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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
•
CLIPPINGS
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_Issued
OSCAR NELSON
AUDITOR ofPUBLIC ACCOUNTS
BANKING DEPARTMENT
State 9f Illinois
Vol. 7
SPRINGFIELD, ILL., AUGUST 1, 1931
No. 5
READ THE REPORTS
We again urge that more attention be slevoted to the
duplicate report returned after the examination of the bank.
It is incumbent upon the Officers of the institution to call
the attention of the Directors to the contents of the report and
request that each one individually familiarize himself with
the information contained therein. The purpose of returning
the duplicate report to the bank is to furnish the Directors
an opportunity to familiarize themselves with the facts concerning the bank which are set forth in a comprehensive form.
Failing to realize the importance to them of the information to be derived from the report, the Directors have delegated to the Cashier and the President the duty of considering
the same and formulating a reply to be returned to the Department. This is a mistake! In some cases Directors have
expressed their regret at having overlooked this opportunity.
Therefore, it is urged that when the report is received
from the Department showing the result of the examination
that the Directors be apprised of the matter and that due consideration be given to the items contained in the report regardless of the time necessary.
The report is not a circular letter but an individual resume of the findings of the Examiner in connection with the
examination of the bank in question.
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Federal Reserve Bank of St. Louis
r
•
.
.0%
33
AMIMEN.
REVIEW OF PAST SIX YEARS
Many requests have been received for a copy of the report of banking activities for the past six years, the pertinent
facts of which were given to the public through an interview
with the Auditor of Public Accounts recently. As the report
has not been put into printed form for distribution we quote
for the information of the inquirers as follows:
In January 1925, the date of assumption of office by the
present incumbent, there were 1403 State Banks doing business in Illinois. Since then 537 have suspended business and
179 others have procured new charters, making a net decrease
of 358 banks and leaving the present number-1045. Of the
537 which ceased doing business, 419 closed their doors during
the six-year period prior to January 1, 1931. Of the 419 referred to only 139, or approximately 35% have gone into Receivership ; others relinquishing their charters through mergers, the purchase of their assets and liabilities by larger
banks, or by voluntary liquidation wherein the depositors
were paid in full.
In other words, in 65% of the cases of closed banks the
depositors lost nothing. The remaining 35% consisted of
small banks with small deposit liabilities and a sizeable rate
of dividend has already been distributed to the creditors.
Since January 1, 1931, 118 banks have suspended business up to and including June 30, 1931. Sixty-six of these
were in Cook County and 52 downstate. Of this number 17 in
Cook County and 39 downstate were liquidated voluntarily—
all depositors being paid in full.
The report further showed that 48 banks closed in villages of 1,000 population and only one closed in a town from
5,000 to 10,000 population, while none closed in towns from
10,000 to 20,000 population outside of Cook County.
One portion of the report lists the technical causes of bank
suspensions. Among those given for the six-year period are
heavy withdrawals 126; depleted cash reserve 101; death of
officer or defalcation 30 and robbery 1.
Total deposits of all State Banks closed from January
June
are listed at $85,023,000. Total resources are set at
to
$126,847,000. Of all the banks closing in that period, less than
25% were capitalized at more than $200,000.
The report includes a table prepared from data by the
Federal Reserve Bank of Chicago listing all banks, both State
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Federal Reserve Bank of St. Louis
and National, which were closed in the United States from
1927 to the present. Nebraska heads the list with 316 closed
banks and Iowa is second with 259.
Illinois had 250 banks closed in the four and one-half
year period while Indiana, with hardly half of Illinois' population, had 217. Wisconsin is listed for 76 closed banks;
Michigan 79; Minnesota 187, and Missouri 224. Only 23 failures were marked against New York, but several of these
were banks with branches and one, the Bank of the United
States, was the largest closed.
In summing up, the Auditor of Public Accounts arrived
at three conclusions as follows:
1. That prior to 1925 the State had too many banks,
mainly because of post-war inflation of real estate and commodity values.
2. That in the six-year period up to January 1, 1931, the
oversupply was being reduced by an orderly process of mergers and voluntary liquidations, resulting in no loss whatever
to depositors, with a certain number of failures among smaller banks, resulting, however, in no great losses to depositors.
3. That bank failures since January 1st, in Cook County
at least, have been due almost entirely to a lack of confidence
by depositors, who if they had left their savings in the bank
vaults would have seen the institutions in many cases emerge
from the current depression as strong as ever.
St. Charles
Rock City
Chicago
St. Charles
Chicago
Kane
PERMITS ISSUED.
Date.
Reserve.
Surplus.
Capital.
State Bank of St.
20, 1931
July
$
210,000
40,000
$
100,000
$
Charles
CHARTERS ISRUEI).
50,000
'tephenson.... Rock City Bank...
J. H. Graham,
President
J. F. Mougin,
Cashier
Sears-Community
Cook
200,000
St,ate Bank
3401 Arthington
Street
J. Louis Kohn,
President
Michael Bolker,
Cashier
State Bank of St.
Kane
100,000
Charles
Lester J. Norris,
President
Paul C. Mellander, Cashier
Central Republic
Cook
I3ank and Trust
14,000,000
Company
208 South LaSalle
Street
Philip R. Clarke,
President
C. C. Haffner,
Jr., Cashier
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Federal Reserve Bank of St. Louis
5,000
2,500 July 3, 1931
20,000
10,000 July 3, 1931
40,000
210,000 July 20, 1931
10,000,000
4,000,000 July 25, 1931
.)
CONSOLIDATED.
Community State Bank and Sears-Community State
Bank under title Sears-Community State Bank.... July 3, 1931
Central Trust Company of Illinois and Chicago Trust
Company under title Central Republic Bank and
July 25, 1931
Trust Company
Chicago
Cook
Chicago
Cook
Chicago
Chicago
Cook
Cook
CAPITAL STOCK INCREASED.
Chicago Trust Company From $3,000,000 to $3,100,000 July 25, 1931
Liberty Trust and Sav700,000 to 1,000,000 July 30, 1931
From
ings Bank
Hudson
McLean
DURATION EXTENDED.
Hudson State Bank
Charter extended 25 years from May 1, 1932
July 15, 1931
LIQUIDATED.
Farmers and Merchants State Bank of Bloomingdale
through Roselle State Bank
Rock City State Bank through Rock City Bank
Stewart State Bank through State Bank of St. Charles
Illinois State Bank of Evanston through Phillip
State Bank & Trust Company, Chicago
July 1, 1931
July 8, 1931
July 20, 1931
Bloomingdale..DuPage
Rock City
St. Charles
Evanston
Stephenson
Kane
Cook
Kane
Dundee
Cook
Chicago
Cook
Chicago
Spring Grove...McHenry
Chicago
Chicago
Chicago
Cook
Cook
Cook
Cook
Chicago
Cook
Chicago
CoOk
('hicago
Cook
('Ilicago
Cook
(:hicago
Cook
Chicago
Chicago
Cook
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Elmwood l'ark. Cook
Kane
Dundee
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Chicago
Cook
Cicero
Cook
Berwyn
Winnebago
Seward
Spring Grove...McHenry
Cook
Chicago
Cook
Glencoe
Cook
Chicago
Cook
Lyons
Cook
Chicago
Cook
Berwyn
Lake
Waukegan
Cook
Chicago
Chicago
Cook
Berwyn
Chicago
Chicago
Cook
Cook
Cook
CLOSED.
Dundee State Bank
Immel State Bank
The Roseland State Savings Bank
Spring Grove State Bank
RECEIVERS APPOINTED.
Fullerton State Bank-Walter P. Mack
Bryn Mawr State Bank-Irwin T. Gilruth
West Englewood Trust & Savings Bank-Irwin T.
Gilruth
Stony Island State Savings Bank-Irwin T. Gilruth..
West Lawn Trust and Savings Bank-Irwin T. Gilruth
Armitage State Bank-Irwin T. Gilruth
Auburn Park Trust & Savings Bank-Irwin T. Gilruth
Brainerd State Bank-Irwin T. Gilruth
Chatham State Bank-Irwin T Gilruth
Chicago Lawn State Bank-Irwin T. Gilruth
Elston State Bank-Irwin T. Gilruth
Ridge State Bank-Irwin T. Gilruth
West Highland State Bank-Irwin T. Gilruth
Sheridan Trust & Savings Bank-Ernest Ridgeway..
Elmwood Park State Bank-Einer S. Liljeberg....
Dundee State Bank-H D. Hemmens
Lincoln State Bank of Chicago--John P. O'Brien....
West Town State Bank-Thomas B Roberts
Immel State Bank-R. F. Gentzel
Diversey Trust and Savings Bank-Glen C. Hodges....
Second North-Western State Bank-Norman O. Geyer
Mid-West State Bank--Arthur A. R. Nelson
Twelfth Street State Bank-Arthur A. R. Nelson....
Seward State Bank-Christ T. Wilhelm
Spring Grove State Bank-Frank 13. McConnell
South Side Savings Bank & Trust Co.-John A. Carroll
Glencoe State Bank-Chicago Title & Trust Company
Noel State Bank-Henry S. Savage
Lyons State Bank-Francis Karel
Italian Trust & Savings Bank-Howard C. Holbrook..
Berwyn State Bank-George H. Anderson
Waukegan State Bank-Fred Brown Whitney
Cragin State Bank-Logan L. Mullins
Total
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Federal Reserve Bank of St. Louis
July
July
July
July
2, 1931
2, 1931
3, 1931
9, 1931
July 9, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 10, 1931
July 16, 1931
July 17, 1931
July 20, 1931
July 20, 1931
July 21, 1931
July 21, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 22, 1931
July 24, 1931
July 24, 1931
July 27, 1931
July 28, 1931
July 28, 1931
July 28, 1931
July 28, 1931
July 30, 1931
TRUST CERTIFICATES ISSUED.
Deposit.
Central Republic Bank and Trust Company $500,000 July 25, 1931
TRUST CERTIFICATES CANCELLED.
American State Bank of Berwyn
Chicago Trust Company
Central Trust Company of Illinois
RECAPITULATION.
State Banks in Chicago
State Banks in Cook County outside Chicago
State Banks in Illinois outside Cook County
Allys.11 (62501-1,900)
July 29, 1931
July 9, 1931
July 25, 1931
July 25, 1931
114
68
858
_
1040
-
No. 11
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
69
would appear that these institutions were distinctly over-capitalized,
indicating that promoters had over-estimated the amount of business
available in the community, or that business once available had disappeared. Moreover, over-capitalization bringing with it a demand
for abnormally high earnings in proportion to the amount of earning
assets probably caused bank managers in some instances to take risk.s
or indulge in competitive practices that were eventually responsible for
the closing of the bank.
STATISTICAL SUMMARY
The statistical analysis contained in this chapter clearly proves that
no simple solution of the Indiana bank failure problem such as eliminating all small banks or all country banks or any single type of bank is
adequate if we are to place our banking institutions again on the sound
basis necessary for the promotion of the economic welfare of the
state. It does indicate, however, that the surplus and undivided profit
accounts of these failed institutions was far below normal; that the
northeastern and northwestern sections of the state have lost a much
higher percentage of their active operating banks than have the southwestern and southeastern sections; and that the failure record of national
banks in the state has been better than that of the state-supervised
institutions.
Since these statistics broadly analyzed indicate that no single characteristic size, type, or location can be charged with the responsibility for
failure, it became necessary for the Study Commission to analyze the
methods of operation of these failed banks in order to determine whether
there were mistakes of management common to all of them or whether
they were forced to close by economic circumstances and conditions beyond their control.
THE CAUSE FOR FAILURE AS EXPRESSED BY RECEIVERS, TRUSTEES,
AND LIQUIDATING AGENTS
Since the records of failed institutions for the past several years,
were insufficient to allow the Study Commission to make a personal
investigation of each of the 210 state-supervised institutions that failed
in Indiana from 1925 to 1931, the receivers, trustees, liquidating agents,
and other men conversant with the condition of these institutions, were
asked to supply the major causes of failure in each institution with which
they were acquainted.' These men submitted 88 causes for the failure
Out of a possible 210 replies, 178 were received. For the remaining 32 banks the
opinions of men conversant with the conditions of the banks and of the communities in
which they failed were taken in lieu of the opinions of the receivers. A table identical
with that of Table XXXVIII was compiled from the replies of these 178 receivers alone.
Since it agreed essentially with the results in Table XXXVIII, it is not here presented.
It attributed to forces external to banks 29.58 per cent of the causes for bank failures
and 70.41 per cent of the causes to situations within the control of the banking business.
The questionnaire sent to receivers asked "What were the causes in order of their
importance for the failure of the institution for which you are the receiver?" If a list
of possible causes had been submitted asking receivers to check off such answers as best
seemed to fit the ca.se of their particular bank, greater uniformity of replies would have
been secured. But such a list would probably have influenced the receivers' replies to
some extent. The method used, however, made it necessary for each receiver to analyze
the mistakes which had been made by the institution of which he was in charge and to
list those mistakes uninfluenced by any previous suggestion as to what they might be.
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Federal Reserve Bank of St. Louis
a- 11 31
70
of the 210 institutions with which they were acquainted. These replies
are tabulated in Table XXXVIII retaining in all essentials the language
of their authors.
TABLE XXXVIII
CAUSES FOR INDIANA BANK FAILURES'
1925-1931
(As submitted by Receivers or Liquidating Agents)
Causes for failure of Indiana Banks submitted by receivers
1.
2.
3.
4.
5.
6.
7.
Withdrawals
Lack of confidence by people
Incompetent managenuent
Poor loans
Excess loans
Too many second mortgage loans
Depressed business and agricultural conditions, causing lowered incomes
of customers
A
8. Insufficient and worthless security
9. Too much competition .
10. Frozen loans
11. General depression
12. Decline in land values
13. Improper chartering .
14. Lack of proper supervision by officials and directors
15. Dishonesty of officers.
16. Too many and excessive mortgage loans
17. Closing of neighboring bank
18. Loaning to outside interests of officials
19. Defalcation
20. Renewal of too many loans .
21. Loans On inflated real estate values
22. Inadequate bank supervision and examination
23. Insufficient business
24. Inadequate credit information
25. One man dominating bank affairs
26. Neglect in collections
27. Improper loan policies
28. Negligent management
29. High taxes on land
30. Loans to officers and directors too large
31. Inadequate cash reserves .
32. Decline in value of assets
33. Depressed industrial conditions
34. Declining deposits
35. Officials having outside interests
. Unqualified directors
. Excessive investment in banlc building and fixtures
38. Improper dividend policy
39. Failure to write off losses when sustained
40. Too liberal a loan policy
collection
41. Inability to collect loans rapidly and in some cases no
42. Speculation by officers
43. Too much investment in real estate
44. Too much money loaned
45. Bank not able to secure aid on its collateral
46. Overhead expenses too large.
47. Inefficiency of management
48. Removal or shut down of only community industry
49. Too much credit extended to security affiliate
50. Too much authority to cashier
reserves
51. Mortgages and real estate bonds used as secondary
52. Failure of correspondent
securities
in
53. P(x)r investment
54. Breach of trust
55. Attitude of the public
56. Too many chattel loans.
57. Taking notes for interest payments
58. Loans not diversified
59. Capital too small
purposes.
60. Loans for capital requirements and promotion
61. No cooperation between officers and directors
\ill
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Federal Reserve Bank of St. Louis
Number of
banks
reporting
each cause
Ratio of
occurrences for
each cause to
total occurrences
for all causes
37
31
29
29
25
23
6.4%
5.3
5
5
4.3
4
22
19
17
16
15
15
14
12
11
11
3.8
3.3
3
2.7
2.5
2.5
2.4
2.2
1.9
10
9
9
9
8
7
7
7
7
7
7
6
6
6
6
6
6
6
6
6
5
5
5
4
4
4
4
4
4
3
3
3
3
3
3
3
3
2
2
2
2
2
2
1.9
1.7
1.5
1.5
1.5
1.4
1.2
1.2
1.2
1.2
1.2
1.2
1.
1.
1.
1.
1.
1.
1.
1.
1.
.9
.9
.9
.9
.9
.7
.7
.7
.7
.7
.7
.5
.5
.5
.5
.5
.5
.5
.5
.34
.34
.34
.34
.34
.34
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1931
71
BLE XX \ I II-Continued
Causes for failure of Indiana Banks submitted by receivers
Number of
banks
reporting
each cause
62. Appropriation of money by officers
--63. Inefficient directors
64. Inadequate secondary reserve
65. Charter expired .
66. Failure to cooperate with State Banking Department
67. 13orrowmg by banIc
68. Accepting notes to cover overdrafts
69. Officials and directors endorsing too many loans
70. Heavy bank taxes
71. President selling own stocks arid bonds to bank
72. Non-resident president having no community interest
73.• Death of president who was sole owner
74. Financing of automobile sales
75. Check kiting
76. Forgeries and note duplication
77. Robbery of bank .
78. Deposits too large for capital of bank .
79. Improper analysis of department expenses resulting in operating losses...
80. Taking over a weak bank
81. Excessive salaries
82. Issuing and trying to protect mortgage certificates
83. Cashier using bank for his own interests
84. Cashing cold checks for large cowation
85. Crop failures
86. Interest rates too high
87. Unwarranted demand for liquidity
88. Failure of other banks
2
2
2
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Total
583
Ratio of
occurrences for
each cause to
total occurrences
for all causes
.34
.34
.M
.34
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
.17
100.0%
'State supervised banks.
This table is interesting as a general expression of the opinions of
the receivers in charge. The differences in phraseology, however, make it
far too cumbersome for effective use in making generalizations. Consequently, these causes were grouped into certain major classifications.
Such headings were used as would appropriately describe and be representative of the various items. (Table XXXIX.)
TABLE XXXIX
CAUSES FOR INDIANA BANK FAILURES'
(Grouped by Major Classifications)
1925-1931
CAUSES FOR FAILURIC
LOAN Fowlers (Evidenced by)
Poor loans.
Excess loans
Too many second mortgage loans.
Insufficient and worthless security
Frozen loans
Too many and excessive mortgage loans.
Loaning to outside interests of officials
Renewal of too many loans
Loans based on inflated real estate values
Improper loan policies
Inadequate credit information .
Loans to officers and director% too large
Too liberal a loan policy
Inability to collect loans rapidly and in some cases unable to collect
Extending too pinch credit to security affiliate
Number of
times each
cause occurred
IMPRoPF:R
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Federal Reserve Bank of St. Louis
29
25
23
19
16
11
9
9
8
7
7
6
5
5
3
Percentage of
the total 583
occurrences
No. 11
72
TABLE XXXIX—Continued
CAUSES FOR FAILURE
Percentage of
Number of
the total 583
times each
cause occurred occurrences
Too many chattel loans
Loans not diversified .
Loans for capital and promotion purposes
Officers and directors endorsing too many loans
Financing automobile sales
Total occurrences of above causes
Percentage of causes occurring under "Improper Loan Policies" based on
total occurrences of all causes
INEFFICIENT MANAGEMENT (Evidenced by)
Incompetent management
Lack of proper supervision by officers and directors
Dishonesty of officers with the public
One man dominating the bank
Neglect in collections
Negligent management
Inadequate cash reserves
Officials having outside interests
Unqualified directors
FAcessive investment in bank building and fixtures
sAmproper dividend policy
Failure to write off losses when sustained
Inefficient management
Bpeculation by officers
Too much investment in real estate
Loaning too much money
Overhead expenses too largo
Too much authority to cashier
Real estate mortgages and bonds held as secondary reserve
Poor investment in securities
Capital too small
Taking notes for interest payment
No cooperation between officers and directors
Initffequate secondary reserve
Inefficient directors
No cooperation with banking department in taking their suggestions
Too much borrowing by bank
Accepting notes to cover overdrafts
Non-resident president having no community interest
Deposits too large for capital of bank
Improper analysis of departmental expenses resulting in operating losses
Excessive salaries
Issuing and trying to protect mortgage certificates
Cashing cold checks for large corporation
Interest rates too high
Taking over a weak bank .
Total occurrences of above causes
Percentage of causes occurring under "Inefficient Management", based on
total occurrences of all causes
DECLINING PRICE LEVELS AND EARNINGS OF BORROWERS (Evidenced by)
Depressed business and agricultural conditions
Decline in land values
General (lepression
Decline in value of bank assets
Depressed industrial conditions
Declining deposits
Crop failures
Total occurrences of above causes
Percentage of causes occurring under "D,iclining Price Levels and Earnings
of Borrowers" based on total occurrences of all causes
PSYCHOLOGICAL ATTITUDE OF PUBLIC (Evidenced by)
Lack of confidence by public and withdrawals
Attitude of public
Unwarranted demand for liquidity
Total occurrences of above causes
Percentage of causes occurring under "Psychological Attitude of Public"
based on total occurrences for all causes
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Federal Reserve Bank of St. Louis
2
2
2
1
1
10(1
32.60%
29
12
11
7
7
'6
6
6
5
5
5
4
4
4
4
4
3
3
3
2
2
2
155
26.58%
22
15
15
6
6
6
1
71
12.18';
68
3
1
72
12.35%
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITVIONS (1932)
73
TABLE XXXIX—Continued
CAUSES FOR FAILURE
IMPROPER CHARTERING OF BANKS (Evidenced by)
Too much competition
Improper chartering
Insufficient business
Removal or shutdown of only industry in community
Total occurrences of above causes
Percentage of causes occurring under "Improper Chartering of Banks" based
on total occurrences of all causes
BREACH OF TRUST BY OFFICIALS (Evidenced by)
Defalcation
Breach of trust
Appropriation of money by officials
President selling own stock and bonds to bank
Check kiting
Forgeries and note duplications
Cashier using bank for his own interests
Total occurrences of above causes
Percentage of causes occurring under "Breach of Trust by Officials"
based
on total occurrences of all causes
[Number of
times each
cause occurred
17
14
7
3
41
7.04%
9
3
2
18
3.08%
INADEQUATE BANK SUPERVISION
7
HIGH TAXES (EVideDeed by)
High taxes on land
High taxes on banks
6
1
Total occurrences of above causes
Percentage of causes occurring under "High Taxes" based on total occurrence
s
of all causes
FAILURE OF OTHER BANKS (Evidenced bv)
Closing of neighboring bank
Failure of correspondent
Total occurrences of above causes
Percentage of causes occurring under "Failure of Other Banks" based OD
total occurrences of all causes
ROBBERY OF BANK
DEATH OP' PRESIDENT WHO WAS SOLE OWNER
BANK UNABLE TO SECURE AID ON ITS COLLATERAL
CHARTElt EXPIRED
GRAND TOTAL
Percentage of
the total 583
occurrences
1.2%
7
1.2%
11
3
14
2.41%
.17%
4
2
583
.7
.34%
100.0%
,State-supervised banks only. All data from XXXVIII.
These major divisions were in turn then reclassified as to whethe
r
they were beyond the control of bank management or wore
related to
the banking business itself. (Table XL.)
It is very significant that only 28.64 per cent of the responsibility
for bank failures, in the opinion of these men, rests upon situati
ons
and conditions external to the banking business. Consequ
ently 71.36
per cent of the situations or practices responsible for the
failure of banks
in this accumulation of data were peculiar to the bankin
g business itself
and as such may be affected to a greater or less degree
by regulation and
supervisory control.
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Federal Reserve Bank of St. Louis
No. 11
74
TABLE XL '
MAJOR CAUSES FOR BANK FAILURES FOR INDIANA BANKS
1925-1931
CAUSES FOR FAILURE
INTERNAL CAUSES
Improper loan policies
Inefficient management
Breach of trust
Bank unable to obtain aid on collateral
Death of President who was sole owner
Number of
Percentage Of
times each
occurrences to
cause occurred totaloccurrences
190
155
18
4
1
368
INADEQUATE STATE SUPERVISION AND CONTROL
Improper chartering of banks
Inadequate supervision of banks
41
7
48
EXTERNAL CAI'SES
Declining price levels and earnings of borrowers
Psychological attitude of the public
Failure of other banks
High taxes ...................
.
Robbery of bank......
Charter expired
8.24%
72
71
14
7
1
2
167
583
Total
63 12%
28.64%
100.0%
'State-Supervised institutions only, 210 in number.
EXTERNAL CAUSES OF FAILURE
When the individual items within the category "external causes" are
analyzed, it becomes doubtful whether 28.64 per cent of the failures
resulted from causes beyond the control of bankers. The heading under
this group that has the greatest weight is "declining price levels and
earnings of borrowers." It is realized that in some instances price levels
and earnings have fallen farther than the history of past depressions
and price movements would cause the loaning officers of banks to anticipate. These extreme fluctuations downward, however, are probably
responsible for only a part of the total number of scores attributed to
this category by the receivers. It is the business of the loaning officer
of a banking institution to make loans in such a manner and with such
safeguards that the cyclical and secular trend of prices will not wreck
their value. This item, therefore, has probably been given more weight
by the receivers than it deserves.
The second largest classification of external causes is that of
"psychological attitude of the public." In reading the replies it was
found that the major reason for this unsatisfactory psychological attitude on the part of the public was due to a lack of confidence in individual
banks. Since banks are still operating in many of the communities
concerned, it would appear that internal policies in the failed institutions
were the cause of the loss of public confidence. It is realized, however,
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Federal Reserve Bank of St. Louis
TARIM
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITuTIONS (1932)
No. 11
75
that in some cases well-managed banks were forced to suspend by reason
of "blind fear" on the part of the public.'
A third large group of external causes is "the failure of other
banks" composed principally of the item "closing of neighboring banks."
Again it is necessary to consider the relationship of the condition of
the bank concerned and the state of mind of the public. Although the
closing of a neighboring bank ordinarily does cause the depositors to
scrutinize carefully the balance sheet and management record of other
banks in the same general locality, banks that can make a satisfactory
showing, are in a position to gain business instead of losing it since
many depositors are deprived of banking facilities through the failure
of their bank. Three more of the scores found in this category were
caused by the failure of correspondent banks. It is recognized that the
failure of a correspondent bank might on occasion "freeze" such a large
proportion of the liquid funds of a reasonably well-managed institution
that the latter would be forced to close. A bank whose internal condition, however, was satisfactory would be able, under most circumstances, to gain sufficient aid from other banking connections to enable
it to meet such an emergency as this.
The next classification of external causes as given by Table XL is
that of high taxes. Six of these scores are listed by reason of high
taxes on land. It is the duty of a loaning officer of a financial institution
making a loan for which real estate is the security to make only such
loans as the capitalized value of the net earnings from this real estate
would j.ustify. Since the annual tax payment is an expense necessary to
be paid before net earnings are determined, it might be said again that
this category at least received all the weight that it deserved and
probably more.
In the light of the analysis of the external causes for bank failure
it may be safely said, therefore, that not more than 28.64 per cent of
all causes for the failure of banks in Indiana was the result of general
economic conditions beyond the control of the banking industry and
was therefore not capable of being avoided by state regulation and
supervision.
INTERNAL CAUSES OF FAILURE
An analysis of the classification, "Internal Causes," seems to substantiate this conclusion also. Here are found the major headings
"Improper Loan Policies," "Inefficient Management," "Bank Unable to
Obtain Aid on Collateral," and "The Death of President." A reading of
the individual items, as found in Table XXXIX, which make up these
major groups, leads inescapably to the conclusion that those banks that
failed by reason of these major causes did so because of "amateurish"
mistakes, rather than because of a lack of brilliant loaning or managerial
ability. In other words, if the more rudimentary and elementary types
of improper operation had been avoided, there would have been few
failures. Banks did not fail by reason of a lack of ability to execute
high and intricate financial projects; they failed because they made
1 For further information on this subject see data contained
in Chapter IV under
the section dealing with withdrawals.
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Federal Reserve Bank of St. Louis
•
76
obvious mistakes, the dangers of which are well known, and easily recognizable by the ordinary successful bank executive. Moreover Table
XXXIX indicates that in 18 instances failure was caused by dishonesty
on the part of officials. Clearly, therefore, the public might in large
measure escape the effect of these mistakes by vigorous state supervision, enforcing adequate regulatory statutes.
"INADEQUATE SUPERVISION" AS A CAUSE OF BANK FAILURES
The smallest classification in Table XL is that of "Inadequate State
Supervision and Control." In this classification seven situations are
listed, in which the receivers are of the opinion that bank examiners
were negligent or incompetent. The larger category in this group, that
of "Improper Chartering of Banks," has reference to the locating of
banks in communities already well supplied with financial institutions,
or in communities where business is insufficient or too unstable to support a bank. It is the opinion of the members of the Study Commission
that this is a very important and fundamental cause. Many of the improper practices listed by the receivers as contributing to the failure
of banks were probably caused by competitive conditions in communities containing too many banks. It is natural that receivers should
observe and mention only the improper practices. If they were not
familiar with the banking business and with the history of the operation
of the particular institution of which they are in charge, it is improbable that they would attempt or be able to analyze the fundamental
reason for the use of these practices. Keen competition in many instances causes banks to take such great risks that eventually the banking
ethics and banking practices of whole communities are degraded, destroying the initiators of these practices and their competitors as well.'
A SUMMARY OF TIIE OPINIONS OF RECEIVERS
in the opinion
A summary of the preceding analysis indicates that
t with
conversan
men
other
and'
agents,
of receivers, trustees, liquidating
in
that
failed
ns
institutio
ed
-supervis
state
210
the condition of the
cause of their failure
Indiana from 1925 to 1931, 71.36 per cent of the
s within the banking
is directly attributable to practices and condition
ent contributed
managem
of
control
the
beyond
factors
business while
XL.) The
(Table
failure.
only 28.64 per cent of the total cause of
apology
frequently
popular
the
refutes
opinion of these men directly
economic conditions bethat
namely,
failure;
bank
of
defense
in
offered
cause for failure.
yond the control of bank managers is the major
TIIE CAUSE OF BANK FAILURES IN INDIANA
of failure
After many months of discussion and study of the causes
that probably less than
concluded
has
on
Commissi
Study
the
of banks,
control of the banking
28.64 per cent of these failures are beyond the
relationship to failure is developed more
The importance of improper chartering in
of banks in.Chapter IV.
charteting
the
with
dealing
section
the
completely in
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITUTIONS (1932)
77
industry. Several methbers of the Study Commission are of the opinion
that probably the only conditions which bank management should not be
expected to meet are such extraordinary conditions as complete destruction by war, civil commotion, earthquake, etc., or the complete breakdown
of the financial and credit structure of the country, making impossible the
normal course of commerce and exchange. It is believed that in most instances banks do not fail because of economic conditions. Trying conditions and depressed economic situations merely serve as the test for
the soundness and comprehensiveness of the management policies of
financial institutions. If banks failed solely because of economic depressions, there would be no banks left at the present time. The facts of
._
TABLE XLI
MAJOR CAUSES FOR NATIONAL BANK FAILURES IN INDIANA
1925-1931
CAUSE Poll FAILURES
INTERNAL CAUSE OF FAILURE
Incompetent Management:
Incompetent management
Speculation by officers
Inadequate cash reserves
Unqualified directors
Failure to take advice of Banking Department
Total
Improper Loan Pol icies:
Frozen loans
Too many second mortgage loans
Too many and excessive mortgage loans
Poor loans
EXCeS8 loans
Loaning to outside interests of officials
Loans to officers and directors too large
Loans for capital and promotion purposes
TOO liberal a loan policy
Total
Number of
Ratio of each
times each
occurrence to
cause occurs total occurrences
10
14
28%
3
2
2
1
A
1
1
1
1
13
Breach of Trust by Officials:
Defalcation
Dummy directors
Total
TOTAL IN'rERNAL CAUSES
2
29
INADEQUATE BANK SUPERVISION AND CONTROL
Too tnuch competition
Inadequate bank supervision and examination
Total
EXTERNAL CAUSES
Depressed business and agricultural conditions
General depression
Lack of confidence by public and withdrawals
Decline in land values
Depressed industrial conditions
Crop failures •
Unwarranted detnand for liqoidity
Burning of bank building
2
8
2
2
TOTAL EXTERNAL CAUSES
19
36',
TOTAL ALL CAUSES
50
11) '
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the situation are, however, that the majority of banks which were in
operation at the beginning of the depression period in Indiana are still
operating successfully. In many communities where banks have failed
because of the depression, according to apologists for such institutions,
other institutions are still operating with success—institutions that have
had to deal with the same classes of customers, the same types of business, the same general overhead costs, and that have experienced depressed conditions identical to those of the institutions which have closed
their doors. Consequently the conclusion must be drawn inevitably that
the majority of failing banks close not because of business depression alone, but because of internal policies and practices that so weaken
them that it is impossible for them to withstand the rigorous period of
testing that a severe business crisis and depression brings for every type
of business institutiony
GENERAL CONCLUSIONS
By reason of the analysis presented in the preceding two chapters
and because of their contacts with this problem, the members of the
Study Commission are of the unanimous opinion that bank and building
and loan failures might in large measure be eliminated by a more adequate system of state supervision and control. After months of careful
consideration, the Study Commission has evolved such a system. If
adopted in its entirety, it is believed that the financial institutions of
the state will be strengthened immeasurably, and that their failure will
cease to be a great social problem. The succeeding chapters present
the general principles of this system and the arguments therefor that
proved convincing to the members of the Study Commission.
state banks was sent to
'The same questionnaire that was sent to receivers of failed
to 1931 inclusive. Twenty1925
ycars
the
during
failed
that
banks
receivers of all national
Their replies were comthree receivers received our inquiry. Eighteen of these replied.
the replies received from the
piled in a manner exactly similar to that used in compiling
Table XLI. The table is presented
receivers of state institutions. The result is shown in
and the state banks. It is intermerely to offer a comparison between the national banks
be made about this table
esting to observe, however, that the same generalizations might
as were made concerning Table XL.
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Federal Reserve Bank of St. Louis
REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITuTIONS (1932)
102
COOPERATION BETWEEN TUE DEPARTMENT OF FINANCIAL INSTITUTIONS
AND REGIONAL CLEARING HOUSE ASSOCIATIONS
Member banks of clearing house associations with examination departments have withstood the financial stress of the last decade better
than have any other groups of banking institutions. Failures in banks
of this type have been very rare.' In Indiana no member of the one
clearing house association with an examination department' has failed.
This is true notwithstanding the fact that many institutions in the same
community, meeting identical types of business situations, failed. No
unbiased observer can view the record made by clearing house member
banks in this and other states without being convinced that cooperation
of this sort promotes solvency and good management.'
The expense involved in duplicate examinations on the part of clearing house members has made the cost of the scheme prohibitive for rural
banks. Recently, however, the Bank Management Commission of the
American Bankers Association has evolved a different type of organization designed to bring the benefits of clearing house cooperation to the
rural bank. This new type of organization is known as the Regional
Clearing House Association. This plan has already been tried in
'Glenn Griswold in an address before the 34th Annual Convention of the Indiana
Bankers Association, September, 1930, summarized the failure record of Clearing House
member banks as follows:
"In 1906, when the Walsh banks failed in Chicago, there was devised the idea of
banks forming an association to examine each other, and become morally responsible for
the financial condition of each member of that association, in a sense which implied a
moral obligation to guarantee each other. Since that time every metropolitan area in
America has adopted the clearing house examination system, and since that time we
have gone through the worst period of bank deflation in our history, taking into account
the amount of capital and deposits which were destroyed. Since 1906 not one bank in
America has ever failed, with a loss to depositors of a dollar, if it was a member of a
clearing house district--not one--except out in Des Moines—and there was a situation
that bankers all over the country have blushed for.
"Des Moines had talked about organizing an examinations department, and had been
promising itself one for years. But they were just such bad neighbors out there that
they couldn't trust any single committee composed of three men, to draw the papers and
organize the thing. So it went on that way for years. and finally banking conditions in
Des Moines became so bad that the whole structure was threatened. On the very eve of
a collapse they organized a clearing house district and took into it one bank that they
knew was insolvent when they took it in, and then, having organized their clearing
house association, they permitted that bank to fail without supporting it, and caused the
depositors in that bank to lose money. And that is the only clearing house bank failure
in this country where there was a loss of a dollar to a depositor."
At the time Mr. Griswold delivered this address he was Editor of the Chicago Journal
of Commerce.
2 The Association is located in Indianapolis.
'The Hoosier Banker of February, 1931, published by the Indiana Bankers Association, contained an article on page 12 relative to the activity of clearing houses. The
article quoted from a National City Bank letter (of New York) as follows:
"A period of bank failures always raises anew the question how the banking business may be more effectively supervised and regulated. Reg's/a/ion by law haa limitations
and a degree of inflexibility which make it inferior to another kind of regulation which
has been developing in this country over many years. It is a fact well attested by
experience that the beat regulation of banks is the regulation to which the banks voluntarily submit, and which they provide for themselves through their own organizations,
the clearing house associations."
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liquidation of such financial institution. Moreover, all papers and pleadings pertaining to such liquidation, all entries, orders, judgments, and
decrees of court in connection therewith are required to be filed and
entered of record in said cause of action.
