r-a 11-11 -,n
Geoxge T. Ladd, Pres.,
United Engineering & Foundry Co..
Fittsbure4, Pa.
J'hn M. Miller, Jr., Pres.,
First & Merchhnts Natl. Bank,
Richmond, Va
Junius P. Fishburs, Pres.,
Times-World Corporation,
P-anoke, Va.
Oliver G. Lacas, Pros.,
Canal Bank & Trust Co.,
New Orleans, La.
P. G. ehook,
Shook Fletcher Supply Co.,
Birmingham, Ala.
Felix M. Mcghirter,
The Peoples State Bank,
Indianapolis, Ind.
J. Paul Clayton, Vice Pres.,
Central Illinois Public Servt,fo On.
dpringrield, ril.
John G. Lonsdale, Pres.,
Mercantile-Commerce Bank &
lt. Lou's: Mo.
(Trust Co.
Paul Dille.rd, Pre3.1
Dillard & Coffin Co.,
Mcmphib, Tenn.
E. W. Decker, Pres.,
Northwestern Bancorporation,
Minneapolis, Minn.
J. Dean, Prim.,
Nichols, Dean & Gregg,
St. riaa, Kinn.
W. S. McLucas, Chrm. of Board,
Commerce Trust Co.,
Xansas City, Mo.
W. L. Totrikin. Chlirman„
The Grelt Western Sugar Co.,
Denver, Colo.
Nathan Adams, Pres.,
American Exchange Natl. Bank,
Dallas, Texas.
J. J. Culbertson, Vice Pros..
Southland Cotton Oil Co.,
Faris. Text.s.
tienif M. RobInson, Chairman,
Jecurity-First Natl. Bank,
a-geles, Calif.
J. n. Levison, Proc.,
Insurtnce Co.,
Ifiremsn's
San F-ancisco, Calif.
SOULE:
ECONOMIC CONDITIONL, GOVERNMENTAL FINANCE, U.b. SECUitITIEE
(The kat. City Hank of N.Y.)
Page 5--(Jan. 19.'51)
** ***
THE EITUATION IN THE CITIU
The situation has not been so serious in the important cities,
for one reason because the banks of these cities have a grester
diversity of business than is the ease of banks in the farming
communities; moreover, in larger institutions the management usually
is in the hands of individuels of larger banking experience. Under
our loose banking laws, however, banks are likely to spring up in
response to popular wants, and if loose banking is wanted somebody is
willing to supply it in boom times, for liberal commisAons will ettrct
persons into the banking business who will do it. Hence in most cities
in recent years there has been a development of new banks, beginning
small and growing rapidly on a class of businees which the old established banks would not touch.
Neither of the tlio banks that have failed recently in New York City,
and whose troubles have occupied columns in the newspapers ,.nd contributed
to the pessimism of the time, were membere of the New York Clehring House
Association.
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Federal Reserve Bank of St. Louis
4;11
SOURCE:
THF ECONWICS OF BEACH BANKING
!MANCH
Bernhard Ostrolea (1930)
CHAPTER Il
BANK/AG IN CASADA
Puke 14
At the third regalur revielon of the Bank Act, in 19401, the
Canadian bankers' Association Wag given auttority to appoint an
,nel zee -that no
inspector to supervise the bank tote circulttion ,
The repaid-up
capital.
ita
of
excess
bank issued circulation in
to
ausetb
also,
¬i'ler;
its
aell
vision aluo permitted one bank to
reolired.
more detailed monthly returns were
Page 150
the fifth revision, of li2B, resulteo in numerous important
changeL. The rualiiications of grovisimal directors were redefined,
while provision was made for keeping records of attendance tt directors'
meetings and bringing them to tne notice of shareholders. Annual and
special stvtements were given further attention End more complete
returnt, were requirec from tile bunko, particularly in eases where operations other than hankimg were oarrif-d on. Detailed provieions were added
regarding a snarsholdere audit of the affairs of the banks, while the
personal liability of directors in case of distribmtien of profits in
excess of lagal Units was fixed. Hegulationa regarding louns were
amended hind ammeal returns to the AiniEter recurding real and immovable
property were required. Aegistration of security for loans was provided
for; ,monthly and special returns were to be made when called for by the
liniater; certain loans were prohibited; and the punishment of directors
and otner bank officials making false statements was provided for.
Page 15!
During tte period 19E0-19k8 but one bank failed in Canada, the
Beim bank, and this primarily due to inefficient management. Ihis is
in marked contrast with the large number of failures in the United States
during the same period. The failure of the Home Bank, with a capital of
#1,960,591 and liabilities of $24,889,049, contrasts with 4,51! bank
failures in the United States with a total capital of $196,000,000 and
deposits of $1,350,603,000. The bank failurea in the United States
occurred mostly in agricultural regions, while the agricultural regions
of Canada remEined immune from the bank failure epidemic of the Northwest.
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Federal Reserve Bank of St. Louis
CI 50
iThis chapter was written by
the Canactian Liection of
Hansen, Editor of
EXTRACTS FROM "THE COMPANIES ACT. 192J" relating to R, turns and Audits
LAW")
of Banks in England (Book by H. Goitein, entitled "COMPANY
Page 265
Annual Return
108.--(1) Every company having a share capital shall once at
least in every year malv, a return containing a list of all persons
who, on the fourteenth day after the first or only ordinary general
meeting in the year, are members of the company, and of all
persons who have ceased to be members since the date of the
ration
last return or, in the case of the first return, of the incorpo
of the company.
(3) The return must also state the address of the registered
office of the company and must contain a sumfthry distinguishing
partly
between snares issued for cash and shares issued as fully or
particulars-ng
followi
the
ing
paid up otherwise than in cash, and specify
Pages 266-67
110.--(1) The annual return must be contained in a separate part
of the register of members, and must be completed within twenty-eight
days after the first or only general meeting in the year, and the
copy
company must forthwith forward to the registrar of companies
the
of
ry
secreta
the
by
or
manager
the
signed by a director or by
company.
** ****
(3) Except where the company i; a private company, or /6 an
ion
assurance company %hich has complied with the provisions of subsect
annual
the
1909,
Act,
es
(4) of section seven of the Assurance Compani
return shall include a written copy, certified by a director or the
manager or secretary of the company to be a true copy, of the last
balance sheet which has been audited by the company's auditors, inr
cluding every document required by law to be annexed thereto, togethe
id,
aforesa
with a copy of the report of the auditors thereon certified as
shall
and if any such balance sheet is in a foreigh language there
also be annexed to it a translation thereof in English, certified in
the prescribed manner to be a correct translation:
Provided that, if the said last t-elance sheet did not comply
with the requirements of the law as in force at the date of the audit
with respect to the form of balance sheets there shall be made such
additions to and corrections in the said copy as would have been
required to be made in the said balance sheet in order to make it
comply with the said requirements, and the fact that the said cop has
been so amended shall be stated thereon.
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Federal Reserve Bank of St. Louis
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(4) If a company fails to comply with this section or either
of the two last foregoing sections of this Act, the oompany and ever.
officer of the company who is in default shall be liable to a default
fine.
(5) for the purposes of subsection (4) of this section, the
expression "officer", and for the purposes of the last two foregoing
sections of thia Act the expression "director", shall include any
person in accordance with whose directions or instructions the 6ircctors
of the company are accustOmed to act.
Page 27'6_
12Z.--(1) The directors of ever compLny shall at some date not
later than eighteen months after the incorporation of the company and
subsequently once at least in every calendar year lay before the company
in general meeting a profit and loss account or, in the case of a
company not trading for profit, an income and expenditure account for the
period, in the case of the fir:A account, since the incorporation of the
company, and, in any other case, since the preceding account, made up
to a date not earlier than the date of the meeting by more than nine
months, or, in the case of a company carrying on business or having
intereste abroad, by more than twelve months:
Provided that the Board of Trade, if for any special ret,son
they think fit so to do, may, in the case of ark; company, extend
the period of eighteen months aforesaid, and in the case of any
company and with respect to any year extend the periods of nine
and twelve months aforesaid.
(2) The directors shall cause to be made out in every calend-r
year, and to be laid before the company in general meeting, E
balance sheet as at tht date to which the profit and loss account,
or the income :Jad expuiditure account, a$ the case may he, is
made up, and there shall be attached to every such balance sheet
a report by the directors with respect to the state of the conpanyls affairs, the amount, if any, which they recommend should
be paid by way of dividend, and the amount, if any, whicn they
propose to carry to the reserve fund, general reserve or reserve
account shown specifically on the balance sheet, or to a reserve
fund, general reserve or reserve account to be shown specifically
on a subsequent balance sheet.
Page 274
(124.--(1) Every balance sheet of a company shall contain a
summary of the authorised share capital and of the issued share
capital of the company, its liabilities and its assets, together with
such particulars as are necessary to disclose the gencral nature
of the liabilities and the assets of the company and to distinguish
between the amounts respectively of the fixed assets and of the
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Federal Reserve Bank of St. Louis
-3-
floating aseets, and shall state how the values of the fixed zssets
have been arrived at.
(3) Where any liability of the company is secured otherwiee
than by operation of ler on any assets of the company, the balance
sheet shall include 6 stetement that that liabilit ie so
secured, but it shall not be necessery to specify in the belance
sheet the assets on which the liability is secured.
Page 274
125. Where an5, of the eesets of a company consist of shares in,
or amounts owing (whether on account of e loan or otherwise) from
a subsidiary company or subsidiar:, compani,s, the eggregate amount
of those aesets, distinguishing shares and indebtednesF, shall be
set out in the balance sheet of the first-mentioned company. separately
from all itE other assets, and where e company is indebted, whether
on account of a loan or otherwise, to a subsidiary company or
subsidiar;- compeni,s„ the Eiggregate amount of that indebtedness shall
be set out in the balence sheet of that company separately from all
itE other liabilities.
Pagee274 -75
126. (1) Where a compeny (in this eection referred to as vthe
holding compeeny") holds shares either directly or through a
nominee in e subsidiary company or in two or more subsidiary
companies, there shall be annexed to the balancE sheet of the
holding company a stetement, signed by the persons by whom
in pursunnce of section one hundree and twenty-nine of this Act
the balance sheet is signed, stating how the profite and losses of
the subeidiary company, or, where there are two or more subeidiary companies, the aggregate profits and loeses of those cow.
panies, have, so far as they concern the holCine ifompuly, been
dealt with in, or for the purpose of, the accountit of t.1-:e holding
company, and in particuler how, end to what extent,—
provision hts been made for the loesee of a subsidisry
company either in the accounts of that company or of the
holding company, or of both; and
losses of a subsidiar company have been taken into account
by the directors of the holding company in erriving at the
profits and losses of the holding company as disclosed in ite
accounte:
Provided that it shall not be necessary to specify in
statement the actual amount of the profits or losses of
subsidiary company, or the actual amount of any part of
such profits or losses which has bee dealt with in any
manner.
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Federal Reserve Bank of St. Louis
any such
any
eny
particular
-4-
(2) If in the case of a subsidiary compan the auditors'
report on the balance sheet of the company does not state without
qualification that the auditors have obtained all the information
and explanations they have required and that the balance Lheet
is properly drawn up so as to exhibit a true and correct view
of the state of the company's affairs according to the best of their
inforastion and the explanations given to them and as shown by
the books of the company, the statement which is to be annexed as aforesaid to the balance sheet of the holdine company shall contain particulars
of the manner in which the report is qualified.
(4) If for any reason the directors of the holding company are
unable to obtain such information RS is necessary for the preparation
of the statement aforesaid, the directors who sign the balance sheet
shall so report in writing and their report shall be annexed to the
balance sheet in lieu of the statement.)
Pagee 276-277
129.--(1) Every balance sheet of a company shall be signed on
behalf of the board by two of the directors of the company, or,
if there is only one director, by that director, and the auditors'
report shall be attached to the balance sheet, and the report
shall be read beforE th- company in general meeting, and shall
be open to inspection by any member.
((
(2) In the case of a banking company registered after the
fifteenth day of August, eighteen hundred and seventy-nine, the
balance sheet must be signed by the secretary or manager, if any,
and where there are more than three directors of the company
by at least three of those directors, and where there are not -uore
than three directors by all the directors.
(3) If any copy of a balance sheet which has not been signed
as required by this section is issued, circulated, or published, or
if any copy of a balance sheet is issued, circulated, or published
without having a copy of the auditors' report attached thereto, the
company, and every director, manager, secretery, or other officer
of thc, company who is knowingly a party to the default, shall on
conviction be liable to a fine not exceeding fifty pounds.
PaRe 277
130.--(1) In the case of a company not being a private company--
(2) a
copy of every balance sheet, including every document
required by law to be annexed thereto, which is to be laid
before the company in general meeting, together with a
copy of the auditors' report, shall, not less than seven
days before the date of the meeting, be sent to all persons
entitled to receive notices of general meetings of the
company;
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Federal Reserve Bank of St. Louis
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(b) any member of the company, whether he is or is not
entitled to have sent to him copies of the company's
balance sheets, and any holder of debentures of the company, shall be entitled to be furnished on demand wit'out
charge with
copy of the last balance sheet of the company, including every document required by law to be
annexed thereto, together with a cop of the auditors'
report on the balance sheet.
Page 277
131.--(1) Every company, being a limited banking company or
an insurance company or a deposit, provident, or benefit society,
shall, before it commences business, and also on the firs* Monday
in February and the first Tuesday in August in every year during which
it carries on business, make
statement in the form set out in the
Seventh Schedule to this Act, or as near thereto as circumstances
admit.
(0 A copy of the statement shall be put up in a conspicuous
place in the registered office of the company, and in every branch
office or place where the business of t!!c. company is carried cn.
(3) Every member and every creditor of the company shall
be entitled to a copy of the statement, on payment of a sum not
exceeding sixpence.
Pages 278-79
132.--(1) Every company shall at each annual general meeting
appoint an auditor or auditors to hold office until the next annual
general meeting.
(2) If an 6,-Jointment of auditors is not made at an annual
general meeting, the Board of Trade may, on the application of
any 'ember of the company, appoint an auditor of the company for
th6 current year.
(3) A person, other than a retiring auditor, shall not be
capable of being appointed auditor at an annual general meeting
unless notice of an intention to -lominate that person to the
office of auditor has been given by a member to the company
not less than fourteen days before tne annual general meeting
and the company shall send a copy of any such notice to the
retiring auditor, and shall give notice ther-of to the members,
eitner by advertisement or in any other mode allowed by the
articles, not less than aeven days before the annual general
meeting:
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Federal Reserve Bank of St. Louis
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(6) The remuneration of the auditore of s company shall be
fixed by the company in generel meeting, except that the remuneration of an auditor apdointed before the first annual general
meeting, or of an auditor appointed to fill a casual vacancy, may
by fixed by the directors, and that the remuneration of an
auditor appointed by the Board of Trade ma:, be fixed by the
Board.
Page 279
134.--(1) The auditors shall make a report to the members
on the accounts examin€d by theta, and on every balance sheet laid
before the company in general meetiue euring their tenurE of office,
and the report shall state-(a)(whether or not they have obtained all tae information and
explanations they have required; and
(11) whether, in their opinion, the balance sheet referred to in
the report is properly drawn up so as to exhibit a true
and correct view of the sLate „f tic: company's affir,
according to the best of their information and the explanations fi,:iven to theil, and as shown b., the 1,00ks of th,company.)
(2) Every auditor of a company shall have a right of access at
all timea to the books and accounts and vouchers of the company,
and shall be entitled to require from the directors and officers
of the company such information hnd explanation as mny be
necessary for the performance of the duties of the auditors:
Provided that, in the case of a banking company which was
registered after the fifteenth day of Au5ust, eighteen hundred
and seventy-nine, and which has branch banks beyond the limits
of Europe, it shall be sufficient if the auditor is allowed acceEs
to suc:; copies and extracts from auch books and accounts of any
such branch as have been transmitted to the head office of the
company in Great Britain.
(7) The auditors of a company shall be entitled to attend any
general meeting of the company at which any accounts which have
been examined or reported on by them are to be laid beforE
the company and to make any statement or explanation the
desire with respect to the accounts.
Pages 279-80
135.--(1) The Board of Trade may appoint one or morE competent
inspectors to investigate the affairs of a compan: End to report
thereon in such manner b8 the Board direct-(a) In the case of a bankink company having a Ehare capital,
on thc application of members holding not less than one-third
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Federal Reserve Bank of St. Louis
Lue rsnureb
lbblieu•
-7-
(b) In the case of any other company having a share capital,
on the application of members holding not lesE then onetenth of the shareE issued:
(c) In the case of a company not having a sh,r!r capital, on the
application of not less tan one-fifth in number of the
persons on the ,:ompany's register of members.
(2) The applictItion shall be supported by such evidence EE the
Board of Trade may require for the purpose of s'-.owing that the
epplicants heve good reeson for, and are not actuated by nalicious
motives in, requiring the investigation, and the Board may, before
appointing an inspector, require the applicants to give security,
to an amount not exceeding one hundred pounds, for payment of the
cost2 of the inquir.
tE) It shall be the duty of all officere and a.,..eInte of the
compeny to produce to the inspectore all books and documentr in their
cuFtody or power.
(4) An inspector may examine on oath the officers and aEents
of the compeny in reletion to ite businese, and may administer an
oath accordingly.
(5) If any officEr or agent of the compan2. refuses to produce
to the inspectors ,eny to,ok or docmmunt I.:Lich it is hir duty under
this section so to produce, or refuses to answer any queetion which
if; put to him by the inspectors with res,,ect to the effaire of the
company, the inepectore naz- certify the refusal under their hand to
the court, and the court may thereupon enquire into the case, and
after heering any witnesses who may be produced againet or on behalf
after hearing rny strtement which may
of the alleged offunder
be offered in defence, punish the offender in like manner as if he
had been guilty cf contempt of court.
(6) On the conclueion ef the inveetigation the inFpectors shall
report their opinion to the Board of Trade, and a cop3 of the report
shall be forwarded by the Board to the regiatered office of the company,
and
further copy :shall, at thE request of the applicants. for the
investipation, be delivered to them.
The report shell be written er printed, as the Bourd direct.
PaKee 280-81
156. (1) If from any report made under the laet foregoing eection
it appears to the Board of Trude that any person has been guilty of any
offence in relation to the company for which he is crininelly liable
the Board shall proceed as follows-(i) in the case of tin offence in England, if it uppears to the
Board that the case is one in which the prosecution ought
to be underttiken by the Director of Public Proscutions,
the Board ehall refer the natter to him;
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Federal Reserve Bank of St. Louis
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(ii) in the ceee of an offence in Scotland the Boerd shall refer
the matter to the Lord Advocetc
(2) If where any metter is referred to the Director of Public
Prosecution:- under thi. Lection he convidere that the
io one
in which a prosecution outht to be instituted and, further, that
it ie. desirable in the public intereet thet the proceedinke in the
proeecution should be conducted by him, he ehall institute
proceedinge accordingly, and it shell be the duty of all officers
and agents of the company, past and present (other than the
defendent in the proceedings), to give to him all assistance in
connection with the prosecution which they are reasonably able
to give.
For ths purposee of thie aubsection, the expreesion "ati,ente"
in relation to a company shall be deemed to include the bankers
and eolicitors of the company toad
persone employed hy the
company as auditore, whether thoee pereone are or are not officery
of the company.