But the sole and exclusive right to liquidate the affairs of any closed
financial institution is vested in the department. The department is given
power to proceed with the liquidation and to collect all dues and demands. Upon order of the court it has the power to sell assets or
property, compound and compromise doubtful claims, prosecute and defend all suits and actions, execute all deeds, assignments and releases,
enforce the shareholders' double liability, if necessary, and distribute
the assets among the depositors or creditors. The bill goes into some
detail in requiring the department to file with the court an inventory of
the property, a statement of the liabilities and its recommendations
as to the allowances of claims.
The proposed bill also fixes a time for the filing, hearing, and allowance of claims by the court, for the filing of partial and final accounts
by the department, for the disposition of property held as bailee, and
for the enforcement of liability against any officers or directors of
the closed institution.
The department is given the right to delegate power to ahy of its
examiners or other employees or to special agents or representatives, to
take charge of the liquidation under direction of the department. It may
also retain any officers or employees of the closed financial institution
for that purpose. Bond is required of all persons appointed or employed
in connection with such liquidation.
The proposed bill further provides that all cost and expense incurred
by the department in liquidating the affairs of any financial institution,
including court costs and the compensation and necessary expense of
any special representative, assistant, or attorneys employed by the department, in such amounts as may be approved by the department and by
the court, shall be paid out of the assets and property of the institution
under liquidation. It is provided, however, that no compensation above
actual cost shall be allowed or be paid out of such assets and property to
any receiver or to the department or to the director or to any supervisor,
examiner, assistant or other person regularly employed by the department, for services rendered in connection with such liquidation proceedings.
The Study Commission has carefully attempted to avoid the vesting
of arbitrary power in the state department, and the bill provides that
any financial institution to which the act is applicable shall have the
right to appeal to the Circuit or Superior Court, of the county wherein
the financial institution transacts its business, from any order affecting
the rights of such institution and upon such appeal the court is given
the power to decide such questions de novo.
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Nebraska, and is in the process of being organized in a number of other
localities. The members of the Study Commission for Financial Institutions have endorsed this movement.' To expedite it in Indiana, the proposed new law provides for complete cooperation between regional clearing house associations and the new Department of Financial Institutions.
The department is given the power to assign to regional clearing house
associations a regional examiner who "in addition to his other duties as
prescribed by law, shall cooperate with the officers of the clearing house
association in such manner and to such extent as the department shall
determine and direct."
It is hoped by the members of the Study Commission that all of the
bankers of the state at a very early date will group themselves into
these associations, and that the new department will assign to these
regional clearing house associations examiners to act as clearing house
examiners. If the proposed bill is enacted into law, the responsibility
will rest upon the banking leaders of the state and upon the new Department of Financial Institutions to effect this arrangement as speedily as
possible in order to promote the solvency and stability of banks in
Indiana.
The Comptroller of the Currency, J. W. Pole, and S. L. Cantley, until recently
State Bank Commissioner of Missouri, are both quoted in a publication of the American
Bankers Association as favoring this movement. Mr. Pole's statement is as follows:
"What constitutes good management can always be determined by the consensus of
banking opinion. In our larger cities clearing houses have played an effective part in
the development of banking standards. The type of work done by these associations
should be extended to all banks. I know of no better instrumentality by which to build
up in this country banking traditions strong enough to effectively discourage all types
of bad banking."
Mr. Cantley's statement is as follows:
"Organized cooperation in banking is just as essential to success as is organization
in an army. A most important factor in banking is organization for assembling and
disseminating credit information by counties or groups of counties, preferably the latter.
and also, for self-imposed examinations. The clearing house idea appeals to me as not
only one of the best corrective but also one of the most saltitary agencies available for
stable competitive unit banking."
Both of these statements appeared on the back cover of a pamphlet issued by the
American Bankers Association titled "Regional Clearinghouse Associations."
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REPORT OF STUDY COMMISSION
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114
to the enterprise and success of a long established bank has turned
out
to be a mausoleum, housing the financial wreckage of the instituti
on
and the community which it served. Many instances are known in Indiana where too costly bank buildinas and equipment were major causes
for the failure. The forced liquidation of an expensively housed bank
is nearly sure to result in loss to the depositors. The uses to which
a bank building can be put are ordinarily so limited that once it ceases
to serve as the home for a bank its value is largely gone.
LOANS TO OFFICERS AND DIRECTORS
One of the most drastic changes proposed by the Study Commission
in the present law regulating the loan policies of banks is a provision
absolutely prohibiting the loaning of the funds of a bank or trust company to any officer, agent, or employee of the institution. Loans to directors, however, are authorized but only under certain very carefully
safeguarded conditions. In the language of the proposal, "No loan shall
be made, directly or indirectly, by any bank or trust company to any
officer, agent, or employee thereof. The board of directors may by
resolution, duly entered in the records of the proceedings of the board, authorize loans to directors not holding any other office in such bank or
trust
company and not being an agent or employee thereof, and it may likewise authorize loans to firms or corporations in which such directors may
be partners, members, or stockholders, but the total amount of the obligations of all of such directors, or of the firms, or corporations in which
such directors may be partners, members, or stockholders, shall not
at
any time exceed fifteen per cent of the total resources of the bank or
trust company. Loans permitted by this section shall be made only on
authorization by a majority of all the directors of such bank or trust
company and by the affirmative vote of all directors present at the meeting to which such proposed loan is presented. The department under
such general rules and regulations as it may prescribe which shall apply
to all banks and trust companies alike, may require full collateral security for all loans of the types permitted by this section and for the
purpose of providing that such security may be adequate, may specify the
types and kinds thereof that may be pledged."
Such a provision as this adequately enforced by energetic supervisory officials should prevent the looting of a bank by a group of insiders. Too frequently in the past the reservoir of bank credit created
by the savings of an entire community has been used for the purpose
of advancing the reckless interests of a single group rather than
for
the best interests of the community as a whole, resulting in the
failure
of the bank and in great loss and suffering to the community.
STATEMENTS REQUIRED FROM ALL BORROWERS
Many banking leaders have long maintained that no large unsecure
d
loan should be made without first securing a sworn financial
statement
from the borrower as to his financial condition. That the majority
of
banking departments urge the taking of these statements is indicated
by
Table XLVIII.
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The events of the past few years have proved that a refusal to pay
time depositors on demand creates fear in the minds of conunercial
depositors and causes them to "run" the bank. Consequently, it is now
necessary to consider all deposits as demand deposits. Obviously the
investment of short-time funds in long-time loans is exceedingly dangerous. The Study Commission, therefore, has deemed it desirable in its
proposal to restrict very carefully the power of commercial banks to
make real estate loans.
The proposal definitely prohibits banks from investing in second
mortgages unless such investment is necessary for protecting money
previously loaned. First mortgage loans are to be made for a period
not to exceed five years. In the language of the act, "the amount of
any such loan shall not exceed fifty per cent of the cash value of the
real estate offered for security, and such cash value shall be determined
by two competent persons who shall report such valuation in writing to
the bank or trust company. The written report so made shall be verified" (sworn to before a notary) "and in the event that the bank or
trust company make such loan, shall be kept on file by it subject to
inspection by the department." The proposed statute further provides
that the amount of a first mortgage to any individual shall not exceed ten
per cent of the capital and surplus of the loaning bank and that the aggregate of all such loans shall not exceed twenty per cent of the total
deposits of the institution.
The circumstances under which an actual investment of bank funds
in real estate may be made are carefully prescribed by terms of the proposed act. A bank is given the power to purchase, hold or convey real estate for no purposes other than the following: "(a) Such as shall be
of its business. (b)
necessary for its accommodation in the transaction
Such as shall be mortgaged to it in good faith by way of security for
debts previously contracted. (c) Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings. (d)
,
or mortgages
Such as it shall purchase at sales under judgments decrees,
to
debts due
secure
purchase
shall
or
company
trust
or
held by the bank
it." In conformity with the federal statute dealing with this matter, all
real estate so acquired, except the bank premises, is to be disposed of in a
period of time not to exceed five years. Provisions such as these should
prevent banks from speculating in real estate and from engaging in real
estate ventures for their own account.
As a further limitation on the investment of bank funds in bank
premises, the act provides that the sum invested in real estate, buildings, and banking fixtures shall not exceed twenty-five per cent of the
amount of the capital stock of such bank or trust company actually
paid in and unimpaired and twenty-five per cent of its unimpaired surplus fund. The department may, in its discretion, however, permit an
investment in excess of such twenty-five per cent. Such investment may
be made in the stock of a corporation organized to own and hold the real
estate, building and banking fixtures occupied and used wholly or in part
by such bank or trust company. It is realized that such restrictions are
very drastic but they seem to be justified by past experience. Too frequently an unnecessarily elaborate bank building erected as a monument
13-48149
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REPORT OF STUDY COMMISSION
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TABLE XLVIII,
THE POLICY OF STATE BANKING DEPARTMENTS REGARDING THE REQUIREMENT
OF FINANCIAL STATEMENTS ON UNSECURED LOANS
State
Alabama
Arizona
Arkansas
California .
Colorado
Conneeticu t
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Towa
Kansas
Kentucky .
Louisiana
Maine
Maryland .
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexiro
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania .
Rhode Island
South Carolina
South Dakota
Tmmssm
Te
Utah
Vermont
Virginia
WasIlington
West Virginia
Wisconsin
Wyoming
Ire statements required for all unsecured notes of
$500 or over?
No.
Yes.
$1,n00 and over.
Small banks s5no and up—large banks 31,000 optional.
Attempt to do so--recommend.
Over 31,000.
No.
No fixed rule, but urge it.
No.
Not law, but rigid department policy.
3,300 or more.
Yes.
Yes.
Yes.
No, but recommended.
No, but common practice.
No.
Yes, 31,000 and over.
General policy.
Yes.
No.
Yes.
Yes.
/1,000.
Not law, but reconunended on loans over 3.500.
No.
Not law, but strongly advocated.
Yes.
$2,509 or over in smaller communities.
$5,000 or over in larger cities.
Yes.
Yes.
Yes.
Yes.
Ye3.
Loans in excess of I% of capital and surplus of
institution.
Not law, but strongly urged.
No.
Yes.
Not law, but urged.
Yes.
Not law, but urged.
Not regaired, but reeonunended.
No.
Yes.
No.
$590 m'Aimum where deposit is under $500,000.
$1,000 minimum where deposit is over $500,000.
Yes.
This table was compiled by the American Banicers Association. The information
which it contains was gathered by the questionnaire method. By letter the bank commissioner of each state was asked the following question: "Do you require all unsecured
notes of $500 or over to have personal property statements attached?"
The Indiana department has been requesting that this practice be
followed by Indiana banks. Many banks have not followed this suggestion, however, and the department has been powerless to force them to
do so since there is no statute dealing with the subject. To enable the
department to enforce its request, the proposal of the Study Commission provides that no bank shall make an unsecured loan of more than
$500 to any person without first receiving from him a sworn statement
of his financial condition. It is furthermore required that the state-
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Federal Reserve Bank of St. Louis
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ment is to be renewed annually or at such other times as the department
may prescribe. The bank is required to file all such statements received
from borrowers where they may be conveniently examined by the examiners or other representatives of the department.
Any bank that loans funds without an accurate knowledge of the
borrower's financial condition is taking a chance with depositors' money
that can not be justified under any circumstance. To furnish the bank
with a statement of condition works no hardship on the borrower and in
many instances such a statement may be of great assistance to him personally. In making such statements, borrowers are given a new insight
into their own financial condition.
OTHER LOAN REGULATIONS
Other limitations on the loaning of funds prevent any bank or trust
company from loaning on the security of or purchasing the shares of
its own capital stock except in such cases where security of this nature
or such purchase is necessary to prevent loss upon debts previously contracted in good faith. Stock so purchased or acquired must be disposed
of within six months from the time of its purchase by the institution.
As a final safeguard of the loaning policies of banks, officers, directors, employees, or attorneys of these institutions are specifically prohibited from taking commissions or gifts for the procuring of loans.
Many of these new regulations concerning the loaning of funds are
of such a nature that the necessity for immediate compliance with them
by the banks would cause serious loss and hardship. The proposed
act, therefore, gives institutions two years in which to change their
loans and investments in conformity with the new restrictions. It is
provided, moreover, that "the department may in its discretion extend
the time for such conformity in individual instances if the interests of
the depositors will be protected and served by such extension."
CASII RESERVES
The regulation of cash reserves by statute is a very difficult matter. Ranks are located in many different types of communities and serve
varying types of customers. The cash requirements of all institutions
therefore are not the same. Trade and crop movements, moreover, are
responsible for a varying seasonal demand for cash. No satisfactory
cash reserve law has as yet been devised by any state. The customary
type of statute merely attempts to fix a minimum cash reserve below
which no bank in any community can safely go. The present Indiana
law is typical. It provides that every bank or trust company shall main/
2 per cent of its demand
tain cash reserves equal to not less than 121
deposits and 3 per cent of its time deposits. The reserve requirements
of other states for demand deposits range from 10 to 20 per cent.' The
Federal Reserve member banks are required to maintain cash reserves for demand
deposits varying in amount with the location of the bank. Country banks are required
to maintain 7 per cent, city banks 10 per cent, and central reserve city banks 13 per cent.
All banks are required to maintain a cash reserve equal in amount to 3 per cent of
their time deposits.
The Federal Reserve Bulletin for September, 1930, contains a detailed summary of
the provisions of the laws of every state relating to bank reserves.
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losses would be suffered by depositors. Skeptics might contend that
banks in precarious condition would falsify their statements, and not
show the true amount of their non-current loans. Energetic and resourceful supervision such as is contemplated by the proposed new department
could easily control any such attempts to evade the law.
Provisions calling for the segregation of shares of and loans to affiliated companies carried as assets are ones which should prove of immense
value for the protection of the depositor. Bank accounting methods are
such that it would be nearly impossible for banks to evade these two
requirements. Consequently, the public would be informed at least four
times a year of the true extent of the relation existing between banks
and their affiliates.
The last requirement that all public funds be segregated should
make it impossible for public officials to subsidize weak banks and to
keep them open long past the time they should be closed.
The penalty for violation or non-performance in connection with
these provisions governing published statements of condition is so severe
that no bank could afford to violate the statute. It is provided that
"any bank or trust company which shall fail to prepare and submit any
statement of condition required by the department and any bank or trust
company which shall violate any order of the department with respect
to such statement or statements shall be subject to a penalty of one
hundred dollars for each day that shall elapse after the date fixed by
the department for compliance with the terms of its notice concerning
statements of condition. The penalty herein prescribed may be recovered
in any court of competent jurisdiction, in an action by the State of
Indiana, on the relation of the Department of Financial Institutions, and
when so recovered, such penalty shall be paid into the general fund of
the state treasury."
Members of the Study Commission are of the opinion that these
provisions governing the form of the published statements of banks will
serve as a powerful influence for safe and conservative banking. Under
this system publicity will be directed toward practices which have hitherto
been weak spots in bank management. Informed public opinion is irresistible. When banks are forced to inform the public regularly as to the
amount of their questionable assets, their relations with their affiliates,
their trust accounts, and their public funds, no longer will they dare
abuse sound principles ln connection with these accounts.
TIIE DUTIES OF DIRECTORS
It has been frequently stated that bank directors do not fully realize
the responsibilities laid upon them when they accept directorships. Some
receivers of failed banks and other informed persons attribute a great
portion of our banking difficulties to neglect on the part of the board
of directors. This lack of interest or neglect is sometimes occasioned
by the predominance of other interests, residence at great distance from
the bank, or lack of sufficient investment in the institution to make attention to its affairs worth while. The proposal of the Study Commission
therefore provides that every director during his whole term of service
must be a citizen of the United States and that at least three-fourths of
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the directors must reside in the State of Indiana and in the city, town,
or village in which the principal office of the bank or trust company is
located. The present law requiring that directors own stock with an
aggregate par value of at least $500.00 is changed to require directors to
own shares with an aggregate par value of at least $1,000.00.
To insure that directors diligently attend board meetings, the proposed statute provides that banks "shall keep a record of the attendance of directors at meetings of the board and shall make a report,
showing the names of the directors, the number of meetings of the board,
regular and special, the number of meetings attended and the number
of meetings from which each director was absent, which report or copy
thereof shall be mailed to each stockholder annually at the time of the
notice of the annual meeting."
The Study Commission's investigation of insolvent banks has revealed the fact that in some instances officers failed to apprise the
members of the board of directors of the state department's criticism
of conditions within the bank. In some of these instances directors have
maintained that they could have corrected unsound conditions had they
known of their existence. To prevent such situations from arising and
to insure that the board will at all times be fully acquainted with the
recommendations of the Department of Fnancial Institutions the proposed statute provides that the directors shall require the secretary of
the board or some other duly designated agent to make official communications from the state department a matter of record in the minutes
of the meetings of the board. The enforcement of this provision will not
be difficult because it will be possible for the examiner to bring with him •
at the time of the examination duplicate copies of all official communications from the department to the bank and check his copies with those
entered in the minute book of the board.
After the failure of a bank, its directors sometimes insist that they
were intentionally deceived by the officers and, as a result, did not know
the true condition of the bank. In many well-managed banks in order to
make such deceptions impossible it has long been the practice to have the
directors periodically audit and examine the books and affairs of the institution. In this manner it is possible for the members of the board to
secure a personal knowledge of the bank's condition. Such examinations,
moreover, serve to place the responsibility for unsound practices and
conditions squarely upon the board. Recognizirig the desirability of this
practice of self-examination the proposal of the Study Commission provides that the board or a committee therefrom or a firm of certified accountants selected by the board shall examine every bank or trust company at least twice each year and shall submit to the Department of
Financial Institutions a complete statement of the bank's condition as
determined by the examination.
The members of the Study Commission are of the unanimous opinion
that these new proposals defining the responsibility and duties of directors represent a distinct advance over similar provisions of the present
statute. These new provisions should do much for the advancement of
sound management policies throughout the state and should increase the
safety of the depositors' money.
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record of such banks compared with the other state institutions which
were not m mbers of the system. It is recognized that only a study of
this type ould measure the influence of the Federal Reserve System
itself in t e prevention of failures.
For nAany years past the state banks and the Federal Reserve Board
have disagreed over the terms upon which state banks may be admitted
to the system as voluntary members. To this controversy can be charged
a great part of the responsibility for the failure of state batnks to join
the Federal Reserve System in large numbers.' Space does i not permit
a review of this controversy, but impartial observers agree that the
attitude of both parties has been responsible in part for the many misunderstandings that have arisen. It is felt by the members of the Study
Commission that recommendations for the adjustment of these differences lie without the scope of their recommendations. It is their unanim_
mous opinio,n, however, that increased membership in the FederalAel
serve System on the part of Indiana banks would be a stabilizi4g influence for the banking industry, and in addition would bring to a larger
number of communities the benefits of the system's credit reservoir.
The members of the Study Commission believe that a larger membership in the Federal Reserve System is desirable for the country as
a whole if such defects of the old system as decentralization of control
and lack of power to mobilize reserves are to be eradicated. Should the
Department of Financial Institutions be organized as proposed, it is
hoped that it will attempt to solve the problem of increasing the number
of Federal Reserve members among the banks under its supervision.
GUARANTY OF BANK DEPOSITS
Among the many suggestions received by the Study Commission for
the solution of Indiana's bank failure problem was the suggestion that a
bank-guaranty system be created. A careful study was made, therefore
,
of the bank guaranty plans used by other states and of their success.
It was foimd that the first bank guaranty law in the United States
was the Bank Guaranty Law of New York in 1829. The fund created
in this law became bankrupt in 1837 and the law was abolished in
1842.
In the last twenty-five years, however, eight other states have enacted
guaranty laws. These states and the year of passage of the guaranty
act in each are as follows:
Oklahoma
1908 Mississippi
1914
Kansas
1909 South Dakota
1915
Texas
1909 North Dakota
1917
Nebraska
1909 Washington
1917
'In 1924 there were 268 Indiana banks that were members
of the Federal Reserve
System. This number included 247 national banks.
12 state banks, and 9 trust companies.
By June of 1931 the number of Federal
Reserve members in Indiana had declined to 196,
of which 187 were national banks. and the
remaining nine were voluntary state and trust
company members.
The resources in these member banks, however,
did not show a corresponding decline.
In 1924 member banks had resources totaling
$451,734,000. This wa.s 45 per cent of the
total banking resources of the state. Fly 1930
the resources of member banks hatl only
dropped to $435,177,064, or 41 per cent of all
banking resources of the state.
These figures were obtained from the statistical
division of the Federal Reserve Bank
of Chicago.
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Every one of these states has had a disastrous experience with its
laws. In operation they have tended to demoralize sound banking and
to increase bank-failure loss rather than prevent it. As a consequence
every one of these laws has either been repealed or so modified that
the system is no longer operative. The present status of these laws is
as follows:
Oklahoma—Law repealed March 31, 1923.
Kansas—Law repealed March 14, 1929.
Nebraska—Law declared unconstitutional by the state's supreme
court, 1932.
Texas—Law repealed February 11, 1927.
Mississippi—Law not repealed but inoperative. At a special session
of the legislature in 1931 it was necessary to pass a lay,- to allow the
issuance of bonds to raise funds for the payment of the outstanding obligations of the fund.
South Dakota—Law not repealed but modified greatly. Notwithstanding this modification the law is adjudged a complete failure and
the guaranty fund has a hopeless deficit which is constantly growing
larger.
North Dakota—Law not repealed but inoperative.
Washington—Law repealed June 11, 1929.
The Oklahoma law may be used as a typical illustration of these
various systems. The operation of the guaranty system was placed
under the control of a special supervisory board. This board also had
charge of the liquidation of all failed banks. All state-chartered banks
and the banking departments of trust companies were compelled to become members of the system. Unsecured deposits in banks were to be
guaranteed by the system. A fund for the payment of the depositors of
failed banks was to be collected by levying an annual assessment against
each state bank and trust company equal to one per cent of its average
daily deposits. If depleted by the payment of claims, the fund was to
be replaced by special assessments against the banks. After the levying of special assessments, should the fund still be insufficient to pay
all claims, certificates of indebtedness were to be issued claimants. These
certificates were to be retired when assessments against the banks
brought in sufficient funds.
The experience of every state has been the same. Staggering deficits were accumulated rapidly in the guaranty funds. The continued
operation of the system in most of these states would have brought bankruptcy to all solvent banks.
Experience has proved that unscrupulous wildcat bankers have
flourished best in states with guaranty systems. Depositors, feeling
that their deposits were secure, flocked to the banks where exorbitant
rates of interest were paid on deposits and where free services were
offered without stint. It made no difference how reckless the loan policy
or management policy of such institutions might be, the public was not
afraid to deposit in them, and as a consequence the recklessly managed
banks grew at the expense of the well-managed banks, thereby weakening the entire banking structure. As losses began to accumulate and
assessments against operating banks grew larger and larger, even the
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REPORT OF STUDY COMMISSION
FOR INDIANA FINANCIAL INSTITniONS (1932)
137
most successfully managed institutions were forced to
suspend dividend
payments and increase interest rates to borrowers in
order to meet their
assessments, to the dissatisfaction of both shareholders
and customers.
As a consequence the majority of the well-managed banks
of the state
surrendered their state charters and became nation
al banks. Such
action increased the difficulties of the system, since only
the weak and
tottering banks were left to sustain the fund.
Proponents of state-guaranty schemes have characterize
d them as
insurance systems insuring the depositors against loss.
Such characterization, however, is not correct. It is not possible to
base such plans
on sound actuarial principles since no selectivity of risks
is possible.
Insurance companies do not charge the same rate of premi
um on all
risks, and moreover they ordinarily will not insure very
poor risks at
any rate. Under a guaranty-fund system as used, all banks,
good or bad,
are taxed on the same basis. If insurance companies applie
d this method
to all individuals and to all buildings they would soon
be forced into
insolvency. The differential rate, moreover, is one of the
most effective
weapons which commercial insurance companies have
in influencing the
insured to take precautions that eventually reduce losses.
The experience of every state that has tried laws
guaranteeing
deposits suggests the following arguments against the
plan: (1) That
deposit-guaranty laws tend to weaken the banking struct
ure of the state.
The possibility of loss to depositors serves as a restrai
ning influence on
even the most unscrupulous banker. The removal
of the possibility
of this loss means the removal of a powerful deterrent
to reckless banking. (2) Bank-guaranty systems increase the total
of loss from bank
failures. The public is relieved of the necessity of being
discriminating
in its selection of a bank. Many times the most
reckless management
policies make the greatest appeal to customers. As
a consequence, a
larger proportion of the funds deposited in banks
will be deposited in
weak institutions in those states having guaranty
systems than in those
states which do not have such systems. (3) Such
systems remove all
premium upon wise and careful management. Where
deposits are not
guaranteed, banks endeavor to gain public confidence
by demonstrating
that they are safely and wisely managed. If all institu
tions are made
equally safe by government action, wise management
can no longer be
offered as an inducement to depositors. (4) Deposit-guar
anty laws are
expensive. They add to the ordinary costs of banking and
as a consequence the public must ultimately pay these costs. It
is only natural
that banks reimburse themselves for direct expenses by
exacting higher
interest rates on loans or paying smaller interest
rates on deposits.
(5) Guaranty of deposits does not allay
the fears of over-cautious
depositors. Instead of fearing banks, depositors
fear the insolvency of
the guaranty fund or long delay in reimbu
rsement from such fund.
Experience has proved that their fears concer
ning the guaranty system
are well-founded. (6) Bank guaranty
laws cause state banks to surrender their state charters in favor of nationa
l bank charters.
There is no reason why Indiana's experience
with a bank-guaranty
system should be different from that of the
other eight states which have
tried such plans. In every one of these
states the system has failed to
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prevent bank failures and has demoralized state banking. Such a law
in Indiana would cause the well-managed and solvent state-chartered institutions to surrender their charters and reincorporate under federal
statutes. As a consequence only the very weak institutions would remain as members of the system resulting, in all probability, in its eventual
bankruptcy. The obligations of the guaranty fund then would either
have to be repudiated or assumed by the state. In case the state did
assume them the loss would fall upon the general taxpayer. The members of the Study Commission, therefore, are of the opinion that the
legislative creation of a mutual bank-guaranty system in Indiana would
be a ruinous and foolhardy experiment. Consequently, the Study Commission has rejected all suggestions that it incorporate a bank-guaranty
system in its list of reform proposals.
There is no reason why Indiana's experience with a bank-guaranty
system should be different from the experience of the other eight states
that have tried it. In every one of these states the system has failed
to prevent bank failures and has demoralized state banking. The members of the Study Commission, therefore, are of the opinion that the
legislative creation of a mutual bank-guaranty system in Indiana would
be a ruinous and foolhardy experiment. Consequently, the Study Commission has rejected all suggestions that it incorporate a bank-guaranty
system in its list of reform proposals.
It is the almost unanimous opinion of the members of the Study
Commission that a nation-wide bank-guaranty system would also prove
disastrous. It is possible, however, that Congress may at some future
date create such a system or some other system designed to be a stabilizing influence for the banking industry. If Congress should take such
action, it is probable that provision would be made for state banks to
share in the benefits expected to result therefrom. The proposal of the
Study Commission, therefore, gives to the Department of Financial Institutions the power to permit banks and other financial institutions
under its jurisdiction to participate in any optional plan prescribed by
federal legislation if in the opinion of the department such participation
will serve the best interests of the institutions and the public.'
PENALTIES
In describing the various features of this proposed regulatory code
for Indiana banks, little mention has been made of the penalties for
the violation of its various provisions. Adequate penalties, however,
have been provided throughout. It is believed that these penalties are
sufficiently drastic to cause banks and trust companies to regard scrupulously the provisions of this proposed act should it be adopted by the
legislature and enacted into law.
1 Had it not been for the fact that a special session of the General Assembly WAS
called for another purpose it is probable that many months would have elapsed before
Indiana building-and-loan associations could have joined the Home Loan Bank System.
Under the terms of the statute just described above no legislative action would have been
necessary to allow them to join.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
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8
rs, depositors and directors in
The Federal government, stockholde
have participated heavily in
all
large
at
the banks and the communities
The debentures constituted a large part
the reconstruction of the banks.
it was partly by means of purchasof the rehabilitation program, and
and depositors participated. Stocktors
direc
ing "B" debentures that
purchased personally real estate and
holders and directors also have
al agencies have taken the brunt
Feder
other underirable assets. Various
s during the period.
of real estate financing off the bank
passive factor in bank manageThe bank director, long a rather
past year to realize more fully than
ment, has been made during the
nsibilities. He has been a heavy
respo
and
s
ever before his active dutie
program. Records of directors' attendcontributor to the rehabilitation
state show vast improvement over
ance at meetings in banks over the
has been reduced in many inprevious years. The number of directors
directors who are actually
those
only
stitutions and includes more nearly
lation can set up safeLegis
bank.
the
of
nt
geme
effective in the mana
banks but it remains
of
ties
the activi
guards and can define the scope of
policies and make
the
mine
deter
to
rs
office
for the directors and active
trend towards
the
s
or fall. Unles
decisions upon which banks stand
banking instiof
tion
ilita
rehab
t
recen
better management continues, the
ble results.
tutions will not achieve the best possi
RESTRICTED BANKS
remained in Indiana on June 29,
Only one restricted state bank
g the past two years 132 banks
durin
1935, in spite of the fact that
another under restrictions as to
have been operating at one time or
nt writing the one bank is operatwithdrawal of deposits. (At prese
granted an unrestricted license in
been
ng
ing without restrictions, havi
July, 1935.)
d bank" situation has come
The rapid clearing up of the "restricte
rtment, which supervised
the
Depa
en
as a result of co-operation betwe
and directors in the banks
itors
depos
rs,
holde
stock
the rehabilitation, and
co-operation, only sevclose
this
of
and the Federal agencies. In spite
e to effect a suitunabl
were
-one
sixty
ed;
enty of the banks were open
were forced to close.
able rehabilitation program and
were operating under restricted lithat
s
bank
y-six
Of the thirt
which was restricted after that date,
censes on July 1, 1934, and one
en
have been closed, and one remained
fifte
twenty have been reopened,
the end of the period.
in the restricted classification at
in the restricted banks that were
Over one-half of the deposits
released. Of the total of more than
opened during the year have been
these banks, approximately three
in
n
froze
eight million dollars once
deposit liability was used to purchase
million dollars of the remaining
ns, which assets were trusteed
inadmissible assets of reorganized institutio
from the trustees particived
recei
who
itors
for the benefit of the depos
d deposits. In addition appation certificates in lieu of their impounde
was used to rehabilitate
rs
dolla
proximately eight hundred thousand
the capital structures of banks.
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Federal Reserve Bank of St. Louis
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hitherto accomplished by examination only are completed by correspondence. This enables the Department to dispense with time-consuming
routine examinations, and to concentrate more of its effort on "problem"
banks. The resultant saving of time for bank executives by the elimination of unnecessary examinations is important as the pressure from
newer phases of bank management becomes greater with the increasing
problems brought on by changing financial conditions.
The bankers of the state already are expressing appreciation of
these new co-operative efforts by the state's supervising authority. The
policies are based on the belief that the people of the state will best
be served by strong banks, efficiently managed, and critically but helpfully supervised with modern procedure.
In the matter of called reports the Department also is undertaking
to eliminate some of the complexities which overlapping authority of
Federal agencies and the cry for more stringent supervision by all authorities have caused. Steps have been taken with the Federal agencies
to modify the lack of uniformity in called reports. The special committee referred to above is working also to solve such problems.
A helpful step toward permanent strengthening of the banking
structure in the state is being undertaken. Under the amendments to
the 1933 Act, adopted by the 1935 legislature, "sound capital" was defined to include the proceeds from debentures. Two types of these debentures are now used widely by banks of the state for the purpose
of reconstructing their capital protection for deposits. One, the "A"
debentures, in general are those sold by banks to the Reconstruction
Finance Corporation and the other, "B" debentures, are sold to shareholders, depositors or others in local communities.
It has been the policy of the Department to encourage the use of
these debentures. Gradually the banks may develop capital structures
somewhat comparable to private industrial financing. The bank's common stock will compare with industrial common stock, having the controlling interest, and the proceeds of debentures will compare with the
bonds and preferred stock of industrial firms. This use of debentures
will permit elasticity of the capital structures, and will allow banks to
increase or decrease their capital structure (sound capital) in ratio to
deposit fluctuations.
Approximately ten million dollars was injected into Indiana bank
capital structures by the use of "A" and "B" debentures during the
fiscal period from July 1, 1933, to June 30, 1934. In addition, capital
structures were strengthened during this period by means of purchase
of undesirable assets by stockholders and directors and through voluntary contributions. During the past fiscal period additional debentures
in the amount of approximately five hundred thousand dollars were
used to rehabilitate the capital structure of restricted banks changing
to unrestricted licenses. The result of this use of debentures has been
so good that the "sound capital" amendment was projected and study
has been given to the permanent benefits which will accrue to the banking system from using debentures as a permanent factor in their capital
structures.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
137
SCHEDULE 0 (Continued)
Fort Wayne—
Jacob Sunshine, D/B/A Leo's Loan Office, 1410 Calhoun St.
Gary—
Gary Loan & Mercantile Company, Inc., 1550 Broadway.
Gary Loan & Mercantile Company, Inc., 1004-6 Broadway.
Sam's Loan Shop, 1604 Broadway.
Star Jewelers. Inc., 704 Broadway.
Hammond—
Hammond Loan Company, 125 State St.
Charles J. Lessor, 453 State St.
Indiana Harbor—
M. W. Tepper, 3528 Main St.
Indianapolis-Bloom's Money Loan Office, 229 E. Washington St.
Isaac Bremen, 304 W. Washington St.
Chicago Jewelry Company, Inc., 146 E. Washington St. (S).
City Loan Company, Inc., 364 Indiana Ave.
Eagle Loan Office, 326 Indiana Ave.
Estates Loan Company, 505 Majkstic Bldg. (S).
Louis Fogel, D/B/A Lew's Loan Office, 504 Indiana Ave.
Indianapolis Public Welfare Loan Association, 330 Occidental Bldg. (S).
Edith I. Werner, D/B/A Jack's Loan Office, 234 Indiana Ave.
M. Olshewitz, D/B/A Joseph's Loan Office, 200 Indiana Ave.
Liberal Loan Company, 152 N. Delaware•St. (S).
Lincoln Jewelry & Loan Compasy, 201 W:\ Washington St.
Wm. & Theodore Medias, 506-508 Indiana Aye. (S).
Oscar Tavel, D/B/A Oscar's Loan Company, 856 Indiana Ave.
Sacks Bros. Loan Office, 308 Indiana Ave. (S).
Sussman's State Loan Office, 239 W. Washington St. (S).
Lafay,Ite-Earl M. Nicewander, 801 Columbia St.
F. M. Wood, 22 N. Fourth St. (S).
Marion-Marion Loan Company, 206-2'07 Iroquois Bldg. (S).
—
,
Muncie
Davis Jewelry Company, 509 S. Walnut St.
The Indiana Loan Company, 357 Johnson Block (S).
New Albany—
Alex Palmer, 141 E. Main St.
Terre Haute-Ben Becker, D/B/A Peoples Jewelry & Loan Company. 322 Wabash Ave.
Sam H. Sterchi, D/B/A Sam's Personal Loans, 307 Wabash Ave.
Morris's Pawn Shop, 304 Wabash Ave.
NOTE: (S) indicates Small Loan License as well as Pawnbroking.
REGULATIONS AND GENERAL ORDERS OF THE COMMISSION
FOR FINANCIAL INSTITUTIONS
BANK REGULATION NUMBER 5
PUBLICATION OF FINANCIAL STATEMENTS
Whereas, Chapter 40 of the Acts of the General Assembly of the
State of Indiana for 1933, entitled "An Act Concerning Financial Institutions," approved February 24, 1933, became effective in its entirety on
July 1, 1933, and is now in full force and effect, and
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Whereas, Section 10 of said Indiana Financial Institutions Act provides as follows, to wit:
"The department is hefeby authorized, by a majority vote of the
members of the commission, to make, promulgate, alter, amend or repeal
rules and regulations for any or all of the following enumerated purposes:
"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any financial institution to which this act is applicable.
"(d) For the establishment of safe and sound methods for the
transaction of business by such financial institutions and for safeguarding the interests of depositors, creciitors and shareholders respecting the
withdrawal of funds in time of emergency. * * *''
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority conferred upon it by law, and by unanimous
vote of the members of the Commission for Financial Institutions, does
hereby make, promulgate and publish the following regulation with
respect to publication of information relative to condition of state banks
and/or trust companies.
1. No financial institution of the State of Indiana, required to publish a statement of assets and liabilities upon notice from the Department, shall publish or circulate any other or different statement unless
the total of resources of such financial institution and the capital account thereof as given by such other published statement shall be the
same as that given in such official published notice required by said
Department.
2. This regulation shall be in full force and effect from and after
the 1st day of September, 1934, and shall remain in effect until modified, rescinded or repealed by subsequent regulation.
Witness, my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 24th
day of August, 1934.
BANK REGULATION NUMBER 6
PAYMENT OF INTEREST ON DEPOSITS
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana, 1933, became effective July 1st, 1933,
and is now in full force and effect, and
Whereas, Section 10 (c) of said The Indiana Financial Institutions
Act is as follows, to wit:
Sec. 10. Rules and Regulations. The department is hereby authorized, by a three-fourths vote of the members of the commission, to make,
promulgate, alter, amend or repeal rules and regulations, for any or all
of the following enumerated purposes:
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"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any financial institution to which this act is applicable," and
Whereas, the Federal Banking Act of 1933 (Glass-Steagall Act)
is now in full force and effect, and under the provisions of said act the
Federal Reserve Board has issued regulations pertaining to the payment of deposits and interest thereon by member banks of the Federal
Reserve System, and under an amendment to Regulation Q of the Federal Reserve Board, the effective date of which is February 1, 1935, on
the subject of payment of deposits and interest thereon by member
banks, it is provided that the rate of interest to be paid by such member
bank shall not in any case exceed either the maximum rate prescribed
in such amendment to Regulation Q or the maximum rate authorized
by law to be paid upon deposits by state banks or trust companies
organized under the laws of the state in which such member bank is
located, whichever may be less,
Now, Therefore, the Department of Financial Institutions, by virtue
of the power and authority conferred upon it by law, and by unanimous
vote of the members of the Commission for Financial Institutions, does
hereby make and promulgate the following regulation with respect to
the payment of deposits and interest thereon by any state bank and/or
trust company; such regulations being made, and promulgated to define
a safe manner and safe condition of transacting business by all state
banks and/or trust companies of the State of Indiana, and any violation
hereof shall be and constitute an unsafe manner and unsafe condition
of transacting the business of such state banks and/or trust companies.
(SECTION 1. DEPOSITS PAYABLE ON DEMAND.)
(a) Interest Prohibited. Except as hereinafter stated, no state
bank and/or trust company shall, directly or indirectly, by any device
whatsoever, pay any interest on any deposit which is payable on demand.
(b) Exceptions. This prohibition does not apply to:
(1) Any deposit made by a mutual savings bank.
(2) Any deposit of public funds made by or on behalf of any
state, county, school district, or other subdivision or municipality, with
respect to which payment of interest is required under state law.
(3) Payment of interest in accordance with the terms of any certificate of deposit or other contract which was lawfully entered into in
good faith before December 22, 1934, and in force on that date and
which may not be terminated or modified by such bank at its option or
without liability; but no such certificate of deposit or other contract
may be renewed or extended unless it be modified to eliminate any provision for the payment of interest on deposits payable on demand; and
every state bank and/or trust company shall take such action as may
be necessary, as soon as possible consistently with it contractual obligations, to eliminate from any such certificate of deposit or other contract
any provision for the payment of interest on deposits payable on demand.
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(SECTION II. INTEREST ON TIME DEPOSITS)
(a) Time Deposits. The term "time deposits," for the purposes
of this section, includes "time certificates of deposit," "time deposits,
open accounts," and "postal savings deposits," as defined below.
(1) Time Certificates of Deposit. The term "time certificate of
deposit" means an instrument evidencing the deposit with a bank of a
certain sum specified on the face of the instrument payable to bearer
or to any specified person or to his order.
(I) On a certain date, specified in the instrument, not less than
30 days after the date of the deposit, or
(II) At the expiration of a certain specified time subsequent to the
date of the instrument, in no case less than 30 days, or
(III) Upon notice in writing which is actually required to be
given a certain specified number of days, not less than 30 days, before
the date of repayment, and
(IV) In all cases only upon presentation and surrender of the
instrument.
(2) Time Deposits, Open Accounts. The term "time deposits, open
accounts" means deposits, other than "time certificates of deposit,"
"postal savings deposits," and "savings deposits," in respect to which
a written contract has been entered into with the depositor at the time
the deposit is made that neither the whole nor any part of such deposit
may be withdrawn, by check or otherwise, prior to the date of maturity,
which shall be not less than 30 days after the date of the deposit, or
on written notice which must be given by the depositor a certain specified number of days in advance, in no case less than 30 days.
(3) Postal Savings Deposits. The term "postal savings deposits"
means deposits in banks which consist of postal savings funds deposited
under the terms of the Postal Savings Act, approved June 25, 1910, as
amended by the Banking Act of 1933, and which comply with the requirements of paragraph 1 or 2 of this subsection.
(b) Payment of Interest. Except in accordance with the provisions of this section, no state bank and/or trust company shall pay
interest on any time deposit in any manner, directly or indirectly, or
by any method, practice or device whatsoever.
(c) Maximum Rate of Interest.
(1) No state bank and/or trust company shall pay interest, accruing after February 1, 1935, on any time deposit or any part thereof at
a rate in excess of 21/2 per cent per annum, compounded quarterly, regardless of the basis upon which such interest may be computed, except
as otherwise provided in paragraph (2) hereof.
(2) • A state bank and/or trust company may pay interest on
time deposits in accordance with the terms of any certificate of deposit or other contract which was lawfully entered into in good faith
prior to December 22, 1934, and in force on that date and which may not
legally be terminated or modified by such bank at its option or without
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Institutions of the State of Indiana (1935)
141
liability; but no such certificate of deposit or other contract shall be
renewed or extended unless it be modified to conform to the provisions
of this regulation, and every state bank and/or trust company shall
take such action as may be necessary as soon as possible consistently
with its contractual obligations, to bring all such certificates of deposit
or other contracts into conformity with the provisions of this regulation.
(3) A state bank and/or trust company may pay interest on a
time deposit received during the first five days of any calendar month
at the maximum rate prescribed in paragraph 1 of this subsection
calculated from the first day of such calendar month until such deposit
is withdrawn or ceases to constitute a time deposit under the provisions
of this regulation, whichever shall first occur.
(d) Deposits Payable Within Thirty Days. Interest at a rate not
exceeding that prescribed in subsection (c) of this section may be paid
until maturity upon deposits which were bona fide time deposits at the
time of deposit, although they have since become payable within 30
days. On time deposits with respect to which notice of withdrawal shall
have been given to the bank interest may be paid until the expiration of
the period of such notice at a rate not exceeding that prescribed in subsection (c) of this section. No interest shall be paid by a state bank
and/or trust company on any amount which, by the terms of any
certificate or other contract or agreement or otherwise, the bank may
be required to pay within 30 days from the date on which such amount
is deposited in such bank.
(e) No Interest After Maturity or Expiration of Notice. After
the date of maturity of any time deposit, such deposit is a deposit
payable on demand, and no interest may be paid on such deposit for
any period subsequent to such date. After the expiration of the period
of notice given with respect to the repayment of any time deposit, such
deposit is a deposit payable on demand and no interest may be paid on
such deposit for any period subsequent to the expiration of such notice.
(SECTION III. PAYMENT OF TIME DEPOSITS BEFORE
MATURITY)
(a) No state bank and/or trust company shall pay any time deposit except in accordance with the provisions of this section, even
though no interest is paid on such deposit.
(b) No state bank and/or trust company shall pay any time deposit, which is payable on a specified date, before such specified date.
(c) No state bank and/or trust company shall pay any time deposit, which is payable at the expiration of a certain specified period,
before such specified period has expired.
(d) No state bank and/or trust company shall pay any time deposit, with respect to which notice is required to be given a certain
specified period before any withdrawal is made, until such required notice
has been given and the specified period thereafter has expired.
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(SECTION IV. INTEREST ON SAVINGS DEPOSITS)
(a) Definition.—The term "savings deposit" means a deposit which
consists of funds accumulated for bona fide thrift purposes and in respect
to which—
(1) The pass book or other form of receipt, evidencing such deposit, must be presented to the bank whenever a withdrawal is made.
(2) The depositor is required, or may at any time be required,
by the bank to give notice in writing of an intended withdrawal not less
than 90 days before a withdrawal is made, and
(3) The above requirements are included in the bank's printed
regulations accepted by the depositor or in some other written contract
with the depositor.
(b) Payment of Interest.—Except in accordance with the provisions of this section, no state bank and/or trust company shall pay interest on any savings deposit in any manner, directly or indirectly, or
by any method, practice, or device whatsoever.
(c) Maximum Rate of Interest.
(1) No state bank and/or trust company shall pay interest,
accruing after February 1, 1935, on any savings deposit or on any part
thereof at a rate in excess of 2% per cent per annum, compounded
quarterly, regardless of the basis upon which such interest may be computed, except as otherwise provided in paragraph (2) hereof.
(2) A state bank and/or trust company may pay interest on
savings deposits in accordance with the terms of any contract, which
was lawfully entered into in good faith prior to December 22, 1934, and
in force on that date and which may not legally be terminated or modified by such bank at its option or without liability; but no such contract
shall be renewed or extended unless it be modified to conform to the
provisions of this regulation, and every state bank and/or trust company shall take such action as shall be necessary, as soon as possible
consistently with its contractual obligations, to bring all such contracts
into conformity with the provisions of this regulation.
(3) A state bank and/or trust company may pay interest on a
savings deposit received during the first five days of any calendar month
at the maximum rate prescribed in paragraph 1 uf this subsection
calculated from the first day of such calendar month until such deposit
is withdrawn or ceases to constitute a savings deposit under the provisions of this regulation, whichever shall first occur.
(d) Deposits Upon Wh,ich Notice of Withtlrawal Is Not Given.—
Interest at a rate not exceeding that prescribed in subsection (c) of
this section may be paid upon savings deposits as defined above with
respect to which notice of intended withdrawal has not actually been
required or given.
(e) Deposits Upon Which Notice of Withdrawal Has Been Given.
—Interest at a rate not exceeding that prescribed in subsection (c) of
this section may be paid upon savings deposits, with respect to which
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Institutions of the State of Indiana (1935)
143
notice of intended withdrawal may have been given to the bank, until
the expiration of the period of such notice.
(f) No Interest After Expiration of Period of Notice.—After the
expiration of the period of notice given with respect to the intended
withdrawal of any savings deposit, such deposit is a deposit payable on
demand and no interest may be paid on such deposit for any period
subsequent to the expiration of such notice, unless the owner of such
deposit advise the bank in writing that the deposit will not be withdrawn pursuant to such notice or that the deposit will thereafter again
be subject to the requirements applicable to savings deposits, in which
event the deposit again constitutes a savings deposit after the date
upon which such advice is received by the bank.
(SECTION V.
NOTICE OF WITHDRAWAL OF SAVINGS
DEPOSITS.)
(a) A state bank and/or trust company must observe the requirements set forth below in requiring notice of intended withdrawal of
any savings deposit, or in waiving such notice, or in repaying any savings deposit, or part thereof, without requiring such notice, whether
such notice of intended withdrawal is required to be given in each case
by the terms of the bank's contract with the depositor or may, under
such contract, or by the terms of the Indiana Financial Institutions
Act, be required by the bank at any time at its option.
(1) If a state bank and/or trust company waive such notice of
intended withdrawal as to any portion or percentage of the savings
deposits of any depositor, it shall waive such notice as to the same portion or percentage of the savings deposits of every other depositor which
are subject to the same requirement.
(2) If a state bank and/or trust company pay any portion or
percentage of the savings deposits of any depositor, without requiring
such notice, it shall, upon request and without requiring such notice,
pay the same portion of percentage of the savings deposits of every
other depositor which are subject to the same requirement.
(3) If a state bank and/or trust company require such notice before the payment of any portion or percentage of the savings deposits
of any depositor, it shall require such notice before the payment of
the same portion or percentage of the savings deposits of any other
depositor which are subject to the same requirement.
(b) No state bank and/or trust company shall change its practice
with respect to the requiring or waiving of notice of intended withdrawal of savings deposits except after duly recorded action of its board
of directors or of its executive committee properly authorized, unless so
ordered by the Department of Financial Institutions of the State of
Indiana, and no practice in this respect shall be adopted which does not
conform to the requirements of paragraphs 1, 2 or 3 of subsection (a)
of this section.
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(c) No change in the practice of a state bank and/or trust company with respect to the requiring or waiving of notice of intended
withdrawal of savings deposits subject to the same requirements shall be
made unless ten days' notice thereof shall have been given by posting
of such regulation, or change in some conspicuous place in the room
where the savings deposit business of such state bank and/or trust company is transacted unless such change or regulation shall be upon an
order of the Department of Financial Institutions of the State of
Indiana.
(d) A state bank and/or trust company must observe the requirements of this section with respect to savings deposits even though no
interest be paid on such deposits.
This regulation shall be in full force and effect from and after the
close of business on January 31st, 1935, and shall remain in effect until
modified, rescinded or repealed by subsequent regulation.
Bank Regulation No. 3 of the Department of Financial Institutions
of the State of Indiana issued under date of October 26, 1933, is hereby
rescinded and repealed effective January 31st, 1935, and upon the taking
effect of this regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 19th
day of December, 1934.
ADDENA
The following interpretations of Regulation No. 6 are hereby furnished to all state banks and/or trust companies organized and doing
business under the statutes of the State of Indiana, to aid them in their
practice and operation of their banks under said regulation:
Ruling 1. Payment of Deposits' Tax
The Department of Financial Institutions does not regard and will
not construe the payment of the tax on bank deposits under Chapter
83 of the Acts of the General Assembly of the State of Indiana, 1933,
approved February 28, 1933, as a violation of any section of said Regulation No. 6; The department being of the opinion that such payment of
a
tax is a legitimate operating expense and is paid in lieu of property
trust
company.
It is
and/or
bank
such
tax heretofore imposed upon
the
for
device
payment
of
or
method,
subterfuge,
a
not regarded as
same manner.
interest, all depositors being treated in exactly the
Ruling 2. Payment of Interest on Public Funds
Deposits of money paid in to state court by private parties pending
the outcome of litigation are not deposits of "public funds" made by or
on behalf of any state, county, school district or other subdivision or
municipality within the meaning of the provision of Section 1 (b) (3).
This ruling also applies to the deposits of the so-called "Clerk's Trust
Funds" by the various clerks of state courts in the State of Indiana.
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Federal Reserve Bank of St. Louis
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Institutions of the State of Indiana (1935)
145
Ruling 3. Computation of Reserves
A certificate of deposit with respect to which the bank merely reserves the right to require written notice of not less than 31 days,
may be classified as a time deposit for the purpose of computing reserves; but interest may not be paid on such a certificate of deposit,
because it is in fact payable on demand unless prior to such payment
the notice of not less than 30 days is actually required, and because
the prohibition in Regulation No. 6 upon the payment by a state bank
and/or trust company of any time deposit before its maturity clearly
contemplates that time deposits (other than savings deposits), upon
which interest is payable, must have a definite maturity for at least 30
days prior to payment.
Where any state bank and/or trust company has made a deposit
with a correspondent bank, such deposit being payable on a certain date
not less than 30 days after the date of the deposit, or being payable upon
notice in writing which is actually required to be given a certain specified number of days, not less than 30 days, before the date of repayment,
such deposit may be used in computing the cash means of such stat,e
bank and/or trust company but shall not be considered or used in the
computation of the cash reserve of such state bank and/or trust company under Sections 207 and 210 of the Indiana Financial Institutions
Act.
A deposit, with respect to which the bank merely reserves the right
to require notice of not less than 31 days before any withdrawal is made
is not a "time deposit, open account," within the meaning of the definition of such time deposit, open account.
Ruling 4. Payment of Time Deposits Before Maturity
The making of a loan to the owner of a time deposit in a state bank
and/or trust company by such bank or trust company, or by any other
bank, person, partnerships or corporation in accordance with any agreement, arrangement or understanding with such bank or trust company,
for the purpose of evading any prohibition of Section III of Regulation
No. 6, will, to the extent of such loan, be deemed to be a payment of
such deposits in violation of such prohibition; and, in any case in
which a loan is made to the owner of a time deposit in any state bank
and/or trust company by such bank and/or trust company, or in accordance with any agreement, arrangement or understanding with such bank
and/or trust company, the said state bank and/or trust company must
be prepared to show clearly that it was made in good faith and not
for the purpose of evading any such prohibition.
Ruling 5. Computation of Interest
The words "compounded quarterly" appearing in Section II, (3)
(c) (1) and Section IV, (c) (1) of Regulation No. 6 is not to be interpreted as preventing the compounding of interest at other than
quarterly intervals provided that the aggregate amount of such interest
so compounded does not exceed the aggregate amount of interest at the
rate prescribed in said sections when compounded quarterly.
10-60089
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Ruling 6. Interpretation of Savings Deposits
Where under Section IV of Regulation No. 6, by reason of the
amount of the deposit, the business of the depositor or otherwise, a
question arises whether a deposit is properly classified by a bank and/or
trust company as a savings deposit, the said bank and/or trust company
must be prepared to show clearly that it is a deposit consisting of funds
accumulated for bona fide thrift purposes and that it othenvise complies with the definition as set out in clause (a) of Section IV of said
Regulation No. 6.
Ruling 7. Loans on Savings Deposits
The making of a loan to the owner of a savings deposit in any
state bank and/or trust company by such bank and/or trust company,
or by any other bank, person, partnership or corporation, in accordance with any agreement, arrangement or understanding with such bank
and/or trust company, for the purpose of evading any requirement of
Section V of Regulation No. 6 will, to the extent of such loan, be
deemed to be a payment of such deposit or waiver of notice with respect
thereto in violation of the requirements of such Section V; and, in any
case in which a loan is made to the owner of a savings deposit in any
state bank and/or trust company by such bank and/or trust company
or in accordance with any agreement, arrangement or understanding
with such bank and/or trust company, said state bank and/or trust
company must be prepared to show clearly that such loan was made in
good faith and not for the purpose of evading any requirement of
said Section V.
Ruling 8,. Dividends by Mutual Savings Banks
Your attention is called to the fact that this regulation applies to
any "savings bank organized under any statute of the State of Indiana."
Section 10 of the "Indiana Financial Institutions Act" applies to
mutual savings banks as well as all other financial institutions of the
State of Indiana as defined in Section 3 (a) of such act.
The Department of Financial Institutions of the State of Indiana
will regard the payment of dividends by such mutual savings banks as
the payment of interest on time deposits and an dividend allowed or
paid in excess of the maximum interest rate established in Regulation
No. 6 will be regarded as a violation of such regulation.
BANK REGULATION NUMBER 7
REQUIREMENTS UNDER SUBSECTION (D) OF SECTION
186
AS AMENDED
Whereas, The Indiana Financial Institutions Act approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana of 1933, became effective July 1, 1933,
and is now in full force and effect, and
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Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
147
Whereas, Section 186 of the said Act was amended by the Act of
the General Assembly of the State of Indiana approved January 28,
1935, which amendatory act is now in full force and effect, and
Whereas, the said Section 186 as amended now reads in part as follows, to wit:
"Sec. 186. Every bank or trust company shall invest any and all
money now held or hereafter received by it in any fiduciary capacity
in the following classes of property, but no other:
"(d) Bonds or notes rated in one of the first three classifications
established by one or more standard rating services to be specified
by the department and which satisfy such requirements of marketability
as may be prescribed from time to time by the department which are the
obligations of a corporation whose average yearly net earnings for the
three years immediately preceding the purchase have been at least two
times the interest requirements on all debts of the corporation after
depreciation."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
acts and by unanimous vote of the members of the Commission for Financial Institutions does hereby make and promulgate the following
regulation with respect to Subsection (d) of Section 186 of the Indiana
Financial Institutions Act as so amended as follows, to wit:
Section 1. The following standard rating services are hereby specified by the department for use under and pursuant to the terms of the
provision of Subsection (d) of said Section 186:
(a) Moody's Investors Service.
(b) Standard Statistics Company.
(c) Fitch Investors Service.
Sec. 2. The following requirements of marketability are hereby
prescribed by the department as applying to investments made pursuant
to the authority given in Subsection (d) of said Section 186, to wit:
Any such security must have a broad market, and to insure this it
must be of an issue large enough in the aggregate to be generally known
to bond and investment houses throughout the State of Indiana. An
issue may be regarded as meeting this requirement if
(a) It is listed or traded in on either the New York Stock Exchange or the New York Curb Exchange.
(b) If it is not so listed it must be part of a total issue outstanding of not less than $500,000.00 aggregate amount and it must be
quoted regularly by services or agencies generally recognized by bond
houses in the State of Indiana.
The department will regard such services or agencies as including
among others the following: "Bond and Quotation Record" issued
monthly as a special section of the "Commercial and Financial Chronicle." This is a service which may be subscribed to by the public
generally. Other such services recognized by the department and which
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are available to dealers only are "National Quotation Bureau" and
"Standard Satistics, Inc.," each of which publish a monthly bound
volume of listings and quotations.
This regulation shall be in full force and effect from and after the
close of business on the 25th day of Alarch, 1935, and remain in effect
until modified, rescinded or repealed by subsequent regulation.
Witness my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 25th
day of March, 1935.
BANK REGULATION NUMBER 8
REQUIREMENTS FOR AND RESTRICTIONS UPON THE MAKING OF MORTGAGE
LOANS BY BANK AND TRUST COMPANIES UNDER TITLE II, OF THE
NATIONAL HOUSING ACT
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana of 1933, became effective July 1, 1933,
and is now in full force and effect, and
Whereas, Section 172 of the said Act was amended by the Act of the
General Assembly of the State of Indiana, approved January 28, 1935,
which amendatory act is now in full force and effect, and
Whereas, the said Section 172, as amended, now reads in part as
follows, to wit:
"(b) Subject to such regulations as may be prescribed by the
Federal Housing Administrator acting pursuant to the Act of Congress
entitled 'National Housing Act,' approved June 27, 1934, and to such
regulations as the department finds to be necessary and proper, any
bank or trust company shall have the following powers:
(1) To make such loans and advances of credit and purchases of
obligations representing loans and advances of credit as are eligible for
insurance pursuant to Title I, Section 2 of such National Housing Act
and to obtain such insurance.
(2) To make such loans secured by mortgages on real property or
lease-hold, as the Federal Housing Administrator insures or makes a
commitment to insure pursuant to Title II of such National Housing
Act and to obtain such insurance.
(3) To purchase, invest in and dispose of securities issued by the
administrator under Title II, Section 204, of such National Housing
Act, or by other similar federal credit institutions now or hereafter
organized."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
acts and by unanimous vote of the members of the Commission for
Financial Institutions does hereby make and promulgate the following
regulation with respect to loans secured by mortgages on real property
made by banks and trust companies under Title II of the National
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Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
149
Housing Act, pursuant to the authority granted in said Subsection (b)
of Section 172 of the Indiana Financial Institutions Act as so amended,
as follows, to wit:
Section 1. The making of loans, secured by mortgages on real
property, by banks and trust companies in the State of Indiana, pursuant
to the authority granted in Subsection (2) of Subsection (b) of Section
172 of the Indiana Financial Institutions Act, as amended, except as
hereinafter provided, shall be subject to the following restrictions, to wit:
(a) Any such loan shall not exceed fifty per cent (50%) of the
cash value of the real estate offered for security, as determined pursuant
to Section 201 of the Indiana Financial Institutions Act, unless it shall
clearly appear to the board of directors of the bank or trust company,
and the board of directors shall so find and insert in the minutes of
the meeting at which such loan is granted, that the proposed borrower
is otherwise entitled to the amount of the excess credit requested over
and above the said fifty per cent (50%) of the value of the mortgage
security offered aside from the security itself. All such loans shall
be subject to the general limitations prescribed in Section 196 of the
Indiana Financial Institutions Act as amended by the Act of January
28, 1935.
(b) The total aggregate amount of loans secured by mortgages on
real property, made pursuant to Subsection (2) of Subsection (b) of
Section 172 of the Indiana Financial Institutions Act, as amended,
and/or of securities purchased or invested in pursuant to Subsection (3)
of Subsection (b) of said Section 172, held by any bank or trust company at any one time, shall not exceed five per cent (5%) of its deposits of all kinds.
(c) The foregoing limitations (a) and (b) shall not apply to the
renewal or refinancing through the Federal Housing Administration,
of any loan now existing and owned by any state bank or trust company if such loan is not increased and is renewed or refinanced with
the same mortgagee which now owns the same; nor shall it apply to
mortgages taken in good faith to secure debts previously contracted.
This regulation shall be in full force and effect from and after the
close of business on the 31st day of March, 1935, and remain in effect
until modified, rescinded or repealed by subsequent regulation.
Witness my hand and the seal of The Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 12th
day of April, 1935.
SPECIAL REGIONAL BANK REGULATION NUMBER 1
REGIONAL REGULATION APPI,YING TO GRANT COUNTY AND VICINITY
Scope of Regulation.
This regulation relates to the establishment of a system of metered
service charges and shall apply to all banks and/or trust companies,
banks of discount and deposit, private banks, loan and trust and safe
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Federal Reserve Bank of St. Louis
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deposit companies, trust companies, or savings banks organized under
any statute of the State of Indiana (all hereinafter referred to as "any
state bank and/or trust company") which said state banks and/or trust
companies are located in Grant County, State of Indiana, and the following incorporated towns in the State of Indiana, to wit: Warren, Huntington County; LaFontaine, Wabash County; Converse and Amboy,
Miami County; and Greentown, Howard County, and/or such state
banks and/or trust companies located in additional adjacent areas and/or
incorporated towns such as may be hereafter designated by the Commission for Financial Institutions.
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana, 1933, became effective July 1st, 1933,
and is now in full force and effect, and
Whereas, Section 10 (c) of said The Indiana Financial Institutions Act is as follows, to wit:
"Sec. 10. Rules and Regulations. The department is hereby authorized, by a three-fourths vote of the members of the commission, to make,
promulgate, alter, amend or repeal rules and regulations, for any or
all of the following enumerated purposes:
"(c) Defining what is a safe or an unsafe manner and a safe or
unsafe condition for conducting and transacting business by any
financial institution to which this act is applicable," and
Whereas, all of the state banks and/or trust companies located in
the said county of Grant, State of Indiana, as well as all of the national banks located in said county and the national bank located at
Converse in Miami County have heretofore entered into a mutual agreement to put into effect as of December 1, 1934, the schedule of metered
service charges hereinafter set out, and whereas it appears to the
Commission for Financial Institutions that the other areas included in
the scope of this regulation are competitive areas with such state banks
have heretofore enand/or trust companies and national banks which
agreement,
tered into such mutual
, by virtue
Now, Therefore, the Department of Financial Institutions
by
and
law
by
it
unanimous
upon
of the power and authority conferred
, does
Financial
Institutions
for
Commission
the
vote of the members of
with reference
regulation
following
the
promulgate
and
make
hereby
charges by any state
to the establishment of a system of metered service
such regulation
area;
prescribed
the
within
company
bank and/or trust
and safe condition
being made and promulgated to define a safe manner
and/or trust companies,
of transacting business by such state banks
an unsafe manner and
constitute
and
be
shall
hereof
and any violation
state banks and/or
unsafe condition of transacting the business of such
trust companies.
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151
SECTION ONE
PART 1
The following schedule of metered service charges for various services rendered or to be rendered by the said state banks and/or trust
companies located in the above described area within the scope of this
regulation is hereby prescribed, to wit:
Par. 1. CHECKING ACCOUNTS.
For
(a) all such state banks and/or trust companies located in said
area the following scale of minimum charges shall apply:
Short Analysis (See Appendix)
Checks or Debits
Average Balance
Basic Charge Permitted Each Mo.
Less than $50
500
5
$50 to $99.99
None
5
$100.00 to $199.00
None
10
$200.00 to $299.00
None
15
$300.00 to $399.99
None
20
$400.00 to $499.00
None
25
Additional checks or debits at 30 each.
(No charge if no checks or debits are paid by bank during the
month, except as provided in Dormant Maintenance Charge Regulations
in Paragraph 4 following.)
Long Analysis (See Appendix)
(Accounts $500.00 and over, or depositing or cashing many checks.)
Average daily ledger balance.
Less 25% Cash Reserves.
Less Float (average daily uncollected).
Accountancy allowance on available balance at 6% per annum.
LESS EXPENSES
10 for each local clearing house check or P. O. money order deposited
or cashed.
21/20 for each out-of-town check deposited or cashed.
30 for each customer's own check, receipt, debit or payroll order
paid by or "thru" the bank.
30 for each deposit in excess of 50 during month.
Not less than actual cost of check imprinting, if any.
Exchange charges for drafts, etc., purchased.
Bond and Coupon collection charges, if any.
The excess of account-expenses over accountancy allowances shall
be assessed as a monthly service charge. Each checking account shall
be analyzed and charged individually.
Note: The service charge shall be whichever is the greater, whether
figured on the "short analysis" or "long analysis" basis.
(b) For banks or groups of banks classified as "city Banks" in
sub-paragraph "e" hereof, the following scale of MINIMUM charges
shall apply:
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Federal Reserve Bank of St. Louis
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Short Analysis (See Appendix)
Checks or Debits
Basic Charge Perrnitted Each Mo.
Average Balance
10
$1.00
Less than $100.00
10
.50
$100.00 to $199.99
10
None
$200.00 to $299.99
15
None
$300.00 to $399.99
20
None
$400.00 to $499.99
Additional checks or debits at 50 each.
(No charge if no checks or debits are paid by bank during the month,
except as provided in Dormant Maintenance Charge Regulation in Paragraph 4 following.)
Long Analysis (See Appendix)
(Accounts $500 and over, or depositing or cashing many checks.)
Average daily ledger balance.
Less 25% cash reserves.
Less Float (average daily uncollected).
Accountancy allowance on available balance at 6% per annum.
LESS EXPENSES
10 for each local clearing house check or P. O. money order deposited or cashed.
30 for each out-of-town check deposited or cashed.
40 for each customer's own check, receipt, debit or payroll order
paid by or "thru" the bank.
40 for each deposit in excess of 50 during month.
Not less than actual cost of check imprinting, if any.
Exchange charges for drafts, etc., purchased.
Bond and Coupon collection charges, if any.
The excess of account-expenses over accountancy allowances shall
be assessed as a monthly service charge. Each checking account shall
be analyzed and charged individually.
Note: The service charge shall be whichever is the greater, whether
figured on the "short anlysis" or "long analysis" basis.
(c) It is expressly provided that no bank shall absorb the Federal
check tax but shall assess the same in full against every checking account. It is further provided that service charges shall be computed and
collected monthly, and that no carry-over credit shall be allowed from
any month showing a hypothetical profit, against any other month
showing an analysis loss resulting in service charge. It is further provided that no exceptions or exemptions of any kind shall be allowed
to any depositor or any class of depositors whatsoever, but that each
checking account shall be analyzed and treated individually, without regard to affiliated accounts or the business of the depositor with any
other department of the bank.
(d) Cream and other "Orders": Where so-called cream or farm
produce orders are handled by the bank of final payment, said orders
being drawn by the drawer or against itself (or himself) as drawee, such
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1
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
153
items shall be charged for, on the "long analysis" basis, at the established rate for handling local clearing house checks: provided, that all
of the following conditions and provisions exist or are immediately
established.
1. The drawers shall furnish the instruments themselves without
cost to or allowance from the bank.
2. Legal stop-payment on all such items shall be waived by the
drawer.
3. The paying bank shall not be held responsible for signatures,
endorsements, forgeries or other irregularities in any such item.
4. The items shall not be charged against the drawer's account,
nor shall any statement form be furnished the drawer by the bank other
than a plain adding machine listing daily.
5. All such items accumulated by the bank shall be taken up and
paid for by the drawer every business day.
6. A clear majority of such items shall be distributed over a wide
geographic area, and shall not actually be paid in cash in the paying
bank, which might increase the bank's expense in taking care of peak
customer loads, or necessitate the importation or use of unusual amounts
of cash.
7. The average amounts (in dollars) of such items shall be small,
to obviate the necessity of importing or using unusual amounts of cash.
8. The average number of such items handled per month shall be
not less than 500 in "country banks" and 1,000 in "city banks," both
designations within the meaning of sub-paragraph (e) hereof.
9. It is recognized that the handling of certain other items (orders)
may comply with some of the stipulations of sub-paragraph 1 to 8, inclusive, hereof. It is further recognized that probably no class of items
other than said cream orders will comply with all such stipulations.
Therefore:
A. No bank shall grant the rate specified in (d) hereof except to
°ream orders as stipulated, and then only by express permission of its
city cluvring house association, county organization and or organized
group of counties.
B. No bank or group of banks shall allow any other reductions in
the standard rate for paid items (namely 30 for "country banks" and
50
for "city banks").
(e) Each City Clearing House Association, County Bankers Association or organized groups of counties shall classify all banks and/or
groups of banks within its respective jurisdiction as either "city banks"
or "country banks," due consideration being given to the following:
1. The operating costs and conditions of the banks or groups.
2. The character and size of the communities served.
3. The judgment of the banks or groups concerned.
4. Competitive conditions as regards neighboring banks or groups.
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Federal Reserve Bank of St. Louis
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(f) Nothing herein contained shall be construed as affecting the
method of handling public money, deposited and held pursuant to the
statutes governing the same: provided, that accounts of public officials,
not expressly required by law, shall be subject to all the provisions of
these Regulations.
(Note: MAXIMUM service charge provisions are contained in
Part 4 of this Section of these Regulations.)
Par. 2. OVER-PRINTING CHECKS. Not less than the cost of
be collected
over-printing and numbering of all checks in all banks shall
when delivered:
(a) By cash, or
(b) By debiting the customer's deposit account, or
.
(c) By charging to the depositor's analysis of account
shall make a
Par. 3. CHARGES FOR NSF CHECKS. All banks
NSF
checks, said
red
dishono
all
on
item
per
250
of
charge
MINIMUM
each
time so
at
t
accoun
charge to be debited to the drawer's deposit
dishonored.
E.
Par. 4. DORMANT MAINTENANCE CHARG
balances of less than
(a) All banks, on deposit accounts with
more, shall make a
or
year
$25.00 that have not been active for one
the balance is
where
year;
per
$1.00
of
minimum maintenance charge
be the amount of the
shall
balance
the
of
amount
the
$1.00
less than
maintenance charge.
S.
Par. 5. CASHING OUT-OF-TOWN CHECK
um charges shall
minim
of
e
schedul
ng
followi
(a) For all banks, the
to savings account and
made
be
shall
and
s
positor
non-de
all
to
be made
balances:
time deposit customers with inadequate
100 per check
Up to $25.00
150 per check
$25.01 to $50.00
200 per check
$50.01 to $100.00
250 per check
$250.00
$100.01 to
1/10 of 1% on each check
Over $250.00
be made to savings and
shall
s
(b) The above schedule of charge
and shall be made in
s,
balance
uate
inadeq
time deposit customers with
g charges for checkevadin
be
to
appear
ers
custom
all cases where such
ing service.
are entitled to cash or deposit
(c) Checking account customers
on of exchange charges, but
deducti
above
out-of-town checks without the
be entered against said
must
,
cashed
or
ed
deposit
such items, whether
.
customer's analysis of checking account
on out-of-town banks may
checks
payroll
issuing
ers
(d) Custom
employees at par in any
their
by
arrange to have such checks cashed
in such communities
banks
ory
deposit
their
community by authorizing
r's analysis of
custome
the
against
to make the charge for such service
e of such
schedul
the
ees;
employ
the
account, instead of collecting from
g out-of-town items
cashin
for
d
adopte
as
same
analysis charges to be the
for non-customers.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
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155
(e) Exchange charges shall not be mandatory on out-of-town
checks given to banks in payment of notes, interest, safety vault rentals,
insurance premiums, bonds, travelers checks, or any service of a profitable nature to the bank.
Par. 6. CHARGES FOR BANK DRAFTS, CERTIFIED CHECKS,
CASHIER'S OR SECRETARY'S CHECKS, BANK MONEY ORDERS,
OR DEMAND CERTIFICATES OF DEPOSIT issued in lieu of same.
(a) The following schedule of minimum charges shall be made by
all banks to all non-depositors, and to all depositors in any department
with inadequate balances:
Up to $25.00
100 per draft, etc.
$25.01 to $50.00
150 per draft, etc.
$50.01 to $100.00
200 per draft, etc.
$100.01 to $250.00
250 per draft, etc.
Over $250.00
1/10 of 1% on each draft, etc.
With an optional maximum of $1.00 each per draft on items over
$1,000.00.
When items are given in payment of drafts, etc., an activity charge
shall be added, as follows:
One cent for each local Clearing House check or P. O. money order
so tendered.
SO for each Out-of-Town check so tendered.
(b) The above charges may be waived by any bank officer in the
exceptional cases when it would be to the bank's own interest to issue
exchange in lieu of paying out currency.
(c) Proper analysis charge at the above rates shall be made
against checking customers maintaining average balances of $500.00
or more.
(d) Cash charges at the above rates shall be made to savings and
time deposit customers with inadequate balances and in all cases where
such customers appear to be evading charges for checking service.
(e) Banks shall have the option of absorbing the Federal check
tax on the items covered by this paragraph, or they may add 20 to each
rate specified above.
(f) In cases where a draft or other exchange item is given by a
bank in payment of savings or time deposit withdrawals, banks may
waive exchange charges to the extent that a savings in interest to the
bank was realized sufficient to offset such exchange charges.
SAVINGS ACCOUNTS
Par. 7. In cases where, because of the nature and frequency of
items deposited in savings accounts, or because of excessive withdrawals
made, customers appear to be attempting to evade charges for checking
service or for the cashing of out-of-town checks, appropriate charges
shall be levied on such customers; or they shall be required to change
such practices; or they shall be required to close such savings accounts.