(3) The expenses of an incidental to an inveetigation under
the last preceding eection ef thie
;in thi, eubeection referred
to au "the expensee") shall be defruyed ab folloeo-(a) Where as a result of the investigation a prosecution ie
inetituted by the Director el' Public Prosecution:: or by
or on behelf of the Lord Advocate, the expeneee shall be
defrayed by the Boerd of Trude;
(b) In eny othea. eeve the expene;s Alen be defrayeZ, by the
compeny unlese the Board of Trade think proper to
: authorised to do, that
eirect, es the Board ere barely.
they shall either be 'Add by the eplicents or in part by the
company and in part by the. up,ilicantL;:
Proviee
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Federal Reserve Bank of St. Louis
th,t--
(i) if thf, company faile to pay the whole or any part
of the eum which it ia liable to pas/ under
subeection,
the applicanty shall make goQd the deficienc:: up to the
amount by which the security given by thee. under the
lhet preceding section exceede the amount, if any, which
they have under thie eubsection been directed by the
Board to pey; end
(ii) emy hallence of the expeasee not defreyed either
by the company or the applicents shall be clef/eyed by
the Board.
-9-
137.--(1) A company may by special resolution appoint inspectors
to investigate its affairs.
(0 Inspectors so appointed 1311E11 hnve the seme powers End
cept that,
duties as inspectorF appointed by the Ro.t-re of Trade,
instead
reporting to the Bord, they shall report in guch manner
and to such persons as the company in general meeting' mey direct.
(5) If any officer or 6gent of the company refuses to produce
the
to
inspectors any book or document which it is his duty under
this section so to produce, or refuses to answer any question which
i8 put to him by the inspectors with respect to the affairs of the
company, he shall be liable to be proceeded against in the same manner
as if
insp ctors had been insvctors appointed by the Board of Trade.
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Federal Reserve Bank of St. Louis
SOURCE:
THE ANNALS OF THE AMERICAN ACADEMY - JAN.-MAY 1924
SECURING COMPETENCY IN BANK EXAMINERS * By Peter G. Cameron, Secy.
of Banking, Commonwealth of Pennsylvania.
Pages 357-58-59-160
A man may be fully competent to satisfactory discharge the
4im2ortant duties of a bank examiner, so far as training and
experience are concerned, but, unless he possesses strict integrity
of character and a determination to faithfully discharge every
duty, he lacks two most essential qualifications, and is as much
a menace to the reputation of his superior officer and the
safety of the funds of the depositing public as is the incompetent
or dishonest examiner.
A successful administration of the affairs of any department or
bureau charged with the supervision of banking institutions depends
very largely upon the efficiency of the force of bank examiners
and the thoroughness and reliability with which the individual
examiners discharge their duties. The head of the department
or bureau has no means of ascertaining the condition of the
institutions entrusted to his care, except the reports of his
examiners. * * *
REASONS FOR INCOXPETENCY OF BANK EXAMINERS
Inadequate compensation has been, and now is, in large measure,
V- responsible f r lack of efficiency in bank-examining forces. Uther
reasons have been the undoubted sacrifice of efficiency to political
expediency, on the part of the appointing power, and the uncertainty
of tenure of political appointments.
%
cI
Another fbctor that has rendered it difficult to maintain examining-3
\tforces at the desired standard of efficiency has been the severance
from public service of the more efficient examiners by the larger
banks and trust companies, and by accounting firms, that offer much
higher salaries than are paid examiners.
* * * after a few years of this experience, the average examiner
is ready to accept an offer of even equal compensation, accompanied
by the prospect of avoiding the constant absence from home, extensive traveling and uncertainty of tenure of his political appointment.
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Federal Reserve Bank of St. Louis
-t"'"'y
kb
THE ANNALS OF THE AMERICAN ACADEMY - JAN.-MAY 1924
Address by Peter G. Cameron (contd.)
Pages 357-58-59-60
SECURING COMPETENT BANK EXAMINERS
* * * Not until politics has been wholly eliminated as a
consideration in the appointment of these officiels, and the compensetion is made commensurate with the importance and sacredness of the
duties of the position, will it be possible to build up an
examining force throughout the nation such as the depositing
public has a right to expect shall be maintained for the
protection of its interests.)
*
*
*
* * * In addition to the integrity of the highest order, some of
the essential qualifications may be briefly referred to as
follows:
(At least a high school education, together with a number of
years of practical banking and business experience. Completion
of a college course, or graduation from a school of finance and
coamerce of recognized standing, coupled with banking experience,
insures a foundation much more desirable. * * *
A thorough knowledge of the principles of accounting, and
experience of a practical nature in applying them, is absolutely
necessary in an efficient bank examiner. * * *
The second qualification requisite to an efficient discharge
of the duti:s of a bank examiner is a thorough knowledge of the
banking laws of his state, if he is a state examiner, and of the
national banking laws, if he is a national examiner; a similar
knowledge of the negotiable instruments law, and of the laws in
general relating to contracts, and familiarity with recognized
practices, rulings and court decisions governing the several
classes of instruments handled by all banks and trust companies.
Both state and national examiners should possess a knowledge of
the fiduciary laws and the laws governing the administration of
trust estates; a knowledge of mortgages, deeds of trust, etc.,
and should be able to pass intelligently upon and determine the
legality of such instruments, both as respects form and execution. 4" * *
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Federal Reserve Bank of St. Louis
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THE ANNALS OF TUE AIERICAN ACADEMY - JAN.-MAY 1924
Address by Peter G. Cameron (contd.)
l'ages 357-58-59-60
The third important qualification of an examiner is good
judgment in appraising the assets of a bank, which is peilaps
the most important feature of an examination; * * *
Other qualifications requisite to make a successful examiner
are: strength of character, moral courage, tact, discretion,
diplomacy, courtesy. * * *)
The standard outlined in this article is a high one and
calls for an order of ability not readily obtainable. And when
the services of men possessing the qualifications enumerated are
secured, they are not usually long retained, because, as before
stated, their ability is quickly recognized and they have no
difficulty in securing positions that carry higher salaries than
are usually paid bank examiners, to say nothing of avoiding the
hardships and uncertainties of examinerships--this latter
objection applying principally to those supervising agencies in
which political expediency is a consideration in making appointments.
Therefore, the answer to the question, "How can the efficiency
of the several governmental agencies charged with the supervision
1. of banking institutions be increased?" is, by increasing the
salaries paid, by eliminating politics as a consideration in
making appointments, both as respects the heads of the several
agencies and the examining forces, and by the adoption by the
several supervising agencies of a standard of requirementc for
appointment to the position of examiner in the several grades.
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Federal Reserve Bank of St. Louis
*
The following excerpts,taken froin a letter written by Mr. Ben DuBois,
secretary of the Independent Bankers Association, to the members of the
Independent Bankers Association, are taken from a news item in the
American Banker, February 17, 1937:
"The Federal Reserve Board is known, of course," Mr. DuBois
says, "to be pro-branch banking. They are opposed to our dual
system. If they can establish regulations that will eventually
bring about par clearance, they will have dried up the earninzs
of many small banks and will have paved the way for the destruction of our system of State chartered institutions and will have
gone a long way toward bringing about branch banking. This
regulation which they intended to put into effect February 1
would, in itself, have little bearing on the bfinks of the Northwest but it was an entering wedge and it is to the interests of
independent banking to oppose it.
"Fortunately, the views held by the directors of the Federal
Deposit Insurance Corp. were at variance with the views held by
the Federal Reserve Board. Our alignment was with the Federal
Deposit Insurance Corp. and it was in their board room that we
held our meeting."
"Our recent conference in Washington was one of the best
that we have ever attended. The Southern bankers are militant,
they will do their part, and there seems to be a general
realization of the seriousness of the situation that confronts
us. Independent banking will prevail."
These excerpts support previous arguments that bankers and other supervisory aoncies may not always be expected to agree with the Board in its
policy matters and that in such cases the Board might expect to be "ganged".
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Federal Reserve Bank of St. Louis
J
•
SOURCE:
BANKING--Sept. 1956
Page 14
UNIFORM EXAMINATIONS
The New York State Banking Department has assured state
banks in that commonwealth that by the time the next condition
report is called for, an agreement will have been reached for a
uniform examination questionnaire to meet the requirements of state
and Federal authorities. This is interesting but optimietic. Banking superintendents in 32 states have agreed to use the F.D.I.C.
form, others have agreed to adopt that form in the near future, the
FederEil Reserve authorities are ready to cooperate with Mr. Crowley's
organization, but the Comptroller's office says it cannot modify its
own form. Since the Comptroller cannot make the change for the
national banks, the Reserve authorities cannot do so for the state
member banks and thus state authorities handling non-member bank
matters are delayed in reaching an agreement.)
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Federal Reserve Bank of St. Louis
772
•
"Deposit Insurance for Mutual Savings banks"-by the Banking Group, Bureau
of Economic Research, Bklyn. College, under direction
of W. H. Steiner (Reprinted from THE BANKERS MAGAZINE-reprint received in Library 6-26-36)
THE NEW YORK PLAN
Both Federal and original Massachusetts plans covered only a
situation in which an institution suspends operations. The New York
plan goes one step further. It seeks to avoid danger. The agreement
creating the Fund confers upon the trustee, namely the Trust Company,
broad opportunities for assistance in the improvement of management
and the correction of unsound practices. If the Superintendent of
Banks certifies that the condition of the bank is such as to require
attention by the Fund, it is required to utilize the services mentioned
in a preceding article, of which it might at apy time have voluntarily
availed itself, and which has frequently been done. The Fund then takes
charge of the individual bank, but only when that is required to fulfill
its responsibility to all its member banks.
The New York plan also provides financial assistance which may
be needed to permit the bank to rearrange its affairs while maintaining
its surplus at a safe level. It may take one of a variety of forms:
1. Purchase of assets (even real estate acquired by foreclosure)
at book value, with or without a repurchase agreement, under certain
circumstances; e.g., to replenish a depleted surplus.
2.
approval.
Contribution to a member's guaranty fund, with the Superintendent's
: control and operation of a member, under
5. Assumption of temporarthe Superintendent's approval. The member may be turned back upon completion
of necessary requirements, or it may be liquidated.
4.Eventual repayment of advances is required, but the terms are not
so stringent as to embarrass the recipient. Of course, in a closed bank it
may make available to depositors as much of a deposit deficiency as the
resources of the Fund permit.
Many other services are rendered by the Fund which may make it unnecessary to render financial assistance. The FUnd freely consults with
and advises individual savings banks at their request on every phase of
savings bank management. Revision of the bond list may be discussed.
Operating problems may be considered. In granting financial assistance,
the official personnel may require additions; but a drastic change is
seldom required. Mergers may be called for in other cases. Thus the
Banking Department has co-operated with the savings banks through their
state association and the Savings lianks Trust Company in furthering its
program of strengthening savings banking through the elimination of unprofitable or poorly managed units by mergers with stronger institutions.
Whatever the form, the plan, in the words of the New York Superintendent
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Federal Reserve Bank of St. Louis
W. H. Steiner
of Banks,2/ "has one distinct advantage, since in addition to providing
for payment of depositors in full upon liquidation, it also permits the
strengthening of going institutions whose condition may for any reason
have become unsatisfactory."
The revised Massachusetts plan apparently also seeks to anticipate
difficulty to some extent. Instead of giving the bank commissioner power
besides that already cited to certify to the Fund merely "that it is unsafe and inexpedient" for a certain bank to continue to transact business,
he may in his discretion certify that it is "inadvisable or inexpedient"
that a bank continue to transact business. Thus he is granted specific
discretion of a broader sort. In suchcases, "whenver in the judgment of
its board of directors such action may reduce the risk or avert a threatened
loss" to it, the Fund with the Commissioner's approval may purchase the
bank's assets in whole or part in order to effect the purposes of the Act.
The terms and conditions, including book or other values, are determined by
the directors with the Commissioner's approval.
Annual Report, 1934, p. 13.
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Federal Reserve Bank of St. Louis
•
SOURCE:
PROCEEDINGS 46th ANNUAL CONVENTIONMO. BANKERS ASSO.--KANSAS CITY
MAY 1936
Address by Phil S. Hanna
Editor of Chicago Journal of Comnerce
l'ages 117-118
(Among other activities of my varied career, I was a banking examiner
l\z' for four years. I could tell you of instances wherein politics prevented
the censure and the closing of banks that ought to have been closed. I
know of one bank in particular that remained open for four years after it
was recommended for censure and for closing, but politics prevented. Can
we be sure that in another emergency credit will not be refused a needy
bank because some touchy senator has not first been consulted about a future
loan?
What assurance is there that the new machine will work any more smoothly than the old one? I do not profess to know the idealcure. I mean no
reflection on individuals, on what they did or did not do in 1932 and 1933,
but I am very definitely convinced that political self-interest will always
be a greater hazard to the American depositor than bankers' self-interest. I
am convinced that decentralized control, operated under clearly thought-out
rlflation conditions alone, as
statutes that are not bEsed on post-Er
I deem the present Act to be, but upon the experience of older countries that
.sare today solvent, will achieve the maximum possible of achievement. To ex:pect more than that is to expect the human to behave contrary to his behavior
from the time of Adam.
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Federal Reserve Bank of St. Louis
I ‘J'
•
SOURCE:
THE TARHEEL BANKER---JULY 1936 (Convention no.)
ANNUAL ADDRESS OF THE PRESIDENT--C. T. Leinbach, V.P., Wachovia Bank & Tr. Co.,
Winston-Salem
Page 32
A
Chartered
Banking System
The average citizen regards a bank as a purely private business,
conductEd solely for private benefit and profit. You and I know, of
course, that this is far from the truth. We have in this country a
chartered banking system which is regulated and supervised at every
turn by Government officials who are the representatives of the public
47and who act under broad authority given by numerous banking laws and codes.
v (It is estimated that our statutes regulating banking exceed in volume all
,L,
crj1 ( similar laws of all the other leading nations of the world. It would take \
:
.20,000 pages on which to reproduce all the banking codes of the 48 states.)
/(,)
Banking in the United States is not a private business, but a chartered
business operated under strict governmental control and supervision.
/<)
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Federal Reserve Bank of St. Louis
148
SOURCE:
THE FINANCIAL AGE---JUNE 1936 (Convention no.-N.Y. State Bankers
Association)
Page 453
COMMITTEE ON TRUST FUNCTIONS
Wm. H. Stackel, Chairman
"It may not be amiss here to refer to regulations recently
promulgated by the ederal Reserve Board to govern the review of
trust investments by national banks acting in fiduciary capacities.
These regulations undertook to specify the frequency with which a
committee of the board should make such reviews and otherwise to
supervise the investments held in various trust capacities.
"It is conceivable that btate authorities or the Federal Deposit
Insurance Corporation may follow the lead of the Federal Reserve Board
in this respect. Thus special importance attaches to the whole subject.
Langer of Regimentation
"The discussion in detail of the regulations in question or any
discussion of the supervision of trust investments would require more
time and space than is allotted to this report. However, it is to the
principles involved in such regulations that I desire briefly to address
myself.
("When public authorities undertake to lay down minimum investment
review requirements, it comes dangerously close to attempting to define
what constitutes reasonable diligence. This will inevitably lead to
stricter rules in the course of time and the virtual regimentation of
boards and institutions in their technical operations.
"It must be apparent to those familiar with such subjects that any
effort to define 'due diligence' in terms of dates and periods would be
futile. What would constitute reasonable diligence in one situation
would not meet the requirements for more frequent watchfulness in other
situations.
"Confusion and increased liabilitj for the corporate fiduciary is
likely to resalt from any attempt to promulgate any such regulations.
"Furthermore, the regulations in question give no credit to staff
reviewers as distinguished from board and court reviewers. It must be
obvious that the true test must be: Did the corporation as such, either
through its board or its staff or both, exercise due diligence; and second, did the board take reasonable precaution to see to it that its staff
operated efficiently and with due diligence?
"Your chairman views with concern any attempt to set up technical
standards
in matters where discretion must ba given large play."
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Federal Reserve Bank of St. Louis
147
SOUECE:
THE TARHEEL BANKER—JULY 1956
(Conventi' n no.)
ANNUAL ADDRE&S OF THE PRESIDENT—C. T. Leinbach, V.P., Wachovis Bank & Tr. Co.,
Wiast‘Aa-alem
raze 31
At the same time, we recognize that the ultimate soundness of our
banking system lies not so much in legislation se it does in the ability and
integrity of bank management. Laws provide certain safeguards, but the
experience, honesty, ana sound judgment of tne men who o2urnto: our banking,
institutiona will always be the determining fectore. Therefore, while we
welcome helpful banking legislation, it in no manner relieves ue of our
individual responcibilit
operate good b:aks.
The management of a bank calle for qualities and capebilities equal
to those of any profeseion, am, while I belie\e banking la distinctl
business, I am convinced tnat, in tht: selection and training of men who
staildarde vhould be em:7oyed.
of banidng,
conduct the
Aare and more our chartering authorities e.re giving consideration to thie
thought, and the renewea inerust in t4FJ ..3tivities of tha American Institute
of Banking, and pi,,rticularly th-. success e th3 newly established Graduate
L;ehool of Basking at Rutgers University, are further evidences that proacceptance.
fessional standarde of requirement are gaining wider attention
auch has been eaid recent4 regarding tLe public attitude torard banks.
There is no butiness or profession in tflich some mistakes are not made or which
doee not at times deserve some criticism, and during recent yeare the business
of banking could quite properl:, be criticized for many of itt mistckes.(At
the same time, because banks muet necessarily bear the brunt of economic storms,
and because the businesa of banking is little understood by the public at large,
we have been the recipients of an extra and undeserved measure of public critician
and misunderstanding. Unquestionably, such e conditiolras productive of punitive
)
legislati n in many instances and has hampered the proper functioning of our banks,")
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Federal Reserve Bank of St. Louis
#7441
•
SOURCE:
THE TENNESSEE BANKER—JUNE 1936 (Convention number)
AN APPROACH TO BANKING PROBLIES—Tom K. allith, ijres., Boatmen's Nat. Bank,
St. Louis, First Vice-Pres., A.B.A.
Page 73
In speaking of the problems ahe,ad of us, S. Sloan Colt, president
of the New York State Bankers AssociEtion, in a recent address before
his association, stated tbe need for more careful analysis of the
problems of commercial banking so clearly that his words will bear
repetition here. He said:
” . . . I think we will all agree that there are some major
unsolved problems in our commercial banking system. Many of the laws
which have been enacted affect the general regulation and supervision
of banking policy but leave untouched some of the fundamentals of banking
structure and banking operations. Deposit insurance on a national scale
is a new experiment and while it may have its effect in preventing the
spread of withdrawals in time of trouble it can in no way be accepted as
a substitute for good banking. Supervision can limit the scope of bank
operations, but the ultimate decision as to the kind of assets to be held
in the portfolios of the banks rests with the bankers.
"One of the most important questions which bankers face is this:
Are we going to have a banking system which wil] stand up in future
periods of depression, or shall we have a system that will accentuate
the difficulties and lend itself to excessive liquidation in periods of
stress?"
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Federal Reserve Bank of St. Louis
'7'39
•
SOURCE:
THE MAGAZINE OF WALL STREET AND BUSINESS ANALYST--April 25, 1956
WHY THE NEW BANKING LAWS MAY PROVE DISAPPOINTING
by
Robert H. Hemphill
Page 14
Almost no-one seems to visualize the full significance of the
great change which our banking system has undergone in the last few
years. The most adventurous bankers who in former depressed periods
initiated recovery by liberal expansion of credit, areout of the banking
picture, never to return. They went out with the ten thousand or more
banks which have gone into the discard in the last very few years. The
survivors are a different breed. "Commercial credit" as we knew it in predepression days, is only a memory.
Even if present bank managers were so disposed, the Comptroller
of the Currency and his corps of examiners, with the vision of the last
few years fresh in their minds, would never permit the loose methods of
credit extension which gave us our amazing prosperity but wrecked the
banking system.