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Federal Reserve Bank of St. Louis
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Par. 8. COLLECTION CHARGES.
A—INCOMING COLLECTIONS
On all items received, minimum collection charges shall be deducted
from the remittance or credit as follows:
(a) One-tenth of one per cent (1/10%) on each item for the first
$2,500.00 thereof plus one-twentieth of one per cent (1/20%) for the
amount thereof in excess of $2,500.00.
(b) In addition to any collection charges imposed, a service charge
of One Dollar ($1.00) shall be made for the execution and recording of a
mortgage, plus cost of said recording.
(c) A minimum charge of twenty-five cents (250) per item shall
be made, except that a minimum charge of fifteen cents (150) per item
may be made on group collections, except further than a minimum charge
of ten cents (100) may be made for each entry or partial payment
).
collected and credited (if remitted, 250 minimum charge applies
with
ondent
banks
to
corresp
waived
(d) Collection charges may be
banks.
by
made
been
have
ements
arrang
on
collecti
which reciprocal
(e) These collection rules shall not apply to items paid by or
through Trust Departments of Banks.
B—OUTGOING COLLECTIONS
sub-paragraph A hereof,
Same rates and provisions as prescribed in
s charges to "long
analysi
made
be
may
charges
own
except that a bank's
analysis" checking customers.
m charge of 250 per report
Par. 9. CREDIT REPORTS. A minimu
d:
provide
shall be made,
(a) That this charge may be waived to correspondent banks with
which reciprocal arrangements exist.
the credit report would
(b) This charge may be waived when
benefit a reporting bank's customer.
no information can be or is
(c) This charge may be waived when
given.
charged to bank customers for
(d) Not less than the cost shall be
.
reports
securing special credit
LOANS.
Par. 10. MINIMUM CHARGE ON
made on each note or loan
(a) A minimum fee of 500 shall be
the earned interest or disof
excess
made by all banks, the amount in
charge.
service
count to be collected as a
PART 2
OTHER REGULATIONS
accounts that are prePar. 1. No bank shall accept for deposit
, over the deposits of
implied
or
express
ferred by their terms, either
by the depositing bank
on
executi
and/or
nce
accepta
other customers. The
that such deposits
ent
agreem
of any form in which is embodied the
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Annual Report of the Dep-artment of Financial
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157
preserves a separate identity or is received in trust, including the use of
transfer drafts or withdrawal receipts covering the same in which such
terms are used, is expressly forbidden. (This shall not be construed as
interferring with the acceptance of bona fide Trust Deposits by the Trust
Departments of any Bank or Trust Company.)
Par. 2. No bank shall give or credit premiums in the form of either
cash or merchandise for new or additional business.
Par. 3. Christmas Club accounts shall not entitle the customer to
exemption of charges for any other service of the bank.
Par. 4. The fee charged on the sale of travelers' checks shall be
not less than 750 per hundred with a minimum charge of 400 per sale,
plus 20 per check for Federal check tax.
Par. 5. Travelers' checks shall be cashed at par, without exchange
deduction, when presented by the person to whom issued.
Par. 6. No check or cash item shall be cleared or forwarded as
cash more than twice by any bank.
Par. 7. Local clearing house checks may be cashed free to the payee
thereof or local clearing houses may establish uniform charges therefor.
Par. 8. Correspondent Banks. The accounts of Correspondent
Banks may be exempted from the service charges hereinbefore established, but it is expressly provided that all banks shall maintain interest-free, net collected balances with their correspondents at an
average level sufficient to compensate for the expenses of all services
received.
PART 3
LOCAL REGULATIONS—GENERAL STATEMENT
(a) Local organized groups, in formulating their minimum local
rates and provisions pursuant hereto, shall see that the same are not
prescribed or set below costs involved in each case. (See Appendix A
for suggested minimum rates and provisions.)
(b) City clearing houses and/or county or group associations, shall
formulate minimum charges and/or provisions covering the following
services:
Par. 1. Minimum safety vault rentals (plus Federal revenue tax,
and plus insurance where contents are insured). (Said insurance shall
not, however, cover currency or coin kept in safety vault boxes.)
Par. 2. Minimum charges for the safe-keeping of securities. (Note:
It shall be the policy of all banks to discourage safe-keeping business.)
Par. 3. Charges for handling purchase or sale of stocks.
Par. 4. Charges for handling purchase or sale of bonds.
Par. 5. Charges for registering United States Government bonds.
Par. 6. Charges for exchange of United States Government bonds.
Par. 7. Charges for the collection of maturing bonds and coupons.
Par. 8. Charges to cover insurance, postage, registration fee, and
handling, in the mailing of securities for customers.
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158
Par. 9.
Par. 10.
Par. 11.
Par. 12.
Clubs.
Par. 13.
Charges for after-hour depository service.
Charges for handling escrow agreements.
Uniform stop payment regulations.
Uniform regulations governing Christmas and other
Charges for mailing statements to customers upon request.
PART 4
MAXIMUM SERVICE CHARGES
Any bank or group of banks assessing service charges in any particular that appear to be excessively higher than those outlined in these
regulations shall be prepared to substantiate that such charges are
warranted and reasonably justified by the operating conditions and costs
of the bank or group.
PART 5
TRUST SERVICES
Par. 1. Trust Departments shall be operated in accordance with
the provisions of the Statement of Principles of Trust Institutions,
adopted by the Trust Division of, and approved by the Executive Council
of the American Bankers Association, on April 6, 1933; said statement
appearing in the Appendix of the ABA Code as Schedule A.
Par. 2. Because many trust services are already governed by
statute, banking regulations or the courts, and because of the widely
varying conditions under which trust services in different localities
are rendered, city clearing house associations, county associations,
and/or organized groups of counties shall formulate whatever additional
regulations are deemed advisable or necessary to effectuate the purposes
and provisions of said Statement of Principles for Trust Institutions.
The suggested minimum fees and provisions for trust services are
being formulated by a Special Sub-committee, and will be supplied later
to all banks in the form of a supplement, marked Appendix B, to these
Regulations.
PART 6
GENERAL STATEMENT
It is the purpose of these regulations to promote sound practices,
and it shall be the policy of all banks to operate soundly and to perform no services at less than cost. Appropriate service charges may
with due regard
be made in any case not specifically provided for herein,
group of banks
or
bank
the
of
to the operating costs and conditions
customer.
the
to
service
and of the value of the
SECTION TWO
SAFETY VAULT RENTALS
the facilities and
Minimum Rental per year $1.00, depending upon
service offered.
Insurance and Federal Tax extra.
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Minimum charge (to absorb expenses of changing locks and records); one year's rental.
Rebates for unexpired rental period, in the second or succeeding
years, to be made down to a minimum charge of $1.00 for current year.
Optional admittance charge-one entry per month. Additional
entries at 1/10 per annual rate per entry.
SAFE-KEEPING OF SECURITIES
On bonds and securities payable to bearer, a charge of 500 per
annum per $1,000.00 up to $10,000.00; 300 per annum per $1,000.00 in
excess of $10,000.00, minimum charge of 500%
On securities registered, or otherwise not transferable, annual charge
of 500 for each receipt. Banks shall limit their liability to the exercise of due diligence and reasonable care.
HANDLING THE PURCHASE OR SALE OF STOCKS
(Per 100 shares)
Price of Stock
$ 0.00 to $ 10.00
10.00 to
25.00
25.00 to 50.00
50.00 to
75.00
75.00 to 100.00
100.00 to 200.00
$5.00 minimum charge.
Broker's Charge
$7.50
12.50
15.00
17.50
20.00
25.00
Total Bank Charge
$10.00
15.00
20.00
22.50
25.00
30.00
HANDLING PURCHASE OR SALE OF BONDS
* On all bond orders charge customer the actual cost plus /
1
4 of 1%
commission; $1.00 Minimum Charge.
* NOTE: Except in Governmental Bonds when the amount exceeds
$5,000.00, then the commission is 1/8 of 1% on said amounts exceeding
$5,000.00.
REGISTERING U. S. GOVERNMENT BONDS
$0.25 per $100.00 up to $1,000.00.
$1,050.00-$2.50 plus five cents for each additional $100.00.
Minimum charge 250, plus expenses.
EXCHANGE OF U. S. GOVERNMENT BONDS
Charge five cents per $100.00 up to $5,000.00.
Minimum charge 250 plus expenses.
Twenty-five cents per $1,000.00 for any additional.
COLLECTION OF MATURING
BONDS AND COUPONS
United States Bonds and Cou,pons
Coupons-five cents per $100.00 or fraction thereof.
Bonds-250 per $1,000.00 (minimum charge 250) plus expenses.
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Other Bonds and Coupons
Coupons-100 per $100.00, with a minimum charge of 100 on each
issue.
Bonds-500 per $1,000.00 up to $10,000.00 on each issue. Minimum: 500.
Bonds-300 per $1,000.00 in excess of $10,000.00 on each issue.
All bonds and coupons payable locally—charges optional.
All bonds and coupons payable at other points also subject to exchange charges of collecting bank and other expenses.
MAILING SECURITIES FOR CUSTOMERS
(Charges to cover insurance, postage, registry fee, etc.)
$900.00
$800.00
$700.00
$1,000.00
$600.00
$500.00
$400.00
.70
.65
.75
.60
.55
.45
.35
$0.35 minimum charge.
$0.25 for each $1,000.00 additional.
AFTER HOUR DEPOSITORY SERVICE
Rental per year (payable in advance) $6.00.
Less than one year: 500 per month, plus $1.00 service fee.
Deposits for equipment:
Sacks at $1.00 each.
Sack-locks and keys at 650 each.
Chute keys at 350 each.
All deposits for equipment refunded when same is surrendered in
serviceable condition, ordinary wear excepted.
ESCROW AGREEMENTS
(a) A charge of one-tenth of one per cent (1/10%) shall be made
on the value involved, subject to a minimum charge of two dollars ($2.00).
(b) The above charges shall be reimposed each year that the instrument remains in effect and in the bank's custody.
(c) Banks shall limit their liability to the exercise of due diligence
and reasonable care.
STOP PAYMENT REGULATIONS
(a) No stop-payment request shall be binding upon banks unless
delivered or served in writing, said written request to set forth all the
provisions of this rule and to be agreed to as evidenced by authorized
signature of the person, firm, corporation, or organization requesting
the stop payment.
(b) No stop-payment request shall be released or revoked (before
sixty days from date thereof) except by written, signed notice delivered
or served upon the bank.
(c) All stop-payment requests shall automatically expire, and be
null and void not more than sixty days from date thereof (unless revoked or released theretofore in accordance with paragraph (b) hereof),
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except that stop-payment request may be renewed for additional periods
of not more than sixty days each by compliance with paragraph (a)
hereof.
DONATIONS AND CONTRIBUTIONS
No donation or contribution shall be made by or in the name of any
individual banking institution, to any cause, fund, individual or individuals, firm, association, society, club, organization or corporation for
any purpose whatsoever.
APPENDIX B
(Explanation of Checking Account Measured Service Charges)
"SHORT ANALYSIS" ACCOUNTS OPEN FOR LESS
THAN ONE MONTH
Practice to be followed on bona fide opened and closed accounts; not
to apply to recurring cases, or evaders; not to apply to full months on
any accounts, but only to those accounts opened or closed during the
month, receiving only a part of a month's service.
No basic service charge where the check or receipt that closes the
account is the only item paid during the month.
No basic service charge:
(a) When the account is opened AFTER the twentieth of the
month, or
(b) When the account is closed ON OR BEFORE the tenth of the
month: Provided, in both (a) and (b), that
(c) Less than three checks or receipts are paid during that partmonth (not including the item that closes the account).
Basic service charge WILL be made:
(a) When three or more checks'or receipts are paid during the
part-month that the account is opened or closed (not including the item
that closes the account), or
(b) When the account is opened ON OR BEFORE the twentieth
of the month, if one or more checks or receipts are paid, or
(c) When the account is closed AFTER the tenth of the month,
if one or more checks or receipts are paid.
"LONG ANALYSIS" ACCOUNTS OPEN FOR LESS
THAN ONE MONTH
Figure average daily ledger balance by accumulating daily balances
for actual number of days account is on books, and dividing the total by
that number. (Cents may be omitted.)
Figure float (uncollected) by multiplying by actual days' delay, and
dividing by number of business days in entire month. (Cents may be
omitted.)
Allow accountancy allowance for actual number of days account
is on books.
Figure reserves, and compute expenses, as you would for a full
month.
11-60089
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Federal Reserve Bank of St. Louis
No. 11
162
"LONG ANALYSIS" ACCOUNTS FOR FULL MONTH
Average daily ledger balances are obtained by accumulating the
ledger balances for every day in the month, including Sundays and holidays, and dividing the aggregate sum so obtained by the number of
days in the calendar month. Cents may be omitted from this calculation.
Reserves are figures against ledger balance before the deduction of
float. Actual cash reserves, estimated at 25%, should be deducted rather
than legal reserves. Six per cent per annum is considered to be a
generous allowance on any bank's actual earning assets.
The Federal Reserve schedule of transit time, plus the day (or days)
required for mail to travel from your community to your district Federal
Reserve Bank or branch should be the basis for computation of float.
Cents may be omitted from this calculation. Float must be recorded
daily, before deposits are broken up or checks leave tellers' cages. This
is a simple job. As a matter of expediency, all items up to $50.00 or
$100.00 may be counted as averaging three days delay. Sundays and
holidays (which impose additional days delay) may be ignored, if the
number of business days in the month (that is, the number of calendar
days, less Sundays and holidays) is used as the divisor in reducing the
aggregate float to a daily average figure.
Example: September, four Sundays and one holiday, the divisor
(float) for float is 25.
Balances: September has 30 days; the divisor is 30 for average
daily ledger (balances).
Wherever any payroll, cream or other "orders" (not posted to the
customer's account, but "sold" to customers daily) are held overnight,
the amount so held over should be treated and calculated as one day float.
The reason for this is that customers are given analysis credit for
average daily ledger balances, and banks should protect themselves
against such hold-over items.
Wherever an analysis of an account shows a net collected overdraft,
this should be charged for at 6% (not 5%, as in such cases you are
lending the customer money), the charge being cuided to the expenses
of the account to determine the monthly service charge.
Banks, may, or may not, at their option, mail notices of service
charges ("long" or "short") made on checking accounts. Probably
"city" banks would mail such notices, figuring analyses on a calendar
month basis and taking approximately ten days for computation and
billing. However, some banks may close their accounting periods somewhere between the twentieth and twenty-fifth of the month, and could
put the service charge slips in customers' statements for delivery at
the end of the month.
No analysis charge should be made for Federal check tax or service
charge debits to the account.
The formulas and charges specified in these Regulations represent
the cost experiences of several different size banks, said cost analyses
having been made by competent bank analysts. They are fair and
equitable in every instance.
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Federal Reserve Bank of St. Louis
Annual Report of the Dep'artment of Financial
Institutions of the State of Indiana (1935)
163
The item charges in all schedules are based on competent, average
cost analyses of average banks, and the mistake should not be made of
considering any of these charges out of line unless you have had for
your own bank, an actual survey made to determine your costs.
DRAFT CHARGES
Some companies request banks to accept and hold cash and items
from various representatives and agents of such companies, the bank to
accumulate such various sums and items into one draft for remittance
to the company at the end of a day, or periodically. Each such separate transaction should be charged for separately at the same rates as
though the drafts or remittances were made and forwarded separately
for the receipts of each representative or agent.
Draft charges preferably should include the two cents Federal check
tax in the rates quoted, for the reason that standard draft registers
usually do not carry extra columns for the recording of check tax; this
being the case, it would be necessary to handle every two cents tax
item at the time of each issue of exchange. In that respect this differs
from the tax on customers' checks, which is only required to be accounted
for monthly by the Government. The advisability of having a simple
schedule, with no odd cents to handle, is obvious when one considers
that thousands of bank tellers and clerks throughout the State will try
to memorize it.
OUT-OF-TOWN CHECKS
Here, again, the advisability of a simple schedule, adapted to memorizing, is seen. If this schedule is the same for exchange on drafts, it
is doubly desirable.
The rates set, moreover, should be sufficient to charge the nondepositor more for the service than the depositor who supports your
bank and leaves a balance with you as a protection against checks
deposited that may be returned NSF. The schedule set does that.
SAVINGS ACCOUNT AND OTHER CUSTOMERS
Out-of-town checks may be deposited at par and without exchange
charge in savings accounts or for credit into time Certificate of Deposit.
"Depositing" is defined as:
1. Depositing $10.00 or more of out-of-town checks that have a
face amount of $20.00 or more; said deposit not to be withdrawn from
savings accounts in less than three times the number of days required
to collect the item.
2. Depositing at least one-half of out-of-town checks that have a
face amount of less than $20.00, said deposit not to be withdrawn from
savings account in less than three times the number of days required to
collect the item.
In enforcing these Regulations, the ahn should be to see that customers in one department are not allowed to evade provisions and
charges imposed in other departments for similar services received.
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Federal Reserve Bank of St. Louis
No. 11
164
GENERAL
In response to suggestions made to the Committee, allowance has
been made for a reasonable difference in the charges in the checking
account schedules, between so-called "city" banks and so-called "country"
banks, because of alleged differences in operating costs and conditions.
It is the conviction of the Committee, however, that no appreciable
differences in reserve deduction percentages of accountancy allowance on
available balances exist, or should exist, between banks or classes of
banks, since all soundly operated banks are subject to the same general
conditions in these respects.
The Committee holds a similar conviction on the advisability of
maintaining the uniform, state-wide minimum measured service charges
provided for other classes of business. The value of such services to
customers is identical, whatever bank renders them; and the alleged
differences in bank costs, where they actually exist, are slight.
OVER-PRINTING CHECKS
Wherever a customer requests a bank to pay for or absorb the cost
of special checks, banks may make an appropriate allowance to such
customers, but in no case exceeding the cost to the bank of its standard
checks which are furnished to other customers. (Example: If your
standard checks cost you $1.00 per thousand, your allowance in such
requests would not exceed $1.00 per thousand.)
PAYROLL ORDERS
The handling of payroll orders usually entails:
(a) The use of unusual amounts of currency, because of the dollaramount of most payroll orders. This frequently requires the periodic
importation of extra cash into banks, always a hazardous job.
(b) The creation of expensive periodic peak loads in banks, to
take care of the extraordinary demands imposed, necessitating extra
tellers and costly extra lobby space.
Peak loads are very expensive factors in any business, and the
banking business is no exception. Probably nothing creates and aggravates peak loads in banks more than payroll accounts. It is doubtful
if any payroll order case, carefully examined, would justify any reduction in standard paid-check rates. Even though no bookkeeping record of the items is made, and they may be made payable to bearer,
yet the fact that they must be routed away from a fully equipped and
manned bookkeeping department, geared for machine production, into a
separate and diverse routine channel, means a rise in handling cost that
probably offsets any bookkeeping economy effected.
Any modern manufacturer understands this kind of language.
Volume of items handled probably means less in the operating economy of banks than in any other comparable business. After all, every
item (with the exception of those cream orders described in section one,
part 1, sub-paragraph (d) of these Regulations) presents an individual
job of examination for signature, date, comparison of written and figure
amounts, fraudulent alteration, endorsements, stop-payment records, etc.
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Federal Reserve Bank of St. Louis
Annual Report of the Dep-artment of Financial
Institutions of the State of Indiana (1935)
165
That examination, properly done, takes just about ten times as long for
100 items as it does for ten items. If those items stream into banks in
periodic bursts, slight volume advantages are reversed.
Nevertheless, it is conceivable that in rare instances banks may feel
that they have a payroll customer whose case merits special consideration.
MINIMUMS AND MAXI1V1UMS
The term minimum, applied to service charge rates, is clear in all
cases except perhaps for the formulas prescribed for checking account
analyses. Using MINIMUM balances, instead of AVERAGE DAILY
ledger balances, would be permissible (under short analysis ONLY),
since the MINIMUM balance of an account would always be less than
the AVERAGE DAILY balance, resulting in INCREASING any service
charge.
Long Analysis: Average daily ledger balances here are considered
advisable, 20% deductions for cash reserves mean that 18% is NOT permissible, since that would have the effect of REDUCING any service
charge. Twenty-five per cent deducted for cash reserves, on the other
hand, WOULD be permissible, since that would have the effect of
INCREASING any service charge.
Under the provision allowing 50 free deposits per month, NOT
MORE THAN 50 can be allowed free.
Only 25 free deposits allowed per month WOULD be permissible,
or even ALL deposits might be charged for . . . although the latter
is considered inadvisable.
(The maximum figures above are used only as examples.)
This regulation shall be in full force and effect from and after
the close of business on November 30, 1934, and shall remain in effect
until modified, rescinded, or repealed by subsequent regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 28th
day of November, 1934.
BUILDING AND LOAN REGULATION No. 5-A
REQUIREMENTS FOR AND RESTRICTIONS UPON THE MAKING
OF MORTGAGE LOANS BY BUILDING AND LOAN
ASSOCIATIONS UNDER TITLES I AND II OF
THE NATIONAL HOUSING ACT
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana of 1933, became effective July 1, 1933,
and is now in full force and effect, and
Whereas, Section 273 of the said Act was amended by the Act of the
General Assembly of the State of Indiana approved January 28, 1935,
which amendatory act is now in full force and effect, and
Whereas, The said Section 273, as amended, now reads in part as
follows, to wit:
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Federal Reserve Bank of St. Louis
No. 11
166
"Subject to such regulations as may be prescribed by the Federal Housing Administrator pursuant to the National Housing Act,
approved June 27, 1934, and subject also to such regulations and
conditions as may be prescribed by the department, which regulations and conditions may apply to one or more associations and/or
to one or more localities in the State of Indiana as the department
in its discretion may determine, said associations are authorized to
make such loans and advances of credit as the Federal Housing
Administrator insures or makes a commitment to insure pursuant
to Titles I and II of the National Housing Act and to obtain such
insurance."
Now, Therefore, The Department of Financial Institutions, by virtue
of the power and authority so conferred upon it by the above entitled
Acts and by unanimous vote of the members of the Commission for Financial Institutions, does hereby make and promulgate the following regulation with respect to loans secured by mortgages on real property made
by building and loan associations under Titles I and II of the National
Housing Act, pursuant to the authority granted in the said last paragraph of Section 273 of the Indiana Financial Institutions Act, as so
amended, as follows, to wit:
Section 1. The making of loans, secured by mortgages on real
property, by building and loan associations in the State of Indiana,
pursuant to the authority granted in the last paragraph of Section 273
of the Indiana Financial Institutions Act, as amended, shall be subject
to the following restrictions, to wit:
(a) Any such loan shall not exceed sixty per cent (60%) of the
appraised value of the real estate offered for security, as determined
pursuant to Subsection (b) of Section 275 of the Indiana Financial Institutions Act, unless it shall clearly appear to the Board of Directors of
the association, and the Board of Directors shall so find and insert in
the minutes of the meeting at which such loan is granted, that the proposed borrower is otherwise entitled to the amount of the excess credit
requested over and above the said sixty per cent (60%) of the appraised
value of the mortgage security offered aside from the security itself.
All such loans shall be subject to the other general limitations prescribed in Section 275 of the Indiana Financial Institutions Act.
(b) The total aggregate amount of loans secured by mortgages on
real property, made pursuant to the last paragraph of Section 273 of
the Indiana Financial Institutions Act, as amended, held by any building and loan association at any one time, shall not exceed ten per cent
(10%) of the total amount of paid-in credits on its capital stock unpledged to the association as security for loans.
This regulation shall be in full force and effect from and after
the close of business on the 22nd day of April, 1935, and remain in
effect until modified, rescinded or repealed by subsequent regulation.
Witness, my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 17th
day of April, 1935.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1955)
167
THE DEPARTMENT OF FINANCIAL INSTITUTIONS
BUILDING AND LOAN DIVISION
IMPORTANT BULLETIN
April 1, 1935
This bulletin is being forwarded to all state building and loan associations operating in the State of Indiana. This department instructs
the Secretary of each association to submit this bulletin to all officers
and directors of his association, asking that it be read, studied and
thoroughly considered. After it has received such consideration it shall
then be placed in the permanent minute records of your association.
We further request that your secretary sign the perforated slip hereto
attached showing that such bulletin has been read and considered by
your officers and directors and forward the same to this department immediately.
For the purpose of this bulletin, all state associations are classified
ions:
under two groups, namely class "A" and class "B" associat
EACH
meet
which
ions
associat
those
are
1. Class "A" associations
ments:
require
ng
of the followi
es of
(a) Unimpaired capital, which means that the total liabiliti
the total
the association to its creditors and shareholders shall not exceed
value of its assets as determined by the department.
any actual
(b) Contingent fund or reserves adequate to provide for
by the
ned
determi
be
to
fund
such
of
ncy
sufficie
or probable losses, the
as
such
assets
of
items
department, from a fair valuation of all
and
building
office
es,
securiti
tes,
certifica
mortgages, real estate, sheriff's
equipment and similar items.
wal demands
(c) Sufficient liquidity to meet the reasonable withdra
community.
the
of
needs
ng
of its shareholders and the reasonable borrowi
ds upon its
dividen
ble
reasona
(d) Sufficient earning ability to pay
outstanding shares.
ions unable to
2. Class "B" associations shall include all associat
associations.
"A"
class
the
of
ments
require
the
of
meet any one or more
cations.
classifi
ng
foregoi
Your association comes within one of the
associaall
bring
to
ent
departm
this
of
It is the immediate purpose
will be no question as
tions under an "A" classification, wherein there
to members, some
return
of
rate
to solvency, ability to pay a fair
, as well as the
demands
wal
withdra
of
care
reasonable ability to take
which it exists.
in
ity
reasonable demands of borrowers in the commun
appears to be
there
,
position
a
such
Unless the association can enjoy
e.
existenc
its
of
ance
continu
the
for
no further reason
1933, all assoAt the time of the National Moratorium, in March,
and each
cations
classifi
two
into
divided
ciations in this state were
This
license.
ed
restrict
association was granted either a general or
in
file
on
then
reports
the
of
y
scrutin
classification was based upon a
department at
the
to
e
availabl
tion
informa
other
this office and upon
elapsed since the National
the time. More than two years have now
a restricted basis have now
upon
placed
ions
associat
Moratorium. Those
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Federal Reserve Bank of St. Louis
No. 11
168
had ample time within which "to get their house in order." Some associations receiving general licenses must now be reclassified, due to
changes in their condition and to additional information received by the
department from time to time. It is manifestly unfair to the community and to borrowing and investing shareholders, and to the building
and loan industry in general, to permit impaired and restricted associations to continue their operations without some definite and constructive
plan for rehabilitation under way. The acceptance of new money from
investing shareholders by an association whose shares are worth only
eighty (80) or ninety (90) cents on the dollar, constitutes a palpable
fraud for which the officers and directors are responsible. If the
books of the association do not properly reflect all losses, which is
probable if your appraisals of real estate and other assets are inflated,
or if proper allowances have not been made for losses on the delinquent loans, or if items of expense have been erroneously capitalized,
the annual statements and the reports to the department are misleading.
Furthermore, if copies of the annual statements have been mailed to
the shareholders through the United States mail, a Federal liability
exists. As officers and directors it is to your interest to ascertain the
accuracy of the statements and reports referred to, before these statements are signed and distributed, especially where they are deposited
in United States mail.
As the reports of examiners are submitted to this office, each report
will receive the most careful consideration. This applies to associations
now operating under a General License, as well as those operating under
a Restricted License. If the department finds, after examination, that
the association can qualify itself as to solvency, sufficient reserves, sufficient liquidity and ability to pay reasonable dividends, it will then be
classed as an "A" association. If such association cannot measure up
to the requirements of a class "A" association, as shown by its own
statement, or as shown by reports of our examiners, or other information
received by the department from any other source, the association shall
then be classified as a "B" association. Those associations receiving
a "B" classification will be required to take IMMEDIATE steps to conform to the requirements as set forth under an "A" classification. In
many instances this will mean the complete reorganization of the association, or the organization of a new association and the taking over of
sound assets and trusteeing of undesirable assets, or having the same
liquidated by this department under section 41, and the following sec- •
tions, of the Indiana Financial Institutions Act pertaining to liquidation.
Associations able to show marked progress in their attempt to
correct any unsound conditions which exist, will, of course, be given
reasonable time within which to accomplish their program. When so
requested, officers and directors of associations needing rehabilitation
will be expected to make a personal visitation at the office of the department, where plans can be promulgated for the future operation of such
association. This department will give every possible cooperation and
service to those associations requiring rehabilitation. On the other
hand, the department will insist that the officers and directors, after
studying the condition of their association, take immediate steps to place
the association in a sound condition and in a position to function normally in its community.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
169
We submit herewith the following suggestions which must be given
careful consideration by the management, with a view to placing the
association in position to meet the borrowing and investment needs of
the community at the earliest possible date:
1. Appraisals should be made of all "Real Estate Owned" by competent appraisers. Such appraisers should not be interested in the association, at least not as an officer or director.
2. Appraisals should also be obtained on properties securing mortgage loans which are badly in default.
3. Office Building Account and Furniture and Fixture Account
must be adjusted to reasonable figures.
4. An adequate Contingent Fund for losses should be provided.
5. Worthless and questionable assets should be segregated and
taken out of the association by charge-offs, or by obtaining sufficient
write-down of share value. (Any operation of this kind must have the
full approval of this department.)
6. Insurance of shares might be obtained from the Federal Savings and Loan Insurance Corporation, if this should be necessary to
restore public confidence. Undoubtedly, the obtaining of such insurance
will be mandatory in many cases of reorganization or rehabilitation.
7. Membership in the Federal Home Loan Bank might be acquired,
thus insuring further liquidity in those associations unable to function
in a normal manner, either as to payment of withdrawals or as to the
lending of money.
8. Special consideration should be given to the personnel of each
association. Competent men should replace incompetent ones. To compete with other mortgage lending institutions, our state institutions
must be operated by board of directors composed of men whose minds
are attuned to present day conditions and who can immediately sense
the necessity of a change of policy, when such change is necessary.
While the above, at this time, are merely suggestions of this department, we ask that the board of directors of each association immediately,
and upon their own volition, take all necessary steps to place their
association in good standing.
Liquidation is imperative if the association can no longer serve a
need in the community in which it is located, if its assets are so impaired as to make reorganization impossible or inadvisable, or if its
directors and officers persistently fail, neglect or refuse to comply with
the law and the regulations of the department. An association which
permits its managing personnel or their friends to profit on real estate
deals, transfers and other transactions may avoid liquidation only by
removing the persons responsible for such practices.
The department will also carefully scrutinize those associations that
are now in voluntary liquidation. If, in the opinion of this department,
such liquidation can be carried on in a more equitable and less expensive
manner, the department will not hesitate to take charge of such liquidation.
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Federal Reserve Bank of St. Louis
No. 11
170
associaNaturally the department will be reluctant to liquidate any
comits
e
in
servic
real
of
be
can
tion, which by rehabilitation or merger
when
only
to
ed
be
resort
will
ation
liquid
n
reaso
munity, and for that
na Financial Instirehabilitation or merger is impossible. The India
ive, provide for
inclus
136
to
114
ns
sectio
tutions Act, sections 47 and
your attention
call
ically
specif
we
and
r,
merge
and
on
such rehabilitati
d and placed
litate
be
rehabi
can
to these sections. Many associations
stock values.
of
own
write-d
small
ely
rativ
compa
a
on a sound basis by
the hands
in
placed
and
Bad and doubtful assets can be segregated
olders.
the
shareh
to
issued
icates
certif
g
of trustees with participatin
older, but
the
shareh
from
away
ing
anyth
take
not
does
Such operation
it should progress and be
does place the association in a position where
nity.
commu
the
as
well
as
,
olders
of benefit to the shareh
forth has been discussed
The program of the department herein set
g building and loan men of
with and has the approval of the outstandin
and loan industry expects
ng
buildi
the
if
that
e
realiz
the state. They
sibilities which it owes
respon
and
to survive and discharge the duties
at large, immediate
public
the
to
and
rs
membe
to its thousands of
ence and to place the insticonfid
public
e
restor
to
taken
be
steps must
normal manner. We trust that the
tutions in position to function in a
ed cooperation and support in its
heart
whole
your
have
department will
efforts to accomplish this result.
2
SMALL LOAN REGULATION NUMBER
METIIOD OF KEEPING RECORDS
of the General Assembly of the
Whereas, Chapter 154 of the Acts
8, 1933, became effective
March
ved
appro
1933,
for
na
State of India
force and effect, and
full
in
now
is
on the 22d day of May, 1933, and
es in part as follows:
provid
154
er
Chapt
said
of
1
n
Whereas, Sectio
ered to make by
and
empow
ized
author
"The department is hereby
ic rulings and
specif
and
tions
regula
and
rules
its order such general
this act as may be necesof
ions
provis
the
with
istent
findings not incons
such business and the enforcement of
sary for the proper conduct of
this act," and
Institutions Act, approved FebruWhereas, The Indiana Financial
40 of the Acts of the General
er
Chapt
ary 24, 1933, the same being
1933, became effective in its
for
na
India
of
Assembly of the State
force and effect, and
full
in
entirety on July 1, 1933, and is now
40 the powers, duties, maner
Chapt
said
of
Whereas, by Section 5
tment of Financial Institutions are
agement and control of the Depar
ssion for Financial Institutions,"
Commi
conferred on and vested in "The
and
er 40 of the Acts of the General
Whereas, Section 10 of said Chapt
1333 provides in part as follows,
for
Assembly of the State of Indiana
to wit:
ized, by a majority vote of the
"The department is hereby author
promulgate, alter, amend or remake,
to
members of the commission,
or all of the following enumerated
peal rules and regulations, for any
purposes:
•
•
•
•
•
•
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
171
"(b) Prescribing the methods and standards to be used in making
the examinations and evaluating the assets and prescribing the forms
of reports of the several financial institutions to which this act is applicable," and
Whereas, to the end that in classifying small loans and fixing the
maxhnum interest rates which may be charged thereon from time to
time, it is necessary that the department have before it a correct indication of the actual operating results insofar as each licensee is concerned.
Now, Therefore, it is hereby ordered by the Department of Financial
Institutions by the unanimous vote of the Commission for Financial
Institutions of the State of Indiana that the following general regulations be adopted for the purpose of regulating the manner of the keeping of their records by small loan companies, firms, co-partnerships,
and individuals licensed by said department:
1. The small loan business shall be accounted for on a separate
set of books from the books and records used to record any other business
in which the said licensee may be engaged.
2. The cash received from the small loan business by any such
licensee shall be kept in a separate fund in the office and shall be deposited in a separate bank account.
3. Any expenses which are common to both the small loan business
and any other business or businesses which may be engaged in by the
said licensee shall be separated on an actual basis insofar as that may
be possible, and whenever it is necessary to separate such expense on
an arbitrary basis, the method of allocation shall be approved by the
board of directors if such licensee be a corporation and such approval
n
recorded in the minutes of such board together with an explanatio
n
thereof. And in all cases the journal entry showing the distributio
method
the
of
n
explanatio
an
of such common expenses shall contain
followed in the allocation thereof.
4. The department may from time to time require correction of
the method of making such allocation and the result thereof if deemed
necessary in the case of any pafticular licensee.
These regulations shall be and remain in full force and effect from
or
and after the 1st day of March, 1935, until repealed, rescinded,
modified by subsequent regulation.
Witness, The Department of Financial Institutions of the State of
Indiana, by R. A. McKinley, its Director and the seal of said Department
at Indianapolis, Indiana, this 28th day of January, 1935.
SMALL LOAN REGULATION NUMBER 3
PROVIDING FOR CERTAIN FAIR PRACTICES
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective
on the 22nd day of May, 1933, and is now in full force and effect, and
Whereas, Section 1 of said Chapter 154 provides in part as follows:
"The department is hereby authorized and empowered to make by
its order such general rules and regulations and specific rulings and
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Federal Reserve Bank of St. Louis
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172
findings not inconsistent with the provisions of this act as may be necessary for the proper conduct of such business and the enforcement of
this act," and
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are
conferred on and vested in the Commission for Financial Institutions,
and
Whereas, Section 10 of said Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933 as amended in Chapter 5
of the Acts of 1935, provides in part as follows, to wit:
"The department is hereby authorized, by a majority vote of the
members of the commission, to make, promulgate, alter, amend or repeal
rules and regulations, for any or all of the following enumerated purposes:
or
"(c) Defining what is a safe or an unsafe manner and a safe
any
s
by
busines
ting
transac
an unsafe condition for conducting and
financial institution to which this act is applicable."
by virtue
Now, Therefore, the Department of Financial Institutions,
entitled
the
above
by
it
upon
ed
conferr
of the power and authority so
for
ion
the
Commiss
of
s
member
.the
of
vote
ous
acts and by unanim
ate the following
Financial Institutions does hereby make and promulg
of business by corporaregulation for the conducting and transacting
under and purlicensed
als
individu
and
,
erships
co-partn
tions, firms,
40 of the Acts of the
suant to the terms and provisions of Chapter
for 1933 in order to secure
General Assembly of the State of Indiana
that such business will be
end
the
to
s
busines
such
of
proper conduct
purposes of said act, and
the
within
operated honestly and fairly and
, to wit:
business
such
ing
conduct
of
manner
as defining a safe
a period longer
for
into
entered
be
shall
loan
a
1. No contract for
monthly installments of
equal
in
le
repayab
if
months
(20)
than twenty
le in any other manner.
principal or twelve (12) months if repayab
on all loans where the ind
require
2. Monthly payments shall be
monthly payments.
such
justifies
bly
reasona
come of the borrower
collect principal payto
e
diligenc
due
3. All licensees shall use
the best interests
with
tent
inconsis
not
,
contract
the
ments according to
of the borrower.
borrower of more than
4. The collection by any licensee from any
te unfair operation of
constitu
shall
the following amounts of interest
of Chapter 154 of the
s
purpose
the
within
,
licensee
the business of such
Acts of the General Assembly of 1933:
15, 1935, the original
(a) On all loans made on or after May
amount of interest
that
r;
borrowe
amount of which is paid in full to the
permitted by
rates
m
maximu
the
at
d
collecte
which would have been
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Federal Reserve Bank of St. Louis
1
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
173
General Order No. 3 issued concurrently herewith had the loan been paid
off in thirty-six (36) equal monthly principal payments.
(b) On all loans made on or after May 15, 1935, the original
amount of which is used entirely to pay off a loan then owing to the
licensee, the amount of unused interest on the pre-existing loan, as
hereinafter defined.
(c) On all loans made on or after May 15, 1935, the original
amount of which is paid in part to the borrower, the remainder being
used to pay off a loan then owing to the licensee, the sum of (1) the
unused interest on the pre-existing loan, as hereinafter defined, and
(2) the amount of interest which would have been collected at the
maximum rates permitted by General Order No. 3, issued concurrently
herewith, on the principal amount of additional money actually loaned
had it been a separate loan paid off in thirty-six (36) equal monthly
principal payments.
The term "unused interest" as used herein means the maximum
amount of interest which could have been charged at the maximum rates
permitted by General Order No. 3 issued concurrently herewith, had the
loan been paid off in thirty-six (36) equal monthly principal payments,
less the amount of interest actually paid thereon.
5. No licensee shall pay any bonus or commission in any form
either directly or indirectly for the purpose of inducing any borrower
to apply for or receive any loan from such licensee.
Any violation by any licensee of this or any other regulation promulgated by the department shall be sufficient cause for revocation of the
license of such licensee.
This regulation shall be and remain in full force and effect from
and after the 15th day of May, 1935, until repealed, rescinded or modified by subsequent regulation.
Witness my hand and the seal of the Department of Financial
Institutions of the State of Indiana at Indianapolis, Indiana, this 11th
day of April, 1935.
SMALL LOAN GENERAL ORDER NUMBER 2
MAXIMUM INTEREST RATES
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its
entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are
conferred on and vested in "The Commission for Financial Institutions,"
and
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective
on May 22, 1933, and is now in full force and effect, and
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Federal Reserve Bank of St. Louis
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174
Whereas, Section 1 of said Chapter 154 of the Acts of 1933, provides as follows, to wit:
"The term 'Department' as used in this act shall refer to, mean and
include the Department of Banking and/or the Department of Financial
Institutions and/or the successor of either of them."
Whereas, Section 2 of said Chapter 154 of the Acts of the General
Assembly of the State of Indiana for 1933, provides as follows, to wit:
"It shall be the duty of the department and the department shall
have power, jurisdiction, and authority to investigate the conditions
and ascertain the facts with reference to the business of making small
loans, as described in the first paragraph of Section 1 of this act, and
upon the basis of such ascertained facts:
(a) To classify such small loans by general order according to
such system of differentiation as may reasonably distinguish such classes
of loans for the purposes of regulation under the provisions of this act;
and
Now, Therefore, it is hereby ordered by the Department of Financial Institutions by the unanimous vote of the Commission for Financial Institutions of the State of Indiana that the following general regulations be adopted for the purpose of regulating the manner of the keeping of their records by small loan companies, firms, co-partnerships, and
individuals licensed by said department:
1. The small loan business shall be accounted for on a separate
set of books from the books and records used to record any other business in which the said licensee may be engaged.
2. The cash received from the small loan business by any such
licensee shall be kept in a separate fund in the office and shall be deposited in a separate bank account.
3. Any expenses which are common to both the small loan business
and any other business or businesses which may be engaged in by the
said licensee shall be separated on an actual basis insofar as that
may be possible, and whenever it is necessary to separate such expense
on an arbitrary basis, the method of allocation shall be approved by the
board of directors if such licensee be a corporation and such approval
recorded in the minutes of such board together with an explanation
thereof. And in all cases the journal entry showing the distribution of
such common expenses shall contain an explanation of the method followed in the allocation thereof.
4. The department may from time to time require correction of
the method of making such allocation and the result thereof if deemed
necessary in the case of any particular licensee.
These regulations shall be and remain in full force and effect from
and after the 1st day of March, 1935, until repealed, rescinded, or
modified by subsequent regulation.
Witness, the Department of Financial Institutions of the State of
Indiana, by R. A. McKinley, its Director and the seal of said Department
at Indianapolis, Indiana, this 28th day of January, 1935.
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Federal Reserve Bank of St. Louis
Annual Report of the Department of Financial
Institutions of the State of Indiana (1935)
175
SMALL LOAN GENERAL ORDER NUMBER 3
MAXIMUM INTEREST RATES
Whereas, The Indiana Financial Institutions Act, approved February 24, 1933, the same being Chapter 40 of the Acts of the General
Assembly of the State of Indiana for 1933, became effective in its entirety on July 1, 1933, and is now in full force and effect, and
Whereas, by Section 5 of said Chapter 40 the powers, duties, management and control of the Department of Financial Institutions are.conferred on and vested in "The Commission for Financial Institutions,"
and
Whereas, Chapter 154 of the Acts of the General Assembly of the
State of Indiana for 1933, approved March 8, 1933, became effective on
May 22, 1933, and is now in full force and effect, and
Whereas, Section 1 of said Chapter 154 of the Acts of 1933, provides as follows, to wit:
"The term 'Department' as used in this act shall refer to, mean
and include the Department of Banking and/or the Department of Financial Institutions and/or the successor of either of them."
Whereas, Section 2 of said Chapter 154 of the Acts of the General
Assembly of the State of Indiana for 1933, provides as follows, to wit:
"It shall be the duty of the department and the department shall
have power, jurisdiction, and authority to investigate the conditions
and ascertain the facts with reference to the business of making small
loans, as described in the first paragraph of section 1 of this act, and
upon the basis of such ascertained facts:
(a) To classify such small loans by general order according to
such system of differentiation as may reasonably distinguish such classes
of loans for the purposes of regulation under the provisions of this act;
and
(b) To determine and fix by general order such maximum rate of
interest or charges upon each such class of small loans as will make
available adequate credit facilities to individuals, without the security
generally required by commercial banks, by inducing efficiently operated
commercial capital to enter such business in sufficient amounts to provide
such adequate credit facilities; the department may from time to time
upon the basis of changed conditions or facts redetermine and re-fix
any maximum rate of interest or charge previously fixed by it but such
changed maximum rates shall not affect pre-existing loan contracts lawfully entered into between any licensee and any borrower; any and all
orders which the department may make respecting rates or charges
shall fix and contain the effective date thereof, which shall not be earlier
than thirty days after notice given to each licensee by depositing such
notice in the United States mail directed to him at his address as shown
by the records of the department."
Now, Therefore, the Department of Financial Institutions of the
State of Indiana, by virtue of the power and authority conferred upon
it by law, and by unanimous vote of the members of the Commission for
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Federal Reserve Bank of St. Louis
No. 11
176
y make, and
Financial Institutions of the State of Indiana, does hereb
classificathe
to
t
respec
with
order
al
gener
ing
follow
the
promulgate
es upon
charg
or
st
of
intere
tion of small loans and the maximum rate
and
made
being
al
order
gener
such
loans,
each such class of small
ies to individuals,
facilit
credit
ate
adequ
ble
availa
make
to
d
lgate
promu
banks and to inwithout the security generally required by commercial
small loan busithe
enter
l
to
capita
rcial
comme
ed
duce efficiently operat
credit facilities.
ate
adequ
such
e
provid
to
t
amoun
ient
suffic
in
ness
1. CLASSIFICATION OF LOANS
bed in the first
‘The following classifications of small loans as descri
General Asthe
of
Acts
the
of
154
er
Chapt
of
1
n
paragraph of Sectio
ished:
y
establ
hereb
are
sembly of the State of Indiana for 1933,
pal balance
d
princi
unpai
the
of
part
that
(a) Class A shall be
small loan.
such
any
of
s
dollar
.00)
($100
ed
hundr
one
not exceeding
unpaid principal balance in
(b) Class B shall be that part of the
($100.00) dollars and not
ed
hundr
one
than
excess of but not less
such small loan.
any
of
s
dollar
.00)
($200
ed
hundr
two
exceeding
d principal balance in
unpai
the
of
part
(c) Class C shall be that
.00) dollars and not
($200
ed
hundr
two
than
less
excess of but not
small loan.
such
any
of
s
exceeding three hundred ($300.00) dollar
2. RATES OF INTEREST
y fixed upon each such class
The following rates of interest are hereb
hereof:
1
raph
parag
by
mined
deter
of small loans as
that part of the unpaid
being
A,
(a) On all small loans in Class
.00) dollars of any
($100
ed
hundr
one
ding
principal balance not excee
raph of Section 1 of
parag
first
the
in
bed
descri
as
such small loans
al Assembly of the State of Indiana
Chapter 154 of the Acts of the Gener
lf per cent per month.
one-ha
and
three
for 1933, at the rate of
B, being that part of the unpaid
(b) On all small loans in Class
less than one hundred ($100.00)
not
but
principal balance in excess of
($200.00) dollars of any such
ed
hundr
two
ding
excee
dollars and not
lf per cent per month.
one-ha
small loans, at the rate of two and
that part of the unpaid
being
C,
Class
in
(c) On all small loans
two hundred ($200.00)
than
not less
principal balance in excess of but
dollars of any such
.00)
($300
ed
hundr
dollars and not exceeding three
.
month
per
cent
per
two
of
small loans, at the rate
3. EFFECTIVE DATE
force and effect on and after the
This general order shall be in full
n in full force and effect until
remai
15th day of May, 1935, and shall
general order of the Dequent
subse
by
ed
modified, rescinded or repeal
Loan General Order
Small
; and
partment of Financial Institutions
of January 28, 1935,
date
under
tment
No. 2 promulgated by the depar
the close of business on
at
ive
effect
ed
repeal
and
is hereby rescinded
May 14, 1935.
of Financial Institutions has
In Witness Whereof, the Department
executed by its director and sealed with
caused this general order to be
Indianapolis, in the State of Indiana, this
the seal of the department at
11th day of April, 1935.
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Federal Reserve Bank of St. Louis
27
SMALL LOAN ADVERTISING
Various attempts at price cutting, particularly on large loans, culminated last spring in the reduction of the interest rate to as low as
one per cent per month on that part of the loan balance in excess of
$150.00. This type of rate reduction, however, does not result in any
saving at all to the majority of borrowers, for eighty-three per cent
of all loans made are for less than $150.00. Moreover, the savings on
larger loans are substantially less than indicated by the low rate, due
to the effect of the combination rate. In order to prevent misunderstanding on the part of prospective borrowers and also on the part
of the public generally, the department now requires that any advertising that makes mention of a combination rate shall also state, in the
same size type, the equivalent single rate for various size loans. (See
Small Loan Regulation Number One).
DIVISION OF RESEARCH AND STATISTICS
GENERAL STATEMENT
The work of the statistical division may be divided roughly into
two groups, namely, routine work done for other divisions, and special
projects. Included in the routine jobs are the checking and summarizing of called reports from banks and semi-annual or annual reports
from building and loan associations, small loan companies, and credit
unions; verification, tracing, and reconciling of all items which cannot be
verified at the time of examination; preparation of the department's
annual report; maintenance of records showing status of individual
institutions; preparation of department budget, including examination
fee schedules; preparation of monthly report of operations, receipts,
and expenditures.
Special projects during the past year included the designing of a
uniform system of accounts for building and loan associations; preparation of forms and outline of procedure for building and loan directors'
examinations; preparation of forms for annual report for small loan
companies; detailed analysis of operating costs for small loan companies
and collection of data for setting maximum interest rate; analysis of
costs and progress of bank receiverships in Indiana; investigation of
operation of consumer finance agencies other than licensed small loan
companies. In several of these projects the division received without
charge the help of advanced students in the Department of Economics
and Sociology and the School of Business Administration at Indiana
University, under an arrangement whereby the students received regular
university credit for the work done.
AND LOAN ASSOCIATIONS
UNIFORM SYSTEM OF ACCOUNTS FOR BUILDING
A uniform system of accounts, including manual of instructions and
specifications of ledger and other forms, has been prepared for use by
Indiana building and loan associations. The need for such a ssytem has
existed for several years. Its adoption will not only facilitate the exam-
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Federal Reserve Bank of St. Louis
vO
Annual Report of -the Department of Financial
Institutions of the State of Indiana (1934)
No.. U.
28
ination and supervision of associations, but will also provide the officers
and directors with facts upon which sound decisions can be made.
Although the system of accounts is in completed form, its use has not
yet been prescribed by the department, due to the fact that most associations are devoting their full time to the elimination of undesirable assets
through conversion into Home Owners' Loan Corporation bonds or
otherwise.
FORMS AND PROCEDURE FOR DIRECTORS' EXAMINATIONS
1
The Financial Institutions Act requires of each building and loan
association that the board of directors, a committee therefrom, or a
certified public accountant make an annual audit of the association's
affairs and submit a report of the audit to the department. Since
many associations would have been unable to meet this requirement
without incurring considerable expense, due to their not having any
accountants or auditors on their directorate, special forms and a detailed
outline of procedure were prepared and sent to each associaton. Comments from building and loan supervisors and League officers in other
states, together with experience in using the forms in this state, have
demonstrated the value of this project.
SMALL LOAN ANNUAL REPORT FORMS
The revised small loan law required that each licensed small loan
company submit an annual report to the department, and authorized the
department to analyze such reports and, if necessary, based on the
analysis, to revise the maximum interest rates. Since maximum interest
rates had never before been based on actual operating facts, it became
a serious problem as to just what information should be included in the
annual report form. After much investigation and research, however,
and after conferences with representatives of the industry, a set of forms
was devised and special instructions were prepared. These forms are
the most complete in use by any state, although some states have since
copied in part from the Indiana report.
ANALYSIS OF SMALL LOAN OPERATING COSTS AND COLLECTION OF DATA
FOR SETTING MAXIMUM INTEREST RATE
The logical approach to rate fixing was thought to be an analysis of
the cost of carrying various size loans. The statistical division therefore made a detailed allocation of costs for individual companies and
prepared various tables and charts for the consideration of the com,mission. After the first meeting of the commission, the division also
collected other data pertaining directly or indirectly to the interest
rate, and altogether spent several months on the project. The expenditure of such an amount of time has made available the actual facts
relative to the making of small loans. These facts will serve to protect
both the public and the industry.
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Federal Reserve Bank of St. Louis
37
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Federal Reserve Bank of St. Louis
,
J. W. Pole, Comptroller of the Currency
Hearings — S. Res. 71
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
13
The CHAIRMAN. Has the comptroller's office been disposed to discourage security loans by commercial banks—by national banks which
are supposed to be commercial banks?
Mr. POLE. If, in any way the amount of those security loans
would seem to be interfering with its ability to accommodate its
commercial customers; yes. Otherwise I should say no.
The CHAIRMAN. IS it your opinion,'Mr. Comptroller, that what
we call brokers' loans is a good form of banking for a commercial
bank ?
Mr. POLE. It has proved to be a very profitable form of commercial
banking.
The CHAIRMAN. But has it proved to be a very safe form?
Mr. POLE. I know of no instance where a bank has lost anything
throligh its loans to brokers.
_
The CHAIRMAN. You think, then, it is a sound form of banking for
commercial banks, to put out their funds in call loans on the market?
Mr. POLE. I should say, in answer to that, Senator, that if a. bank
has accommodated its commercial customers, which is its first duty,
and attended to its local needs, that whatever surplus funds it has
may be so invested without criticism.
The CHAIRMAN. Does it not frequently happen that a commercial
bank fails to accommodate its commercial customers in order that it
may use the funds for call loans?
Mr. POLE. I have no doubt there are cases of that.
The CHAIRMAN. Mr. Comptroller, do you think our reserve requirements at the present tiine are adequate?
Mr. POLE. A re adequate ?
The CHAIRMAN. Yes. You know they have been twice very materially reduced since the original passage of the Federal reserve bankin act.
r. POLE. I feel, Mr. Chairman, that that is rather a broad question and which I think is now being studied by the Federal Reserve
Board, and I should like to reserve my reply to that question until
perhaps I have had a little further opportunity of looking into it
and giving it further study.
The CHAIRMAN. Your examiners have had access to the business
of all of these national banks. Is it or is it not a fact that the
banks—some of them, if not a great many—have adopted the practice of manipulating their reserves and transferring from their demand-deposit accounts to their time-deposit accounts, in order to
avail themselves of the 3 per cent reserve on time deposits?
Mr. POLE. There have been cass of that kind, Senator.
The CHAIRMAN. Have there not been manv cases of that kind?
Mr. POLE. I do not know of many cases a that kind. I think,
as a general thing, banks calculate their reserves on a proper basis.
I think, particularly in the West, there have been efforts made to
create special deposits and perhaps use certain artifices wherebv what
would be a proper demand deposit is converted into a time deposit.
I would not say that that is at all general, however, that matter
is being investigated with a view to correction, in connection with
the same investigation as to the reserves, by the Federal Reserve
Board.
The CHAIRMAN. Well, we want to investigate it also.
34718-31-PT1-2
I
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Federal Reserve Bank of St. Louis
J., W. Pole — Page 2
, /7,3/
14
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. POLE. Yes.
The CHAIRMAN. If that is not true, I am sure I am at a loss to
account for the enormous increase—relative increase—in time deposits as contrasted with demand deposits and upon inquiry, the
answer made to me has been—not public, because there has been no
public inquiry, but privately—that that has been a source of great
abuse in the banking system.
Do you think national banks should be permitted to take time
deposits ?
Mr. POLE. Yes, I think so, Senator.
•
is to correct
The CHAIRMAN. The function of this committeethey
exist, and
ng
notwithstandi
done,
be
to
not
ought
that
things
we
perhaps,
thought,
I
is,
view
own
without indicating what my
commercial
a
what
of
conception
experienced
your
might obtain
bank ought to be permitted to do.
Mr. PoLE. I think it would be an indeal situation, indeed—
The CHAIRMAN. Well,I can tell you that we can not do anything
disposed
that is ideal. I can tell you that right now. People are
making
to
come
you
when
but
politics,
and
politicians
deride
to
too,
politicians,
and
politics
with
reckon
banking laws, you must
what
do
and
not
can
you
what
of
question
a
is
it
it,
take
, and as I
\you may do in an ideal way.
1
1
- . ._
The CHAIRMAN. Mr. Comptroller, do you think this thing of peritting national banks which are supposed to be strictly commercial
nstitutions. to have affiliated investment companies is a sound species
of banking V
in
•
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Federal Reserve Bank of St. Louis
1
20
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. POLE. I think that it is in a great many instances productive
of unsound assets in the bank with which these corporations may be
affiliated.
The CHAIRMAN. Well, we saw that recently.
Mr. POLE. Yes.
The CHAIRMAN. In one single bank that had to write off over
$392000,000 of one investment company affiliated with a notable
national bank—which had to write off $18,000,000 in losses or
$57,000,000 in all.
Mr. POLE. The method, Senator, is undoubtedly susceptible of a
great many evils.
The CHAIRMAN. And a great many evils have been applied in the
operation, have there not?
,Mr.POLE. Yes, sir.
J. IN. Pole — Page 3
1
1
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
27
Mr. POLE. Yes. I think the fact that higher interest rates are paid
on that account and that they are savings; that, in a general sense,
people do not expect to withdraw those savings and they are more
or less dormant, there is no reason to my mind why there should be
any increase in the reserve requirements. I am speaking of legitimate savings and not those savings which may, in fact, be commercial savings but transferred to the savings deposits under some
arrangement.
The CHAIRMAN. Is not that largely done ? Has not that manipulation gone on ever since we modified the law and made this 3 per cent
reserve behind it ?
Mr. POLE. I am not prepared to say to what extent that is done,
but I am inclined to think it is not a large ext,ent.
The CHAIRMAN. I am sure you ought to have knowledge of the fact
it is largely done.
Mr. POLE. I think it is largely done in perhaps a single section of
the country. It has become a habit, I think in a measure, in California to rig up special arrangements about savings contracts, but
otherwise I would not be prepared to say it is general at all.
The CHAIRMAN. I have never been able to expel from my mind an
incident that happened, as I recall, before the Banking and Currency
Committee of the House, or the subcommittee, during its money
trust investigation. They had under examination one of the notable
figures of the banking community and he was asked if his bank ever
violated the statutes and his very frank response was, as I recall it,
"Why, yes. What do we hire the best legal talent in the world for
except to evade the law ? Anybody can comply with the law."
It has seemed to me that in this very particular matter of the
manipulation of the deposits many of the banks have just taken that
view of it; they want to evade the law rather than comply with it.
•
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Federal Reserve Bank of St. Louis
George L. Harrison, Governor, FRB, N. Y.
Hearings — S. Res. 71
y
ot.-et-4.4.-..--7, /9-3 /
Governor HARRISON. You see, you haye had a deflation in coinIliodity prices of all kinds all over the world.
Senator NORBECK. And how can a change in the banking system
remedy it?
,
1
Governor HARRISON. I think that you can never set up a system 11
that is going to protect depositors against dishonesty or bad judgment, even though you have the strongest banking laws.
Senator NORBECK. Nor against the falling prices of commodities
that affect all property values, can you?
Governor HARRISON. If you could devise a law that would, in
effect, guarantee the immediate payment of all deposits, I think the
country would be much worse off than it is; in other words, it would
have to be so constructed that the banks in a given community would
have to keep so very liquid that they could not do the business that
\\'
the community demands. Therefore, while I think we can not and
should not attempt the English system of no regulation, I believe we
..
should strive to get as nearly uniform laws in the 49 jurisdictions
)11 --as possible to control deposit banking along sound lines, and then
i
'
do what I think is one of the things not done now as much as it
should be--have the directors of each bank realize the responsibility
they legally have to see that their officers are complying with the
law and to see to it that they are conducting business soundly within__
the law.\\ I think the banking directorates are too big and that they
leave too much leeway, in some cases, to the executives of the banks.
If it were possible, perhaps, through some limitation on the size of
directorates of banks, to impress upon the directors the real responsi-,
bility they have got in controlling the management of the bank
within the law, I think we could obviate many of the difficulties we
have had, because then you would have the minbined judgment of a
k.k,
group of directors who are directly controlling the bank's business
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Federal Reserve Bank of St. Louis
46
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
instead of having directors many of whom are merely new business
getters.
J. H. Case, Chairman, FRB, N. Y.
Hearings — S. Res. 71
..,•••••
• •
.
••.
•
•
..
....
The CHAIRMAN. 8ome of us are disposed to think, Mr. Case, thai
there are some bankers in New York so big that they assume to
tell directors what to do rather than have the directors tell them
what to do.
Mr. CASE. Yes. Unfortunately, there have been situations of
that sort. And as Governor Harrison suggested in his talk, if there
were a small board of directors or an executive committee charged
with the responsibility of running the bank while the others, who
were going to be"business getters," were put into some other position than that of director it might be wise.
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Federal Reserve Bank of St. Louis
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Charles S. Hamlin, Federal Reserve Board
Hearings — S. Res. 71
/93/
We bankers have a responsibility beyond our own balance
sheets for the general
course of events.
We must look beyond the safety of the collateral offered us
safety of the aggregate volume of the collateral that we know for a loan to the
is being offered for
loans at all the banks.
When we see an unhealthy development getting under way, we
must not only
protect our own immediate institution, but we must take a
broader view with
reference to the interests of the entire community.
In other countries, where banking development has been
has proceeded farther, certain methods of control have been longer and banking
A customer in England is not granted unlimited credit on developed.
the basis of security
offered as collateral; he is granted a line of credit in
nce with his credit
standing and the requirements of his business, and he accorda
not easily exceed that
line, no matter how much collateral he may be able tocan
offer.
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Federal Reserve Bank of St. Louis
George W. Davison, Pres., Central Hanover Bank & Trust Co.
Hearings — S. Res. 71
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The CHAIRMAN. Do you think the situation in 1929 was brought
about by bad banking management?
Mr. DAVISON. Yes.
The CHAIRMAN. Well, what different type of management would
you suggest to us?
Mr. DAVISON. Well, I could not suggest any different type of management. I will give you, in support of my opinion, the statement
of the man who, in my office, has closest touch with the correspondents, who made the remark to me that no good bank had failed. He
is in touch with a great many banks throughout the country.
The CHAIRMAN. Have no banks failed
Senator NORBECK. May I ask a question? Isn't it a fact that all
banks in New York failed at one time?
Mr. DAVISON. That they all failed at one time?
Senator NORBECK. Yes.
Mr. DAVISON. Not that I know of.
Senator WALCOTT. Is the converse of that true, that all banks
which have failed, have failed necessaiily because they are badly
run banks?
The CHAIRMAN. I was going to ask a kindred question to that;
that is to say, have not many good banks failed because of bad
management?
Mr. DAVISON. There is no doubt some banks that would have been
fundamentally sound, but for dishonesty or bad management, have
failed—yes.
34718-31-PT 1-17
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254
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
The CHAIRMAN. Do you think the management of the Federal
reserve system had anything to do with the situation in 1929?
Mr. DAVISON. I think the Federal reserve system has been a
tremendous contribution of benefit to the banking situation in the
.
__ _United _States.
1
Henry M. Robinson, Chairman, Security—First Nat. Bk. of Los Angeles
Hearings — S. Res. 71
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Federal Reserve Bank of St. Louis
Senator WALcoirr. Your California law provides for some sort of
departmentalized banking, does it not?
Mr. ROBINSON. Yes.
Senator WALcorr. Do you regard that as a success?
Mr. ROBINSON. Yes; I think it was a success.
Senator WALcorr. You like it?
Mr. ROBINSON. Yes.
Senator WALcorr. And is it taken advantage of by most of the
banks?
Mr. ROBINSON. The State banks?
Senator WALcorr. Yes; the State banks.
Mr. ROBINSON. They have to.
Senator WALCOIT. It is obligatory?
Mr. ROBINSON. It is obligatory.
Senator WALCOTT. What about the net result in the last two years
in the bank failures in California ? Have you any figures in mind
that would show.any percentages there?
Mr. RosiNsoN. No; I do not recall. There have not been many.
Senator WALCOTT. Do you think in proportion to the number of
banks in California they fared a little better ?
Mr. ROBINSON. Yes.
Senator WALcorr. So far as failures were concerned?
Mr. ROBINSON. Yes.
Senator WALcorr. That might be partly due to your better commercial situation or economic situation?
\
Mr. ROBINSON. Yes; it might in part, although I do not think
\ that is the principal reason.
1
Rome C. Stephenson, Pres., American Bankers Asso.
Hearings - S. Res. 71
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,
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7
----e-e-c-,
,
Mr. WILLis. Your associatio,n has recommended the clearinghouse associations and has suggested that there should be organ\
I
k
zed local clearing-house examination systems among the rural banks
for the purpose of keeping the banks, so to speak, toned up?
Mr. PATON. Yes.
Mr. WILLis. The question is, how many of those associations
have been formed?
Mr. PATON. I will read the report of the bank management commission made at the last convention dealing with that subject:
t conferences, the
Supplementing the work of the regional bank managemen
n of city, county,
organizatio
the
stimulating
in
active
been
has
commission
local machinery for
and regional clearing-house asosciattions as essential
and uniformities
standards
necessary
operation
to
in
putting
setting up and
assoclearing-house
452
operation
in
now
are
There
in banking practices.
ciations of the city and regional type.
•
I
Mr. WiLms. They have been in existence for many years.
Mr. PATorr (reading):
a detailed plan for
We recently prepared and published in pamphlet form
associations—each associaorganizing and operating regional clearing-house
counties, thus availing county bankers
tion to consist of the banks of several
Twenty-six regional and
of the advantages of a clearing-house facilities.
county clearing-house associations have been organized
,
(
Mr, WILLIS. Under that plan?
Mr. PATON. Under the plan.
Mr. WILLI& Which the association has promulgated? Twenty-six
have been organized?
Mr. PAToN. Yes;
more in process of formation.
and are in successful operation, and many
to 426. The regional
City clearing-house associations have been increased
possibilities for standardizing
tremendous
it
with
carries
idea
-house
clearing
profitable basis.
county banking practices and placing them on a sound,
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Federal Reserve Bank of St. Louis
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ki:• STEP-HEN'SON. The- AirieriCia-n- tankers. Ais-so-ci.a-tion 'has'.Wiiali
-'
is known as a bank management commission, and it has been the
practice for the past two years to hold these regional-bank management conferences at various parts of the country, and the growth of
the regional clearing house is dependent upon the education of the
bankers to the benefits that will accrue by reason of the organization of those clearin.g houses.
They have also instituted what is known as the county credit
bureaus, whereby the banks in a county may keep watch and obtain
information relative to duplicate borrowing by their customers
which we think has been quite beneficial.
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Mr. Wm.'s. Is that beneficial quality shown by actual statistics
of losses or is it a general opinion ?
Mr. STEPHENSON. I do not know whether the system has been in
effect long enough to tell what the result will be, but I know that
it has checked men who were suilty of duplicate borrowings and
preyented the banks from making losses by reason of the information they obtained from the county credit bureaus. It has been
very helpful to the banks in that respect.
The AcriNG CHAIRMAN. Do you consider that mismanagement is
largely responsible—I am speaking of the rural banks we are discussing—or a fundamental economic condition?
Mr. STEPHENSON. I think that a fundamental economic condition
is largely responsible for the condition which has brought about
the closing of a_great many banks.
Melvin W. Traylor, Chairman, First National Rank of Chicago
Hearings - S. Res. 71
See clippings filed
under
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Federal Reserve Bank of St. Louis
10
Prof. iwiarcus Nadler, of N.Y. Univ.
Hearings — S. Res. 71
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Federal Reserve Bank of St. Louis
Senator WALcorr. You have the greatest flexibility, for instance,
in England, but you do not get these periods of terrible inflation
such as we do as the result of the pouring in of bank credits;
other words, their bankers are better than ours?
The CHAIRMAN. You do not get these violent variations in the callmoney market.
Senator WALCOTT. No; they do not. They can put banking credit
behind securities, of course, over there. They have the utmost leeway.
Professor NADLER. There is the greatest difference between American banking and British practice. An American bank may not know
me but if I have securities to offer as collateral they will grant me a
loan. They have credit files, and if you took them away from the
American banks they would be blind. In England they look more
at the transaction—whether the transaction is self-liquidating or
not—and not so much to the individual. Here if a man has securities there is practically no limit to the amount of credit he can get
so long as he deals with a number of banks. In London, however, a
man deals only with one bank.
The CIIAIRMAN. Yes; and in Canada the same way.
Professor NADLER. In England a man is not entitled to credit
primarily because he is responsible. They look at the transaction
itself.
Hearings — S. Res. 71
Appendix
Letter to Senator Norbeck from Arndt E. Dahl,
V. P., Citizens State Bank, Castlewood, S. Dak., Feb. 4, 1931
(
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/ 93 /
The statement recently made by the Comptroller of the Currency, Pole, that
good management of a small unit bank would not prevent a bank failure, I
believe, was pretty far fetched and certainly most unfair to the many good little
banks over the entire United States. There are many banks in South Dakota
that are small, but, nevertheless, weathered the storm the past few years. I
will agree that good management may not prevent an operating loss if the
territory is too small to support a bank, but certainly good management will
prevent a loss to depositors, and that is the most important part and what the
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
public is chiefly interested in. Good management of an unprofitable point
will not lose the assets of the bank by making poor investments, and good management woula prevent the bank from continuing to operate at a loss sufficiently
long to cause any los-s to depositors, as good management would close the affairs
of the bank, pay off the depositors, and return the excess to the stockholders.
I therefore believe that Mr. Pole was very unfair to the small unit bankers in
making the statement that he did, and it certainly was not one that would help
the small banks, but rather tend to undermine the confidence in the small
banks.
Hearines — S. Res. 71
Appendix
Letter to Senator Class from Fredk. C. Trimble, May 1A, 1921.
—
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Federal Reserve Bank of St. Louis
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All national and other banks
in the Federal reserve syste should
hibited from contributing in
be proany manner to any guarantee m protec
for
tion of
depositors. These guarantee
systems are, in my opinion,
to promoters to get into the
an Oen invitation
banking
game..
Hearings - S. Fes. 71
Appendix
Letter to Senator Glass from Fredk. C. Trimble, May 14, 1921
See cliprings filed
under No. 10
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Federal Reserve Bank of St. Louis
Hearings - S. Res. 71
Appendix
Part III - Bank Investments
Accountingfor se-curity investments.-In view of the large proportion of total banking assets placed in bonds, the method of carrying
such investments in the banks' condition statement becomes a
matter of first-rate importance. At times of stable or rising bond
prices, the bond accounts give no trouble in this respect, but in a
1
1040
•
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
period of deflation, such as 1930-31, the market value of the bond
portfolio may decline far below original cost.
Several alternative methods have.been followed by banks in stating their bond investments in their condition statements. These
include:
1. Original cost.
2. Original cost, with amortization of premiums and accumulation
of discounts to maturity.
3. Original cost, with a partial reserve against market depreciation.
4. Composite market value of the entire portfolio, permitting
appreciation in some issues to offset depreciation in others, in so far as
it exists.
5. Cost or market, whichever is lower.
Two questions on the subject .of accounting for security investments were included in the committee's questionnaire. These were:
Are the amounts of bond holdings based on original cost, cost with allowance
for amortization to maturity, or prevailing market price? and
Do you ever make allowance for unrealized appreciation or depreciation in
your bond accounts?
Replies from 19 New York City banks were as follows:
TABLE
Bank
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Federal Reserve Bank of St. Louis
40.-Accounting for
Bond investments, end
of 1930
No. 1
No. 2
No. 3
No. 4
$392,000,000
308,000,000
263.000,000
248,000,000
No. 5
146,000,000
No. 6
No. 7
No. 8
No. 9
No. 10
No. 11
No. 12
No. 13
No. 14
No. 15
No. 16
No. 17
No. 18
No. 19
124, 000,000
97,000,000
87,000,000
85,000,000
68,000,000
41,000.000
31,000,000
30,000,000
24,000,000
14, 000,000
13, 000,000
11,000,000
5, 000,000
5,000,000
bond investments, New York City banks
Accounting method used
Original cost, with a reserve account for. depreciation.
Cost, with "allowance for depreciation if.and when necessary."
Cost. Only "exceptional cases of depreciation written off."
Up to Dec. 31, 1930, United States Governments at par, others at cost or market,
whichever lower. At Dec. 31, 1930, total investment account at market.
Cost with allowance for amortization. "Occasional" allowance for depreciation.
Prevailing market price.
Cost.
Net cost. In published statement,security items shown at or below market."
With amortization allowance.
Cost, less a reserve of $696,100 for depreciation.
Actual cost. "Depreciation sometimes charged to profit and loss account."
Cost with allowance for amortization.
Prevailing market price.
Original cost.
Cost or market, whichever was lower, used in 1929 and 1930.
Prevailing market price.
Original cost.
Do.
Do.
Of the 19 institutions whose replies are summarized above, 6 only
appear to give full weight to market values in reporting the bondinvestment account in their statements.
Hearings - S. Res. 71
Appendix
Part III - Bank Investments
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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
1041
Accounting for bond investments, out-of-town banks
State in which
located
Bond investments, end
of 1930
No. 1
Massachusetts_ _
$45,000,000
No. 2
No. 3
No. 4
No. 5
No. 6
No. 7
No. 8
do_
do
Rhode Island.__
New York
Pennsylvania....
do
Ohio
37,000,000
3,000,000
43,000,000
48,000,000
72,000,000
6,000,000
59,000,000
No.9
No. 10
No. 11
do
Michigan
do
14,000,COO
34,000,000
8,000,000
No. 12
No. 13
Illinois
do_
270,000,000
23,000,000
No. 14
No. 15
No. 16
No. 17
No. 18
No. 19
No. 20
No. 21
No. 22
No. 23
No. 24
No. 25
Missouri
Wisconsin
Minnesota
do
do
North Dakota_ _
Nebraska
California
do
do
do
do
32,000,000
2,000,000
32,000,000
31,000,000
21,000,000
2,000,000
10,000,000
247,000,000
136,000,000
70,000,000
24,000,000
21,000,000
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Federal Reserve Bank of St. Louis
Accounting method used
Original cost. "Depreciation or bonds occasionally taken
when requested by national bank examiners. Reserve
set up in December, 1929, for depreciation of general bond
list.'