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Federal Reserve Bank of St. Louis
if 38
toSOURCE:
BANKING (Journal of the ABA)---JUNE 1936
PAGE ONE
Constructive Regulations
The regulations of the kederal heserve Board coverinv the
exercise of trust powers by the national banks of the colmtry,
and known as Regulation
go into effect on June 1. The Banking
Act of 1955 has been in operation a little over nine months. During
this period practically all of the new regulations of various /ederal
supervisory authorities called for by its provisions hsve been
formulated and promulgated. Un the whole, it will probably be readily
admittea by even those who opposed many of the provisions of the act
that, up to the present time at least, the new regulations and the
entire new setup under the law have worked to the benefit of American
banking.
It is true that so far some of the more radical provisions of the
act which were most strenuously auestioned have not yet been brought
into action. The Open larket Committee has been organized, its
regulations promulgated, and itE executive committee appointed, but in
the peculiar situation in which the banks and the Government find themselves none of the powers of the committee have been used. The Board
of Governors of the Reserve System has as yet taken no action for the
control of credt by increasing the required reserves of member banks.
In short, practically none of the extraordinary powers of Government
supervision and control to which strenuous objection was made a year ago
have been exercised, and it can hardly be said that the new system has
really been tried in that respect. The powers are there to be used in
the discretion of the Reserve Board, and the Federal authorities and the
banks have yet to experience what the exercise of those powers will mean
for them in a time of emergency or of changing national policy.
Trust
Principles
In more routine matters, however, banking undoubtedly has been
strengthened and its status before the public improved by the course
followed in the application of supervisory powers. The new Regulation
is an outstanding example. It applies to national banks directly but
doubtless will bc applied to state member banks in so far as the heserve
_authorities can control state banks in trust matters. As a matter of fact
the new regulation merely embodies the principles and rules of trust
administration contained in the Statement of Principlts of Trust Institutions
adopted by the Lxecutive Uouncil of the American Bankers' Association as
far back as April 1933, later embodied in the Bankers' Code under the
N.L.A. and generally followed by most trust institutions before and since
its approval by bankers themselves.
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Federal Reserve Bank of St. Louis
,a
c,
Banking--June 1936
The very fact, however, that these principles have finally been
given the form of law is a demonstraition both of the soundnesF of the
principles and of thi disposition of the Government to cooperate with
the bankers in their efforts to improve banking service. It is
especially important that actual regulations under the law, rather than
mere ethical considerations, require a bank exercising truat_functions
to create an investment trust committee of a definite number of members-three--and that "all investments of trust funds by the trust department
of every national bank shall be made, retained or disposed of only with
the approval of the trust investment committee, and such committee shall
keep minutes of all its meetings showing the disposition of all matters
concerned and passed upon by it."
Of similar importance is the requirement that a committee of directors, exclusive of active officere of the bank, "shall at least once
during each period of twelve months, make suitable audits of the trust
department or cause suitable audits of such departments to be made by
auditors responsible only to the board of directors."
'Sound
Practices
It is in accordance with the practice of most enlightened trust
concerns that the statute requires that funds of a trust account of a
national bank are not to be used by the bank in the conduct of its
business unless the bank, with the permission of its board, delivers
Government obligationa or readily marketable securities in its place,
but it is well that the new legal requirements be restated in an
authoritative way.
uther practices of better managed trust departments also are now
mandatory, especially restrictions upon the purchase or sale of trust
assets by or to the bank or its officers, and those prohibiting the
mixing of the assets of different trusts and prohibiting officers in any
way connected with trust management from having any interest, direct or
indirect, in a trust. These new legal requirements are reflected in the
new bank examin. tion forms upon which Federal and state supervisory
authorities have been working for the past two years or more.
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Federal Reserve Bank of St. Louis
** *** ***
•
Source: The American Banker — August 26, 1936
Page 2
Text of Addresses Praising President — by William T. McCaffery, President,
Lincoln National Bank & Trust Co., Syracuse, N. Y.
Stock Speculetion
(Mile this was the major reason, there were many other local and
national defects which became apparent during the crisis. Possibly the most
important of these was the. heavy speculation in the stock market, especially
in the East. Every bank with which I am familiar carried many large loans
secured by stock exchange collateral. The s)eculative fever was so great
that little consideration was given to the worth of the borrower and the
banker depended almost entirely upon the collateral.
During this period the Federal Reserve authorities had no power to
1ead and warn but they had no right to
correct the situation. They could )
discipline.
Another weakness of our system was the offering and sale of
questionable securities and the purchase of the same Jn the part of banks.
A third weakness was the granting of loans by one banker to another banker
on too generous and loose a basis.
A further cause was an excessive rate of
interest paid by banks for time dei.osits.
Such practices caused a competition
for deposits which was very harmful."
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Federal Reserve Bank of St. Louis
577
tiOURCE:
Excerpts from resuae of speech by Glenn Griswold,
editor of Busineso Week, etc., before Wis. Beakers
Asso. Tues. June 23, 1956
Following the debacle of 1921 four or five veri sivle reforms
could have been effected by the voluntar7 cooperation of organised
banking and by tilt. pressure it could have exerted on public opinion
and political action. They were:
1-Immediate and permmaent correction of the evil of too many
beaks destructively competing for business often wit': incompetent
management. Mergers and liquidation would have accomplished p.rt of
the job the basic cure for the evil rested with inviolable legislaties
to prevent the opening of a bank anywhere unless the community needed
increased facilitiee and also unless the applicants for a eharter were
coapetent bankers, adequately financed.
2-An adequate, unified, non-political and competently staffed
system of the bank examinations working in cooperation with urban and
regional cleflring house associations.
5-A single banking system, whether it bv stAte or mItional.
For years the integrity of our banking systems has been undermined by
laws permitting unsound practices first to the state and then the national system that one might have an advantage in eompeting with thc
other.
4-Arbitrary and inescapable rules assurinc that the aoment
bank's capital is impaired, it most be restored or the bank closed.
6-Complete segregation of bankiac into ite natural Ametiosal
divisions. To some extent this has been eccomplishod in form by realest
legislation hut the benefits of that legislation are lost by the failure
to make the investment policies of banks conform to the needs of the
division of the business in which they operate.
i believe that the guarantee of bank deposits is unsound in
principle and must eventually fail in practice an it has heretofore.
* *•
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Federal Reserve Bank of St. Louis
1
__a
"'Future of Bsnking In the United Stateer
by Wood Netherlanl, V. Pres.,
Mercantlle-Comserce Bank & Trust Cos, St. Louis, Me.
40th Annual Convention
Oklahoma Bankers Asso., May, 13.,6
**
**** ***
if- Whether we likeit or not, we must realise that in our 1-,resent economic
order bsnks have now been rlseed substantially in the category of public
utilities, in which state they enjoy certain rights snl at the same time
assume certain respoesibilities. We must ale° reali-e the public utilities
are so clolely associated with our civilisation, supplying vents so funiamental to the comaunity that government has at ell tines sub,)mdelthea to a
large measure of control. Chief Justice Taft once said that in a sense,
the rublic is concerned about all lawful busincse because it contributed
to the prosperity and well-being of the people. But the expression
"clothed with a sublic interestr AS applied to a particular business means
more than that the rublic eelfare is affected by the continuity with 'which
or by the price at which a commodity is sold or a service rendered. The
circumstances which clothe a particular kind of business eith a sublic
interest suet be each as to create a peculiarly close relation between
the public and those engaged in the business, and raise imrlicstions of
an affirmative obligation on their psrt to be reasonable when dealing with
the rublic. Re may ust as well realize that we exist by sufferance, and
not by divine rightSs
)Therefore, if in tlds new fature btsaks are to have
the status of a public utility rith rights and definite obligations, we
should know what those rights and obligations are.
2b* Service Charge
Certainly se have a right to collect a reasonable price for our services and receive therefor a reasonable profit. Since aur success or
failure more deeply affects the community life than that of any other
business, it should be patent that no basking service ehatever should be
rendered at less than cost. Profits should be so sure and so desenlsble
as to permit the accumulation of reserves sufficient to meet all continsencies. We should be privileged to establish sudh rules and regulas
tions both for our orn respective institutions and for the banking business as a ehole as rill insure sound and sensible managesent, even to the
denial of bahking service to those individuals or corporations whose
operstions are subversive of sound business.
e
view of our general
'
we have a right to expect, particularly
participation in the Federal Deposit Insurance Corporation, that no man
or set of men will be allowed to enter or to resain in the banking hesiness 131
ellen their conception of their responsibilities is not of the highest order. •
We have a right to expect that the political machinations by which bank
charters hsve too often been obtained in the rast, shall be relegated to
the rubbish hr,ap along with foreign bonds and watered stocks.)
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Federal Reserve Bank of St. Louis
4'37
- 2We have a right to expect that the Goverment will withdraw forthwith
from competition both in the matter of receiving de7osits in postal savings
and through subsidized agencies in the lending field. In e,ort, if we are
to assume the responsibility of providing an adequate banking system in
these United States, then we have the right to a clear track.
But if we are to Insist on these rights, then what obligatims mast Ile
assume? First and foremost is that of continuous self-examination and selfaudit. Mr. Owen D. Young, who for fifteen years has been a director of tho
Federal Reserve Bank of Sew York, in a stateient am the &,nking Act of 1935
made the following observation: "One may veil say tkat a bankine system
which failed to restrain a boom and collapsed during a depression should
be restudied as a *hole." Many other lines of business for years have devoted ouch of their energy and resources toward n scientific investigation
of the factors which affect their business. Telephone companies, steel
manufacturers, the railroads—all have maintained substantial research departments in order to meet the growing demands of the public. In contrast,
bankers have done little work of this type. "By initiating rosearch projEcts
in their own field of operntions, bankers may take an active part in
improving the structure and operations of the commercial banking system,
and may render a service not only to themselves but to society as well.'
Yoreovers they say anticipate and forestall hasty and ill-advised legislation by proposals which tre the result of proper research and sound consideration.
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Federal Reserve Bank of St. Louis
**** * * * **
•
SOURCE:
BANKING, December 1956 (Section II, Supplement)
P. 16
THE F.D.I.C. LOOKS AT MANAGEMENT—Vance L. Sailor, Supervising Examiner,
Sixth Federal Deposit Insurance District,
at Conference on Banking, University of Ill.
* * * We can also agree that in times past we have had a great
many more banks of deposit than we have had competent bankers to manage
them. This situation was due partly to the excessive chartering of
banks resulting in destructive competitive methods and partly to a
genuine scarcity of trained bankers. It is the corporation's annaunced
policy to lend its best efforts to the prevention of a recurrence of this
situation. You have already been told of the extent to which the corporation
goes in investigating the applications of new banks which apply for insurance.
The other phase of this matter, namely, the careful appraisal of manage—
ments in operating banks, is also receiving its most earnest attention. At
each examination the management is carefully studied by the examiner who
submits to the corporation a supplemental memorandum giving pertinent informa—
tion regarding each officer and director of the bank as well as his estimate
of their respective qualifications and abilities.
The reports of examination are cerefUlly studied in the office of
the uupervising examiner and by the review examiners in Washington for
the purpose of detecting unsound tendencies and obtaining their correction
before they have gone too far. In cases requiring special attention the
work of the regular examiner is followed up by a field conference examiner
who is specially trained for that purpose. The field conference examiner
goes to the bank not as an examiner but as a consultant and ftx friend to
review with the board of directors the criticisms set out in the last report
of examination and to ascertain what steps can or will be taken to correct
them. This particular feature of our work has received much favorable
comment from the state banking departments.
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Federal Reserve Bank of St. Louis
SOURCE: BANKING—December 1956 (Section II, Supplement)
p. 1
EXAMINERS ARE NOT POLUEMEN--Paul T. Betz, Exec. Vice Pres., First National
Bank in Lincoln, Lincoln,
before
Conference on Banking at University of I11.
It is unfortunate that public opinion today more or less regards a
bank examiner as a kind of policeman. I know that it is not the wish
of the examiners to be placed in that category. After all, examiners and
bankers have many characteristics in common--there should not be much
variance in their viewpoints, their attitudes and sympathies. The ambitiions
and purposes of both are to serve the interest of constructive banking. Likewise both are aware that mere observance of the banking laws does not insure
the success of a bank. Bankers must do more than the law requires.
The examination of any bank involves two phases of procedure. The
first phase includes a comprehensive audit of the bank's detailed activities.
The other phase concerns itself with ascertaining a knowledge of the
capabilities and policies of the management. Examiners find the latter by
far the more difficult to ascertain and to classify, but an examination
cannot be successful which fails to detect these qualities of the banker.
A bank examiner must understand men. The comprehensiveness of his report
depends upon his ability to examine the banker as well as the bank, to
determine whether the banker in question is capable of devising and guiding
policies conducive to the successful conduct of his bank. For no bank can
operate successfully without definite policies, and policies mean nothing
unless they are controlled and adhered to. Banks do not drift to success,
they are guided there by sound banking policies; if they drift they sooner
or later fail. The examiner cannot submit a true report of the status of
a bank unless existing conditions will permit him to gain an intelligent
perspective of the individual force administering the routine and principles
of the institution, without having to resort to forcefill tactics. Therefore,
if there does not exist a spirit of cooperation between the banker and the
examiner it can be readily understood a wrong impression of the banker and
of the condition of his bank may be gained by the supervising authorities
to the detriment of the institution.
It was my experience to learn, while an examiner, that the astute
bankers were anxious to avail themselves of every benefit which a
constructive examination should provide. Progressive bankers who knew they
had a good bank were usually proud to exhibit it. They approached the
examiner in a spirit of cooperation—accepting him as an agent of constructive advice or criticism and not as a policeman.
In bank examining, the same as in any other profession, we occesiionally
find a misfit. That is unfortunate both for such an examiner and for the
banks he contacts. It is inconsistent with the aims of competent bank
supervision and I believe that the banker should be entitled to protest the
incapabilities of an examiner when such is apparent. When banks pay the
fees for examinations they like to get their money's worth. Bank examining
should be maintained upon a high plane where it will be attractive to men of
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Federal Reserve Bank of St. Louis
-2high purpose. It should be entirely free of political influences, as
should every other branch of bank supervision. Bank examining should be
made attractive as a career. Only men who, by apprenticeship, have
proved themselves to be naturally adapted to this particular type of work,
and have successfully passed a qualifying examination, should be commissioned
and clothed with the authority that accompanies the title. Furthermore,
examiners should be paid salaries which, at least in some reasonable degree,
are commensurate with their responsibilities.
Both bank examiners and the bankers must be aware of the high plane
upon which it is necessary to conduct this close-to-the-heart, close-tothe-pocketbook profession. It requires courage, visiion and initiative
motivated by the compelling desire to serve and cooperate. Anyone with a
lesser inspiration can never hope to be either a good bank examiner or a
good banker.
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Federal Reserve Bank of St. Louis
•
SOURCE:
MICHIGAN INVESTOR--Mich. Bankers Convention--July 18, 1936
Congress and Banking--by Hon. Prentiss M. Brown, St. Ignace
Page 23
In W4, I introduceia bill which afterwards was known by my
j'rk„:206.4.*L41.4name, and which was extensively commented upon in banking journals,
particularly in the eastern part of the United States. It was my
liyurpose then to strike at one small item in this vest field of duplication
.,
)10.0and triplication of governmental bureaus, and that was in respect of the
VA
vro) examination of banks. I fought, but fought unsuccessfully, to prevent the
q 114 Q,-‘,0
Federal Deposit Insurance Corporation from having the right to examine
1),1- 931101
'
0- national banks and Federal Reserve Banks. I felt that the Comptroller's
L.4. I
Office, which is an efficient organization, could well give that information
,
771JAA94to the Federal Deposit Insurance Corporation, and that the information could
•fo 14
'
be given by the Examiners of the Federal Reserve Banks to the same institution.
1P
-4
I, therefore, introduced a bill which provided, in substance, that
those examinations should be conducted by the Comptroller's Office, and the
information given to the other two bodies.
0„na„....:L.
11°13
During the examination of the Governor of the Federal Reserve Bank,
and the head of the Federal Deposit Insurance Corporation, and the Comptroller
of the Currency, as they appeared before our Committee, I questioned them
extensively upon that subject. The Governor of the Federal Reserve Bank,
Governor Eccles, readily agreed that there should be no examination of Federal
Reserve Banks that were national banks, by Federal Reserve Examiners.
Under the law as it now is, the first section thebrelates to examinations provides that the Federal Reserve Board may accept the examinations of
the Comptroller's Office. I do not know who was in power when the practice
sprang up, but evidently that did not supply enough jobs, end they established
a group of Federal Reserve Bank EXaminers, and they did not follow the law
relative to examinations, the acceptance of examinations by the Examiners of
the Comptroller's Office.
6
r
When the Federal Deposit Insurance Corporation came into existence,
they did not have the power to examine national banks; but in the Banking
Act of 1935, against my efforts, they obtained it. Under the bill that I
introduced, and which would have been reported out by the BankinE and Currency
Committee of the House if it had not been for other considerations which I
have not the time to mention, all of these examinations would be held under
and made by one organizetion. I picked the Comptroller's Office, because it
has had the greatest experience in the examination of banks)
by
Of course,/the very nature of the situation, we cannot cover the
smamination of State non-member banks of the Federal Reserve System by the
National Banking Department. But I was somewhat pleased, after due con-
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Federal Reserve Bank of St. Louis
on .Prentiss M. Brown
e 23 (cAmtd.)
sideration, that my bill was not reported favorably, because it seemed
to me, and I have given it a great deal of consideration, that what re
need in the United States today is a National Banking Department.
I do not think that there is any necessity for three governmental
organizations operating upon the activities and the pocketbooks of the banks
of the United States. We pay money to the Federal Reserve Board, we pay
money to the Comptroller's Office, and we pay money to the Federal Deposit
Insurance Corporation.
There is not any reason, except possibly the concerted opposition
that comes from the bureaus themselves, why there should not be a
consolidation of the Federal Reserve Board, the National Banking Department,
and I mean by that, of course, the Comptroller's Office, and the Federal
Deposit Insurance Corporation.
Hopeful of Consolidation
Under One Organization
We could not, in the emergency that resulted in the creation of
the Federal Deposit Insurance Corporation, pay much attention to the
necessity for careful reorganization, but now that that emergency has
passed now that we can take time in Congress, through the committees that
I have mentioned, to consider these things carefully, it is my belief not
only that serious consideration will be given, but the probabilities are
that something will come out of the work we are now undertaking that will
result in a consolidation of these various agencies into a National Banking
Department of the United States.
. If these three great branches of the Government, the Federal Reserve
Board, or, the Board of Governors of the Federal Reserve Banks, the National
Banking Department, and the Federal Deposit Insurance Corporation could be AO.,
consolidated under one head, I think it would be better for the banking
fraternity of the United States, I think it would be less expensive for the1\
banks of the United States, and I think it would be a splendid contribution ,
towards the development of a more efficient Governmental banking supervisory
authority in this country.)
I realize that it perhaps will take sometime to convince whatever
Administration happens to be in power during the progress of these investigations. My interest in the Committee to which I was appointed was pretty
largely that, but, as I pointed out to you in regard to navigation, and as
I could point aut to you in regard to a multitude of other things, there is
vast opportunity for a great reduction in personnel, a great reduction in
the expense of Government, by consolidation of these various agencies of the
Government.
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Federal Reserve Bank of St. Louis
.3 •
On page E of the Miphigan Inveator, June 1.7, la6 issue,
appear the fol.:loving comments (appartlitly editoriA1):
"Imoortant Chaws in Lama Outlined by Boll :5tudy Commission
*
*
*
thrce-maa
One of the startling pr:yobale is tilt. erection of
bankini COMASbiOU, in °roar to split the burden of work which now
falls on one man. In thia connection, it is suggcsted thpt exasinntions
be ist,de more frequently and that the ex&miners see th;;It their recommcndetioar are carri d out, instead of repo/AIN:, them after each
examination.