Cost, less re,serve for depreciation.
Cost. Makes allowance for depreciation in recent years.
Cost. Unrealized depreciation provided for by reserves.
Cost. "At times we set aside reserves for depreciation."
Allowance for depreciation, but not for appreciation.
Original cost.
Original cost, "except in few individual cases where securities were charged down."
Cost with allowance for depreciation.
Cost with amortization to maturity.
Cost or market, whichever is lower, except United States
Government.
Cost with amortization to maturity.
Cost. "Make reserves from time to time against depreciation."
Cost with allowance for amortization.
Cost. Premiums charged off.
Cost.
Cost. Allowance for depreciation.
Cost.
Cost. Reserve for depreciation.
Cost, with allowance for amortization.
Cost, with amortization at premiums.
Cost. "Make allowance for depreciation."
Cost.
Do.
Cost. "Specific securities may be written down."
Of the 25 banks outside New York City whose replies are summarized above, 2 adopt the method.of carrying bonds at cost or
market, whichever is lower. In addition, eight other banks make
some provision against unrealized appreciation by setting up reserves.
The determination of market values is frequently a difficult matter,
especially where a large proportion of the bond portfolio consists of
unlisted and not readily marketable securities. Even in the case of
those banks which follow the practice of writing down their portfolios to market values, large blocks of bonds which could be sold
only with difficulty, and then perhaps at large concessions, are carried at cost for want of another available basis of valuation. This
applies in particular to real estate and smaller industrial issues, as
well as some municipals. .
Efforts of banking supervisory authorities to encourage or enforce
the practice of writing down bond investments showing substantial
depreciation to market value levels are understood to have been taken
in bad part by many institutions. The theory advanced in such
cases is that a bank investment once made may be held until maturity,
so that market value may be ignored in valuing the portfolio. During the years 1930 and 1931, however, when prices of others than
gilt-edge bonds were declining sharply for the most part, banks which
sought to liquidate bonds on a large scale to meet demands on them
frequently faced the necessity of taking heavy losses. In other
instances, where liquidation was not necessary, the published statement gave a misleading view of what could be realized on the security
portfolio, because of the general decline in values which was not
eflected in the condition statement.
Hearings — S. Res. 71
Appendix
Part III — Bank Investments
7f_3
What were the chief reasons for utilizing the repurchase agreement in preference to advancing direct security loans in these cases?
•
The answers to this question are summarized as follows:
1. Accommodation of customers: Such accommodation apparently
covers cases where security dealers and syndicates, wishing to obtain
credit beyond the legal limit of 10 per cent of the bank's capital and
surplus, utilize this device. Also, the repurchase agreement is preferred by customers because they can obtain the full value of their
securities thereby, rather than merely a stated percentage, as is
usual with security loans. Also, greater flexibility as to the period of
the loan is feasible than with time loans, while the repurchase agreement is preferable to a call loan from the borrower's standpoint.
One bank states, "It is customary to carry for dealers in Government and municipal bonds (which form the bulk of this item) on
repurchase rather than on loan." Several other institutions indicate
that most such transactions are made with dealers in municipal
bonds, where protection in the form of a margin of collateral value
over and above the amount of the advance is not regarded as necessary.
2. A better rate of return to the bank. The bank usually retains
the full coupon rate of interest on the bond, and in addition where
the bond issue is tax free, no income tax need be paid on such return,
whereas interest received on loans is so taxable. Several banks
stressed this income-tax exemption in their replies as of first importance. The customer can afford to pay a lugher rate than on loans
because his loan equals the full value of the collateral.
3. Simplify accounting for dealer customers in the case of nontaxable securities.
4. Various special reasons: A bank in New England says, "Chief
reason we believe is desire of taxpayers to adjust their portfolios to
conform to various State laws in order to decrease their taxable
holdings or increase their holdings of nontaxables."
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
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1049
Another institution explains a single transaction of this kind thus,
"The company wished the bonds available for its sinking fund at a
future date but did not wish to buy them in advance of the sinking
fund date."
A western bank says, "The borrowers wish to avoid showing
borrowed money on their statements."
_ In several cases of group banks the large banks report buying bonds
under repurchase agreement from other banks only for the purpose
of aiding them to meet special demands for accommodation.
A nuniber of banks specifically indicate that the repurchase agreement is resorted to only on the request of customers, and that the
bank does not actively prefer them over loans.
10. Investments and time deposits:—The expansion of bank security
investments is usnally ascribed primarily to the increase in savings
and other time deposits in the hands of commercial banking institutions. The Comptroller of the Currency ruled that there is nothing
in the national bank act to prevent a bank from opening a savings or
thrift department as long ago as 1903, and the Federal reserve act
specifically authorized the banks to accept savings deposits, which
were given preferred treatment as to reserve requirements with a
flat 3 per cent reserve provision.
1
Hearings - S. Res. 71
Aprendix
Part III - Bank Investments
/r 3
(
Time deposits have shown a steady inc ease, especially since the
war. During the decade 1921-1930 the increase in time deposits of
all banks compared as follows with the increase in investments:
TABLE 43.-Increase in time deposit and investments of all banks
[Source: Annual Reports of the Comptroller of the Currency]
Date
Time deposits
June 30, 1921
June 30, 1930
Increase, per cent
$9,769,454,000
20,216,314,000
107
Investments
$8,405,814,000
13,671,629,000
63
1 This figure is probably too low by $1,000,000,000 or more, because of inadequate classification of State
bank deposits. This factor, when allowed for, cuts the gain in time deposits for the decade to approximately
88 per cent.
It has already been seen that country banks have invested a substantially larger part of their total resources in securities than have
the city institutions, and they also have gone more heavily into real
estate loans. The country banks also have a much larger proportion
of time deposits, however, as shown in the following table at the end
of 1930:
•
TABLE 44.-Time deposits and investr4n,ts, by groups of member banks
[Source: Member bank call report, Federal Reserve Board]
Investments and real
estate loans
Time deposits
Bank groups
Amount
New York City banks
Chicago banks.
Other reserve city banks
Country banks
Total
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Federal Reserve Bank of St. Louis
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1
Per cent of
resources
A mount
l'er cent of
all deposits
$2,583,000,000
538,000,000
5, 128,000,0(10
5,974,000,000
19
21
33
39
$1,296,000,000
510,000,000
5, 202,000,000
6, 538,000,000
19
32
49
56
14,223,000,000
32
13,546,000,000
36
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
The possession of a large .proportion of tinie deposits is often
regarded as justifying a bank in investing a greater part of its assets
in securities and real-estate loans than would otherwise be considered
conservative. One reason advanced for this view is that the bank
retains the right to demand notice of 30 or 60 days in advance of
withdrawals, thus securing a respite during which slower assets can
be disposed of in case of concerted demands for funds on the part
of time depositors. In practice this provision may be valueless for
the commercial bank, however, as refusal to pay out time deposits
on demand tends to impair confidence in the institution, and thus
leads to a "run" which is joined by the demand as well as the time
depositors. The collapse of four substantial banks in Toledo, Ohio,
in August, 1931, was directly attributable to this condition.
On the other hand, the velocity of turnover of time deposits is
unquestionably much less than that of demand deposits. In normal
times this would justify a bank in making commitments in "slower"
assets with its time deposits, but experience on several successive
penods of deflation and impaired confioccasions has shown.that
dence depreciation in security investments, combined with withdrawals of time deposits, may become a major cause of bank failures.
Such experience indicates that liquidity of assets remains a necessity for commercial banks, regardless of the proportion of time
deposits obtained.
1
Hearings - S. Res. 71
Appendix
Part. III - Bank Investments
11. Further restrictions on bank inrestments.—A further question
included in the questionnaire was as follows:
Do you think the present restrictions on bank investments in securities adequate? If not, state suggestions for change.
The almost universal response was that present restrictions were
sufficient. One large New York bank qualified such an answer by
saying that they were adequate for central reserve cities, implying
that banks outside New York and Chicago should be further restricted
in their security purchases.
A New England bank states, "Management will be always the
principal factor, but comptroller should have any reasonable increase
in his powers or appropriations that he desires." No indication is
given as to the direction in which such extension of the comptroller's
powers is thought desirable. A more radical suggestion from another
New England bank is that "Commercial banks with savings departments should be required to invest savings deposits in legal securities." This suggestion, however, necessarily.seems to involve the
segregation of savings deposits, a broader question than the regulation
of bank investments as such.
A bank in Philadelphia answers:
Law can not take the place of management. It has been too easy to get into
the banking business, and too many bankers have had little or no experience in
times of depression until the present time. Larger capital of banks should be
required, and the banks should not be permitted to organize in towns where
business and conditions in the territory do not warrant.
A reduction in the number of banks is thus preferred to specific
further limitations on investments.
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
1051
The president of a large bank in the Northwest replies:
I think present restrictions on bank investments in securities are adequate.
No unusually strict or arbitrary rule would improve the situation. It is necessary
that a bank have some leeway in order that it may properly conduct its business,
if the management is sound, and no legislation can protect a bank with unsound
management.
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A large California institution states:
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Federal Reserve Bank of St. Louis
We believe restrictions' at present are adequate and it would be difficult to
cure poor judgment by more drastic restrictions. Further, greater restrictions
would tend toward the employment of more funds in loans, which would depri ve
banks of diversification obtainable in security purchases and desired liquidity.
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Hearings — S. Res. 71
Appendix
Part IV — Security Affiliates
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Federal Reserve Bank of St. Louis
y 3i)
Activities Of a bank's security affiliate 'as a. holding or finance
company or an investment trust are also fraught with the danger of
large losses during a deflation period. Bank affiliates of this kind
show a much greater tendency to operate with borrowed funds than
do organizations of this type which are independent of banks, the
reason being that the identity of control and management which
prevails between the bank and its affiliate tends to encourage reliance
upon the lending facilities of the former.
When the affiliate acts as a receptacle for slow or doubtful assets
of the bank,its existence is of apparent aid in maintaining the liquidity
of the parent institution, especially where the capital of the affiliate
is provided by stockholders and not by the bank itself. However,
when it becomes necessary to help finance the affiliate through loans
from the bank, there is no real benefit to the bank from its operations,
since the bank itself then advances the funds to hold these doubtful
assets. Furthermore, such transfer of doubtful assets to an affiliated
corporation, by giving the bank an appearance of liquidity which is
greater than the facts of the case warrant, may encourage assumption
of other commitments that might not be desirable in the light of
losses already indicated in the portfolio of the affiliate. In fact the
mere existence of an affiliate which might be made the receptacle for
unwise loans and investments when needed tends to reduce the degree
of caution exercised by bank managements, there is reason to believe.
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Federal Reserve Bank of St. Louis
//
Leo T. Crowley, Chairman of the Board, Federal Deposit
Insurance Corporation
Hearings - H. R.5357
d?,a'1,41.42,4h1
The extent to which the caliber of bank management will improve
in the future, over what it has been in the past, cannot be estimated.
While it is hoped that a better quality of personnel will develop,
it must be recognized that there will continue to be poorly managed
banks and that such institutions will eventually succumb. We cannot foretell the extent to which the existence of deposit insurance
will influence bank management.
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Federal Reserve Bank of St. Louis
Marriner S. Eccles, Governor Federal Reserve Board
Hearings — H. R. 5357
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Federal Reserve Bank of St. Louis
"?.5.r"
Mr.-1-VILLIAms. Is it your thought that Government-owned central
banks can operate as economically and as efficiently and as much in
I
the interest of the people of the country as our present system ?
Mr. ECCLES. I do not think that the fact that it may be Govern-. ,
ment-owned, in and of itself, should make any difference. It may fr
be operated as efficiently and it may not be operated efficiently,
That, as I say, gets to the human problem, after all.
Mr. WILLIAMS. The ownership of it, in that respect would make
no difference?
Mr. ECCLES. I do not think so, not necessarily. If the manageI
ment of the banks, the personnel of the board consisted of efficient
men who would feel independent to use their best judgment and
thought in carrying out the affairs of the institution, the ownership
would make no difference. If, on the other hand, people were appointed to operate the system for purely political reasons, rather
'than with reference to their qualifications, and they were made to
fee subservient to the point where their best judgment was not
is°
\\ • exercised, then of course the system,.under those conditions, would
be badly and inefficiently and ineffectively operated.
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Federal Reserve Bank of St. Louis
Governor Harrison
Percy H. Johnston
Spencer S. Marsh
Edmund S. Wolfe
Memorandum to Committee on Banking and Currency
Submitted by Governor Harrison, FRB of NY
Dated April 7, 1932
(Included with Hearings - S. 4115)
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Federal Reserve Bank of St. Louis
As' I stated when I appeared before your committee in January. 1931, and
_as I reiterated to Senator Glass, chairman of the subcommittee of the Senate
1932--a
Committee on Banking- and Currency, in my letter of February
•copy of which I would like to attach—much of the banking trouble which we
have experienced in the past has been due not so much to violations of law as
to mismanagement within or abuse of the privileg,es afforded by the law. Competition between the State and National Governinents in the granting of charters and in the liberalization of the banking laws has gone further and further
to make these legalized abuses possible. Limitations and restrictions in the
law intended as safeguards against bad banking- are too often regarded as
invitations to unwise banking within the law. We fear that no matter how
well a law may be conceived and drafted, that danger will always be present
-unless the manngement of individual banks is of the highest type. If, therefore, it is not possible at this time, either for practical or political reasons, to
provide for one banking: system which would include all commereial banks, as
we would favor, then it seems to us that one of the most important contributions that may be made to the banking sitnation would be the adoption of such
amendments to the law as might insure better and hotter management of individual banks, and not the centralization of managerial or dictatorial powers
in the Federal reserve hanks or the Federal Iteserve Board. No law. however
perfect in itself, can serve RS a substitute for management of individual institutions, and with a dual competitive banking system legislative restrictions
often prove inoperative in any event. If too strict in one system, banks shift
to the other. If to() lenient because of the competition for membership. they
sanction bad banking-. Ultimately, therefore, the protection of bank creditors
and the community must depend largely upon the character and experience of
bank management
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Letter to Senator Glass from Governor Harrison,
F. R. B. of N. Y. - Feb. 6, 1932
(Included with Hearings - S. 4115)
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Federal Reserve Bank of St. Louis
One more comment I would like to make and that is this: As I think I
stated before your committee about a year ago, much of the banking trouble
which we are now experiencing is due not so much to violations of law as to
mismanagement within or abuse of privileges afforded by the law. Competition between the State and National Governments to liberalize the banking
laws has gone further and further to make these legalized abuses possible.
Limitations and restrictions in the law intended as safeguards against bad
banking are too often regarded as invitations to unwise banking within the
law. I am afraid that no matter how well a law may be conceived and
drafted, that danger will always be present unless the management of individual banks is of the highest type. If, therefore, it is not possible at this
time, either for practical or political reasons, to provide for one banking
system which would include all commercial banks, as I would favor, then it
seems to me that one of the most important contributions the proposed bill
can make will be to insure better and better management.
With this in view might it not be appropriate for your counnittee further
to consider some modification designed to insure better management in fact
quite apart from legislative limitations and restrictions, such, for instance,
as (a) reducing the number of directors on each bank so as to concentrate
responsibility and to encourage supervision and management through experienced directors; (b) provision, under adequate safeguards, for the removal of incompetent bank officers after thorough investigation by disinterested authorities, and possibly (c) restriction upon the right of bank
officers to borrow except with the approval of the appropriate committee of
directors.
These and pos.sibly other suggestions might be considered as a means of
insuring a more conservative and effective nranagement of banks within the
limitations provided by law. No law. however perfect in itself, can serve
as a substitute for management of individual institutions. And with a dual
competitive banking system the legislative restrictions often prove inoperative
in any event. If too strict in one system, banks shift to the other. If too
lenient because of the competition for membership, they sanction bad banking. Ultimately, therefore, the protection of bank creditors and the coininut!ity must depend largely upon the character and experience of bank
inanagement.
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Percy H. Johnston, Pres., Chemical Bank & Tr. Co., N. Y.
Hearings — S. 4115
March 1932
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Federal Reserve Bank of St. Louis
It iS too much to hope that good banking can be brought about
( by legislation. After 35 years of banking experience. six years as
\,national-bank examiner, I am convinced more laws will not effect a
p,42_ ,/
1
cure. Strict rules and. careful discrimination in the granting of
charters will go a long way. We have had too many banks and too
few bankers.
Mr. JOHNSTON. Yes, sir; I think there is leSs restraint upon the
State banks than on the national.
Senator GLASS. Has that anything to do with the fact that of the
4,000 banks which have failed within the last two years five to one
are State banks?
• Mr. JOHNSTON. I (10 not think so much, Senator. I think the fact
that the State banks are so much smaller, I mean smaller per unit
average, that they have not been able to get the management.
Senator GLASS. You do not think the character of their portfolios
has anything to do with their failure at all?
Mr. JouNsToN. I think that is responsible for the failure. but then
the character of the portfolio is due to the management.
Senator GLASS. Why, of course.
Mr. JOHNSTON. The small banks can not get the management.
They can not pay for the type of management. It takes just as
much intelligence to manage a $500,000 bank as a $500,000,000 bank,
and I know what I am speaking of.
Senator GLASS. I understand ; and not having that wise type of
management, they prefer to fill their portfolios with unliqua assets
and when the trouble conies, they crash—isn't that true?
Mr. JOHNSTON. Too late, you mean—yes, sir; that is correct.
Senator FLETCIIER. Isn't that bank failure proposition largely due
to lack of confidence in banks? Haven't we got to do something
to build up confidence in the banks?
Mr. JOHNSTON. Yes, sir.
Senator FLETCHER. To get rid of this fear and apprehension.
That is the thing to do. You do not think it ought to be done bv
any system of guaranty. but something must be done to restore
confidence in the banks—isn't that true'?
Mr. JOHNSTON. Yes. I just do not know exactly what is the best
thing to do, either.
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Spencer S. Marsh, V. Pres., Nat. Newark & Essex Banking Co., Newark
Hearings — S. 4115
March 1952
.
.
Mr. MARSH. Our experience in New Jersey has been that almost
in every case where a bank is closed there has been bad banking
behind it. There may be somewhere that has not been so; but it
has not been only the one thing • it is a combination of a couple
of things: Bad banking somewhere in the past and the present
crisis has brought it to a head. I may be wrong but I think it
would be a very healthy thing for some of those banks not to be
opened.
Senator BROOKHART. You do not think these 8,000 banks have
failed in the United States because of bad banking, do you?
Mr. MARSH. No. I have not enough knowledge of those, really,
Senator, to have a definite opinion, but I have enough knowledge of
the New Jersey situation to know what happened in a good many
of those cases: Not all bad banking—I do not say that—but I safd
in a great many instances it was predicated on bad banking and
the present situation brought it to a head.
NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
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Federal Reserve Bank of St. Louis
1
303
Senator GLASS. Did not bad banking bring about the present
situation?
Mr. MARsH—Yes. I think it did.
Senator BROOKHART. In big places and big banks that reached out
over the whole country?
Mr. MARSH. Yes; I think it did.
Senator BROOKHART. Alld they ruined our little banks and
bankers.
Mr. MARsx. My feeling, Senator, is that there was an overproduction of banks, both national
_ . and State banks, all over the country.
1
Edmund S. Wolfe, Pres., First Nat. Bank, Bridgeport, Conn.
Hearings — S. 4115
March 1932
Mr. WOLFE. Under some circumstances, yes; depending on the
type of bank. I think the type of bank and the management of
the bank would have a lot to do with it and the character of the
loans.
Senator COUZENS. We can not write into the law specifying the
type of management, can we?
Mr. WoLFE. Well, you are trying to get authority for the Federal
Reserve Board to control the management so the management has
but little discretion. That is what rather alarms us.
Senator COUZENS. I rather object to that myself. I was trying
to get at some reasonable method whereby we could take that control
out of the board. __
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Leo T. Crowley, Chairman of the Board, Federal Deposit Insurance Corporation
Hearings — S. 1715 and H. R. 7617
April, 1935.
The extent to which the caliber of bank management will improve
the future, over what it has been in the past, cannot be estimated.
While it is hoped that a better quality of personnel will develop, it
must be recognized that there will continue to be poorly managed
banks and that such institutions will eventually succumb. We cannot
foretell the extent to which the existence of deposit insurance will
influence bank management.
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Federal Reserve Bank of St. Louis
a
1. a. Graettinger, Executive Vice President Illinois Bankers Association
Chicago, Ill.
Hearings — S. 1715 and H. R. 7617
May, 1955.
GRAEITINGER. Yes.
By one method, they may be assessed beyond their ability to pay—'—
which would contribute to their weakness, thus making them charges
on the Corporation; while the other method, by calling for a reasonable assessment, would be helpful under present circumstances
and permit the banks to build up their strength for the benefit of
the Corporation. While the experience over the past years might
justify a higher rate of assessment, it is quite conceivable that with
proper supervision and authority lodged in and exercised by the
Federal Deposit Insurance Corporation, the rate suggested may be
sufficient to carry on its purposes. No actuarial basis can be provided
until an experience over a number of years and under varying conditions has been had; and until then, and because of the circumstances cited, we feel that the statutory provisions should call for
the rate suggested until such time as a correct assessment basis may
be determined.
There is one other provision in title I in the bill before this committee with which the nonmember Stat,e banks are particularly concerned, and that is section 23, page 37, which requires all banks
to become members of the Federal Reserve System before July 1,
1937, in order to continue as insured banks.
And on this point I wish t,o say that the banks in the territory
already referred to, whether large or small, national or State, are
practically unanimous in asking that this provision be eliminated
from the bill. It would seem that State banks having the qualifications for insurance by the Insurance Corporation under subparagraph 2 of section 6, page 9 of the bil_,1 having the capital requirements under the laws of the respective States in which located, being
acceptable to the Insurance Corporation as qualified insured banks
and being under supervision and authority of the Insurance Corporation as well as of the several State governments, should not also
be compelled to become members of the Federal Reserve System and
put under additional supervisory power and authority. Banks in
these States want to see the dual system and the right of States
to charter banks, in accordance with localized sentiment and conditions, retained, for they fear that the effect of the provision in the
bill will be the pogsible centralization of banking to which compulsory membership may lead. :
After all, the management is the
measure of succe,ss of any banking institution or of any kind or
form of banking, and, without question, there is just as efficient
management in the smaller urut banks as in the larger institutions,
which fact has been very definitely demonstrated during the recent
years.
Banks under State supervision have gone along year after year 1
serving not only.their own communities but the country as a whole
and are respon,sible to a great extent for the development of this
country. The unit country bank, whether national or State, owned
and officered by men who have their homes in the community where
the bank is located, has been the greatest factor in building up that
,community. It has prospered with the people and suffered with
Mr.
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Federal Reserve Bank of St. Louis
M. A. Graettinger - Page 2.
240
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Federal Reserve Bank of St. Louis
BANKING ACT OF 1935
them. These so-called "country banks" have gathered together thesavings of their communities and used them in a large measure to
build up their home towns and the country thereabouts. It has been
an ideal financial set-up both for the banker and the customer.
True, unit country banking has had its share of failures, but in
no greater degree than was experienced in metropolitan centers,
because people who owed the bank could not pay their obligations
on account of the world-wide economic conditions over which neitherthey nor the bank had any control. All that is wanted by the State
banks is the opportunity to continue to be of service in their particular field. A closer a.djustment to local problems can be had
under State laws. Therefore, there should be the alternative opportunities that now exist from which banking institutions and local
business interests may choose, so that they can function or conduct
their business relationships under that banking code which be,st meets
the conditions of the times and of the place, as they see them.
There are a number of these State nonmember banks which do
not have sufficient capital to meet the requirements for admission
into the Federal Reserve System ; but in many instance,s the capital
structure is large enough in proportion to the liabilities to adequately
take care of the business entrusted to them, and these banks could
not profitably employ or meet the necessary capitalization increase
which would be required for membership. Is it not pos,sible that,
with the changing trend of economic conditions in the smaller communities, this situation will take care of itself by the natural process
of evolution and adjustment, without the requirenient of compulsory
membership, which appears rather repugnant to these smaller banks?
It i,s on behalf of all of the banks in the 14 States mentioned for
I speak that we earnestly hope you will trivewhic favorable consideration to the request for the elimination of this one provision in
the bill.
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention—Nov. 1335
Address of the Pres., James C. Bolton, VP Rapides Bank & Trust Co.,
Alexandria, La.-4State Bank Div.)
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Federal Reserve Bank of St. Louis
Something more than legislation and supervision is, of course, necessary
to produce a system of strong banks. Both of these can help, but the real
responsibility for keeping State banking sound must always rest on the
shoulders of the thousands of bank officers who have charge of formulating
and executing the policies of the individual banks which comprise the
"system." The State Bank Division therefore has an interest in improving
the technique of banking. To this end it maintains an active Committee
on State Bank Research. In previous years this committee has collected
valuable figures on resources and liabilities of State banks in various
States as of the end of each year. Without dropping that activity, it
added, this year, the collection of significant data on earnings and expenses
of State banks, and succeeded in securing the co-operation of 35 of the 48
States. The results were published in "Banking," reprinted, and distributed
to such persons as it was believed would be interested.
The study of the earnings figures made by the Committee on State Bank
Research revealed several respects in which banking practice is susceptible
of improvement. I shall review these briefly, referring you to the articles
themselves for details. The committee found that what would contribute
ntost to an improvement in bank net earnings at the present time would be
smaller write-offs on loans and investments. It suggested, therefore, a
number of ways in which loaning and investment policies could be improved
to eliminate some of these losses in the future. It found also that an
important obstacle to net earnings WaS the payment of too large a proportion
of gross income as interest on deposits.
Finally the committee noted the importance of income from service charges
in those States which reported net profits in 1934, and concluded that while
such income may be small in absolute amount, it often represents the
difference between a net profit and a net loss.
I
We shall continue to co-operate with and support State Bankers
Associations, State Bank Supervisors and the members of State
Legislatures in all
measures designed to strengthen the State banking system,
especially those
' which embody lessons learned during the recent period
of adversity. Limitations on the number of new banks organized in the future
should have our
support, for nothing can be clearer than the experience of
recent years on
this point—that there were too many banks in this country.
Raising the
inimum capital for new banks is an equally worthy objective
, since every
tudy of failures (whether bank failures or commercial
failures) lists as
ne of the important causes "inadequate capital."
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In our own banks there are many things
we can do to further better,
stronger, sounder State banking. Suppose,
for instance, that all of us in
making loans in the future should inquire
rather carefully into the borrower's plans for repayment. I need not
remind you that if a loan is to
be sound it needs to be made with
repayment in mind. I venture the
opinion that this simple practice, if adhered
to (in the sense of declining to
make a loan when the borrower could
not show a plan for repayment)
would
cut future losses on loans by a substanti
al amount.
Suppose also that we undertook to place
as many of our loans as possible
on a basis where periodic payments
would be required. Would that
not
tend to make all our loans more
liquid, at the same time giving prompt
notice of any change for the worse
in the borrower's condition through
failur
to meet his periodic payments?
The idea of amortization which is gainin
such favor in the field of mortgag
e loans might then be applied to commercial banking with salutary
results.
/
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With such a history, we
cannot stop until the fight
is won./We mu
continue the campaign to
improve bank supervision.
to guard jealously the
We must continu
rig,hts of State banks.
Finally, the Division
(and this is perhaps the
mus
most important of all) help
members to run strong,
and encourage its
sound banks, banks in,
which the interests of
depositor are always
the
paramount, where no undue
risks are taken with
depositor's funds, and where
the
all reasonable demands
such deposited funds can
for
the
return
of
be met at any time. This
difficult to challenge the
is a task sufficient]
ability and energy of all of
us
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THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
The Banker and the Federal Deposit Insurance Corporation--Some of
Their Mutual Interests--by Leo T. Crowley, Chmn. FDIC
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Federal Reserve Bank of St. Louis
-Public Must Participate
nally, the public must participate in
the attainment of our mutual
3111 itions. It is vitally necessary
1
for us to obtain the support of
the
An erican public if we are to put
banking upon the plane we all desire.
It is incumbent upon the Corpor
ation, and particularly your Association,
to acquaint the public by all legiti
mate means with the fundamentals
at',
sound banking. It should be possible
through our combined efforts tO
establish an,1 form a public opinion which
will reward the sound banker
and penalize the individual or institution
which is inefficient. The Corpoy
ration hopes to make its insignia a symbo
l of soundness, safety and service!
_,
It will be a hallmark of quality which should
distin
guish
the
genuin
e
from
•""
the imitation. It will he notice to the
world that a bank which is insured
by the Corporation is efficiently managed,
and that its dep%itors can hay(
•
ionfidence in its policies and practices.
In the language of diplomacy—
the imposition by the public of business
sanctions upon bankers who
insist
upon violating the principles of good bankin
g will serve to make them
reform or close their doors. The members
of the public can do their
part
bv advocating and supporting such laws as
will raise the standards of
our
financial business and by requhing the
banks which they patronize
to
live up to high ideals.
The FDIC and the bankers of the United
States have large, mutual
,
financial interests in one another. Why,
N, hose legislative. social and financial aim therefore. should not the FDIC,
is the establishment of a
sounder
and more effective banking; system, co-ope
rate with bankers. and why
not banks, whose reason for existence
should
is the safe and profitable
service of
the financial needs of their commun
ities, co-operate with the
FDIC? I am
,ertain that the public for whose
benefit the Corporation was
foit whose business the banks
created and
must compete will have only
one answer.
THE COMMERCIkL & FINANCIAL CHRONICLE--ABA Conventicn--Nov. 1935
Through the Bankers' Eyes--address of the Pres. of the ABA, R.S. Hecht
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Federal Reserve Bank of St. Louis
Looking Forward
But the responsibility now rests upon us to so conduct our institutions I
of
n the future as to retain and merit the public's continued approval
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banks.
our activities and their confidence in the soundness of our
in refor
accomplish this it will not be enough that we merely acquiesce
see to it tha
of banking by law. We must do more than that. We must
and the
banking itself without compulsion of law reflects the changes
nation has
lessons of the times and the difficulties through which the
of the past
passed. It is our duty to profit by the experience and lessons
foster throughout
and apply them to the operations of the future. We must
to the conduct
the banking business an attitude and a practice in respect
on rendering
of our banks that will stress the fact that we are determined
scope of our
the
within
a full measure of sound, helpful public service
the powerful
proper functions. I know of no better way to meet effectively
to advance
political attacks constantly aimed at our business and calculated
credit structure. •
the utopian dream of a completely socialized banking and
C-- -1 -17
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THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
Business, Industry and Taxation--by Lewis H. Brown, Pres. JohnsManville Corp., NYC
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Federal Reserve Bank of St. Louis
Business is tremendously interested in a sound banking,
system. Business recognizes only too well that because the
people themselves demanded local control of banking, many
banks were started in the past, by people who were, in fact.
not bankers capable of being entrusted with other people's
nioney but might better have risked their (/%111 money in their
own private enterprise I suggest by far the largest portion
of the banks that were wiped out during* the depression were
not operated by bankers. The confidence of business and
industry to-day in our banking system lies largely in the
belief that the banks that are open to-day are operated by
trained bankers. Deposit insurance may have some mystic
merit in the mind of the average small depositor, but .those
who understand the problem realize that having banks managed by real bankers is the greatest and best insuranc
for the safety of depositors' funds.
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Federal Reserve Bank of St. Louis
nirCOMMERCIAL & FINANCIAL CHRONICLE-ABA Convention--Nov. 1935
SESSION.
23
iierage coverage of 80/
1
4 of their total deposit liability and 13,300 banks
are insured 70% or more. Since the creation of the Corporation over 7,700
banks have voluntarily applied for insurance. There are only about 1,000
licensed comrnercial banks which are not insured by the Corporation. The
Corporation
now permitted to examine all insured banks and has access
to reports of their condition made to various agencies. It must be appointed
receiver for all insured National banks which close, and it is authorized to
act as receh•er in the case of the closing of any insured State tnember or
non-member bank. Joint examinations with State supervising agencies are
authorized and are being presently conducted in a great many States. We
are allowed to exchange reports with various State authorities, and in quite
a number of instances State agencies are accepting our examinations. Many
of them are using our examination form.
FDIC Ideal Agency to Cope with Problem
It is apparent from these facts and figures that the FDIC not only has a
tremendous financial interest in the vast majority of the nation's banks,
but occupies a unique position in the banking field on account of the
pcwers granted to it by Congress and the many contacts it has with the
banks themselves and the several State agencies which are charged by
the laws of their particular States with the supervision and regulation of
the banks under their jurisdiction. The Corporation, therefore, is able to
exert its power and influence and to lend its support in behalf of any
means or measures which will help to bring about a sounder and more
effective banking system.
If a person were to start upon an independent search and study for an
instrument to be used in improving the banking situation as it exists
to-day, it is reasonable to suppose that he would finally decide upon an
agency such as the FDIC. It would be hard to conceive of any instrumentality which wGuld be in a better position to handle the real and
practical problems that have to be faced and which takes into account the
tact that the banking business exists in a matter-of-fact and a work-a-day
world.
There are, of course, other ways in which the Corporation can promote
the best interests of depositors and bankers, but I believe I have indicated
the principal means afforded by Title I. I now wish to draw your attention to the leading part you gentlemen can play.
Banker Voice in FDIC Management
In the final analysis whether we are all going to be successful in the
attainment of our purpose depends upon your co-operation and support.
Mere legislation in and of itself will not suffice. Unless you actively
participate in the problems of the Corporation and assist in the elimination
of those conditions \\MO) have caused so much grief, there can be no
lasting and healthy recovery of American banking. If the mernbers of
your Association are going to condone abuses which logic and experience
indicate ought not to be tolerated, the task of Government and State
agencies will be an impossible cne. The FDIC needs and wants your help.
I feel certain you will give it.
Although the FDIC is for most purposes a Government agency, it has
many characteristics of a private corporation. I am thinking especially
of the financial interest which insured banks have in its management, and
its eventual success. In view of this situation I suggest that consideration
ought to be given to the creation of an advisory committee or board which
would give the banks proper and fair representation. Such a group might
meet at stated intervals with the officials of the C,orporation for the purpose
of consulting and advising upon problems and policies vitally affecting all
insured banks. If the insured banks were given a voice in the management
and policies of the Corporation. any tendency towards bureaucracy would
bc discouraged and checked. Regardless of the desire of its officials, there
is always the possibility of a department such as the FDIC becoming too
arbitrary and too much inclined to transcend prescribed authority. I am
prompted to make this suggestion upon my own personal experience and
that of others in the Corporation. I am happy to acknowledge the many
helpful suggestions that have been made from time to time by various
members of your Association. The Corporation has greatly benefited from
the personal conferences that have been held with bankers from all over
the country. As a result, we have been able to get the viewpoint of the
bankers in the rural communities as well as those in the large financial
and industrial centers.
Replace RFC with Local Capital
I want to say a word about the repayment of your RFC obligations.
Those of you who can. should retire them as soon as practical, as it vvas
never the intention of the Administration to have the Government take
the place of local investors. The needs of a community are best served
when its citizens have a real and financial interest in the management and
successful operation of its banks. Furthermore, it is only just that stockholders should first absorb any losses that may be incurred. The greater
the investment by local individuals. the greater will be their desire to
have the plan of deposit insurance more widely accepted. As economic
conditions improve and your institutions reach a more profitable level,
efforts should be made to replace the RFC investments with local capital.
The repeal of the Federal Double Liability law, together with the tendency
in many States to pass similar measures, will make such retirement
much easier.
All of this is not to say that eNery bank in which the RFC has an
investment should immediately make application to retire its preferred
stock or capital notes. I am sorry to say that far too many banks are in
no pcsition to carry out such
program. The premature retirement of
these obligations in banks which have a low capital ratio would defeat
the very purpose for which the investment was made. Here, as in everything else, there must be a sensible discrimination shown.
Efficient Management the Need
oasibly the greatest assistance the members of your Association can
to the Corporation, the public, and to yourselves, lies in the efficient
anagement of your daily business. By this I mean the placing of your
houses in order through the pursuit of practices recognized everywhere as
being sound and businesslike. For example. the writing off of losses currently and unfailingly, the avoidance of disastrous methods of competition
which lead to losses in the long run. the elimination of free services, and by
alert attention to and unbiased appreciation of the needs of depositors
and the social. economic and legislative problems of your profession.
! The Corporation is perhaps as anxious as you are to have your institutions
make money, provided, of course. that your earnings are the result of good
management. Profitable operations permit you to compensate adequately
24
BANKERS'
the efforts of your officers and employees and to attract and retain capable
executives. The matter of earnings is, therefore, a vital one
Corporation. Many banks can never hope to have the kind of !liana,
they need because of their scant profits and the undue riska they must
This fact is overlo,ked by those who ;alsely believe that every commun,i;
or locality must have a bank.
The necessary building, of reser,es for losses and contingencies is intimately tied up with the size of a bank's carnings. This is ancther reason
vihy the Corporation wants to encourage a fair return upon your capital.