Complete abolition of private bankint in Aichigan is pr, dot.ee,
that the 29 nor operating without charter go out of
which., will m•
business or :Accept stE,te or national supervision.
7
/
Prokibition iE alio recommtuded of the use of the eord "U:nker"
/ by any other financial organization but a lieemeed bask. This recalls
// the controversy that was precipitated by real estate men over the use
of the word nreator."
\s./7
An increase of ;tapitalik,ktion of state banks WW9 proposed to
the extent of Zt. per cent. On this basic the minimum capitalization
would be tk5,300. In aedition, it is suggested that 4b0,00_ Le fixed
LIC the minium ca.itaiLxtion of banks not member of the Federal
Reserve System but which wish t open branches."
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Federal Reserve Bank of St. Louis
* * * k k *
,718
"Co-operative Banking for Savings Banks"--by the Banking Group, Bureau
of Economic Research, Bklyn. College, under direction of W. H.
Steiner (reprinted from THE BANKERS MAGAZINE--reprint received
in Library 6-26-36)
* * *On November 15, 1933, the New Hampshire banks created
a fund under the general emergency state legislation of that year
providing for organization of clearing houses or similar bodies, as
did the Maine banks on May 29, 1934.
The various plans were thrice amended. Massachusetts added
deposit insurance on February 21, 1934, and in March, 1936, extended
the life of the fund from the five years originally specified to ten
years, and enlarged its powers. On April 26, 1935, Connecticut broadened
its plan in some ways along the same general lines as obtain in New
Hampshire and New York.
Co-operative banking for mutual savings banks thus exists today
in four New England states and in New York. Thus, it embraces well over
60 per cent, in both number and deposits, of the savings banks in the
country. * *
The New York plan is by far the most comprehensive of the five
plans, and differs in salient particulars from the other four. The cooperation among the savings banks developed through the Savings Banks
Association of the State of New York has been extended to many lines of
savings bank operation and management.
In New York, both the organizations created have found opportunities
for additional services as the need declined for them to provide a source
of liquidity.
Savings 13anks Trust Company has added the following duties in
reference to securities:
1. Investment service, established in the latter part of 1934, to
act as a clearing house for information on savings banks investments and
give advice on the management of their portfolios. * * *
2. Trustee for savings banks having defaulted bonds, under a
deposit agreement of March 31, 1934. * * *
3. Joint subscription on behalf of members to new security issues.
This has been done in the case of UnitedStates Treasury issues, but has not
yet been extended to others. In addition the Trust Company provides safekeeping of securities, acts as agent in purchases and sales, and renders a
general collection service for savings banks.
715
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** * * * *
Federal Reserve Bank of St. Louis
•
S. Sloan Colt, Pres., Bankers Trust Co.
Address - Kansas and Missouri Bankers Associations
May 6, 1936.
*******
***
\Banks deal with the lifeblood of business, namely, credit. If they extend
,
credit too liberally, and upon the wrong type of assets, they may feed the
flames of credit expansion and speculetion until these culminate in a crisis
and liquidation. More than one student has stated that banks, through the extension of unwise and excessive credits, contributed materially to the speculative excesses of the late 'twenties. On the other hand, if bankers are
niggardly in their lending policies and restrict credit too severely, they may
hinder the normal, healthy growth of business and of their communities.' To
expect bankers to be all-wise in their policies or to be totally unaffected by
the temper of the times in which they live, is to expect the impossible. But
one thing is sure: the responsibility for exercising this power is too broad and
too much involved with the public welfare to be considered from the viewpoint
of narrow or selfish interests.
Perhaps the individual banker does not realize the full force and effect
of his activities because he frequently looks upon his institution as having
a local interest only, and not as a part of the banking system as a whole. We
have learned from the lessons of recent years, however, the necessity of
familiarizing ourselves with the broader problems of the banking system as a
whole. One institution may not be a significant factor viewed as an isolated
unit, but when thousands of banks pursue the same or a similar course of action
the effects are far-reaching.
- manufactured anywhere from Maine to California goes into the
Credi:,
country's whole pool of credit and can be used anywhere else. Once we create
it we cannot control its use. It follows that credit wisely or unwisely
created Ln New York State may influence conditions in Texas, Florida or
MInnesota, as well as in our own State and locality.
Our own individual activities will be judged in the long run by the results of the activities of the system as a whole. Each banker, therefore, is
vitally concerned with the kind of banking done in every other institution.
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Federal Reserve Bank of St. Louis
***********
(1-
•
•
S. Sloan Colt, Pres.,.Bankers. Trust Co.
Address - Kansas and Missouri Bankers Associations
May 6, 1936.
I have attempted to give you a brief statement of three types of economic
changes which have created several major problems for bankers. These changes
are: (I) changing economic conditions at home; (2) world political and economic
disturbances resulting in extraordinary capital movements, gold flow into the
United States and an exceedingly large accumulation of excess reserves; and (3)
the changing character of banking in this country both in assets and in deposits.
I do not suggest this as a complete list of theEconomic developments which
affect banks but mention them merely to illustrate the dynamic nature of our
economic and social order and to emphasize the urgent necessity for constant
study and investigation by bankers of these broader proble-ns. The future course
of banking in this country is going to depend very largely upon how well we as
individual bankers understand these larger problems and how sound the measures
are which we take to solve them. This is not a task which can be accomplished
in a moment, but one which will require continuous research and study.
It must be clear by now that lasting improvement in the banking system can
seldom be obtained by legislation. The futility of trying to substitute
arbitrary rules and laws for sound business judgment has been amply demonstrated.
That is why a project wherein the men actually operating banks undertake to make
a careful analysis of the banking problems is so important and may bring
productive results. We have tried legislation for a hundred years; let us now
try research and analysis.
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Federal Reserve Bank of St. Louis
1';TY
•
SOURCE:
Thh AMERICAN ECONOMIC REVIEW - VOL. MI, No. 1
SUPPLEMENT
March, 1936
RECENT LEGISLATION AND THh BANKING SITUATION - By JACM VINER,
University of Chicago
Beginning at page 106 through 118
* *
*
*
An outstanding aspect of the depression in the United States
was the extraordinary weakness which the American banking system
revealed under pressure. The mass withdrawals of cash by the
banks, the forced liquidation of their assets by the banks in
their desperate attempts to remain open, the repeated waves of
banking failures which were survived only by those banks which
were most quick and most expert in converting themselves into
safety deposit institutions, the final closing of the system as
a whole, these phenomena were without a near parallel in any
other country, although this was a depression which no western
country escaped. The depression, it is true, was more severe in
the United States than in most other countries, but the weakness of
the banks must be held largely responsible for this. In any case,
after the most generous allowances have been made for this and
other extenuating circumstances, our banking record was deplorably
bad. While other countries also suffered from flights away from
their currency, we alone had to endure flights from the banks to
the currency while the currency itself was still free from pressure.
As a result of this loss of confidence by the public in the banks,
and by the banks in each other, the deflation of bank credit was
carried much further in the United States than in almost any other
country for which comparable data are available. Measured by total
bank loans and investments, the volume of bank credit was in the
low year of the depression only 62 per cent of the 1929 level in
the United States, as compared to corresponding lows of 97 per
cent in England, 82 per cent in Canada, and approximately 80 per
cent as the average for thirty-eight countries.
What are the causes of this peculiar weakness of the American
banking system? The explanation, I am convinced, lies in the fact
that of all the modern national banking systems it alone has adhered
predominantly to the eighteenth-century model of individual smallscale unitF, as distinguished from large-scale banking institutions
with many branches. The American bank-closings of 1931 to 1933
were but a typical reproduction of the normal events of an English
business depression before the development in England of branch
banking on a large scale.
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Federal Reserve Bank of St. Louis
80
f•-•
Recent Legislation and the Banking Situation - by Jacob Viner (contd.)
* * * The legislation of the past few years has failed to clear
the legal barriers from the path to large-scale interstate brnnch
banking. However glaringly parish-pump banking may- fall short of
meeting the banking needs of an economy which is in other respects
national and even international in the scope of its operations, a
better system could be substituted for it only at the cost of a
major political battle in which there would be ranged against the
reform not only the small bankers themselves but also the agrarians,
the small-town people, the state officials, the many persons who
feel that many of our economic woes come from the bigness of our
economic units and who cannot see that an exception should be made
for banking. The present Administration, so far at least, has
shown no eagerness to wage this battle, in which it would find its
friends on most other issues ranged against it and its foes not to
be trusted to surrender the opportunity to make political capital
-wren on an issue on which the Administration happened to be on the
right side. It may be regrettable, therefore, but it is not
surprising that the Administration has not undertaken to eliminate
this seriaus flaw in our banking structure, but has instead, in the
words of Governor Eccles, decided that "we cannot go faster than the
people of the country are willing to have us go."
* * * The literature in support of branch banking, moreover, seems
to me often to overestimate its advantages or to look for them in
the wrong directions and to dispose too cavalierly of the objections
which have been raised against it. Even the economies of branch
banking, of which so much has been made in the liternture, seem to
me to be highly conjectural. In Canadian experience the potential
economies have been largely dissipated in expensive premises,in
unduc, multiplieation of branches, and in other types of promotion
and advertising expenses. * * * But for the national economy, if
not for the individual customer of the bank or for the banker himself, branch banking has certain indisputable advantages which
seem to me, and apparently to all economists who have lived in a
branch-banking country, to be overwhelmingly more important than
all the disadvantages which can conceivably be charged against it.
It automatically provides diversification of risks, regional and
occupational, for each la independent unit in the banking structure.
By reducing the number of independent units and increasing the
importance of each unit, it imposes on each bank a measure of
recognition of its repponsibility for the impact on the national
economy of its own activities and of recognition of its
obligations to the rE-st of the bankinE system. The large units
which result from branch banking can afford to attract a higher
grade of talent and to subject their personnel to a superior End
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Federal Reserve Bank of St. Louis
-5-
hecent Legislation and the Banking Situation - by Jacob Viner (contd.)
broader economic training than can the average unit bank in the
United States. In reducing the number of responsible executives,
branch banking also facilitates the achievement of co-operative
action in emergency situations whether on the initiative of the
bankers themselves or in response to governmental pressure. The
size of the units gives to them a prestige and an appearance of
strength which, whether it is justified or not by the facts, is
extremely valuable in a crisis. These are extremely important
advantages of branch banking, especially during a severe depression
before we learn that we cannot do without it.
This country, unique in clinging to unit banking, has developed
two methods of minimizing its shortcomings which are also largely
peculiar to itself; namely, detailed bank regulation and supervision
and pulAjc guarantee of bank deposits. There are in this country
forty-eight state authorities with power to supervise, examine, and
rEgulate state banks, each with a headquarters and a field staff.
There are four federal authorities independent of each other with
powers of supervision and regulation which overlap both as between
the federal agencies themselves and as between the federal and
the state agencies. There is no detail in the operations of any
American state or national bank which is not subject to statutory
or administrative scrutiny and regulation, and in practice the
regulation and the examination are carried out to the most minute
details. There is no other American industrial or commercial
activity--outisde of the prison %orkshops and the issue of coin
and currency--which is as rigorously regulated and as closely
supervised. Nor can any parallel be found in the banking field
itself in other countries. Unless I am mistaken, except for the
restriction on the issue of its own paper money, an English
commercial bank is subject to no restriction which iE not a part
of the body of commercial law to which all persons and corporations
are subject, is required to make report to no official agency
except the income tax collector, and receives no visitations from
any government official. In Canada, where in spite of the predominance of branch banking they still had bank failures before
the War, perhaps throw& contagion from across the frontier, the
chartered banks were in 1913 subjected to supetvision and examination, but(to date the entire supervisory and examining staff
appears to consist of an inspector-general and an army of two
or three clerks and stenographers.)
It is evident, therefore, that bank supervision and examination
are neither necessary nor sufficient conditions to assure that the
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Federal Reserve Bank of St. Louis
-4-
Recent Legislation and the Banking Situation - by Jacob Viner (contd.)
banking system will be strong enough to withstand a severe
depression without whole sale collapse, although it may be
presumed that the record of the American banking system would
have been even worse if it had been wholly free from supervision
and regulation. But unless it is directed with this danger in
mind, the nature of the examining process is itself such as to
impose upon the activities of the banks a perverse cyclical
pattern from the point of view of stabilization.( The examiners,
through the qualitative credit standaras which they impose on
banks, indirectly influence the quantity of bank credit. When
business is prosperous and optimism prevails, examiners, like
the bankers themselves, must tend to appraise credit risks in
terms of the favorable conditions of the moment. The bankers,
and especially the small bankers, confident that what is good
enough to pass the scrutiny of the examiners should be good
enough to meet their own standards, persist on their career
of credit expansion. Later, when the tide of business turns,
when banks begin to fail and loans which were passed without
criticism during the boom days have to be written off as bad
debts, the examiners are blamed. Reacting in a perfectly natural
manner, they become stricter and more exacting in the standards
they apply, and they press the banks to liquidate loans and
investments which the banks, if left to their own devices, would
be happy to keep in their portfolios. The process of bank examination thus tends to encourage credit expansion during the upswing of
the business cycle and, more seriously, to intensify credit
contration during the doznswing)
,There is an obvious cure for this perverse effect of bank
examination, requiring three innovations in the administration
of the examinations: unified control of bank supervision and
examination; co-ordination of examination policy with credit
control policy; and systematic and continuous supervision and
instruction of the examiners in terms of a uniform and flexible
policy. Fully to attain all of these objectives would require
the centralization of all bank examining functions under the
direction of the Federal Reserve Board.) Some progress toward
centralization of examinations has been made in the last few
years as the result of the examining authority acquired by the
FDIC over insured non-member state banks. Important progress
toward co-ordination of examining policy has also been made
administratively, through gentlemen's egreemente between the
examining authorities. It is still possible, however, for the
Comptroller of the Currency, the FDIC, the RFC, and the fortyeight state examining authorities to neutralize through their
influence on the individual banks the efforts of the Federal
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Federal Reserve Bank of St. Louis
V
-
Recent Legislation and the Banking Situation - by Jacob Viner (contd.)
Reserve Board, as the central credit control agency, to secure a
loosening or a tightening of bank credit. For a time daring
1933-34, while the President, the Secretary of the Treasury, and
other federal officials, were urging the banks to relax their
credit standards from their deep depression severity, various of
the examining agencies were exercising pressure on the banks to
purge their portfolios of assets classed "doubtful" and "slow",
fl slow" being a technical examining term as
to whose meaning no
two examiners can be found to agree except that it does not mean
slow. Full unification of the administrEction of examinations must
Aait upon full unification of the banking system as a whole, but
the recent banking legislation has failf-d to bring about statutory
improvement in even the federal situation, a failure for which
there is not the excuse that it faced serious political obstacles,
for the only obstacles in the way were the minor rivalries of the
several examining authorities, who perhaps did not all love each
other as much as good DemocrEts should.
**********
Incidental to tVe deposit guarantee scheme, moreove
4 are provisions which give/the FEIC potentially important powers
of supervision over insured banks, including banks not otherwi
se subject
to federal regulation, and even more important if exercis
ed, powers
over the admission of new banks into the insurance
scheme, thus
enabling it to some extent to prevent the establi
shment of new
weaklings or of new banks which, by their
competition, would endanger the solidity of existing banks in their localit
y. The
pinnuoiniftalaniiiinicWanii 30,000 banks of 1929
have now been
reduced to some 15,000. This secms to me a
sufficient number of
banks to provide ample banking facilities for
the nation. The
rest of the world manages to get along with
less.
The FDIC legislation was drafted with
the most painstaking care
and, I believe, with great skill, and it may
have been as good as
was at the time obtainable. Some obvious defects
, however, call
for the most serious consideration. The premium
of 1/li of 1
per cent on deposits is, on past experie
nce, almost certain to
prove insufficient to meet the drafts on the insurance fund, even
in the absence of recurrence of major depresslons. Those who foresee the accumulation of a fund so large
as to constitute in itself
a significant problem for credit control are finding bogeys where
they may. As bank earnings grow, it seems
to me it will be a tise
precaution to increase this premium, especia
lly until time has tested
whether the wholesale elimination of weak banks during the depression
and the added regulatory and supervisory powers of federal agencies
will suffice to lower the pre-depression loss ratio through failures.
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Federal Reserve Bank of St. Louis
********
*
--6-
hecent Legislation and the Banking Situation - by Jacob Viner (contd.)
I find myself unable to follow this reasoning. The large banks
gain from the increased stability of the small banks, but so do
at least eaually the small banks gain from each other's increased
stability, and from the greater stability of the large banks, and
if this reasoning were ctirried out to its logical conclusion each
bank should pay the premiums not on its own deposits but on the
deposits of other banks. There is, moreover, no obvious connection
between payment of interest on demend deposits and deposit insurance.
Payment of interest on demand deposits has never been compulsory,
and the legal prohibition on such payment merely IlL.stened and
intensified a process in which the banks were voluntarily engaged
under the pressure of meager earnia-s on the use of these deposits.
The real basis for the charge of premiums on uninsured deposits
is to be found in the fact that many of the small banks are not
paying their way and cannot afford to pay their appropriate share
of the insurance cost, 30 that instead of closing these banks, the
large banks are being forced to subsidize them. Its net effect
is to weaken the relatively stronger elements in the banking
structure in order to keep alive the relatively weaker elements, a
type of compulsory benevolence which if cantinJod indefinitely and
carried further would provide a sure guarantee that the banking
structure will retain its inherent weaknesses and that the deposit
insurance scheme will go the way of earlier schemes of this nature.
Title II contains provisions relocating credit control power and
provisions strengthening and extending credit control power, but
does not expressly place any new mandate upon any authority or
change the objectives to be pursued through the exercise of such
authority. * * * From the point of view simply of efficient
administration of credit control policy, whatever that policy
might be, reorganization was Obviously necessary. It was urgent
that there be one central agency in which responsibility rested for
credit policy, and in which was vested all the important control
powers so that they could be exercised in a harmonious and coordinated fashion, and the existing situation fell far short of
__this. Control over rediscount rates was divided between the Federal
Reserve banks and XI the Federal Reserve Board, with notorious
instances in the past of conflict between the banks and of deadlock
between the banks and the Board. Control aver open-market operations was divided between 14 agencies, consisting of 128 members,
each agency wita at least a partial veto power over action. Control
over reserve requirements was shared by the President and the
ederal Reserve Board. Without taking into account the diffusion of
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Federal Reserve Bank of St. Louis
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Recent Legislation and the Banking Situation - by Jacob Viner (contd.)
authority over security margins, purchase of acceptances, and bank
examinations, and in connection with the provisions of tne Thomas
amendment of 1933, and the direct control powers of the Treasury,
to say nothing of a host of other minor provisions which have direct
bearing on the volume of bank credit, it should be apparent that
so fantastic an exhibit of administrative disorder could never
have been deliberately designed by man, but must have been the
product of a long process of patchwork legislation for which
control of the volume of credit was not a major objective. If it
was desirable that as far as practicable there should be centralization of these powers in a single agency, then the logical agency
was the Federal Reserve Board. * * * I hope that by a process of
further piecemeal legislation the Federal Reserve Board will
gradually acquire undivided authority over most of the other
instrumentalities of credit control to which I have referred, and
that in those cases where the activity cannot appropriately be
lodged with the Federal Reserve Board it will on principle be so
exercised as to be as neutral as possible in its bearing on the
total volume of bank credit.
** ******* *
The new powers of the Board include both increased powers of credit
expansion and increased powers of credit restriction. The former are
not likely to receive much exercise until the next depression comes,
but they may then serve to prevent a recurrence of the disastrous
credit contraction of the present depression. The chief changes of
the expansion--or rather antideflation--type are liberalizations
of the limitations on the types of securities which the Federal Reserve bank may accept as a basis for rediscounts; so that member
banks, as long as they are solvent and can provide collateral, will
not be estopped from obtaining needed help from the Federal Reserve
banks merely because of a shortage of assets of certain narrowlyrestricted types. To the school which holds that if commercial
banks limited their portfolios to short-term commercial paper,
credit booms and crises could not occur and the volume of bank
credit would always be proportioned to the "needs of business",
these liberalizing provisions are presumably anathema. But that
school is nursing ancient fallacies. In a banking system whose
portfolio consisted only of "sound" short-term commercial paper
there still would be ample scope for drastic cyclical fluctuation:
in the velocity of use of bank deposits; in the monetary volume of
commercial discounts resulting from fluctuations in the price
level and in the number of hands through which commodities passed
before reaching the consumer; in the ratio of commercial transactions
financed by recourse to the banks to the total volume of commercial
transactions; and in the total physical volume of business. This
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Federal Reserve Bank of St. Louis
-8-
Recent Legislation and the
anking Situation - by Jacob Viner (contd.)
school is right in its contention that within substantial limits
a banking system can during a depression liquidate its assets, but
it is wrong if it regards such liquidation as an activity to be
welcomed and fostered while the central bank still holds adequat
e
reserves.
In properly organized banking system every bank should feel that
its liquidity is assured through the rediscountability of its assets
as long as it maintains a genuine excess of the value of its assets
over its liabilities, and liquidation or expansion of the system
as
a whole should be controlled by the central bank and not by the
wishes or the exigencies of the individual banks. The extensi
on
of the rediscount powers of the Federal Reserve banks marks
an
important step in this direction, and it is within the power-aad
the responsibility--of the Federal Reserve Board that it shAll
not
be so used as to foster credit expansion pt. inappropriate times
or
to inappropriate degrees.
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Federal Reserve Bank of St. Louis
********
**
_
S. Sloan Colt, Pres., Bankers Trust Co.
Address - Kansas and Missouri Bankers Associations
May 6, 1936
*** * * ******
* * * Deposit insurance on a national scale is a new experiment and while
it may have its effect in preventing the spread of withdrawals in time of
trouble, it can in no way be accepted as a substitute for good banking. Supervision can limit the scope of bank operations, but the ultimate decision as to
the quality of assets to he held in the portfolios of the banks rests with the
bankers themselves.
** ** *
* * * **
* * * The banker has become a trustee for the public and has assumed
responsibility !fl'or the investsent of its funds. This is a service which the
,-all domestic investor has demanded and which the banks have unjertaken to
perform in larger and larger degree.
The responsibility assumed in this connection is a real one. These investors can ill afford to lose their savings. They are the hardworking, thrifty
classes of our people who are the backbone of our country. The security of
their de2osits is all-important, not only to them as individuals, but also to
the safety of our whole economic order. Give this class of small savers security
and protection in good times and bad, and you will establish a public confidence
and support of the banking system against which the demagogues will be powerless.
Let the losses to these people be substantial and the seeds of political and
economic discord will fall into fertile ground.
* * * * * ** * * * *
The Federal Reserve and other supervisory authorities have been given
extensive powers to check or prevent unsound credit activities and excessive
credit expansion. However effective these controls may be, it is my opinion
that they can never take the place of soutad bank management. The responsibility
for maintaining high quality assets of the right Character must rest upon the
managements e the individual institutions.
*** *** *****
* * * The evidence is that we have been getting further and further away
rom commercial banking. The proportion of bank assets consisting of investments, real estate loans and collateral loans, which for purposes of convenience and brevity we refer to as "capital assets," has been increasing
steadily, while the proportion consisting of unsecured loans has been growing
smaller and smaller. We faund, for example, that "all other° loans, the group
which is commonly supposed to contain most of the short-term commercial advances, decreased from 29 per cent of total resources in 19:)3 to 25 per cent
in 19P9 and to 16 per cent in 1934.
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I39
- 2** * * ** * ****
While this significant change in Resets has been going on with remarkable
consistency, there has been no modification of the contract with depositors
calling in form or in fact for payment of funds on demand. There is little
indication of any permanent change in the practice or building up reserves or
capital funds for the protection of depositors. Whether adjustmen+as must be
made along these lines or in an entirely different direction is one of the
questions which we face. At least one concluaion from recent developments
seems inevitable, however: rith the growing volume of long-term assets the
element of quality is of supreme importance. As long as prices are rising and
business is growing, banks csn carry on with assets of secondary quality and
perhape make large profits, but the day of reckoning always comes when the
economic trend changes. These periodic reverses must be expected, and the
bank that fails to recognise this in the selection of its assets doea not
weather the storm.
*** * ***** **
In effect the predoratnant business of the so-called comaercial banks has
eome to be that of bringing together the investor, tn the guise of the depositor, and the long-term borrower, rather than that of supplyiag short-term
businers credits, for which there has been little demand. In other words,
commercial banks have taken on many of the characteristice of investaent truats,
except that no change has been made in the nature of the liability ehich they
assume toward their depositors. In fact and in practice these time deposits are
little different from demand derosits, particularly in time of stress. Thus we
have a picture of commercial banke relying to an increasing degree upon longterm aesets, on the one hand, aad assuming short-term liabilities on the other.
Banks are not only guaranteeing the depositor against loss (to the extent of
the banks' capital), but, in addition, hre including in that guarantee an
obligation to convert these investments into cash practically on demand, and to
pay depositors their claims at par regardless of the price realieed upon the
sale of the assets.
*
****
* *
*
Mr. Kettering (V. P., General Motors) said of his work, "We are trying to
study what the automobile business is going to be in rive, ten, fifteen or
twenty years." Let us ask ourselves what the banking business is going to be
like in 1946 or 1950. Are we progressive enough to list the things that are
wrong with our buainess, and to devote our time and energy to the correction
of these defects? Many bankers feel confident that had we started such projects
twenty years ago we might have avoided some of our recent unfortunate experiences.
If this be true the time to build for the future is today. The greater the
widdou we show in handling our own problems of benk management, the greater the
voice we may hope to have in the determination of thove other policies of national
and International scope.
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Federal Reserve Bank of St. Louis
bANKING SITUATION IN ME UNITED STATES
•
*
*
*
WAFTER 1 - TtiL A.Z4ICAN BAAING
*
*
*
(Pages 26 and 17)
lanimagg
9r
woe/ GLeaalus AssocUtions
Leeslly, aany independent emit banks are co-ordinated with other banks
ln the ousaunity through clearings associations, of 'hien there are 11,Z
in the various cities of tue coantry. Organised for tne purpose of iderforming a aecnanical function, the clearing Jr cneeks, and thus facilitatIng the oomemnitvli Widnes. payments and tne circulation of bank deposits,
the clearings ast,ociation has come to eabrace usually mucn broader functions
of co-ordination and to contribute materially to tae systematisation of
the American banking organisation. It is terough tue local clearings
association that community banking problems are oi-,enly discussed among
bankers and taat local baniting policies and management anquire sole uniformity of standards. In frequent instasees regulations are adopted
regarding discount, Interest, and banking service charges, and rules laid
doss regarding local loan policies. Farthermore, in a fee large cities
clearings association exAminations of member banks are accepted as a
necessary adjunct to tle maintenance of local banking stability, vnien
enables clearings ust-ociation members to act togetaer to avert failure
and to prevent tne growth of 4 general local distrust af banking conditions in the eveat of any local banking weaknosse
ofor “.)
*
CdAPTIA II - STitUCTUhAA.
*
•
caucits Is riE
*
*
AURICAN BLAIN SIMS
*
*
(Pages 44 and 45)
Caustit of /allure
The causes of bank failures are both sdecific aud general. They
are specific in tne sense that ta each bank failure particular Internal
causas may nave had a part in bringing about insolvency. Bank failures
in individual cases may be assigned to such causes as: (1) the over,accumulation of doubtful, slow, or past,due paper; (k) heavy withdrasals
of deposits compelling the default of payments to avoid liquidation of
eound assets at sacrifice terns; (t) general aIl-nround poor management;
(4) an unexpectedly large depreciation of sscurity investments; (5) large
loans to officers and directors; (6) defalcstion or elbesslenent; (7)
excessive loans to businesses In taich officers or directors are interested;
(6) the failure or a banking correspondetit
yams funds have been depoeited; and (9) the failure of any other large debtor. At least three
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AO* k•Fil•
of these particular causes, tne first, fifth, and sevenths might be
grouped together under bad management, but the others are quite beyond
the complete control of bank management. The latter are external and merge
,tith a whole series of otaer lottraneous Influences operating to bring
about banking difficulties.
rhea bank failures occur sporadically, it is no doubt proer to
analyse then in terme of individual causes. then they occur more generally in large nuMbers, however, it is nore likely that a real insiga
t
into tae reasons for the failure may be gained from a cossideration
of
general factors affecting bantint; condition6, even though individusl
failures are mainly prectpitated by such more specific causes as are
listed above. The general fsctore are to be found, an tcie one nand,
in the subtle, imperceptible caunges in the SOCild uad sommosie structure of society, occurring, for example, as
consequenee of the development of transportation facilities; in tae growing concentration of indastry and commerce; in innovations of widespread influence in
the
tecanique of production in industry and agriculture; and in the reorganization of metnods of distribution. They are to be l'ound, on
the
other aund, in changes in tae aetaods of business financing that
occur
partly in response to the changes of a physical charucter descri
bed
above, but thich ms)( be partly coincidental vita, or in antici
pation of,
tbose changes. The policies and practices of the banks themselves,
similarly in part responsive to, and in part concomitant tith or
in
advance of, changes in the economic fabric of eociety, ure also
an Important factor affecting banking oonditions.
(Page 63)
The Pro4em of Fsderel R.eserve 'Ariemorsnio
It should be recognized ut tae outset taat, generally speaki
ng, it
is not neceesary for the effective operution of a centra
l banking e:o stem,
such as the Federal Reserve System, that all private
banking institutions be ambers of taat system, have access to its
dieepant facilities,
&nd teep their reserves with it. Ab long a* tae
majority of tne larger
banks, having tn. bulk of bank resources, are
related to it and as long
ae it possesses adequate open-sartet posers,
its influence, if administered efficiently, should ordinarily suffice to
maintain sound credit
conditions, although its maim= effectivenes
s is to sone degree diainished
by its inability to deal directly zith non-ne
mber banks. The Important
thing, it would appear, is the aold that tae
Federal Reserve bystes aas
on its aember banks; that is, tae extant to
silica the latter, of necessity or of choice, largely remain a perman
ent adjunct of the bystem.
Giaaractor of Ghenies in
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Federal Reserve Bank of St. Louis
Fedtral
Rimerve MeabionsalD
IP es
-,*
*
*
*
(Pages 69 and 70)
The fact that tne mortality of ember banks snould nave ceased a
lass In membership of lo1J6 bank° is very significant. Thie figure
vas over 10% of tne tntal members active at the end of lila and It%
of all bank failures during the period. It saows that access to tfte
reeources of tae Federal Reserve Systea tnrough membership has been
ineufficient in many cases to avert bank suspension. Doubtless, this
has been a factor tn retarding any extension of membership in tae Systea.
Effect# on Federal iieserve byoten
The net effect& of recent structural chnnges in the banking eystem
of the country on the Federal Reserve System have been: first, a saift
tn tae componition of its membership, the proportion of compulsory nenbers
or national banks rising from 00 in 192k to 87% in 19b0 and tnat of
voluntury sember& or state member banke declining from 17% to It%;
second, a shift in tc...e relative control of banking resouroes aeld titain
the Syestem, the share aanaged by national bnake diminishing frost 35%
to 61%, and tae share controlled by state member banka increasing from
Mere nes been virtually no change in tae position of tae
al% rho
federal Soserve bystem in relation to tne proportion of all banks and
all bent resources encompassed by it. The shifts within the System are
suggestive. Tney indicate tae high degree of semsitivity of banking
institutione to the coaperative liberality of tne conflicting banking
codes, national or state, under which tney may operate. Naturally, tn.
choice betteen national and state governaent caarter hinges on estimated
net advantages. Competition between state and national banking oodas
sight conceivably go to suet extremes as to bring about a relaxation of
statutory restraints extralaely detrimental to the maintenance of the
bank liquidity required to protect the interests of bank depositors and
to ensure the successful operation of the Federal Reserve System.
Certainly the history of past developments, as tne following eaapter till
suggest, intimates the poesibility of this consequence. Furthermore,
suould the national banking code prove leas responsive in the onspotitive
race, the Federal Reserve System would be left with a national banking
membership controlling a smell percentage of the country's banking sowarms and a vacillating membership of state banks controlling a majority
of basking resources. The withdratal of the latter in numbers might easily
iaad to c. dangerous pyramiding of commercial banking reserves.
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GiNERAI, AVMS
*
*
*
*
(Pages i48 and 149)
Adjustments to
Changed Conditions
Accordimg to the facts assembled in the present study, banking
today itS a quite different type of business from vaat it is commonly
conceived to be. Ite fundamental functions are no Longer primarily
tae mediatorial financing of a purely local industry and trade. In
consequence of the depressed state of American agriculture and net conditions of agricultural production, tde altered organization and concentration of Amerieen industry and trade, significant canalise in tao
cnaracter of bank deposits, and rapid expansion of dei;osits because of
ample gold reserves, the functions of banks have become far more istiaately integrated with the central money and seaurity narketa than
ever before. As a result, a modern banking institution assumes a larger
airect risk or carries a much narrower margin of protection and is dependent on tae play of a much 'icier range of econonic fortes tLan the typical
American banking institution of eves a decano ago, ,tith its broad local
interests and purticipation in local incuatry and trade. ileum the
bank of today requires a new type of management, a different type of
organization, and a more integrated type of governsental superviaion.
Aoreover, because of tae growing internependence of national economic
life, toe American banking system would seen to recAre greater geographical consolidation or unification than exists at the present tiae and
standards of bunking pructice as nearly uniform as it is possible to
attain.
This statement does not ignore tne fact taat zany biLuaks have made
adjustments In their management fold organization according to the recuirements of changing conditions in the past; the city bsnke, especially
the large city banks, have undoubtedly done &o. Nor dose it imply that
banking lawe aave not "JAI&
altered from time to time to meet the needs
of changed conditions. It recognises, however, that many banking institutions neglected to make the adjaatmeate required or could not make
then readily beceuse of sills or location, in view of tae restrictions
or limitatione of the prevailing booking laws - a fact amply attested
by the unprecedented succession of bask failures not oni.j, in 19SO and
19Z1 but la the entire i.eriod following 1920. It is a depreesik; commentary on tne American banking system tut a concentrati.)ft of buuking
facilities in order to render effective banking servicee in a e:langlat
economic environment has had to proceed so largely tdrough tail destructive procese of bunking failure.
Because failures were mainly confined to small banks, tae lag in
baaking adjuetnent to the needs of agriculture, industry, ano trade may
be said to have been drinci)ally restricted to such banks, but uith
grave consequencez for large banks is the end. Great importance must
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tnerefore be attributed to the existence of banking lave directed to the
preservation of the local independent unit bank as a large factor in the
inability of banking enterpriee to adapt itself to all pauses of caanging
economic conditions. Aoreover, owing to the geographical distribution
of baaking fatalities and the greater mortality rate for state taaa for
national banks, weight must also be given to the naraful and often °ontradictory multiplicity of boating laws and tae competition between state
ana nutional banking codes for bank incorporation, loading to a gradual
lowering of standards of banking for tae tbole banking systea. The
ability of tne Federal Reserve System to moot a critical oanking situation
ariUng out of severe business depression and to contribute to recovery
is inevitably hampered by the exit.tence of taese conditions.
*
*
*
*
-44tare-oe
*
*
*
(Feces 150 and 151)
The Problem of Corqrok
gust not the iroblem be faced znetner a satisfastary banking systeL
can be attained with legialative ano edwinistrative eontrol of bank
establishment and bank operation vested not oniy ia the National Government but in the states as yell? Experience has Shorn taat the national
banking system establisned la 186S and tae Federal heservs System establisned in 1914 have been unable to bring about a unification of the
behLing system. Both sought this end by making their provisions attractive to bankts oderating ander state charters. If unification of Logi*.
lative aad administrative control is to be attained, ;mat there not be
a resort to some measure of compulsion? Those who ansver this question
affiraatively are not deterred by the obvious objection that national
action to this end might be in contravention of rights reserved to the
states by the Federal Constitution. They hold taat there ir ample le;-al
authority for the Federal Government to tate over the control of all
bankinc institatione and sake clear that, if the Supreme Court of the
United States should not uphold this view, the uay of constitational
a4end:qent remains open.
The fact that the Federal Reserve Board is actively studying ways
and aeans of bringing all the banks of the United States without exception under its jurisdiction is encouraging to those vho believe such a
course to be a first ste; toward the attainment of satisfaettry banxing
conditions.
Txte Probies
4failiktragot
rould unity in Legislative and administrative control ser7e by
itself to establish unity of action and high standarde of performance
for the banks of the United States? In other sords, can upward of
25,000 managerial units be brought into harmony of action? Tae unit
banking grate" of the United States, *nether controlled by national or
state law, has been extolled because it has facilitated the extension
of banking facilities throughmt the country. Suca a result is highly
commendable, but independent
unit banks arf, not the only aeans of
lk
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Federal Reserve Bank of St. Louis
frp
-6-
attaining it. The economic demand is for banking facilities, not necessarily for banKs.
dae not the time come to aim for & vary material reduction in the
total number of bank managements without reducing banking fecilities?
Coula not equally ample, more useful, and less expensive bankin6 eccoMmodation be offered to the American people by a relatively small number of
banks rith u relatively large nuaber of offices? Branca bankiag and in
a lesser degree chain or group banking vould in large aeasure substitute
the services of professionals for those of alateure la baniang menage
ment. ditherto these roma of coucentretion ia banking :lave been tolerated
rather than proaoted. Snould not all barriere to the development of
these banking forms be swept away and their progress facilitated? ?lacing
all banking under the juriediction of tae Federal Uoverament rould
the vay for such a policy li it ;:ere deemed In the public Interest.
Tae Problegy of Raggiation
A system of banks to take the place of tae aggregate of institutions
nor at best loosely knit togetaer could ooviously be built up only slorly.
After tae organism had been created and its scope of operation defined,
various problems of regulation youlf:1 arise. In many matters of bank
administration the public rould be wholly =tilling to trust to the
discretion of the benxers. It tould
itaelf whether aeans could not
be found to prevent in the future such developments as aad proved narm,
ful in the past. It would alsk 'nether Aeany could not be found to limit
loans on real estate or securities Then conditions tureutened un*,ise
and speculative expansion. Could the Federal Reserve Bankat by vlth,
holding rediscount privileges, chusten unruly und guide inemperienced
member banks? Could law or administration adopt rules that rould preveat
the banks lending uid to epeculation at the expense of productive enterprise*? Should there not be a more definite segregation or demenh and
time deposits? Or should, as the Committee on Bank Reserves of tug
Federal Reserve System recommende, the banks be required to ftold mierves
im proportion to the activity of their deposits revirdless of Weir classification am time or demand deposits?
Innumerable questions of detail would without doubt arise im any
radical reconstruction of our banking system. The fundamentui questions
remain: Aave re too diverse a control of banking institutions? dime
me too many banks?
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Address of A. L. Lathrop, Pres., Calif. B. A.,
V. Pres., Union Bank & Trust Co., Los Angeles
45 Annual Convention of California
Bankers Asso., Sacramento, May 1956
FDIC Encouraies Careful Banking
It seems obviaus that insurance of deposits has done much to restore
public confidence in banks, and that it will be a strong influence to
prevent panics and hysteria in future times of stress. It is not, however, a substitute for good banking, and in itself is not an assurance
that all banks will be soundly managed. In fact, it has been said that
because deposits are insured, bankers may be encouraged to be too liberal
in the granting of credit, and that careless banking is encouraged because the properly conducted banking institutions are assessed for the
shortcomings of the badly conducted banks, and, therefore, that the
system puts a premium on bad banking.