The increased protection afforded depositors by adequate reserves for losses
and contingencies correspondingly incieases the soundness of the risk of
the Corporation.
At the very root of all of our discussion involving improvement of our
banking structure is the matter of personnel. It is idle to talk about
deposit insurance, co-operation, and the goal we seek if unfit individuals
are allowed to take part in the management of our banks. The banking
profession must see to it that there is brought to the business of banking
ccmpetent administration. You have it within your power to do so, and I
am confident that you will. In this connection I regard the program
being carried on by your Institute of Banking and the Graduate School of
Banking inaugurated last year as m9st praiseworthy and effective. It is
constructive work of the finest kind and should receive your enthusiastic
support.
More Good BanLs—Smaller Premiums
The manlier in which you conduct your affairs will very nearly determine
the amount of the assessment you will lime to pay for deposit insurance.
The more good banks there are insured, the less the premium should be.
A lower assessment can only be justified after insured banks have proven
that they are furnishing the needs of their customers safely and wisely.
The reccmmense to the institutions which are now bearing a rather large
percentage of the total premium must, therefore, be in the efforts the
Corporation had made and will continue to make towards preventing a
multiplicity of banking facilities and in helping to improve the general
standards of existing banks.
To claim tbat large banks have no particular stake in the success or
frfilure of smaller banks is to overlook the fact that there are 9,700 banks
with deposits of $750,000, or lees, in which the average insurance coserage
is over 80%. These banks have 10,500,000 depositors. This is more than
20% of the depositors in all insured banks. If through our united efforts
we are able to improve the standards of these and the other banks
in the
Fund, it is only reasonable to assume that future assessments will reflect
more accurately and fairly the risk involved.
If history is to repeat itself, we are likely to have a recurrence of periods
of financial stringency and general economic depression. It is
at such a
time that the FDIC and American banking will have to prove
that they
can meet the demands that will be made upon thmi. Ati intelligent
administration of deposit insurance and a concerted and steadfast adherence
to
right basic principles by you gentlemen. now and in the future,
should
make banking holidays unnecessary in crises which may later
arise.
Avoid Causes of State Intervention
I have said that you should ha‘e an unbiased appreciation
of the needs
of depositors and the social, economic and legislative
problems of your profession. In my mind, this is extremely important. The members
of your
Association, and bankers generally, performed a real service
to the country
at large in the testimony which they gave before the Banking
and Currency
Committees during the pendency of the banking bill this
year. I realize
that bankers cannot, in a certain sense, take an aggressive
leadership in
advocating le,lislatifin. Nevertheless. they have the duty,
as they have the
right, of informing legislators and the public of their
views upon bills
affecting their business. I sometimes think that bankers
have been a little
slow to realize the various trends in our economic.
social and financial
thought. Bankers are entitled to 1,ave a well-ordered
zeal fcr their cwii
Banking
By CARTER GLASS.
United S
The inability of Senator Glass to attend the Convention,
(scheduled as a speaker at the first day's session of
the
General Convention), was announced as follows by President
Hecht, at the beginning of the session:
"It is a source of the keenest possible disappointment to
me, as I know it will be to you, but I have to advise you
that
the gentleman whom we had wanted to honor by
asking
him to be our first speaker here this morning was
unable to
come. I have a letter from him, as well as from two of
his
physicians, to the effect that it is simply out of the question
for the Senator to travel this distance in his present
physical
condition.
Through the
Address of the President of the A. B. A., R. S. HECHT
New Or1(
For many years it has been the custom for the
President of your Association to open the annual convention with a review
of his stewardship and
a survey of the economic and financial situation
as seen through the
bankers' eyes. It is with some misgivings that
I follow this custom. So
far as concerns the past year's work, I should
like to have the record speak
for itself. As for the discussion of our
various business and financi:11
problems, we have provided an all-star cast
of sneakers, all of whom are
leaders in their respective fields, and their
utterances Kill, I am sure,
be most interesting and enlightening.. In view
of these circunislane, T
shall try to make my own report as brief as
possible.
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Federal Reserve Bank of St. Louis
•
CONSTRUCTIVE CUSTOMER RELATIONS CLINIC
chip on
improve their service. Now as to the kicker who has a permanent
crowd
his shoulder. Verily, like the poor, he is always with us. In any
travelers,
of human beings, whether they are bank depositors, or railroad
percentage
a
certain
or post office patrons, or department store customers,
servants
of them are bound to be cranks, and those public or semi-public
in
whose job it is to meet the public, must develop the patience of Job
calmly and sweetly handling those folks who insist on being "snubbed" and
"abused."
For example, here comes a party from out of town who is an absolute
stranger, but who wants some money and has presented his personal check
on "Timbuctoo" to one of the tellers. The stranger is politely informed that
he will have to be indentified, and so he comes tearing up to the officers'
and
platform with the very definite complaint that he has been insulted:
in
when the officer to whom he has appealed asks him if he knows anybody
town who can properly establish his identity, his indignation increases.
can
he
Horrors! When he is told very courteously but firmly that before
obtain cash for his $300 check on a distant city be must satisfy the bank
that be is actually the person that he claims to be, and that his check is
good, he roars out of the office with the air of one swearing eternal vengeance on so boneheaded an institution.
It is Saturday. Time is 11:40. One hundred people, most of whom
just as well could have come in earlier in the day, are lined up at the tellers'
windows, and there are three emergency windows opened in addition to the
dozen normally on the job. Most of the people accept the situation
philosophically, but here and there an impatient crank raises a holler about
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Federal Reserve Bank of St. Louis
81
the "rotten service." He threatens to withdraw his account and take it to
some bank that can wait on him without "this interminable delay," although he doesn't realize that practically every bank in America has the
same jam just before closing time, simply because so many of our mutual
friends of the human family put off their banking until the last minute.
Here's a man who wants a loan. Ile isn't entitled to it and when he is
turned down he kicks to high Heaven and declares that the banker is hardboiled. It would be well if the average bank customer who has had his
application for a loan declined could keep quiet about it, because, as a
general rule, he is merely advertising to the world the fact that his credit
is not so "hot."
"Why did you throw out my check?" says a loud-voiced chap who
comes belligerently up to an officer's desk.
"Let's look into it," says the officer.
When the information is obtained it develops that the customer had failed
to make a certain deposit which he thought he had made. But does he
apologize? Well, not so often as to be embarrassing.
The bank makes mistakes, and is genuinely sorry for them, for mistakes
cause the bank to lose business. Consequently, banks constantly are endeavoring to maintain perfect service. The customer also makes mistakes.
It is the permanent job of the banker to maintain the most cordial relations
with his customers by ironing out these differences, most of which, as we
well know, are caused by avoidable misunderstandings. It will be the purpose of this program to-night to rehearse tested methods which at least
will assist in developing this desirable condition.
1
Convention--Nov. 1935
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA
STATE SECRETARIES SECTION
AMERICAN BANKERS ASSOCIATION
«
Annual Meeting, Held at New Orleans, La., Nov. 12 1935
INDEX TO STATE SECRETARIES SECTION
Address of President George A. Starring
Page 82
Report of Committee on Legislation, by Ray O. Brundage__ _
82
Report of Committee on Bank Management, by H.B. Crandall
84
Report of Public Education Committee, by David M. Auch _
84
Report of Committee on Insurance and Protection, by
William Duncan, Jr
84
Resolution Adopted—Discount on Robbery Premiums Covering Cash and Securities Kept Under Time Lock
Page 85
Report of Committee on Nominations
85
Discussion on "Effective Methods Dealing with Legislatures"—
"Contact with.Legislators,' by Eugene P. Gum
86
State Asaociation Clinics, by Martin A Graettinger
86
Address of President George A. Starring, Executive
Manager South Dakota Bankers Association,
Huron, S. D.
it is doubtful whether there has ever been closer co-operation between
With the changing conditions affecting banking, including much Government competition, resulting in reduced income, it will be increasingly important for bankers' associations to continue and to enlarge their programs
pertaining to bank management. This subject is, of course, very close to
the Bank Management Committee of this Section. Association Secretaries
have been active in promoting distribution of bank management material
prepared by the American Bankers Association. Some State associations
conduct surveys to ascertain the banking practices in their States and the
information received therefrrom is valuable for committee reference. Other
associations have been successful with bank management clinics held in
connection with their group meetings. Early this year, the Secretary of
this Section wrote all association Secretaries asking their co-operation in
the distribution of a study of the Bank Management Commission under the
title, "Manual for Determining per Item Costs."
The matter of protection against burglary, robbery and other types of
bank crime we will continue to have with us. The cost of insurance is one
which vitally concerns a majority of the associations, some of which have
experimented with plans for reducting insurance costs in dvariety of ways.
Co-operation of the United States Department of Justice, of the protective
department of the American Bankers Association and the State departments of justice vrill continue to help minimize losses; but, as most Secretaries have come to understand it, the real problem is to convince bankers
that the first and most effective step in controlling crime against them is
to reduce their cash exposure and to provide adequate protection within
their own banks. Our Committee on Insurance and Protection has had
this subject under scrutiny and its report and recommendations are anticipated with lively interest.
The members of this Section have had a busy year, not only with their
local legislative problems, but also in co-operating with the American
Bankers Association during the last session of Congress. That the Banking
Act of 1935 stayed so largely within the bounds of reason was due
in part to that fine co-operation which was gladly given. For the splendid
manner with which it handled its legislative program, the American Bankers Association has our appreciation and thanks. We are glad that some
of our State associations, singly or in groups, as in the Central States Conference, were able to have been of direct assistance in Washington. Each
State Secretary has the somewhat heavy task of watching and guiding
legislation in his own State, and the fact that legislatures have not taken
more advantage of their opportunity to the discomfiture of banking is a
tribute in part to the value of State association activity. The report of our
Committee on Legislation will cover this entire subject in detail and we
hope it will offer some suggestions fn. our guidance.
The State Secretaries Section desires to be of the greatest possible assistance in the whole forward-looking program of the American Bankers Aasociation and we renew our pledge of co-operation with that in view.
I deeply appreciate the splendid co-operation which has been extended
by Secretary &almonds and other members of the staff of the American
Bankers Association, by members of the Board of Control, by the Chairmen
of Committees, and by all other Secretaries who are members of this Section.
Respectfully submitted,
GEORGE A. STARRINCI, President.
the members of this Section and other Divisions and Sections of the American Bankers Association that during the current year, with special reference
to national legislation and public education. Since, for the most part,
the same banks are not only members of the American Bankers Association
but also of our State associations, the interests of all are the same. The
past year has seen an excellent demonstration of effective co-ordination
of efforts in behalf of banking and in behalf of the general public.
The work of the State Secretaries Section has been performed mostly
through the following committees:
1. Banking Education—Theodore P. Cramer Jr., Chairman; Secretary
Oregon Bankers Association.
2. Banking Managemtnt—H. B. Crandall, Chairman; Secretary Utah
Bankers Association.
3. Insurance and Protection--William Duncan Jr., Chairman; Secretary
Minnesota Bankers Association.
4. Legislation—Ray O. 13rundage, Chairman; Executive Manager Michigan Bankers Association.
5. Public Education—David M. Auch, Chairman; Secretary Ohio Bankers Association.
The Chairmen of these committees will present their reports at this
meeting.
Last year,President J. W.Brislawn appointed a special committee known
as "Bankers Association Management," W. Gordon Brown, Executive
Manager New York State Bankers Association, Chairman. This committee sent its report to all Secretaries a few weeks ago, in a 73-page outline of
a "Survey of State Bankers' Association Management." Chairman Brown,
Secretary Frank W. Simmonds and Miss Mary P. McLean, American
Bankers Association Librarian, deserve a vote of thanks for the valuable
information so clearly brought forth in that compilation which undoubtedly
has already become the Secretaries' bible. A revision would be in order
in about five more years.
During the fiscal year several new names have been added to the list of
State Association Secretaries. Donald W. Larson has become the first
permanent Secretary of the District of Columbia Bankers Association.
W. B. Machado, Assistant Vice-President Hibernia National Bank, New
Orleans, Louisiana, has succeeded F. W. Kerksieck as Secretary of the
Louisiana Bankers Association. John S. Gwin bas succeeded Matthew
Cushing as Executive Secretary of the Massachusetts Bankers Association.
Elmer D. Nickerson, Assistant Sectetary Industrial Trust Co., Providence,
R. I., has succeeded Robert W. Upham as Secretary of the Rhode Island
Bankers Association. William E. Martin has succeeded J. C. Goodwill
as Secretary of the South Carolina Bankers Association. We welcome these
gentlemen and hope they will find their contacts with this group pleasant
and profitable.
In my report before this Section last spring,a query was expressed whether
there should not be a better and more clear-cut definition of the functions of
this Section's committees on Banking Education and on Public Education,
and the suggestion was made that this matter be considered at this fall
session.
There never was a time when it was more important that bankers, individually as well as collectively through their associations, carry on an
intelligent program of education within the banks and of public relations
with their customers, so that not only the public may be informed of the
true functions of banking, but that it may have the truth concerning the
valiant part which banks have played in the development of this country,
and also of the fact that, in spite of popular opinion to the contrary, the
record of the banks during the depression has been exceptionally good.
These subjects have been given due consideration during ghe past year by
the proper committees. Two circular letters were mailed by the Secretary's
office to all Association Secretaries urging their co-operation in the distribution of "Constructive Customer Relations" published by the Public Education Commission. A special half price of 50 cents was offered on group
orders taken through State Association'offices. The records show that the
Secretaries of each of the following States have sent in orders for one hundred
or more copies: District of Columbia, Illinois, Indiana, Iowa, Kansas,
Massachusetts, Michigan, Minnesota, Missouri, New Jersey. New York,
Ohio, Pennsylvania, South Dakota, Virginia, Washington and Wisconsin.
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Federal Reserve Bank of St. Louis
Report of Committee on Legislation by Chairman
Ray O. Brundage, Executive Manager Michigan
Bankers Association, Lansing, Mich.
Your Committee on Legislation has arrived at the time when a report
of their activities is to be made to you. Surely, the members of this
Committee have been active in their own State as well as active in the field
of Federal bank legislation. This is also true of the Legislative Committee of the Central Stateet Conference.
Your Committee did not submit a written report at the mid-year meeting
of the A. B. A. at Augusta, Ga. It was thought best by Chairman
Starring, because we were right in the middle of the activities on Ftxleral
bank legislation and because of the fact that nothing definite had been
arrived at at that time, no report was made. It may have appeared to
You that this Legislative Committee was just marking time and doing
nothing, but in December 1931 it was decided by President Starring and
the Chairman of this Committee that there are thins it is better not to
make too much noise in a legislative way. We believe that the activities
- 19,9
•
STATE SECRETARIES SECTION
/
for or against the Federal Banking Act of 1935 could be better handled
through committees of the State Secretaries Section. the Central States'
Conference and the A. B. A. rather than having each State Bankers Association turn the heat on in a pernicious sort of a way.
The writer of this report has been cautioned recently not to make this
report too long, that secretaries get uneasy, &c.-so your Committee
will briefly touch the high spots of interesting items in the various State
Associations and close with a short comment on the Federal Banking
Act of 1935.
We will take these in order as they have been presented to our office.
We call your attention first to the report of the Illinois Bankers Association-the following bills of interest to banks have been passed and
have become laws.
H. B. 29, re-enacts the statute permitting the vraiving of public funds.
H. B. 140, amends Section 1 of the Settlement of Small Estates Act
by extending throughout the State the privilege of payment of debts to
decedents estates without probate where the estate does not exceed $500.
H. 13. 563, provides that warrants issued by school districts shall be
payable in the serial order in which tney are issued and permits issuing
sum warrants for the payment of matured principal or interest due on bonds.
S. B. 225, amends the State Securities Act by, among other things,
removing the requirements that banks be licensed as agents or brokers
in the purchase and sale of securities for customers.
S. B. 569, amends Act concerning investments by trustees; pernaits
trustees to exchange securities for refunding issues.
The Missouri Bankers Association reports: Bills passed and signed
as follows:
S. 13. 47, permitting cities of the second class to accept bonds of the
State and United States as security for public deposits.
S. 13. 88. giving a county the right to accept its bonds as security for
its funds on deposit in banks.
S. 13. 122. providing procedure by which a trust company may become
a State bank.
S. 13. 154, providing for pro rata subrogation of rights to the FDIC
by depositors of closed banks. (This bill was not signed by the Governor
immediately, in order that the authorities might ascertain whether it will
conflict with the 1935 Banking Act.)
H.13. 81,authorizing banks to make loans under the Federal Housing Act.
H. 13. 88, extending the time allowed restricted banks.
H. B. 143. requiring companies writing fidelity bonds for banks be
authorized to do business in Missouri.
II. 13. 225, increasing salary of the Deputy Commissioner of Finance
from $3.000 to $4,000. (This looks like a good break for some good
fellow in MISSOuri.)
11. 13. 227, exempting from security the first $5,000 of public funds
on deposit with any bank that is a member of the FDIC.
H. 13. 230-231, eliminating stockholders examination if bank or trust
company be member of the FDIC.
H. 13. 250, 251, 252. 253, increase the surplus requirements of banks
and trust companies from 20% to 40% of capital.
H. 13. 433-440, providing for loans in excess of legal limit to firms where
N
Government agency has agreed to purchase such loans.
According to the report received by the Committee there were many
bills presented to the Missouri Legislature that failed to pass.
Pennsylvania Bankers Aesociation reports the passage of an Act which
establishes a Banking Board to act in an advisory capacity with the Secretary of Banking, particularly with regard to the establishment of branches
anywhere in the State not extending beyond counties and contiguous
counties, and to the enforcement of statutory baking laws where the
executive officers of State-chartered banks decline to conform to the
instructions of the Banking Department. (To your Committee this
legislation looks like a big step in the right direction.)
Iowa Bankers Association reports:
H. B. 106, which reduces the "legal" rate of interest from 6% to 4%
and the "contract" rate of interest from 8% to 7%. It likewise reduces
the "legal" rate of interest on judgments and decrees from 6% to 5% and
the "contract" rate from 8% to 7%.
H. B. 472, provided whenever a bank operated within the State of
Iowa has been heretofore or shall hereafter be closed and placed in the
hands of a receiver, the I3oard of Supervisors shall remit all unpaid taxes
on the capital stock of said bank.
S. 13. 321, sets up two additional police radio broadcasting stations.
(This is certainly a step forward and tne State of Iowa is to be congratulated.)
S. B.394, pertnits banks in Iowa to pay dividends on "preferred stock."
S. 13. 396, permits banks to consider "preferred stock' as a part of their
required minimum capital.
H. 13. 84, extends from March 1 1935 to March 1 1937 the redemption
period from the sale under foreclosure of real estate where deeds of conveyance have not already passed.
(Iowa had several other good banking measures introduced in one
House or the other. but because of the enormous amount of business they
were tabled and not given consideration by the State Legislature.)
Kansas Bankers Association reports:
II. 13. 299, re-enacts the Act more familiarly known as the Moratorium
Act of 1934 (an emergency measure) extending the period of redemption
from judicial sales in foreclosure proceedings, however, in no case beyond
Jan. 15 1937.
assoS. 13. 155, authorizes banks, trust companies, building and loan
Housing
ciations to take full advantage of items set forth under the National
mortgages
by
secured
notes
or
bonds
in
funds
Act and to invest their
insured thereunder, and in the obligations of national mortgage associations or similar credit institutions.
II. 13. 623, County Treasurers to refund any and all penalties, interests,
costs and expenses paid by any person, firm or corporation, who between
Jan. 1 1935 and Feb. 25 1935 redeemed land previously sold for taxes.
S. 13. 446, the State of Kansas shall be liable to the banks for the safe
return of any securities placed in the State Treasury pursuant to this Act.
H. B. 362, provides when a bank or trust company has been closed for
one year, that they shall resume business under the old charter until
application shall have been made therefor to the Bank Commissioner.
S. 13. 201, extends the time for four years beyond the original five-year
period in which a bank may hold other real estate.
Wisconsin Bankers Association reports:
Section 221.01 provides the aggregate amount of the capital stock
any bank hereafter organized shall not be less than 4130,000 in towns,
villages or cities having 5,000 inhabitants or leas; and shall not be less than
20,000
$75.000 in any city or village having more than 5,000 and less than having
inhabitants; and shall not be less than $100,000 in any city or village
20,000 or more and less than 200.000 inhabitants; and shall not be less
than $200,000 in any city having a population of 200,000 inhabitants or
more. according to the last official census.
Section 221.42 eliminates double liability on bank stock when said State
bank IS insured in FDIC.
par
Every new bank director is required to OWII a minimum of $500
deposits
value of stock. They also provided after 20 years unclaimed bank to make
power
have
Deposits
of
Board
shall escheat to the State, and the
and enforce rules and reg'ulations necessary and proper to. the full and
the
complete performance of its functions; require any public depository,
as it
Banking Commission, or segregated trust to furnish information funds;
may request; designate public depositories for deposit of State
prescribe rules and regulations fixing the requirements for qualification
of banks as public depositories, and fix the rate or payment into the State
deposit fund.
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Federal Reserve Bank of St. Louis
83
Spction 220.04, the Banking Commission with the approval of the
Banking Review Board, may classify the several bank.s. savings banks
and trust company banks and may establish uniform rules for classification
fixing reasonable charges to be collected by each bank, saving bank or
trust company bank within such classification for banking services rendered.
Michigan Bankers Association reports:
That two of the proposed Acts were signed by the Governor permitting
full co-operation by Michigan banks in the Federal Housing Act in all
its forms.
An Act which extends the moratorium on the foreclosure or specific
performance of land contracts until March 1 1937.
An Act combining the Michigan Securities Commission and the Corporation Division of the office of the Secretary of the State.
An Act excluding from the provisions of the Land Contract Moratorium
Act any land contract executed after Feb. 14 1933.
An Act which adds five years to the time in which other real estate
may be held by banks.
each bank out
An Act which provides for the building of the surplus by bank.
of the earnings until such surplus equals the capital of the
up to the
funds
public
securing
An Act eliminating the necessity of
amount covered by FDIC.
as a legal
Day
Armistice
of
status
the
defines
Two Acts, one of which
and not
holiday, and the other making Columbus I)ay a public holiday
a legal holiday for banks in 'Michigan.
by the
owned
corporation
any
of
An Act exempting the capital stock
United States or any agency thereof from the annual corporation privilege
fee.
An Act eliminating the double liability on bank stock for State banks
as of July 1 1937.
An Act creating a commission for the codification of all laws regarding
the banks, trust companies. &c. This Act appropriates a fund to carry
on such a codification.
The Ohio Bankers Association reports:
The passage of a law permitting commercial and(or) saving banks to
engage in "special plan" or industrial banking.
Ohio Legislature extended the so-called "mortgage moratorium" to
April 1 1937. They also passed a bill permitting banks to pay interest
on deposits of municipal universities. also a bill permitting banks holding
relationship of affiliate to another bank on Jan. 1 1935 to convert it into
branch if located in contiguous county.
Your Committee is informed that the Ohio Bankers Association did
some good work in defeating certain bills, which would have been a detriment to the bank and trust people of their State.
.North Dakota Bankers Association reports quite an improvement in their
tax program and in the extension of time for the redemption of tax sales.
Also the usual legislation authorizing banks to co-operate on Federal
housing.
Rhode Island Bankers Association reports they have a mortgage moratorium Act, also a bill permitting mutual savings banks to write life insurance. We understand a bill was presented by the Mutual Savings Banks
Association which would reduce interest rates on new mortgages to 5%.
and endeavor to reduce rates of interest on all existing mortgages to 5%.
We understand this bill was killed through the efforts of the Rhode Island
Bankers Association.
Massachusetts Bankers Association holds .the medal, we think, due to
the fact there were 100 bills introduced in their Legislature pertaining to
banking and 150 bills pertaining to taxation; we are not informed as to
how many of them really passed.
Oregon Bankers Association reports:
S. B. 11, which provided for a State-owned and operated Bank of
Oregon. The bill received two votes when it came up for pssaage in the
Senate.
S. 13. 136, increases loans against real estate from 50% to 60% of the
cash market value.
S. B. 28, providing for partial payment of taxes failed to pass. This
same item appeared in many State legislative programs.
S. B. 315, which increased fee for protesting bank checks to $1.00.
Indiana Bankers Association reports:
The passage of an Act, which corrected many of the items in the 1933
legislation and modernized their State supervisory law. This certainly
was a step in the right direction.
They defeated two bilis, which sought to prohibit banks and trust
companies from serving fidueiary clients in many ways.
They also succeeded in their attempt to amend the Administration's
bill to set up more strict control over the sectirities business in their State.
California Bankers Association must have been ses-sick when they looked
at the enormous amount of bills presented to their Legislature--3,665
bills. of which approximately 160 affected banking directly or indirectly•
They apparently passed the bills amending the Public Deposit Acts as
well as the usual moratorium measures seen in other reports. We would
like to hear from California relative to what happened to their bills relating to the practice of law. Michigan passed the intergated bar bill
which prohibits organizations from furnishing legal services to members
when those items do not concern the fraternity at large, also makes each
member of the legal fraternity register with the State Supreme Court.
Washington Bankers Association reports they passed the usual bills, in
order that the bankers of that State may co-operate with the Federal
Government in the Federal Housing Act and the FDIC. Also a bill
which permits the State Treasurer to deposit funds in branch banks not
to exceed the capital and sutplus of the parent bank, and a bill which
permits certain saviags banks to pension their super-annuated and disabled
employees. This State had many bills introduced-good, bad and indifferent-which failed to pass apparently on account of the good work done
by the State Association.
Arkansas Bankers Association reports:
Passed a bill which provided for the setting up of State, county, and city
depository boards, which shall have the authority to deposit public funds
on an unsecured basis in all banks reported by the Banking Commissioner
as being solvent.
window
Also an Act wag passed to permit a bank to maintain a tellers'facilities
in towns without banking facilities, until such time as banking
are supplied.
reduced
South Dakota Bankers Association reports their State Legislature
year instead
the required examination of State banks to once each calendar
of twice. This State also permits banks to open offices in bankless towns,
also
but does not authorize branch banking. They changed their laws
to require fidelity bonds on bank officers instead of surety company bonds.
banks
State
permits
State
their
reports
New Mexico Bankers Association
to have agencies and they are repealing the double liability on bank stock.
Georgia Bankers Association reports amendment to the banking laws
reducing the minimum capital requirements for a State bank in towns
of a
under 2,000 from $25,000 to $15.000, but denying the establishing
new or competitive bank in towns already served either by a private
or incorporated bank.
Alabama Bankers Association reports their State reduced the legal rate
of interest as being 6% instead of 8%, and they passed a bill permitting
branch banking in certain counties.
41
84
BANKERS' CONVENTION.
Nebraska Bankers Association reports the repeal of the so-called "frozen
surplus law," and says their State enacted another law lowering stockholders' requirements on directors of State banks. Also a law which
hold stockholders liable until the creditors are paid, and a law limiting
salaries banks may pay, also reducing capital requirements. A bill was
also passed allowing Superintendent of Banks to hold bank stock.
In a few instances we have been notified by bankers associations that
their States do not have a session of Legislature in 1935 and in one-half
dozen other instances we are informed the State Association had no Legislative program. Practically all States have covered the FDIC situation
and Federal Housing Act in their legislative programs. Most every State
had a taxation program, but it would be too much of a task to enumerate
the items in this report, which brings us down to the 1935 Banking Act.
I am sure this Committee wants to give each State Association credit for
being of more or less help to your Legislative Committee and to the Legislative Committee of the A. B. A. and the Central States Conference.
We want to go on record at this time in paying tribute to Mr. Martin A.
Graettinger and his Committee of the Central States Conference, that
Committee, perhaps, was as active as any in helping to produce the right
kind of information in the 1935 Banking Act. A meeting was held Jan. 19
1935 in Chicago of the officers of the 14 States coveted by this Central
States Conference, and again late in March at French Lick Springs, when
four representatives of the A. B. A. were present and met with this group
and discussed the benefits of the Act quite in detail. Your Committee
feels as though the various bankers associations, their Presidents and Secretaries did all they could to bring about the right conclusion of this Act.
We had at all times the support and advice of the National Association of
Supervisors of State Banks through the President, Mr. R. E. Reichert,
Banking Conunissioner of Michigan. This Act has been discussed so
thoroughly by each Association to and vrith its membership that we are
not going into detail as to the results.
It has been a pleasure to have served this Secretaries Section of the
A. B. A. and we trust the report will be of some benefit to those attending
this meeting.
Respectfully submitted,
Ray O. Brundage, Chairman
Mrs. E. W. Walker
Joseph W. Brislawn
C. C. Wattam
Armitt H. Coate
Chas. F. Zimmerman
Thomas J. Groom
Report of Committee on Bank Management, by H. B.
Crandall, Vice-President First State Bank, Salina,
Utah
First, I want you to know that I do not like to hear long reports, and
second, I want to inform you that I am not going to give one here.
The subject of bank management takes in a lot of territory, and covers
practically everything pertaining to banking: therefore, any one could talk
on and on forever and never get through; that is why I am going to make
my report just as brief as possible, because I know that all committees of
our Association, even though they have some other name, are really
Bank Management committees.
The first half of our year throughout the country was devoted largely to
legislative matters. this being due to the fact that the State Legislatures
throughout the country were in session. To work with these Legislatures
seemed to be the proper thing to do in bank management.
After Congress adjourned. the NRA was discarded. One of the big
problems of the Bank Management Committee and the State Associations
tiwoughout the country was to keep the codes which had been installed
under the NRA, and continue the service charges that had been installed.
This has been, in my opinion, the most profitable thing in bank management that has been done in many years.
Your Bank Managtment Committee has been very busy during all the
year.
I am glad to report that practically every bank in the 'United States is a
member of some regional clearing house association and is operating under
a schedule of service charges.
Your committee has been In constant communication with every State
Association in the country, and I take this opportunity to thank you for
the assistance given us. In addition, we have been in constant communication with many individual banks and clearing house associatians.
The following are the projects of better bank management being undertaken by the different State Associations throughout the United States:
Establishment and continuance of regional clearing house associations.
Strict obeyance of opening and closing hours.
Observance of all holidays.
Keeping every bank a member of a regional clearing house association,
and having all rules observed.
Having all banks in regional clearing house association co-operate with
each other in the matter of credit information, service charges, &c.
Keeping interest rates to a profitable base so that a bank may build up
its surplus to meet bad loans, or unfortunate investments.
Constructive customer relations.
Frequent bank management clinics.
Discussion of bank costs.
Classification of accounts, and audit of accounts to determine their value
to a bank.
Frequent officers' and employees' meetings.
Standardization of bank forms.
Reduction of interest on sa,vings and time deposits to a profitable basis.
Elimination or curtailment of Postal Savings System.
Early retirement of all preferred stock and capital debentures issued by
banks to the Reconstruction Finance Corporation.
Curtailment of Government lending agencies in lines that can be handled
by banks.
Respectfully submitted.
Bank Management Committee,
State Secretaries Section, A B. A.
Warren K. Ayers,
George B. Power,
Wall G. Coapman,
Harry G. Smith,
Theodore P. Cramer, Jr.,
II. B. Crandall, Chairman.
'Martin A. Graettinger,
Report of Public Education Committee, by David M.
Auch, Secretary Ohio Bankers Association, Columbus, Ohio
Public education and customer relations work among State Bankers
Associations has increased to a gratifying extent during the past year.
This was indicated by a survey made last spring by the Public Education
Committee of the State Secretaries Section and confirmed by a more recent
check of the activities being conducted in the various States.
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Federal Reserve Bank of St. Louis
As a matter of fact, it was scarcely necessary to make inquiry as to the
progress being made, so plain was the evidence of enhanced interest in this
important phase of Association effort. On every hand are to be seen
indications of continuation and enlargement, of previously initiated programs
and of the starting of educational projects by Associations which had been
inactive in this respect.
Possibly the most significant development of the year has been the
generally reported realization by bankers of the vital importance of giving
the public at least the basic facts of the banking business. Having recovered in part from the shocks attendant upon depression years, bank
officers are recognizing the important part which public misunderstanding
played in their difficulties. and are co-operating to an increasing degree in
applying the remedy—education of the public in the fundamentals of banking. I believe that I bespeak the unanimous opinion of your Committee
when I say that under present conditions, few things seem more essential
to the future of our business than the work under discussion.
The progress being made is traceable to a very substantial extent to the
effective work done by the Public Education Commission of the American
Bankers Association. The fact that 22,000 of the customer relations
pamphlets offered by our national organization were sold to more than
5,000 banks in all sections of the country fur_tished ample proof of the
acceptance of the customer relations phase of the program in an enthusiastic
manner, while widespread use of suggested material for public addresses
aided most materially in the advancement of the general program of informing the public. Also, there can be no question but that the customer
Relations Clinic of year ago had the broadest kind of effect tnroughout the
country.
And lastly, full recognition must be give:. to the value of the advertising
work done by our parent organization. It does not seem possible that better
newspaper advertising material than that made available through the
advertising department of the Ametican Bankets Association could be
obtained from any other source at many times the cost. Association
secretaries who have not familiarized themselves with this material and
ged its use among their members, are urged to do so immediately.
There is no indication of broad changes in State Association educational
programs during the year. Public addresses by bankers. customer relations
conferences of officers and employees of individual banks or groups of
banks, distribution of printed matter to the public and newspaper publicity
and advertising, continued to be the main features of the programs conducted in the various States.
Perhaps the most effective method of advancing the cause of public
education has been its introduction as a major subject of discussion and
consideration at State-wide, district and local meetings of bankers. At
least several States have featured various phases of educational work,
particularly customer relations, at numerous meetings. The success of
Customer Relations Clinics will be described in detail at a subsequent
point in this meeting.
One development of recent months should be of much importance during
the coming year. That is the greatly increased interest of members of the
Financial Advertisers Association in public education as conducted by State
bankers associations. At the reccut convention of this organization of
bank men, a paper prepared by Mr. Avery G. Clinger, Chairman of the
Committee on Education and Public Relations of the Ohio Bankers Association, attracted much attention. Mr. Clinger's suggestion that these advertising men not only intet est themselves in the dissemination of banking
information, but that they work with State associations in enlarging existing
programs or planning new ones, was extremely well received. Valuable aid
should be available from F. A. A. members in every State. It is felt that
these men who are well-trained in public relations, should be brought
actively into the public education work of every State association.
Due to the fact that members are so widely separated geographically.
it has been impossible to hold a meeting of the Committee during the
year, nor have we functioned as a unit to any degree. However, both the
Chairman and members of the Committee have answered numerous inquiries and have advised with others in regard to plans and methods of
procedure. The general program, no doubt, has been stimulated to some
extent by this work.
Report of Committee on Insurance and Protection, by
Chairman William Duncan Jr., Secretary Minnesota Bankers Association, Minneapolis, Minn.
I feel, in view of the situation confronting us, pertaining to bank insurance and protection, that there was very.little that the Committee could
do this past year. So what I have briefly stated in this report are some
things that I have personally in mind that should be of particular interest
to you Secretaries who are thinking about the same things, undoubtedly.
that I am thinking about, and that is the matter of readjustment of insurance rates. The matter of Insurance and l'rotection is one of vital concern
to every bank in the cotuttry and for a number of years has been very
thoroughly discussed at the annual conventions of the A. B. A.and the conventions of the various States.
The Insurance Committee of the A. B. A., through the maintenance of
an Insurance Department. has given considerable thought and study to
the rate structure affecting burglary, holdup and fidelity coverage, and to
a great extent has been responsible for standardizing various forms of
policies with the thought that banks should be protected under approved
forms that would eliminate litigation in the event of loss.
This work has been very well done and the banking fraternity appreciates the efficient way in which it has been handled by Mr. Baum and his
associate,s. We are not unmindful of the fact that the Insurance Committee
of the Association has been of great assistance to Mr. Baum's department
in this accomplishment.
There has been a diversity of opinion developed in recent years as to
whether or not the rates charged by companies are equitable and fair and
whether they have been scientifically computed. This is a question that
is always open to discussion and one that requires a great deal of study and
thought in order that an unbiased opinion may be arrived at.
Rates have been based upon loss experienee,s and there is a question in
the minds of the bankers as to whether or not it is a fair basis on which to
formulate basic rates. It is quite apparent that no consideration has been
given to any great extent to the class of risks and the various methods
under which protective devices are handled by the individual bank to the
extent that the prudent and cautious banker is penalized under the present
rating system for the negligence displayed by the banker who does not
take the necessary precautions to properly protect the cash and securities
of his institution.
_k_
•
NATIONA.L BANK DIVISION.
offered by the banks. Increases in deposits, ordinarily symbolizing a
healthier business tone, ha 4,ei,itnot been accompanied by an increasing demand
for loans, due no doubt to e fact that the unprecedented increase in bank
deposits is the direct result of vast governmental operations. This is true
in spite of the variety of methods banks have adopted to stimulate sound
credit extensions, but to little avail. There is not a single member of
this Division which would not welcome the opportunity to make further
advances for worthy purposes, and thus give that additional necessary
impetus to business.