I do not agree with these postulates. If the FDIC exercises the
right kind of supervision over insured banks, if it gives them the
thorough and effective examinations which it has the power to administer,
and if it is known that banks which do not measure up to its standards
will not receive the benefit of insurance, the result must be to impel
those bankers who otherwise might be inclined to laxity or carelessness
into care and conservatism.
If in the administration of the Federal Deposit Insurance Corporation
basic principles of sound banking and economics are adhered to, it will be
a powerfill influence in establishing and maintaining the business of
banking in this country on the plane where it should and must be if our
financial institutions are always to be that dependable reservoir of
national credit, in good times and bad, which they are designed and expected to be. It has broad powers of examination and control over insured banks. Its authority can be quickly brought to bear to correct
unsound practices and eliminate weak banks, and should be used upon many
phases of the banking situation and be a primary force in preserving the
equilibrium of our economic structure. It should require efficient
management of banks, and the pursuit of sound and business-like practices.
It is interested to have insured banks operate at a profit, and, therefore, it should be sternly critical of applications for the establishment
of new banks, and should refuse to insure banks which have no hope of
surviving.
Under the old law any solvent bank was entitled to be insured. Under
the new law, before a bank may be insured, the FDIC must take into consideration its financial history and condition, the adequacy of its
capital structure, its future earnings prospects, the general character of
its management, and the convenience and needs of the community to be
served by the bank, and whether or not its corporate powers are consistent
with the purposes of the law.
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Federal Reserve Bank of St. Louis
158
The uniform and unrelenting application of these standards and
principles, as to both operating banks and applications for new banks,
without relaxation, and without favor or preference, must inevitably
be a strong influence in establishing and maintaining uniformly high
standards in the conduct of American banking.
****** ***
The President met this responsibility by appointing the present
personnel of the board, and I believe that the banking fraternity of
America is well satisfied. The appointments had little political flavor
and fell upon men who, as individuals and collectively, will bring to
the exercise of their solemn duties and heavy responsibilities, financial
and business experience, sound judgment, honesty of purpose, and devotion to the best interests of the nation founded upon the traditional
patriotism of good citizens.
They are practical men and not theorists, and command respect and
confidence. The board does take on the character and dignity of a real
supreme court of finance, and its destiny has been written by the
President in terms of man power.
** * ** * * **
The Bank Act of 1935 may not be perfect, but it is good in that by
eliminating the ex-officio members, it limits the danger of bringing the
whole Federal Reserve System under centralized political control. It
creates instrumentalities which, in the hands of courageous ani patriotic
men may be used to neutralize panics and depressions. How effective it
will be, depends entirely upon the ability, the courage, the character,
and the fortitude of the members of the Board of Governors of the Federal
Reserve System. If they have enough moral strength to withstand political
influences, if they can resist partisan coercion and public resentment,
and put on the brakes in a rising market when everyone is making money,
if in the face of a boom they can forget political considerations and
every consideration except those based on sound economic theory, and act
accordingly, the Banking Act of 1935 may well stand as a safeguard to the
banking and financial structure of the country.
The seven men who compose the Board of Governors of the Federal Reserve System are a Supreme Court of Finance--vested with greater powers
over the everyday existence of the average citizen than any other man or
group of men. May they measure up to their heavy responsibilities by
meeting them as fearless, faithful and patriotic American citizens.
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Federal Reserve Bank of St. Louis
******
**
GRAFT IN BUSINESS
John T. Flynn
*
*
Chapter Eleven - BANKING RACKETS
*
*
*
(Pages 255 to 259)
As a matter of fact the outrageous performances of the Bank of
United States were not the criminal acts for thich tne bank's officers
were prosecuted but a group of acts which did not figure in the trial
at all - a group of acts which are not against the law - a collection
of acts which can be duplicated in numerous other banks. To put
the matter more seriously, the acts which were responsible for the
destruction of that institution are those which now characterize
the tendency in bank management.
The crime of the officials of the Bank of United States consists in having failed, in not having been intelligent enough bankers
to manage the mechanism they set up without a crash. Their fault
in this respect was accentuated by the bad times into which we moved.
There is good reason to believe that if the business depression had
not overtaken us the Bank of United States would not have failed
and all the acts committed by the officers would not have become
known and they would now be operating the bank at full speed.
The various devices which they set up in that bank and which other
banks have also set up to circumvent the banking laws and get around
good banking practice rould still be well known to bankers but that
rould make no difference.
All the things, or many of them, which the
bank's officers were charged with having done are acts made possible
by the financial structure of the bank. In other rords when the
collection of corporations which constituted that institution was
formed it could have been done with no other purpose than to permit
the doing of the very things which were later done. If such devices
are found in other banks, what are we to conclude is the reason for
their presence there?
Let us now examine this banking structure and see hot artfully
it was framed for the purposes to which it was later put.
The Bank of United States was a state bank. It was empowered
to engage in the business of banking and nothing else. The banking
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Federal Reserve Bank of St. Louis
laws of New York State, es of most states for that matter, are quite
severe. They have been developed over a course of years and out of
many painful experiences. They have been designed to protect the
depositors directly and indirectly the community because of the necessity of having the funds, which are the life blood of business, carefully guarded against tne cupidity of men.
But there are many such who have felt tnat
our banking laws were a little bit old-fashioned; who thought our
banks should be a little more like the banks of other countries,
Germany for instance, where the banks get into all sorts of business
and control it. And so they gradually invented a form of banking
affili9tes which has now enabled them to do the very things which
half a century of banking law development was needed to prevent.
The officers of the Bank of United States did not invent tais. They
merely used a device which had already been invented. Now here is
what they did:
(Pages 266 to 269)
The important fact now is not that Marcus and his friends made
bad loans here and there, tut that they started off with this carefully
set up manipulation of the bank's powers with the intention of exploiting the bank's funds.
Is all this honest? Apparently bankers tnink it is. It was all
within the law. It was a scheme deliberately cooked to deprive the
bank's stockholders of a large part of the profits accruing from the
management of their funds. The point I am laboring to make is that th
fAilure of the bank was a mere incident. Even if the bank had not
failed, and all these affiliates had pursued their appointed courses,
the profits arising from all the variety of transactions of the Bankus
Corporation and the City and Municipal corporations would have been
cleverly detoured from the bank's stockholders to the pockets of the
officials. With these three corporations, unrestricted by law and
outside of all official scrutiny, the bankers proceeded to organize
some fifty-seven other corporations engaged in all sorts of business.
It was through these three initial affiliates that they were enabled
to carry out their schemes. Is this sound banking? Is there any
reason why it should be permitted to exist? One of the chief flaws
in permitting it is that it invites into banking the kind of men who
run to racketeering in business. It must not be supposed, however,
that the men who formed the directorate of the Bank of United States
were not reputable business men. That is the most serious phase of
the affair. That bank had a large board of directors practically
all of them ridely knorn as business men. Yet most of them approved
,‘t
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Federal Reserve Bank of St. Louis
-3the things that were done, all of them were thoroughly aware of the
intricate web of affiliates organized and some of them had full knowledge of everything that went on. The disturbing thing is that an
orgsnization, carefully devised, rigged from the outset to perform
secret services for the gentlemen who run the bank, invested for no
other purpose than grafting in bank credit, should have among its
directors a group of well-known business men. The managers of the
bank have truthfully said that the crash of the bank was due to the
stock market crash and the wide shrinkage in security values. There
is no doubt about that. It was the market collapse which wiped out
the bank's security values and caused the failure and in turn made
possible the revelation of what was going on behind the secrecy of its
cages and doors. If the market had not collapsed there is very good
reason to believe that the bank would have gone ahead and, of course,
the managers would have continued to ply their grafting activities
unmolested and with the approval of the board. But they rould have
been none the less grafters.
2
(Pages 278 and 279)
But this system of group baakini, in which
widely scattered bankihg interests are held together by means of the
holding company and are tied up with the extensive and promotional
schemes, including security affiliates, insurance companies and financial enterprises of every character - this systeu, lends itself admirably to the ambitions and designs of unscrupulous or at least of
adventurous men. It has been the parent of racketeering in the banking business. The profits which financial adventurers make by means
of these banking devices are hidden, carefully held away from the
public eye, concealed even from the scrutiny of the bank examiner.
No bank examiner can possibly follow them. Even if bank examination
were to be extended to bank holding companies and to banking affiliates, it would not be possible for examining departments to follot
the intricate details of promotion which are possible under this
system. My own view is that the holding company as applied to banks
should be forbidden by lat. But this would
not be sufficient. Security affiliates should also be rigorously detached from the bank and
the trust company. I see no objection to the investment affiliate
of a trust company. But to unite both the security affiliate, which
is a seller of securities, and the investment affiliate, which is a
buyer of stocks and bonds, is to shut our eyes
to the experience of
all time, which tells us that no man should be permitted to be on
both sides of a bargain.
• N,
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Federal Reserve Bank of St. Louis
SOURCE:
THE TRUST BULLETIN—MAY 1936
An address by Tom K. Smith, Pres. The Boatmen's Mat. Bk. of St. Louis,
before the Trust Divisiun's mLelAng at WLshintton Convention
in 19M, re proper trust personnel
Page
p6
"I should like to emphaaim in thi,,.; odic.nection that Vas
and peraonnel policies of the corporate fiduciary ore of
forcmopt importoace. * * * Fiduciari services art. fundamentally
different frooa thc sorvicos performed by other t;ipes bf business.
In general,
buolaeso orgt--ization is responsible day to itki stockholders; it stands or falls by- its ability to make aoney. The officers
of a truzt deportment have thL:i resiponsibility to their stockholders,
of course, but they heve another responsibilit:i wOhich ranko aheae of it:
their responsibility to their beneficiaries. The fiduciary iu not
working with its own capital alone; it is the custodian of the funds of
othere entrusted to its care, in man3, cases the money of women and
children unfitted by training and experitmce to administer it themselves. In the light of this fact the tAmt.(nds of the fiduciary upon
its personnel are more rigorous thbri in other forms of business.
Dependability and intellicence and integrity are at & premium. .Standards of judgment and honor rhich p.ometimes Est b:7 in other fields will
fail hopelessly in trust work."
Page L7 (Quoting agaia from Mr. 5mith's Wash. address)
"The president of a bank can take a very definite pz.rt in the
field of securing new business. H6 s',:ould by all means bc available
for counsel when quextions regarang newspaper advertising, direct-byand other vales campaigns are under conaderation. He can suEgest
that a cell be made on a certain individual or corporation. in important
situations, hp should bE available to write a letter, sake a telephone
call, or, if tht situation warrents, he should count it a privilege to
make a pereonal call. I welcome these opliortunities in my own bank, as
I like to knor at first ham: how the public regc..rds aur bank."
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Federal Reserve Bank of St. Louis
WUFCE:
THE MUT BULLFTIN--Mtrch 1936
FUNtt.iiiiNTALS OF That DEPARTIMIT CMT ANALYSIS—Speech
by
John J. Driscoll, Jr., Before 6eventeenth
Mid-Winter Trust Conference, Trust Div.,
A.B.A., Sew York, Feb. 1936
Beginning at Page 17
The need for an understsndirk and knowledge of
coate in trust
departments and the use of cost figures as e basis for
judging
desirable business nne for determininc the fees that
rhould be
collr;cted has been brought out very definitely through
the
experience of our company- in analorsin6 over 300 banks
with truet
departments. Of this group, approximstely 11 out of 12
trust
departments operate unprofitably; and of those that are prefit
sbls,
only onc out of three shows worth while earnines.
The assumption thpt if s trwt institution passes
a given
amount of total resources it nust be profits.ble like no
husis in fact.
Likewise, mere increnee in volume of business in atrust
department
will not of itself change an unprofitable depGrtnent to
a profitable
one.
DFCIDEDLY UNPROFITABLE
There are two fundasental weaknesses that bring about an unsatisfactory condition in trust department operation.
lira, in certain types of trust business fees received are
based on dollars handled rathor than on service render
ed or risks taken;
and in the majority of cases these fses will not pay the
cort of the
service rendered.
Sf,cond„ in handling trust business where the fee
is subject to
agreement, the trust department too frequently goes
after this business
on a eut rate basis. This lctter prattice hes been partly
eliminated
by the adoption of codes.
* * *With the adoption of ner business depart
ments and widespread
advertising and education of the public, trust depart
ments now find
themselves burdened with main; small trust matter
s which, it ie hardlj
necessar). t- soy, are decidedly unprofitable
.
As a reault, trust departments are now in the sane
potties as
commercial banking was fifteen y: ars ago. Nanely, volume
has boss
secured but profit is not being earned. When it
was faced with this
situation, boaking startod to 'maim, its coats ane
to compare the
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Federal Reserve Bank of St. Louis
141
-2-
John J. Driscoll, Jr.
beginning at pege 17 (contd.)
expense of rendering service with income receiveo, ane it definitely
determined where am- why profits were leakini, aeay. To bolster
tnese profits, banks found it necessary to rebort tu bervice enargee.
Trust departments aaperently are noe ht th, same point end must
determine where end mny their ,Arofies are leee4Aeg away and what remedies must be adopted.
It will probab4 be necestiary to rebuild tee concepLion of new
business in trunt work and a great part of the small, undesirable
business must either be unsold, or if it is to bc.retained it most be
handled on an entirely difterent oasis from vie preeent one.
Pages 19-2.0-21
Trust departments have been seekint, volute rather than quality.
Ws is the same miethke that materially reduced the earning power of
commercial banking.
The development of new business effort to secure volune in the
hope of cutting oosts rarely worke out. Expenses of operetion eeea
to follol. closely increaees in volute handled.
The profit figure should bear
definite relation to Vic time and
expense involved in reudering tle service perforned and also to the
responsibility assuted.
To the question, Tan trust costs be soundly determined?" I give
this answer. Over the past ten years, our company has analysed bank:int
coste in well over WO tanks. About five years ago, we starlet to
build a basis for the determination of trust costs and after we hed it
completed, experitented with it in tame trust deportee:11,s to iron out
the rough edges and aeet the practical problems ooeaslased in its
application. At this time, reports are being prepared for four trust
compant.15 in a clearinghouee group and it is their intention to apply to
the chancellor for a complete revision of their fee bases, based on the
facts that these reports are showing and will show.
As a final thought, I submit the following: Truet departmenta, as
now operated, are in the greet majority of instances unprofitable. With
the increased care and records now necessary, plus the new aid more severe
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Federal Reserve Bank of St. Louis
-3-
John J. Driscoll, Jr.,
Pages 19-20-Li (contd.)
governmental examinations required, it becomes good bosisess to keep
trust department records as sound am efficient as posAble. This
means furtner increased costs. If trust departments continue to
st&te
that a l&rge part of their business is unprofitable, the.7 shoul6
be
aule to show clearly why end where it is unprofitable. To provide
a
backlog to care for continvencies they must Eq4rn a arlfit. To keep
the
rt./
- spect of clients t„no prospective clients trust deptrtments must
be
handled to produce a profit, or tte opinion that they cennot successfully
be operated ia uound to take hold. If higher fees are necessa
ry and
definite facts Chri bc. shorn to prove this, it should incr-,1,se the
confidence of thf,. clients and prospective clients of trust departments
and cause them to feel that trust departmPut officers know end underst-nd their business.
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Federal Reserve Bank of St. Louis
INMEMINNWEI
SOUECE:
NEWSPAPLR REVIEW--Fed. hes. bk. of N.Y., Report!: Department,\\'
Li§irary
July 18, 197.6
\Iv
5.(The weakncsb of the present bwaking system of multiple control
is frshly rcvealf:': in Mat
af thc decree by ths Frt"heserve Board this week raising reserve requirements by. 60 per cent.
Here is a move which, to be properly effective, should apply not
to 4C per cent ,)f
t.wnke bvt tf 11 of tibm.
some mechanism will be devised in this and other states to make nonmember reserves conform to those decreed for member banks. But the
iacident is Finother illuminating example of thc difficultisn of
conducting the nation's banks under forty-nine central governing
boEirds inetead of one.) (Tribune, Ed., p. 10.)
(Noteo
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Federal Reserve Bank of St. Louis
Editorial referred to has been clipped)
ICr‘18
n
BOONC14 Annual Report of the Secretary to
Pa. Bankers Association (Charie F.
Zimmerman, President, First National
Batik* Humtingdom) about May 21, 1956
;312. DI:44U PIMA
It is a privilege to express the confidence felt throughout the Commonwealth because of the manner in which the plans of Secretary of Banking,
Luther A. Harr, have aaterialised since the Scranton Convention, in setting
up the Banking Beard as an arm of the State Government in supervising Estate
chartered banks and trust companies and trust departments of national banks.
The authority conferred upon the imiking Board together with its present
personnel* assures a continuance of souzd regulations and administrative
policies within the Banking Department, and is a considerable guarantee
against umdue political influence in the conduct of the work of the Department. Opinion of our hankers is to the effect that the establishment of
the Banking Board marks a real etep in mivance for an even etronger banking system for Pennsylvania.
nistakon SupeyvisorN folicy
Sensing from correspondence with members of the Association, many new
problems arising nowadays in practical banking* it is difficult to avoid
expressing the thought that constant aggressions in the field of banking
by federal authorities, have brought to the forefront the grave necessity
of aggreseively upholding states rights le banking, if the normal processes
of banking in America are to be preserved te us for the future.
A ~less question in point hat been projected by recent federal legislation umder regulations authorized by t',e Honking Act of 1935. Trust departuents of national banks in this state presumably may te no longer guided
by the Pennsylvania Fiduciariea Act, but instead are expected to submit to
certain methods prescribed im Regulation Y Issued by the Federal Reserve
Board. I refer to the action by Federal mmthorities to upset the establish&
uethod governing our investment of trust Nods held by a national bank trust
department under the jurisdictiom of the County Court, in prohibiting participating's in aortgages owned by the commercial department of the bank, and
eligible for trust funds under our Pennsylvania Fiduciaries Act.
Auch needless ham-stringing of the natural functions and obligations of
corporate trusteee, persuades one that these steps at Washington should be
promptly retraced for tt,'e food of all parties concerned. Neither any banker
nor any other thoughtfUl penes needs to be reminded that integrity cannot
be jadaislid into the conduct of trust deparimem4 management. it is vain
to assume that such
prohibitiom as the forelimb& governing the normal
and lemg established method of investing trust fads by corporate trustees*
can by any means whatsoever promote mere honorable intent or wiser discretion, on tha part of the trust invesbont comnittee of any bank. Laws of
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Federal Reserve Bank of St. Louis
; 9
-2-
this type tend most of all to throw disparagement upon thousands of consciento keep in operation high-grade, cortious bank officers, v4)ose problem it
rect trust practices day in and day mt. It is fair to say that so far as
Pennsylvania it concrrned, thit provi.slon in Regulation r, is devoid of all
merit as a practical measure.
Sony similar instances can be provided to establish the unwisdom of
supervisory policiee now in vogue out of Washington. The influence of the
Pennsylvania Bankers Asaociation eholld be felt in the direction of finding means for having runervision made a serviceable instrumentality rater
them a basis for obstructing the normal and necessary activities of good
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Federal Reserve Bank of St. Louis
1■11P1
•
ADDRESS BY HAROLD G. MOULTON, Pres., The Brookings Insttution,
at Kansas City, Mo., on May 7(1), 1936
SOURCE:
I conclude, therefore, by saying that the vitally significant
role which the commercial banking credit system plays in financing
productive activities, end in facilitating the financiel operations
of government is an absolute essential.
Indeed, if the flexibility
and expansibility provided by commercial banking creeit were eliminated,
it is scarcely too much to say that the economic system itself would
shortly be destroyed.
Such a conclusion, however, must not be interpreted as implying
that the banking system of this country is a satisfactory one, or
that it has always been operated with adequate wisdom and foresight.
There
iF
vital need of improving the organization of the banking
and credit system to the end that it may perform its essential
functions more satisfactorily in the future.
What is particularly
needed is a better integration not only within the commercial banking system itself but also as between the different divisions of
the complex financial structure by means of which the whole system
of economic production and distribution operates.
24
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Federal Reserve Bank of St. Louis
Me 'Future of the Unit Bank*
tr N. W. Koeneke, President
Security Bank, Pones City
%fore State Sank Division, May 7
(The Oklahoma Banker, ley, 1930
*•* * * * * *
(Xt has been fortunate for the unit banks, both state and national,
that at the present time and for the past 18 months, there has been much
dissension and lack of coordination in the different governmental agencies
which were in reality to have been the instrumentalities to bring about
unification in the minds of the framers of the 1953 Banking Act. Therefore, no definite action has been tam on behalf of these agencies to
force all banks into a common system. There is a ,74,ssibility, however,
that coordination will be brought about and when this happens we may expect a more agareesive campaign toward enification.)
The Amerissa dual system of banking, with its many individual unit
country banks, both national and state, I am sure are determined to fight
for their continuation and existence and all the unit banker really desires is an opportunity to be permitted to serve his community and cantinas to have his small part in the building up of our ematry. There
can be no question in the eind of anyone that the dual system of banking
and the unit system of banking *meld receive eredit for the progress
made in this nation and the development of our aatural resourees. In
Oklahoma. the spirit of the piemer is still with us and we, as individual
unit beakers, most certainly are ie a better position to judge the credit
needs of our respective solemnities than some executive or official
residing in a nearby state. I aa quite sure tkat the spirit of kmerica
and the desire to have a traly MMUS& MMUS of banking is quite
prommeed in our reopective communities wad the folks back home who
have prospered with the unit beak and who have metered when they were
unable to pay the obligations ceasing the unit bank trouble, are ready
and rilling to caatinue the fight to maintain our unit banking system.
All they need is factual infornation„ which you and I can give them.
* * * * * * **
,
Me in Oklahoma and other states are justly proud of our state rights
and, vale I do not wish to ,?„eit into the discussion of the subject of
state rights, there tre some things *Job seem important to me, that could
be accomplished and Amid be given serious sommideration, which memlid
Parlpher fortify and strengthen our state bmikling mites. One of the met
isporteat of these undertakings is the forming it sewed policy for
ehartering banks. In appreeekimg this enbjeet eme mat keep is mind that
there are 48 sabdivisiams of cur governmeats each state having authority to
issue dharters for beaks or mrporations„ and in most states the poser to
issue a disaster is vested in a board or °omission. These boards or coomiseions are, is most oases, of a politieal nature and their julammt is at
times swayed by
favoritism. It is, therefore, highly important
that a non-politieal board or commissim have the authority vested in it by
a state law to make a thorough invftstigatima of a proposed organisation of
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Federal Reserve Bank of St. Louis
7 A-
- 2any bank or financial institution. bereft the application for a charter ass
noceive favorable consideratioa by the 'barter board or oomaission. In
states where they now hmve a banking board, whether they act in an advisory
capacity or are actually in charge of supervision of financial institutiemst
It meld be a rather simple matter to have state laws masted which would give
this board simple authority to investigate the propoeed orgmmisers of the basks
the need for a boa* in its particular community, emd the possibilities of its
profitable operation* This board should be given the power to make favorable
or unfavorable recommendations to the charter beard or commission in their
respective states. The law should be so worded as to give the Charter board
or commission the right to refuse to grout a 'barter, evma though it had the
approval of the beekiag board, but limiting favorable action on those appliortions which hove the approv:a of the banking board. In statee where no
banking beard mists, a plan could be worked ant whereby a nommpolitical
board or oommiseion could act in its steeds
It is my thought that by limiting the mathority and eliainating, as
nearly as possible, all political favoritism in the granting of beak charters,
the danger of over-banked conditions, such am existed previous to the bank
moratorium, could be prevented. Hy having a eet-up siailar to the above outline in all 48 states in the Union, I believe whole-hearted sempouration could
be expected and obtained from the national authorities, in regard to the
issuance of ohartPrs for national bftnks. The attitude of tie Controller".
*Mee at prevent is quite favorable to the curtailing of ismaing of bank
*barters without an ample justification for a new bmmk. / am sure that the
banking board of the State of Oklabosa--or any other state, for that =attermod the national supervising authorities would welcome any information as to
the banking history in the respective committals. /, therefore, believe
that all badgers should be in a position to Purnish south information to the
rempeettve Sepervimimg agencies or booking boards., Therefore, it would be
my amemetion that yea sake an eihanetive study mad survey of the banking
history mad cooditiome in peor desSmsity, primmrily for the purpose of being
informed ea to the past epporismor in your conmmait, made secondly, to be in
a position end every reed, te fernish detailed information to the various
supervising agencies, both state and national. should a movement be started
for additional booking facilities in your Immunity.
* * * * * *** * *
Another very important thing whisk should reeeive earefoll consideration if we wish to strengthen and preserve the state beakiag system in the
State of Oklahoma, is a caren1 stogy Ohould be made of the banking laws
governing the operation of state balks within our state. As the matter now
simmds, Oklahoma state briaks are very much testricted as to their investment policies, being limited to investing Punds in Oklahoma municipal end
Oklahoma state bonds and warrants, and obligAions of the United States
govimmmemt* Mile we all h-ve the utmost confidence in Oklahoma mosisips1
on sure lye are all mrryieg a liberal
sod stete bode mod warrants, sad
mmemnt of seek investments, re are at a considerable disedeentage whom we
eempare our invevisistreivileges with these 6be national beaks in Oklahoma
smjoy. It seems to me that we cguld safely be permitted to invest le
mmmicipal bowls origimatiag in other states of the United State* mad ether
evidences of indebtedmesm issued by corporations, under strict rules sod
regulatioas teemed by the banking board, seeming thereby that only sok
investments Amid be permitted as would pass the most rigid tests.
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Federal Reserve Bank of St. Louis
•
SOURCE: PROCEEDINGS 46th ANNUAL CONVENTION MO. BANKERS ASSO.--KANSAS CITY
May 1936
Address by Phil S. Hanna,
Editor of Chicago Journal of Commerce
Page 115
Let us look into and examine the hypothesis of synthetic prosperity.
These people believe that everything can be solved by centralizing the
banking control in one place; by extreme control of credit for the security
of operation of the securities business; by government guarantee of deposits; by manipulation of gold and credit, inflation and deflation. They
believe that by these means, the device can be used to restore and maintain
prosperity. I think it is fair to say that the 1935 Act has been designed
around that principle.
The Act did not solve any fundamental problems. In connection with
branch and unit banks, for example, it left threats of further devaluation 0
and deflation and opened the door to real estate speculation, and more than
that, it left the banks in the hands, not of one authority, but we have the
Federal Reserve Board, the Comptroller, the Federal Deposit Insurance
Corporation, the Reconstruction Finance Corporation, and, in some respects,
the Securities and Exchange Commission, all supervising and compelling the
banks in one way or another.)
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Federal Reserve Bank of St. Louis
.1621
A
•
Remarks by John H. McCoy,
President, Ohio Bankers Association
46th Annual Convention
Ohio Bankers Asso., 1936
(The Ohio Banker, June 1936)
******* * *
(ye have been in freouent communication with the Board of Governors
of the Federal Reserve, the officers of the Federal Reserve Bank of
Cleveland, the Comptrollerls office, our Chief National Bank Examiner,
Mr. Leyburn, at Cleveland, the Federal Deposit Insurance Corporation at
Washington, as well as Chief Examiner Stroefer at Columbus, and Mr.
\OSquire, our State Superintendent of Banks, in regard to interpretations
and methods of operation under the new legislation. We have had their
cooperation in interpreting the meaning of various provisions and have
passed this information along to aur membe-s, who found this service
very helpful)
)pro
I believe the statement can be made that today there is more harmony
and cooperation between all of our supervising authorities and the banks
than at any previous time. In our work with these supervisors we have
found that they have been most anxious to cooperate for the best interests
of the banks and the communities which they serve.
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Federal Reserve Bank of St. Louis
* * ********
f1
•s
•
SOURCL:
SUPPLEMENTARY PROPOSAL FOR BANKING UGISLATION
AND FOR CHANGES IN ADMINISTRATION OF EXISTING LAW
Pages 3 and 4
IV. Legislation for Better Public Supervision of the Banking System
According to a statement made at the last Agents' Conference, it is the
"duty of public supervision of banks to protect the nation's thrift". To
Perform this duty, legislation should centralize supervising authority,
should give it adequate powers, and should impose penalties for not using
these powers in the public interest. In the study of bank suspensions
made by the Federal Reserve Committee on Branch, Group and Chain Banking,
evidences of weak examination and supervision were frequent. Citing
supplementary data that was not included in the Committee's final
report, in over half of the cases studies, examiners admittedly underestimated the losses present in banks. In one-fifth of the cases
studied, they tolerated dangerous affiliation with other banks and
companies. In one-tenth of the cases, they depended too much on the
net worth of the management, and consequently delayed corrective
measures until too late. Individual examiners were criticised for
being over-optimistic, for making hasty and incomplete examinations,
for inadequate appraisal of weak assets, and for temporizing with unsound situations. In this latter connection, it was found that the
assessment policy was frequently weak and that there were numerous unsound consolidations and reorganizations. In several cases, weak
state banks were allowed to join the national system without improvement. There was almost a total lack of criticism of faulty investment
practices. Probably enougn material exists, or will be developed in
other parts of this study, to draft needed reform legislation covering
bank supervision. These revisions should include among other matters:
Centralized control.
Tests for management.
More rigorous provisions for chargingoff undesirable assets.
Enforcement of the publication of bank statements which reveal
the true condition of a bank.
for lax supervision.
Penalties
5.
1.
2.
3.
4.
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Federal Reserve Bank of St. Louis
Excerpts from a letter to Mr. Leo H. Paulger from L. M. Clark of the
Federal Reserve Bank of ALlanta dated November 50, 1936
"Another examination has just been completed of the Savannah
Bank and Trust Company and practically the same violations are again
reported. During the examinel‘is discusbion of the matter with the
management of the t'ank, it develo-o-_,A that other banking institutions
in Savannah have not been required to adhere to the provisions of the
regulation and for that reason difficulty arose 1.n the attempt to
effect the desired corrections, especially as to the public funds
so carried.
"There have bean other instances in this district where correction of violations of thie nature have been difficult due to
cutlined above, and information given by
similar si!Axiticnr
the banks that other banks in the same community had not been required to remove accounts from the savings department where they
n.cwere carried in violation of the provisions of liegulation
are
attemptye
experienced,
difficulty
the
of
view
cordingly, in
ing to obtain the cooperation of the Chief National Bank Examiner
of this district tn an effort to have the provisions of the regulation carried out by all member banks."
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Federal Reserve Bank of St. Louis
•
-atemcg.
•
Draft of Suggested Law Governing Operation
and Management of Mutual Savings Banks
Prepared by National Asso. of Mutual Savings Banks
(June, 1956)
Section 47. Examination of vouchers and assets by trustees. (1)
The trustees of every savings bank, by a committee of not less
than three of their number, on or before the first day of (
in each year, shall thoroughly examine the books, vouchers and assets of
such savings bank, and its affairs generally.
The annual statement or
schedule of assets and liabilities reforted to the superintendent of
banks as provided in section 48 shall be based upon such examinations,
and shall be verified by the oath of a majority of the trustees making
it; and the trustees of any savings bank may require such examination
at 'such other times as they shall prescribe.
The trustees shall, as
often as once every year, cause to be taken an accurate balance of their
depositors' ledgers, and in their said annual report to the superintendent
they shall state the fact that auch balance has been taken, and the
discrepancies, if any, existing between the amount due depositors, as
shown by such balance, and the amount so due as shown by the general
ledger.
Explanatory Notes
(1)
The requirements of this section are generally contained in savings bank laws and seem self-explanatory.
The several states vary as to details.
number of
states, such as Pennsylvania, Connecticut and Massachusetts
require only an annual examination by the trustees.
Others, such as New Hampshire and New York, require a semiannual examination. Some states permit the examination to
be made by an accountant instead of by the trustees;
Massachusetts apparently requires that it be made by an
approved accountant under the supervision of the committee
of trustees. The desirability of requiring a separate
audit by independent accountants should be considered
further.)
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Federal Reserve Bank of St. Louis
EA
I(15
Draft of Suggested Law Governing Operation
and Management of Mutual Savings Banks
Prepared by National Asso. of Mutual Savings Banks
(June, 1956)
Section 48.
1.
Reports to superintendent. (1)
Annual report.
On or before the first day of (
in each year every savings bank shall make written report to the superintendent of banks, which report shall be in the form prescribed by the
superintendent and shall contain a statement of its condition on the
morning of the first day of (
) tn the said year, and
such other matters us the superintendent shall require.
2.
Verification.
Every such report shall be verified by the oaths
of the two principal officers in charge of the affairs of the savings bank
at the tLme of such verification, which shall state that the report is true
and correct in all respects to the best of the knowledge and belief of the
persons verifying it, and that the usual business of the savings bank has
been transacted at the location required by this act and not elseahere.
5.
Special reports.
Every savings tank shall also make such other
special reports to the superintendent as he may from time to tl_ie require,
which shall be in such form and filed at such date as may be prescribed by
the superintendent and shall, if required by him, be verified in such
manner as he may prescribe.
4.
Re)ort to depositors.
At least once in every year every savings
bank shall cause to be prepared a stateLlent showing the condition of the
corporation as it appears upon its books, Ln the gene-fal form of a balance
sheet, and of such particular form and containing such Itens as the superintendent by regulations may prescribe.
Such statement shall be posted in
a conspicuous place in its tanking room where it may be easily read by the
public, and shall remain until another succeeding stateElent is prepared
and posted.
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Federal Reserve Bank of St. Louis
(2)
•
- 25.
Penalty.
Any such savings bank failing to make any report or
file any affidavit of publication required by this section shall forfeit
to the people of the state the sum of one hundred dollars for each day
such report or the filing of such affidavit of publication shall be so
delayed or withheld, unless such penalty shall be waived by the superintendent.
* * * * * * ***
Section 50.
No other report or supervision required. (1)
No savings bank shall 1-e required to make any annull or
other report to the legislature or to any other officer or authority
either of the state or of any subdivision thereof except as provided
in this act; nor shall it be subject to the inspection or supervision
or interference of apy local officer or board in any matter appertaining to its business or dealing.
* *****
Section 51.
***
Communications from banking depart"ent. (1)
Each official communication directed by the superintendent
of banks or one of his deputies to a savings bank or to any officer
thereof, relating to an investigation or examination'conducted by
the banking department or containing suggestions or recormendations
as to the conduct of the business of the savings bank, shall be submitted by the officer receiving it to the board of trustees at the
next meeting of such board, and duly noted in the linutes of the
meeting of such board.
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Federal Reserve Bank of St. Louis
Explanatory Notes
This provision serves two purposes (1) to provide
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Federal Reserve Bank of St. Louis
- 3assurance that all such matters are brought to the attention of the board of trustees and (2) to prevent
evasion of responsibility on the ground of lack of
knowledge.
41r<SOURCE:
PROCEEDINGS RECENT CONGERENCE ON CALL REPORT STANDARDIZATION
May 22-23, 1935, Nat. Press Bldg., Wash. D.C.
gr. Tucker, F.D.I.C.
PaKes 31-32
* * ***** **
(To determine from published condition statements whether individual
depositors could have made a reasonably accurate differentiation between
banks which remained open, and banks which were closed during the depression
was the object of a study conducted by B. M. Giles and F. L. Garlock. This
study analyzed certain ratios obtained from the published call statements
36‘
of selected banks in Arkansas for c period of many years through 1932.
During the period approximetely 50 per cent of the banks studied were
closed. The title of the survey is "General Indicators of the Conditions of
Arkansas Bunks."
The most interesting conclusion of the study was that the ratios of
book capitel to deposits for the banks which were closed were prectically
identical with the ratios for banks which remained open. This lE perhaps
indicative of the extent to which bank statements do not show an actual
evaluation of assets.) However, tilt_ authors did discover certain indicators
or retios which, in their opinion, would have been sound criteria for
depositors. These indicators in the order of their reliability are as
ollows:
(1) Loans, other stocks and bonds, and real estate (minus capital
funds) to deposits;
(2) Cash resources end net United States securities minus borrowed
money to deposits;
(3)
Loens and other stocks and bonds to deposits;
(4)
Loans to deposits;
(5)
Cash resources minus borrowed money to deposits;
(6)
Borrowed money to deposits.
(7)
-;fish resources and net United Ststes securities to deposits.
(8)
Cash resources to deposits.
It will be noted that each indicator is a complex liquidity ratio or
its inverse. Carried to its logical conclusion, the argument of this survey
is that banks, with a large proportion of Government bonds and cash and with
a small volume of loans and di&counts, and with no borrowed money, are the
soundest. It is doubtful if liquidity in itself is a complete formula for
distinguishing sound from weak banks, but such is the apparent conclusion
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Federal Reserve Bank of St. Louis
705
-2-
sir. Tucker,
Pages 31-32 (contd.)
of this study.
.
1 ci
(Undoubtedly, few depositors have a sufficient understanding of
balance sheets to make detailed andyses, and with the advent of the
FDIC tbesmall depositors are largely relieved of this responsibility3
(The fact that banks themselves have lost sizable sums deposited in
y other banks indicates that bankers themselves have often not been eble
to differentiate between sound and unsound institutions from published
statements.
From the survey of ar. Gile and Mr. Garlock, a differentiation on
the basis of the margin of capital protection is apparently subject to misgivings, because bank statements are not and could not be actual evaluations.
For obvious reasons a summary of examination reports cannot be published.
Then, too, to differentiate purely on a basis of liquidity is on the whole
unsound. It would seem, therefore, that the use of the call report to depositors, from the point of VieD of their protection, is open to serious
question.)
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Federal Reserve Bank of St. Louis
SOURCE:
PROCEEDINGS OF RECENT CONFERENCE ON CALL REPORT STANDARDIZATION
May 22-23, 1935, Nat. Press Bldg., Wash. D.C.
Mr. Woodlief Thomas
PaRp 11-12
* * * In summary, it may be said that from this standpoint the more
important defects in available banking statistics are as follows:
1. Reports from all banks are not sufficiently frequent and
regular. Frequent and regular reports are obtained from banks in
leading cities but at times figures for these banks may be mislead
ing
es to the trend of developments. Data for country banks, which are
available only at call dates, are needed at more frequen
t intervals.
2. Classifications of loans and deposits are not suffici
ently
detailed to facilitate analysis. gore information
ie needed as to whom
the money belongs to and also as to who the borrowers
are.
3. Additional information is needed as to volume of operati
ons.
Figures on debits or check payments are obtainable but
have certain
defects,- (a) They are not subdivided
to types of deposits, (b) They
do not apply to the same banks for which deposit figures
are reported and,
therefore, are not directly comparable, and (c) They
are not available for
banks in smaller places.
There is no information at all regarding the volume of loans made
or
credits to depositors accounts. During recent years banka
have been severely
criticized for not making new loans when they were,
as a matter of fact,
making such loans. It happened that repayments exceede
d new loans made and
no information is available regarding the amount of new
loans made and the
amount of repayments.
This is not a program or a promise or a threat. It
is simply a statement of facts that are needed for proper economic analysi
s. In seeking information from banks it is of course desirable constan
tly to avoid placing upon
them too heavy a burden of reporting, and information requested should
be
limited to that which can be more or less easily obtained. It
should be
recognized, however, that ever) day decisions are being made by Governm
ent,
by business, and by banks themselves, based upon supposition as to many
of these
facts. Lertain theories which are the basis for policies and action
havenever
really been tested and cannot be tested except by experience
or except by
reference to factual information. It is always necessary to conside
r whether
the cost for mistakes that may be made without facts is greater than
the cost
of reporting accurate statistics.
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Federal Reserve Bank of St. Louis
A ••
SOURCE: PROCEEDINGS OF RECENT CONFERENCE ON CALL REPORT STANDARMATION
May 22-23, 1935, Nat. Press Bldg., Wash. D.C.
Mr. Wolfe, Phila., Pa.
Pages 14-15
One thought suggested is that the banks prepare this report solely
because the law requires the report to be made. As stated by Mr. Folger,
these reports are put to very little of the use for which they were
originally intended. It strikes me that as we discuss this matter, we
ought to keep in the foreground the purpose of these reports. Why are
we asked for them? There are two types of report, one solely for statistical purposes and in addition the report of the examiner. Each report
should be carefully checked because it is the trend that counts and the
reports indicate the trend. We know then what kind of medicine to prescribe. It would seem to me that the problem faced by the Reconstruction
Finance Corporation, the Federal Deposit Insurance Corporation, the Federal
Reserve Board, the Comptroller of the Currency, and the Supervisory agencies
is to determine among themselves the type of report to be used. That would
be a tremendous step in advancement of this purpose. The time might come
when we could reward the good banks by making examinations less frequent,
or perhaps penalize the weak banks by making examinations more frequent.
The 'problem' banks might have to be examined three or four times a year
and the good ones only once a year. Isersonally, I do not have the confidence
in examinations that the public seems to have, because we must remember that
the banks were heretofore exRmined at least twice a year and yet many of
them failed. While I was manager of the Philadelphie loan agency of the
R.F.C. I found things goint on in banks that I was astonished to see how an
examiner could possibly have passed. The report of an examiner is prepared
from the standpoint of an auditor, whereas no one could be (or perhaps I
shouldsay, should be) better qualified to pass on credit risks than the man
who made the loan. The real work of examination will be done here by experts,
highly paid, I hope.
I can offer you e suggestion. Some bankers may be angry at me for
saying this. Forms should give the history of a bank's loans. Especially for
stetistical purposes. We should show the number of loans made, number
pertially paid, number renewed, number paid in full, etc. The trend would be
very significant. For example, sa there are three banks in one town. The
loan reports of one bank would show a healthy condition, some reported being
paid, some reported being renewed. Another bank in the same town would show
an entirely different picture. That should mean a lot to the groups in
Viashington.
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Federal Reserve Bank of St. Louis
Mr. Wolfe, Phila., Pa.
Page 25
Two examinations a year can either be very complete or very
perfunctory, that iF, purely a general check-up. We might be able to
do something to reward good banks. If their record is good, only
one
detailed examination a year should be necessary and the other examination
more or less cursory. I believe that a man or
bank should be rewarded
for excellency.
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Federal Reserve Bank of St. Louis
APCE: PROCEEDINGS OF RECENT CONFERENCE ON CALL REPORT STANPAR
DIZATION
May 22-23, 1935, Nat. Press Bldg., Wash. D.C.
Mr. Wells, Indianapolis
Page 25
Starting July 1, 1935, with the co-operation of the Federal Deposit
Insur ce Corporation, we in Indiana are going to put our best banks on
an
ual examination basis; those banks in a secondary positio
n on a nine months
asis; those in not such a good position on a semi rinnual basis; and the
Oproblem" banks on a quarterly bttsis.)
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Federal Reserve Bank of St. Louis
SOURCE: PROCEEDINGS OF RECENT CONFERENCE ON CALL REPORT STANDARDIZATION
May 224.3, 1935, Nat. Press Bldg., Wash. D.C.
Mr. Will, Chas Nat. Bank, N.Y.
Pages 28-29
Quarterly statements should be sufficient for the public. The
statements should be more detailed so they would mean something.
(Do
like they do in Canada bnd England--publish an earning statement.
It would be from the standpoint of the stockholders and the
depositors. The present published statement is mebningless. The
question is how far we want to go.
I would suggest that the assets be grouped under pledged and unpledged, and the liabilities under secured, preferred, ordinary liabilities, and capital funds--the same as a commercial house, when it showE
a statement to procure credit.)
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Federal Reserve Bank of St. Louis
SOURCE:
PROCEEDINGS OF RECENT CONFERENCE ON CALL REPORT STANDARDIUTION
May 22-4'3, 1935, Nat. Press Bldg., Wash. D.C.
ivir. Brandon, Irving Trust, N.Y.
Pages 30-31
I am inclined to wonder as to the value of published bank
reports. Why waste the money that is spent on publishing them? Deposit
insurance protects the little fellow so we might as well cease publication
altogether and furnish to those who can underst/nd it a detailed statement that would be sufficiently elaborate to be intelligently understood by the average man.
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Federal Reserve Bank of St. Louis
MEMORANDUM
The Sixth Draft of the Uniform Small Loan Law, as revised
January 1, 1935, by Russell Sage Foundation, New York, contains
the following with respect to application and fee:
"Section 2. Applicetion for such license shall be in
writing, under oath, and in the form prescribed by the Commissioner,
and shall contain the name and the address (both of the residence
and place of business) of the applicant, and if the applicant is a copartnership or essociation, of every member thereof, and if a corporation, of each officer and director therEof; also the county and
municipality with street and number, if any, where the business is
to be conducted and such further information es the Commissioner may
require. Such applicant at the time of making such application shall
pay to the Commissioner the sum of fifty dollars
as a fee for
investigating the application and the additional sum of one hundred
dollars (0.00) as an annual license fee (Note 7) for a period
terminating on the last day of the current calendar year; provided,
that if the applicetion is filed after June thirtieth in any year such
additional sum shall be only fifty dollars (g50) (Note 7d). In addition to the said annual license fee every licensee hereunder shall
pay to the Commissioner the actual costs of each examinetion as
provided for in Section 10 of this Act.
(gso)
Every applicant shall also prove, in form satisfactory to the
Commissioner, that he or it hEs available for the operation of such
business at the location specified in the application, liquid assets
of at least twenty-five thousend dollars (g25,000)."
*
* * * 3E- *
**
"Section 4. Upon the filing of such application and the payment
of such fees and the approval of such bond, if the Commissioner shall
find upon investigation (a) that the financial responsibility, experience, charecter, and general fitness of the applicant, and of the
meNbers thereof if the al)plicant be E co-partnership or asbociation,
and of the officers end directors thereof if the applicant be a corporation, are such as to cominand the confidence of the community and
to warrant belief that the business will be operated honestly, fairly,
and efficiently within the purposes of this Act, and (b) thnt alloying
such applicant to engage in business will promote the convenience and
advantege of the communit:, in which the business of the applicant is
to be conducted, and (c) that the applicant has available for the
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Federal Reserve Bank of St. Louis
59,3
-2-
operation of such business at the specified location liquid assets
of at least twenty-five thousand dollars ($;25,000) (the foregoing facts
being conditions precedent to the issuance of a license under this Act),
he shall thereupon issue and deliver a license to the applicant to
make loanE in accordance with the proviEions of this Act at the location
specified in the said application, which license shall remain in full
force and effect until it is surrendered by the licensee or revoked or
suspended as hereinafter provided; if the Commissioner shall not so find
he shall not issue such license and he shall notify the applicant of the
denial and return to the applicant the bond and the sum paid by the
applicant as a license fee, retaining the fifty dollars WO) investigation
fee to cover the costs of investigatin6 the application. The Commissioner
shall approve or deny every application for license hereunder isithin
sixty (60) days from the filing thereof wit, the said fees and the said
approved bond.
If the application is denied, the Commissioner shall within twenty
(20) days thereafter file with the Department of (Note 8) a written
decision and findings with respect thereto containing the evidence and
the reasons supporting the denial, and forthwith serve upon the applicant
copy thereof, which decision and findinEs may be reviewed by a writ of
certiorari or writ of mandamus within thirty (30) days after the filing
thereof (Note 9)."
* * ** *** *
"Section 9. The Commissioner shall, upon ten (10) days' notice
to the licensee stating the contemplated action and in general the grounds
therefor, and upon reasonable opportunity to be heard, revoke any license
issued hereunder if he shall find that:
(a) The licensee has failed to
the annual license fee or to
maintain in effect the bond or bonds required under the provisions of
this Act or to comply with any demand, ruling, or requirement of the
Commissioner lawfully made Pursuant to and within the authority of this
Act; or that
(b) The licensee has violated any provision of this Act or any
rule or regulation lawfully made by the Commissioner under and within
the authority of this Act; or that
(c) Any fact or condition exists which, if it had existed at the
time of the original application for such license, clearly would have
warranted the Comnissioner in refusing originally to issue such license.
The Commissioner may, without notice or hearing, suspend any
license for a period not exceeding thirty (30) days, pending investigation.
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Federal Reserve Bank of St. Louis
2
The Commissioner may revoke or suspend only the particular
license with respect to which ground for revocation or suspension
may occur or exist, or, if he shall find that such grounds for revocation or suspension are of general application to all offices, or to
more than one office, operated by such licensee, he shall revoke or
suspend all of the licenses issued to said licensee or such licenses
as such grounds apply to, as the case may be.
Any licensee may surrender any license by delivering to the Commissioner written notice that he thereby surrenders such license, but
such surrender shall not affect such licensee's civil or criminal
liLbility for acts committed prior to such surrender.
No revocation or suspension or surrender of any license shall
impair or affect the obligation of anz pre-existing lawful contract
between the licensee and any borrower.
Ever3,- license issued hereunder shall remain in force and effect
until the same shall have been surrendered, revoked, or suspended in
accordance with the provisions of this Act, but the Commissioner shall
have authority on his own initiative to reinstate suspended licenses or
to issue new licenses to a licensee whose license or licenses shall
have been revoked if no fact or condition then exists which clearly
would have warranted the Commissioner in refusing originally to issue
such license under this Act.
Whenever the
issued pursuant to
ment of (Note 8) a
thereto containing
or suspension, and
which order may be
within thirt (30)
Commissioner shall revoke or suspend a license
this Act, he shall forthwith file with the Departwritten order to that effect and findings with respect
the evidence and the reasons sup)orting the revocation
forthwith serve upon the licensee a copy thereof,
reviewed by a writ of certiorari or writ of mandamus
days after the Mink thereof (Note 9)."
"6ection 21. (Note 1G) is hereby authorized and empowered to
make such general rules and regulations and such specific rulings,
demands, and findings as may be necessary for the proper conduct of such
business and the enforcement of this Act, in addition hereto and not
inconsistent herewith."
These sections indicate steps which are considered to be necessary
in connection with this type of financing institutions end may be of use
for suggestions in connection with number 10.
(The Foundation has put out "Small Loan Series" of pamphlets or
books, one of which is entitled "Small Loan Legislation, 1932").
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Federal Reserve Bank of St. Louis
NOTES
(Referred to in foregoing sections)
Note 7. It is thought that 4100 per year per office will return
enough revenue. to cover the cost of necessar;, general supervision
including the preparation, analysis, and tabulation of the annual
report.
7d.
the sentence following (Note 7d) should be eliminated, and
*
Note 8. Here insert the name of the department charged with the
duty of administering the Act. If a subdivision of a larger department administers the Act, the principal department should be named here.
Note 9. The provisions for judicial review of the determinationv,
rulings, findiags, and similar discretionar:, acts of the licensing
official will necessarily vary widely with the codes of judicial procedare of the several states and the constitutional and statutory
provisions relating thereto. If satisfactory general provisions exist
and apply to this situation, the specific provisions hereof may be
eliminated. In states whicn have a sufficiently flexible judicial
code, a direct action to review tne Commissioner's acts is the best
procedure. See also similar mbterial in Sections 9 and 24 and
Note 18.
Note 16. Here insert full title of the licensing official. In this
section insert the appropriate paragraphs if it is desired to create
a new department or subdivision or official, providing for revenues
and disbursements, defining new duties, etc. See Note 3. All general
rules and regulations and all denials, revocations, and suspensions of
licenses should be reouired to have the written approval of the head
of the principal department if a subdepartment administers this Act.
In this section should also appear provisions for tne disposition of
license fees, investigation fees, and any other revenue, if the fiscal
policy or statutory reouirements of the State make such special provisions necessary or desirable; if so, the title of the Act should
contain the words "providing for the disposition of revenues received
hereunder." It is recommended that all revenues go direct to the supervising department for the expenses of administering the Act, if such is
possible.
Note 18 (referred to in Note 9). This section should prescribe the
procedure for judicial review of all discretionar, acts of the Commissioner
which might be open to the construction that they are exercises of judicial
powers, including all findings, decisions, and determinations and the
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Federal Reserve Bank of St. Louis
Notes (contd.)
application of all rules and regulationc by demand
s or recuirements
made upon licensees. In Sections 4 and 9 general provisions are
made for the right of review in the specific cases covered by such
sections. In Section 24 corresponding provisions should be made
to
cover all other cases. In addition, if required in any State,
the
specific procedure for all cases should be provided for in approp
riate
detail. The 1:,st paragraphs of Sections 4 and 9 may have to
be re—
drafted to bring them into accord with Section 24 as to procedure.
Where the judicial code does not specifically so provide, provis
ion
should be made that review is by the State court of general,
original
jurisdiction.
Note 3 (referred to in Note 16.)
If a separate department or super—
vising official is created, there should be added to the
title of the
bill descriptive language covering the creation of such
department or
office, the duties thereof, the raisim and disbursing
of revenues, and
other special provisions incident to such creation. It
is recommended that
a subdivision of tne Banking Department be created in
charge of a special
deputy to supervise the small loan business and admini
ster this Act, such
subdivision to be designated as the Bureau of Person
al Finance. See
Note 16, Section 21.
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Federal Reserve Bank of St. Louis
FP'
THE AMERICAN EC3NOMIC REVIEW
March, 1955
OUR COMMERCIAL BANKING SYSTEM
By A. F. Gephart
Vice President of First National Bank in St. Louis
(Pages 82 to 89)
It is notable that since the beginning of the present century a
tendency in the caaracter of our bank assets has manifested itself.
Whereas formerly the bulk of the earning assets of the average bank
consisted primarily of ordinary loans and discounts, this item has
been decreasing, relatively, in importance and the item "Investment
and Collateral Loans" has been steRdily increasing in importance.
For examJle, from 1901 to 1916 loans and discounts represented about
54 per cent of the earning assets of national banks and investments
about 16 per cent. On June 29, 1929, loans and discounts, exclusive
of security loans, constituted about 65 per cent of total assets,
and investments amounted to 24 per cent, and on June 30, 1934, loans
and discounts, exclusive of security loans, amounted to 20 per cent
and investments to 39 per cent of total assets. In other words,
loans and discounts decreased relatively about 60 per cent during
this period while investments more than doubled. This factor gives
a clue to the reason why so large a proportion of bank assets became
frozen during the depression. te had been gradually changing from
a commercial banking system to a banking system based on loans secured
by capital assets in one form or another.
In the period from 1922 to 1929 it was repeatedly shown that the
country had an excessive volume of available bank credit so far as
ordinary commercial requirements were concerned. This was an important
factor in ultimately driving the commercial banks into putting their
funds to work by the purchase of securities and the making of collateral loans. Action by the Reserve authorities to correct this
situation would nave been nelpful. ks a consequence, our banking
system became clogged Aith an excessive volume of capital loans,
which depended for their liquidity upon their salability. Ahen the
test for this liquidity appeared it was found that these assets could
only be sold at greatly depreciated prices and bank failures becaue
a daily occurrence.
No country has had as many laws and as detailed supervision and
such minute political control over banking as has the United States
and yet the depositors of the banks have not been as Aell protected
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Federal Reserve Bank of St. Louis
1-175
and credit
tries. It
wnolly due
maintained
very large
extension has not been as wisely given as in many other councannot fairly be argued that the unsatisfactory results are
to the detailed political control, but it can justly be
that the existence of this diverse authority has been a
contributing factor to our unfavorable banking experience.
Political control of banking in the United States has not concerned itself primarily with those major aspects of banking organization and operation which were most influential in promoting public
welfare and protecting the bank depositors. Three of the most important
causes of bank failures are: first, tae inadequacy of bank capital;
second, the lack of qualifications of those organizing and operating
banks; and, third, the unnecessarily large number of banks. ior many
decades the states and even the federal government have permitted
banks to be organized rith small capital (in many states with as
little as al0,000) and by individuals with no banking or business
experience to qualify them to conduct a banking business. Banking,
by and large, in this country is not a profession and, in many cases,
does not even have tae standards required of the personnel of many
trhdes. Not only has this been true, but banks have been permitted
to be organized in communities where tnere were already adequate banking facilities or in communities where tnere was not sufficient business
to support a properly conducted bank.
State bank commissioners and even federal authorities cannot
perhaps be too much criticized for tais situation, for if they had
not consented to grant the charters, political influence would have
been brought to bear in many cases and they would have been forced
to do so. After many such unneeded banks had been organized and officered by incompetent officials, the pressure to make earnings for
their stockholders led these inexperienced officers to make bad loans in some cases, tarough pressure by officers of tae bank itself, to
make loans to them or to their friends. Tne factor of community pride
in having a bank to serve tne financial needs of tae district has
also often resulted in the making of bad loans and in having a bad
portfolio of investments. then tnere was a failure of crops or a
business reaction, these banks soon became insolvent because of their
bad loans and their bad investments and their small surpluses could
not take care of their losses.
Chief reliance has, however, been placed on bank examinations.
.
("jtith all due respect to the many highly competent examiners, especially
those of the federal government, bank examinations, on the whole,
have not secured protection for the bank depositor or insured a good
banking system. In many cases, these examiners were less qualified
for their jobs than the bankers were for theirs. They were political
appointees, changing from administration to administration, often paid
very low salaries and with little or no experience in tne banking
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Federal Reserve Bank of St. Louis
-3business. Where clearing house organizations have existed there has
been a system of examinations under which the supervision has been,
in general, superior to both the federal and state examinations,
since the clearing house examiners were appointed by the member banks
of the association on tne basis of taeir qualifications and with
no uncertainty as to tneir tenure of office.)
The second way in which the political control over banking operations has been exercised has been by legislation over credit extension, rates of interest and discount, investment of bank funds, and
certain other phases of bank management. Many of taese laws have
a been passed by legislatures of tne state and federal government under
"\ pressure of uninformed popular opinion and without advice from experienced bankers and often in disregard of fundamental financial
principles. Some of these enactments have been good but many have
been ill advised. Surveying them as a whole, taeir chief emphasis
has been on the minor aspects of banking and has not produced results
of which this country can be proud. Other countries tnich nave nad
a more successful banking history taan ours - notably England - have
a minimum of such minor laws.
6
then the Federal Reserve system was established, it was hailed
as a great forward advance in commercial banking - especially in
the relation of tne federal government to national banks. The Federal
Reserve system was privately ()tried but with certain functions required
to be performed by it for the federal government and with certain
administrative restraints exercised over it by the central government.
Almost from the beginning, however, tne Federal Reserve system has
been controlled by the federal government and this domination has
become in late years almost complete. The exigencies of the World
tar gave the federal government a reason to begin the domination and
the present depression has afforded the opportunity for its completion.
Because of tne financial requirements of tne tar and its aftermath,
the system has never had a chance to demonstrate its true value.
The policies, credit and otherwise, of tne individual member banks
have been influenced by the government - in some instances much less
wisely than if tne member banks had been given greater freedom of
action.
If it is planned, as now frequently suggested, to place control
of commercial bank credit in the hands
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