This disconcerting, outlook is chargeable in a considerable degree to the
encroachment of our Government into the field of money lending, and to
its efforts in directly contesting for banking business. To my mind this is
neither a direct nor an incidental function of Government. It owes no
duty to perform for citizens that which they can do for themselves, and it
should not be so engaged. Rather, its responsibility, generally speaking,
is to co-ordinate, to protect and to preserve the rights and liberties of its
people.
In enunciating this principle, however, I want to keep in mind a proper
conception of the desperateness of the period through which we have
passed. I want to avoid judging too harshly the steps taken to stem the
tide of the decline. I concede that emergcceicies arise, but such heroic measpursued for the duration of the
ures as are taken to combat them should
crisis only. As its end approaches there should be a firm stand against
the regretful tendency to make permanent /3 ,4e devices created for temporary
use. All of us should acclaim freely the v tues of whatever agencies and
whatever means have contributed to our economic betterment. It cannot
be doubted that the key to complete recover is encouragement to private
enterprise which, after all, is the acknowled,ge foundation of our country's
greatness.
Retarding Forces
Happily, in some quarters it is becoming unders d gradually that much
of the credit for such improvements as we have enj ed is due to the consistent and wholehearted and co-operative efforts pu forth by banka. No
longer do we hear their stability questioned. Publi confidence has been
completely re-established. Recoe-,nition of the value an the indispensability
of privately-conducted banking facilities in each locality 'a fully developed
and it cannot be denied that there is offered to the public banking service
never before excelled and entirely adequate to meet cu ent and future
needs. In short, those features of banking with which the ublic is most
familiar, and by which it gauges its approval or disapproval, nquestionably
are all that could be asked. We have succeeded abundantly i meeting all
the requirements of those who deal with banks, but have not rovided so
well for ourselves.
\
Banks still are confronted with drastically low earnings, and /khe future
offers no assurance of any appreciable early betterment. In contriet to the
rise in pricea of commodities interest rates have continued to \decline.
Borrowings and new securities issues are at low ebb, though we fik that
general business has improved. Some lines may be considered as ope‘ating
on practically a normal basis. Others face the immediate future wall an
apparently new-born confidence, but over all there still hangs a pall of
hesitation which obviously does not rest wholly upon whim or caprice.
It is fed by something more substantial and more threatening, and m
be corrected before entirely normal business conditions can be restored.
There is quite a general agreement that we are in the extraordinar
position of knowing what this retarding. force is, but yet being unable t,o
uproot it. This wavering and uncertain trend, and the absence of greater
force in the upward movement, undoubtedly is the result of lack of full
confidence in the future. There is a pronounced fear of further exercise
of Federal control over private business, and a wholesome apprehension over
the effect of reckless extravagance in the expenditure of public funds.
This fear, intensified by the addition of the heavier taxes levied by the
recent session of Congress, raises still higher the barrier to a normal business
volume, and retards proportionately the progress of the forward movement.
The cumulative effect of a series of such discouragements constitutes a
powerful retarding influence in a country where private initiative and
private capital are the bulwark of strength and prosperity.
In the light of these facts and the experiences they have unfolded, it
seems that a workable formula would not be imPossible or even difficult to
produce. The simple assurance that these sinister conditions will not be
permitted to develop further, and that they will be corrected as rapidly
as possible, would erase all of the timidity and create a deg-ree of confidence which almost magically would regenerate the forces which are
clamoring for expression in the form of progTess.
The Outlook
I have spoken of someIthings which appear to be clouding, the horizon
and have expressed disapp oval of them. But I have not permitted my hope
to be destroyed, and I do not despair. Fortunately, the set-back we
received was in the nature of a negative attack, rather than a positive one.
Its violence waa visited upon the things growing out of the elements which
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Federal Reserve Bank of St. Louis
49
make our country great, and not upon those elements themselves. The
spark of business improvement, which sputtered and glowed and then almost
disappeared, has been rekindled, and despite its slow and irregular spread,
and in the face of obstacles which seem to exist without convincing excuse,
the outlook is moderately bright, and there is justification for an increasingly aggressive attitude.
The history of industry in America shows a continuing growth which
never has been more than temporarily retarded by depressions. Never has
it failed to respond to the workings of the economic forces which should
stimulate recovery, and it is unthinkable that this latest experience has
destroyed the influence of these agencies. I have faith that the virility and
the stamina of our people, with reasonable freedom of action, will re-assert
their independence and their individualism, and upon their own responsibility forge a business revival far more lastin,g than any governmental
agency could create.
The sustaining force of the American pattern of business and industrial
life has been the diffusion of the responsibility for its conduct. The drift
away from that principle in recent years may have diverted attention from
it temporarily, but I cannot believe that reliance on that philosophy has
been destroyed. Sly confidence in the force of American determination, and
my hope for a continued broadening of the base of the current business
upturn give me courage at least to believe in the possible approach of a
period so filled with compensations for individual enterprise that the
expanded weight of governmental control will be supplanted permanently
by the maximum of a wisely-conducted private management.
[Incidentally, Acting Chairman Allendoerfer had the following to say
following the submission of Mr. Lord's address:
Ladies and gentlemen, I don't know how many of you know that President
Lora has for some months been Quite 111. I know you will rejoice in the fact that
he la with us to-day: that he was able to travel that long way from Olympia down
here to bring us his message, so clear-cut, so comforting and that his presence
with us adds so much to our meeting.]
Committee Report for Change in By-Laws
Mr. Augustine: Mr. Chairman, I present for the action
of this meeting the following substitute for the first by-law :
"When a member of the American Bankers Association shall have become
an associate member of this Division under Section I of Article X of the
constitution of the American Bankers Association, its officers, directors
trustees, managers or partners shall have equal power to hold office or
committee membership with those of banks becoming regular members
under such Section, including the right to vote as officer or committemember."
I move the adoption.
Chairman Allendoerfer: That is in harmony with amended by-laws in
all of the Divisions in order that members who are interested in the functional
activities of other Divisions may fully participate in those, even to the
extent of holding office in those Divisions, even though their membership
is primarily in the State or National or whatever their form of charter
may be.
[l'he motion was duly seconded, put to a vote and carried.]
Report of Committee on Nominations
Mr. Wharton: Mr. Chairman, Ladies and Gentlemen:
he Committee begs to report the following names for
omination:
',For President of the Division—Carl W. Allendoerfer, Executive Vice
Pirsident First National Bank, Kansas City, Mo.
Por Vice-President--William F. Augustine, Vice-President National
Shawmut Bank, Boston, Maas.
For member of Executive Committee, to serve three years—repregenting
the First Federal Reserve District, James W. Knox, President, First National Bank, Hartford, Conn.
Representing the Eight Federal Reserve District, Capt. William Nichol,
Vice-President, Sinunons National Bank, Pine 131uff, Ark.
Representing the Ninth Federal Reserve District, William N. Johnson.
Vice-President, Northwestern National Bank & Trust Co., Minneapolis,
Minn.
Representing the Eleventh Federal Reserve District, Melvin Rouff,
Vice-President, Houston National Bank, Houston, Tex.
Submitted by: Lang Wharton, Executive Vice-President, First National
Bank, Dallas, Tex., Chairman.
E. S. Coombs, Executive Vice-President, Telegraphers National Bank.
St. LOUIS, MO.
Edwin W. Hunt, President. Home National Bank, T3rockton, Mass.
[The report was duly adopted and the newly elected officers installed.]
.•
THE COMMERCI1L & FINANCIAL CHRONICLE,-ABA Convention--Nov.1935
STATE BANK DIVISION
AMERICA1V BANKERS ASSOCIATION
Nineteenth Annual Meeting, Held at New Orleans, La., Nov. 11 1935
INDEX TO STATE BANK DIVISION PROCEEDINGS.
Management and the New Supervision, by H. R. Wells
Page 50
Investment Problems of Banks, by J. Harvie Wilkinson Jr__ _
53
Mortgages Insured Under Title Il of the National Housing
Act as Investments for Banking Institutions, by Richard
R. Quay
56
1P-Ctf,
Address of the President, James C. Bolton
Report of Committee on Federal Legislation
Report on Resolutions Committee
Report of Nominating Committee
Page 57
58
58
58
Management and the New Supervision
B3- H. B. WELLS, Secretary Commission for Financial Institutions, State of Indiana, Indianapolis, Ind.
The primary function of bank management is to conduct
the work of each institution in accordance with the best
known standards of procedure. The banking business to-day,
however, is in such a position that the performance of the
duties of management within the bank is not in itself sufficient to protect the well-being of the system. In a complicated society such as that in which we are now living, management has certain group responsibilities, most of will&
-grow out of the complex relationship between banks and
governmental agencies of supervision. Not unmindful, therefore, of the fact that good management must begin at home,
I wish to speak this afternoon of some of the relationships
between management and the new type of supervision recently superimposed upon our banking business.
We are in an era of bewildering change. Leaders in every
sphere of human activity find that traditional principles
are no longer esteemed; new and strange doctrines are accorded general approbation by large numbers of our people.
The educator is faced with widespread doubt concerning
the efficacy of our once tenderly nourished institution of universal public education. During past depressions the schools
were protected in large part from unwise and intemperate
retrenchment by a widespread and deeply-rooted conviction
that the American way of life and form of government are
dependent upon universal free education. If the utterances
of some of our leaders and our fictions of the past five years
are properly indicative, this tenet may be near the scrap
heap to which other great ideals of the human race have in
times past been relegated.
The statesman is aware that many thoughtful citizens
challenge the effictiveness of the democratic form of government in a machine age, and would sacrifice the ancient safeguards of our liberties—the ballot box, the right of free
speech in all of its forms, including assemblage and petition ;
the right of trial by jury, and the writ of habeas corpus--in
order to secure the quick gains of a dictatorship. Liberty
has been the goal of the race for more than a thousand years
—yet in these troubled times there are those who would renounce all of the gains we have made because the instrumentalities which insure it seem to stand in the way of a
momentary objective.
The farmer, long the outstanding exponent of individualistic action,.made weary by seemingly never-ending years
of economic adversity, has taken refuge in a new type of
mercantilism which most students of economic history had
believed could never occur again in the world's iiistory.
The merchant and manufacturer are aware that some
substantial citizens boldly challenge capitalism and would
substitute for it some of the various forms of socialism.
Business activity, moreover, must be carried on in a social
and economic setting vastly different from that in which
inordinate profits were amassed during the so-called new
era of the '20s. Rut of all of these the banker is confronted
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Federal Reserve Bank of St. Louis
with the greatest changes in conditions surrounding his
daily activity.
Born of the collapse of our commercial banking system,
there has been erected over and above, round and about the
banking industry in this country one of the most complex
regulatory systems ever imposed on any business of government. The full extent of this new supervision is not yet
realized by either the public or the bankers. As a result of
the passage of a multitude of State and Federal laws, numerous national and State authorities have the power of life
and death over commercial banks. Supervisory agencies
have been given regulatory power and have used it freely to
circumscribe the activity of management. These laws and
regulations have been passed with such rapidity that not
even the research economist with the freedom born of release
from routine tasks can keep informed of them all.
I do not wish to impart an incorrect impression by what
I have just said. I am in favor of this new supervision. I
played an obscure role in the creation of a part of it. While
it is true that banking skill cannot be created by the passing
of laws, the most frequent mistakes of management can be
prohibited and prevented by proper regulatory measures. I
firmly believe that it is necessary to have governmental
supervision of the banking business, and that a thorough
overhauling- of our supervisory machinery was due long
before it came. In my opinion the new system which we have
devised can with minor modifications be conducive to great
good, helping to bring, financial and economic stability and
prosperity.
On the other hand, I am just as firmly of the opinion that
the new supervision has as great potentialities for evil as
for good. Unless this great supervisory colossus, containing,
as it does, provision for the insurance of deposits, is administered calmly and wisely, it can bring in its wake such
chaos that not only will our commercial banking structure
be scuttled, but also the very foundations of capitalism will
be shaken. Some extreme partisans will ridicule this idea.
They will point to the great progress made toward banking
stability since 1933 and justly give large credit to our new
system.
Our experience since 1933, however, is not truly indicative of what may be the result in the future. Our progress
during the last two years was not clue solely to new laws
and new machinery. It was brought about in large measure
by the co-operation of all agencies, Federal and State,
toward a common goal. During all of this period, moreover, reckless banking leadership was stunned into passive
acquiescence with the program, and our conservative and
forward-looking bankers joined with supervisory authorities
in advocating' a thorough housecleaning of the banking
business.
The union of these forces did not occur because of any
deep-seated affection that the parties had for one another.
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STATE BANK DIVISION.
It was a "shot-gun wedding." Already these comes some eVidence that the honeynloon is over. Disturbing stories of
jealousy between certain Federal and State authorities tending to disrupt co-operative functioning are becoming common,
while here and there bankers, forgetful of the lessons of the
past and irritated by the antics of some supervisory official
"puffed up with power," begin to complain of the restrictive
influence of regulatory codes. The real test of the system
wrought by the depression is still ahead.
An ideal system of supervision should provide for the maximum of safety and stability with the minimum of interference with private managerial initiative. Most students
of the problem are of the opinion that our new system is
short of the ideal, but only time and experience will furnish
an accurate appraisal of its true worth. Regardless of any
imperfections now apparent or that may appear in the
future, both from the standpoint of the public and the banks,
experience has proved that some adequate form of supervision is necessary.
The banking business cannot afford to suffer again the
demoralization of those distressing years preceding and culminating with the bank holiday. Should the industry ever
drift into such a condition in the future, I believe it is safe
to predict that private possession of our institutions would
be supplanted by some form of State or Government ownership. There are those liberal thinkers who even now declare
that our President missed a great opportunity in not
socializing our financial system when such a step would
have been comparatively easy in those dark days following
March 4 1933.
The issue, therefore, is not one of regulation versus freedom from regulation, but one of an imperfect regulatory
structure versus an ideal system. Our present supervision
and regulation must be made to approach as nearly as
possible an ideal conception of efficiency. The responsibility
for the achievement of such a goal rests as much upon
our banking leadership as it does upon our supervisory
officials.
The social control of any type of business cannot be
successful without the constructive co-operation of the persons or institutions supervised, and the field of banking
is no exception to this general rule. Supervisory officials
holding posts of importance charged with policy-making,
power need the advice and criticism of the men most intimately acquainted with the problems of banking—the bankers themselves. Any supervisory official who will not listen
to constructive advice or criticism is not worthy of a position
of trust. Likewise, banking leadership that will not offer
advice and criticism in a constructive and thoughtful spirit
deserves little consideration from supervisory officials.
A few days ago I read the weekly letter of one of our
important economic services which told an inspiring story
of the automobile industry's co-operation with government.
You are well aware that new models have been launched
at an earlier date as a result of the suggestions of high
governmental officials seeking to alleviate seasonal unemployment. If successful, this change will circumvent proposals on the part of labor leaders for greater governmental
regulation of the automobile industry. This letter went
ahead to say: "It is a trait of the automobile industry to
handle its problems aggressively."
There are those who may believe that the banking industry
is incapable of aggressive action, and that co-operation
between bankers and governmental authorities is not possible. With that view I cannot agree. I am reminded of
the successful experience of the banking business in my own
State when it attempted to handle its problems co-operatively
and aggressively. Since the beginning of the State, the
banking system in Indiana had been at the mercy of those
selfish and reckless individuals who valued an extreme
independence of action higher than the good name of the
industry. As a result the supervisory and regulatory machinery was hopelessly inadequate. A group of sincere and
forceful banking leaders determined in 1931 that the situation should be remedied. They were responsible for the
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51
creation by the Legislature of a State Commission to survey
and study our plight for the purpose of making recommendations to the next session of the General Assembly. This
Commission's personnel was composed of men representative
of the commercial, financial and business life of the State,
including experienced bankers, selected without regard to
their political affiliations. The Commission engaged a corps
of technicians to assemble needed data. The activity of the
group was financed in large part by the Indiana Bankers
Association, and that Association co-operated throughout, as
did the State Bank Division of the A. B. A. Eventually the
group devised a regulatory code and supervisory machinery
to enforce the code, and submitted them to the careful
scrutiny of the Legislative Committee of the State Association. The Pleasures proposed created consternation in some
quarters and open opposition in others, but the entire program was aired before the men most affected, the bankers
themselves, and its impracticabilities were burned away by
the white heat of free and generous discussion.
The code advocated was subsequently adopted by the General Assembly, and although forced immediately to function
during the extraordinary period of 1933, it withstood every
test satisfactorily and to-day it enjoys the approbation of
both the public and the bankers.
If the experience in Indiana is representative, aggressive
action on the part of the banking industry in the solution
of its problems is possible, thereby avoiding extreme measures untried by experience and resulting in a much more
satisfactory solution than if the change had been formulated
by less able though perhaps equally sincere men.
Social and governmental institutions are dynamic in
nature. They must change and grow as conditions change
and as experience tests their desirability. It is vital, therefore, that inevitable future changes in our banking supervision be directed and controlled by an informed, courageous
and wholesome banking leadership to the end that they be
evolutionary rather than revolutionary in nature.
Already certain problems have arisen as a result of recent
regulatory measures that challenge the thoughtful attention
not only of the best leadership in the banking business but
also of every bank officer.
One of these problems has to do with the simplification
and standardization of our present system of call reports
and of earning and dividend statements. The situation which
has existed in the past resulting in the use of a different
form by the FDIC, the Federal Reserve, the National Department, and each of the 48 State Supervisory Agencies, can
and should no longer be tolerated. A movement has been
launched to remedy this situation, and I wish to describe
its work to you in some detail because I believe it merits
your very active support and interest.
On May 22 last, committees representing the American
Bankers Association, the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Reserve
Board, the National Association of Bank Auditors and Comptrollers, the Reconstruction Finance Corporation, the Iteserve
City Bankers Association, the State Bank Commissioners,
and the Treasury, met in Washington for the purpose of
discussing the standardization of call and of earning and
dividend reports. The FDIC was generous enough to provide quarters for the work of this conference, and for two
days the men attending occupied themselves with a discussion of the desirability, possibility and feasibility of
a uniform set of reports to be used by all supervising
authorities.
In the beginning there was no unanimity of opinion. Discussion waxed full and free for many hours. As the views
of the bankers and of Federal and State authorities were
fully aired, it became apparent that they were not so irreconcilable as it seemed in the beginning. After a full two days,
this group came to the conclusion that our present types of
report forms do not fully meet the need for which they
were originally intended, and that standardization is possible
and desirable. Accordingly, a smaller standing committee,
consisting of one representative from each of the organiza-
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BANKERS' CONV'ENTION.
tions participating', was created by the action of the conference and was charged with the responsibility of devising
suggested forms. A subcommittee of this standing committee
has been at work now for many weeks preparing these forms,
which will-be presented to the full committee and eventually
to the full conference for consideration. It is hoped and
believed that the conference will be able to agree and adopt
forms to be recommended to all agencies.
Once the conference is able to agree upon uniform report
forms, it will be necessary, if the banks are to benefit, to
have these forms adopted by each and every supervisory
agency. Supervisory officials—and I am one of them—are
only human being's. It is always easier to do a thing the old
way rather than in a new way. I have a suspicion that there
will not be universal adoption of these standard forms unless
the bankers themselves insist upon their adoption. It may
be necessary to bring to bear the collective influence of your
membership upon your State Supervisors through your State
Associations. I know most of the State officials, and I feel
confident that they will be happy to have your reactions,
and that once they understand your wishes they will be
more than willing to co-operate. Through the American
Bankers Association let an insistent demand for such standardization be felt in Washington to make certain that all
Federal agencies will act likewise. If the entire program
is universally adopted, it will effect substantial and important economies, for the bankers of the nation will no
longer be required to fill out different reports for each of
two or three agencies for every call made, but perhaps an
even more important result will be that the potentialities
of co-operative group action will have been strikingly
demonstrated.
A successful culmination of the work of this conference,
therefore, would logically suggest the feasibility of a program to eliminate duplications of time and effort in the making of examinations on the part of governmental agencies
with overlapping jurisdictions. There are many forms
which such a program of unification might take. But one
need not be unduly imaginative to be able to visualize the
beneficial results that might come from the consolidation
of all Federal activities pertaining to banks in one agency,
and the consolidation of all State activities relating to banks
in a single State agency within each State. Such a program
would undoubtedly result in better supervision, with much
less cost and hindrance to the banking industry as a
whole.
A proposal in this direction would, I am well aware, meet
with vigorous opposition. That, however, unification is
feasible and highly beneficial, I can illustrate by again citing
the history of just such a program of unification in my own
State.
Two years ago, under the sponsorship of our militant and
vigorous Governor McNutt, a governmental reorganization
bill was passed, giving to the chief executive the authority
to consolidate and co-ordinate governmental units and functions in a manner designed to yield the greatest efficiency
of operation. As a result, the Department of Financial
Institutions, which is the department charged with the responsibility of supervising banks in Indiana, not only makes
those examinations required by the Indiana banking law, but
also makes such examinations of banks as are desired by
the State Tax Board and the State Securities Commission.
One set of examiners does what three sets of examiners
would have done under a different philosophy of government.
That which has been done can be done again, and co-ordination of this nature can be achieved elsewhere throughout
States and the nation if it is advocated with sufficient wisdom and vigor.
Another matter perhaps of more immediate concern,
although of no greater importance, is the elimination of that
provision of the Banking Act of 19,35 Which makes Federal
Reserve membership eventually compulsory if institutions
are to be able to secure Federal insurance of deposits. I
make this statement not because I am opposed to the Federal
Reserve System or to Federal Reserve membership. The little
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Federal Reserve Bank of St. Louis
bank with which my family has been associated for many
years has almost from the beginning of the System been a
voluntary State bank member, and its affiliation has been
happy and profitable.
Federal Reserve membership should be a privilege and not
a compulsory duty. In this spirit the System was founded,
and this philosophy dominated the original draft of the Act.
There needs to be some badge of distinction which a bank
may achieve because of the high quality of its management.
If all banks are to be insured and all are to be members of
the Federal Reserve System, they will all be of equal quality
in the eyes of the public. Much of the incentive for excellence and conservatism of policy will be removed, placing
an even greater strain upon supervisory machinery. Already
it is recognized that the System will have to change its
requirements in order to admit all banks. I do not know
whether or not present requirements are unduly restrictive.
But I do believe that the lowering of standards in order to
include everybody establishes a dangerous precedent. It
could help to create something of the group psychology which
led to ruin and disaster in the eig,ht States which have
already unsuccessfully tried insurance of deposits.
A vigorous fight should be waged, therefore, to remove
this dangerous compulsory clause from the Banking Act of
1935. If that fight should be successful, there should be
just as much activity thereafter in promoting voluntary
membership in the System as there was in securing the
elimination of the cumpulsory provision of the Act. Had
there been a greater acceptance of Federal Reserve membership by the rank and file of the banks of our country, resulting in even a slightly larger percentage of membership than
was the case prior to 1933, the most convincing and compelling argument for compulsory membership in the System
would have been removed. Here, then, again is an illustration of the benefits of constructive co-operation.
There are many other matters of grave concern to the
management of our institutions other than those found in
the day-by-day inside operations which need immediate and
thoughtful attention on the part of our bankers. Among
these are the unfair and unnecessary competition of the
Postal Savings System, discriminatory tax laws in certain
States, the attack upon the sanctity of property rights, and
many other matters with which you are all familiar.
There never was a time when individual bankers of the
country needed to give such loyalty of support to their State
and National Associations as at the present. They represent the only effective machinery for the mobilization and
dissemination of the views of the banking fraternity.
Changes are coming very rapidly. The only thing certain
is that the conditions under which we operate to-morrow
will not be the same as those of to-day. Swift and important
are the currents of moving events all about us. In the
words of General Jan Christian Smuts:
Civilization has struck its tents and the caravan of humanity is on
the march.
If social movements achieve proper objectives, they must
have wise leadership. Bankers cannot afford to fail to make
their contribution to this leadership, because the character
of our social and economic organization in the years to
come will have an important bearing upon the banking
business.
Some of you in the audience may be thinking:
What good does it do for the bankers to organize for the purpose of
expressing their opinions? The nation's law-makers and the public generally
have declared a vendetta upon the banking business. Anything we favor
the rest of the country is against.
It must be admitted that the public has had some such
attitude in the past few years, but the banking business
plays an important part in the economic organization of
society. In times past bankers have occupied a position of
prominence in the councils of the community and nation.
They will, in my opinion, be re-admitted to those councils
just as soon as they have demonstrated not only that they
are capable of running their individual units successfully,
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STATE BANK DIVISION.
but also that they have a constructive and co-operative attitude toward the broad current of human affairs.
Many years ago our Association leaders were calling attention to weaknesses in the banking system. Notwithstanding
their exhortations, we failed to mobilize effectively for any
real reform, and permitted the unhealthy conditions to continue until a disgusted and frightened public dictated a reform program that is in some of its arts revolutionary and
contrary to fundamental principles established by long experience. Had the bankers themselves stood solidly for such
reforms as were generally known to be necessary in the
banking business following the World War, the collapse of
the banking system would have been averted, the force of
the depression would have been lessened, and the reform
legislation would not have taken such extreme forms. The
rebuilding of public confidence and trust in banking leadership is one of the great problems facing our industry.
Restoration of confidence and trust in banking leadership is
53
vitally needed, not only that it may benefit the banking
business itself, but also that society may have the benefit
of banking leadership. Viscount Morley has said:
Great economic and social forces flow with tidal sweep over communities
only half conscious of that which is befalling them. Wise statesmen are
those who foresee what time is thus bringing, and try to shape institutions
and to mould men's thought and purpose in accordance with the change that
is silently surrounding them.
A more familiar statement, similar in nature, is that of
John Stuart .Mill:
The future of mankind will be gravely imperiled if great questions are
left to be fought out between ignorant change and ignorant opposition to
change.
In the direction of the changes inevitable in our social and
economic life, every type of viewpoint is needed, liberal and
conservative. It is our paramount duty to put and keep our
own house in order so that we may again be admitted to the
council table around Which the pattern of society's destiny
is being fashioned.
Investment Problems of Banks
By J. HARVIE WILKINSON JR., Vice-President State-Planters Bank & Trust Co., Richniond, Va.
I cannot bring with me the majesty of age, but I am able
to appear as a veteran of the Seven Years' War which began
in 1929. We have all been engaged in the major campaigns,
and I presume it would be fair to say that our bonus consists
of an opportu
to spend a few days in a city old in charm
and history. Alt *ugh we are enjoying a breathing spell
from the heavy can
ading at Washington and from the
our own war is still on, and the
recent tension in Euro
problem of investing mone never seems to be fought in
pitched battle, but rather in sn ng, sniping, sniping, with
er. And always there
interest rates lower and lower and
seems to be the need for sending out ...re and more funds
if we are to capture a most modest amoun f income.
As regards the individual institution, each
us is forcefully familiar with the harassing problem of inv ing our
funds. Let me simply remind you that in the agg ate
excess reserves of reporting member banks were, as
Oct. 23, at $2,930,000,000 and gold certificates with the Federal Reserve System totaled $6,979,000,000, both figures Constituting a record high in the history of the nation.
To solve the investment phase of a bank's probleni there
are reasonably clear alternatives. The purchase of a sufficient volume of long-term bonds, consisting of a mixture of
Governments, municipals and corporate issues, will return
at least a livable income. But even though NV now enjoy
relative to
the fat and richness of a high interest inco
situation is
prevailing interest rates, we may, unless t
most carefully gauged, find ourselves so loa ed with bonds
that upon a revival in the demand for fun s on the part of
commerce or upon the occasion of some ey'entful happening,
we shall be unable, except at great sacrifice, to liquidate
those bonds either to ward off the eventful happening or
to satisfy the needs of commerce.
I mentioned an alternative, and it is this: A bank can
invest its funds as fully as possible in very short-term
bonds due in three or four years r less, and such amount
as each institution feels the situa on will allow in moderateterm maturities of five to sev
years. By carrying, out
this procedure, the income accou0 will be drastically lessened
and the extent to which one IA willing to adopt this second
alternative will vary among/banks. But it is reasonably
clear, I think, that from the standpoint of sound banking
operations, alternative nullifier two would, under the existing conditions, be the choicgof everyone in the room. Please
do not misinterpret me. Flom the standpoint of sound investment policy, I should beyililad to purchase a substantial percentage of long-term Go rnment bonds and prime corporate
credits if money rates were high. Always, of course, I am
referring to existing conditions.
Long-term United/States Government bonds have crossed
a 3% yield basis, And the corporate and municipal markets
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Federal Reserve Bank of St. Louis
are likewise very, very high. Now, I know there are some
who would like to cite world economic history in the last
part of the nineteenth and the first part of the twentieth
centuries when British consols yielded less than 3% and
when, for the most part, our own Government obligations
returned less than this same 3%. It is necessary to remember, of course, that our total national debt prior to 1914 was
infinitesimal and, also, that the present situation is fraught
with artificialities. But the point which I should like to
crystallize is this--that where banks are concerned, the
crossing of a 3% yield basis in Governments is a sufficiently
important danger signal to cause great heed. Once Governments are yielding less than 3%, a bank is beginning
to tread dangerously, and I feel a sound investment
policy should stand on so simple and elementary a point
as that.
I referred a minute ago to the fact that from the standnt of sound banking operations, alternative number two
of s fort- and very moderate-term bonds would be the desired
policy wi bonds as high as they are to-day If, then, this
is the soun
anking policy, it should be our anchor and
deviations fro it should be fully recognized as deviations
and should be pl ned with full knowledge of the fact. It
is the relentless pre ure of declining interest rates which
may drive us off this s
d ground and, from the standpoint
of the banking system,
t would be, in my opinion, a
catastrophe.
Very well. you say, the altern ves are reasonably clear—
either long-term bonds with the
sibility of being sandbagged into death or short-term bon
with the possibility
of starvation. Without wishing to leai the stage of the
present financial drama by either route, I'r4muld infinitely
prefer to be the Ghancli of the American lohkking system.
I am aware that the bald statement of these ftoices presents no practically helpful suggestions to you, but I have
wisted to state them as briefly and as clearly as I could,
for, as we proceed, they will be the two basic points which
will form the background of our entire discussion.
There are, of course, those who will disagree with me and
who will have different policies or different combinations
of policy. An institution with virtually no demand for loans
and with ft very stable deposit line or an institution with its
capital only nominally committed to real estate, or one carrying an extremely high percentage of savings deposits can
perhaps buy a larger proportion of long-term bonds with
greater equanimity than can other institutions having a
variable loan demand and a volatile deposit line. What is
one man's meat Is another man's poison—what is one bank's
profit is another bank's loss. With differences in policy
there can be no objection, but this point I should like to drive
home above all others, namely, develop a policy suitable to
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the particular conditions of the individual bank and, once
having set that policy, follow it.
Another point of almost equal significance is the practical
operation of an investment portfolio once the policy for the
institution has been determined. It is my observation that
the wigwam method of consultation among many individuals
each with prejudices of a general nature is productive of
poor results. Some do not like municipals, some do not like
rails, some do not like industrials. When these likes and
dislikes have been allowed for, either the bonds it is desired
to buy have been sold or else the principle of unholy compromise has weakened the institutional policy determined upon
and profitable operations of the bond account are virtually
impossible. Place the responsibility for operating within
the framework of Vie policy on one individual—make doubly
sure that individuAl knows securities—and charge him with
the results. Do not measure the results by those obtained
in rising bond markets such as we have experienced in 1934
and 1935, nor by those produced in years such as 1931 and
1932. Take a complete cycle of bond prices and check your
returns against those which could have been obtained from
other outside investments.
To me it is one of the sad commentaries that so many of
our institutions are blown hither and yon by the wind of
bond salesmen and the pressure of monetary frig,ht. Surely
the fact that our interest from bonds has been declining is
no novelty. Why, then, should anyone all of a sudden, deciding that he needs more income, rush into the market and
but a few 414% or 41A% industrial bonds, two or three Government issues yielding 2%% or more, and then sit back?
In far the majority of cases, there is no proper correlation
between the type of investment bought and the type of
deposit money which was used to buy it. Equally as evil
is the lack of knowledge concerning the security bought.
Someone has defined character in its largest sense as a noble
impulse translated into action. I should,like to define character of mind as a mental concept crys llized into action,
and the American banks, large and smal should have and
must have character of mind. 'We do have t in other ways,
and I am at times mystified as to why it I lacking in our
investment operations.
A significant part of many institutions' Inv tment policy
is consultation with correspondent banks. The xchange of
ideas and of facts uncovered is helpful, and I o not feel
this phase has ever been adequately exploited. I is indispensable, however, that the full situation in the i quiring
bank be known—type of funds it is desired to invek condition of portfolio, and the general policy being follNved.
Without this knowledge, any inquiry saying, "We wish. to
invest $50,000," is meaningless and can never result in a
sound and really worthwhile relationship. Moreover, onco
a security had been bought because the correspondent had
it in its portfolio or thoug4ht well of it, the purchasing bank
should, it seems to me, every month or so obtain from the
correspondent a simple statement as to whether it still liked
the bond, and if it had sold its bonds, why? Such a program
would give a closer tie-in and would place the initiative
where it functionally belonged. I do not see how a satisfactory and enduring investment relationship can be otherwise developed.
To this point we have discussed the question of policy
and adhering to it, the necessity for centralization of responsibility, and a method of practical operation involving the
correspondent bank relationship. What, now, are some of
the situations with which we are faced to-day? Government bonds maturing up to December 1936 yield nothing.
Those maturing in 1937 and 1938 give an average return
of lA of 1%. Those due from 1939 through 1941 give an
average return of 1.40%. In spite of the fact that so many
people are indulging in the practice, and, hence, it is a
hazardous one, I still think the idea of purchasing a reasonable proportion of near-term Governments at a very slight
yield and very slight yield losses to maturity is sound, and
my reason is this: As a practical matter, I know that if
substantial amounts of money are uninvested, it has a great
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BANKERS' CONVENTION.
tendency to eat on us, to set up pressure areas which cause
us to sweat and to break down our fibers of common sense-in short, idle money is the third degree for the banks.
Should the bonds offered in refunding the maturing
obligations not sell at a sufficient premium to give an
actually positive yield on one's money, I believe that the
loss which would be sustained would be the cheapest form
of insurance and well worth the price. In this manner it
should not be difficult to obtain interest at the rate of %%
to 114% per annum. There is no stupendous risk in such
operations, and if a set of conditions were to come about
which would make such operations as I have mentioned unprofitable, then it would probably be still more disadvantageous to hold a Christmas mixture of 10- and 20-year bonds.
To what extent one wished to buy the Governments due
beyond 1941 would be determined, as has been said, by the
condition of one's capital account, the status of one's loans,
and the nature of the deposits. This, I think, can be fairly
said of the average commercial bank, namely, that it will
be more advisable to put out large amounts of money due
in a short while rather than small amounts of money due
in 10 to 60 years, provided the short-term maturities are
spread so as to get an average maturity of three to four
years.
Everyone, of course, is concerned with the Government
bond market. At the present time it is a maze and a labyrinth of complexity. Let us try to dissect the situation
briefly and as clearly as possible. Whereas the business of
investing funds does not partake of a science in its exactness. nevertheless there is a law of physics to the effect that
what goes up must come down. Bond prices are very high,
and whe,reas it is more than difficult to predict the time
when tkey will be lower, yet each of us knows such a time
will come. It is a bold man who will try to time the situation
by expecting to sell at the exact hour, and it will be infinitely
better to be ahead of time than late, for each of us who is
tardy will certainly be a Cinderella looking for a fairy
godmother.
An additional consideration is the fact that our Government has been incurring large deficits since 1930. From
1931 through June 30 1935 we have spent $14,677,000,000
more than we have received. Our interest-bearing debt as
of Sept. 30 1935 stood at $28,432,000,000. No consideration
has been given either to the assets over against that debt
or to the contingent liability debt which may or may not
be a real liability. The Reconstruction Finance Corporation
is lending less and less money (it is being paid back some of
the money it has loaned), but in spite of this diminution of
its lending activity, our total deficit continues to be enormous, and those expenditures on which little, if any, repayment can be expected are increasing while those on which repayment can be expected have virtually ceased. The banks
of the country absorbed 91% of the increase in the Federal
debt between June 30 1934 and June 30 1935, and as of
June 30 1935 the banks held 53.44% of the total Government
debt of $28,700,000,000. In 1920 the banks held 15.34% of
the existing Government debt. To-day, to repeat, they hold
more'than 53.44% of it. Between June 30 1934 and June 30
1935 bank deposits were estimated to have increased 8.22%.
Government security holdings increased in that period
10.75%. One can still stand the tar of Toryism and yet ask
the question: How long will this continue, or how long can
this continue? Taken together, the figures I have given you
are, it seems to me, the most alarming figures which any
American could hear. I am alarmed, not at the existing
debt, but at its growth, at the constancy and the nature of
the trend, and at the tendency of the banks to absorb more
and more of this increasing debt. The credit base which
our national deficits have in part helped to lay is gigantic.
I do not wish to cry wolf. I hope that the momentum
generated will not make too much headway, but I saw a
devastating momentum of deflation begin in 1929 and continue with all the killing force of a cataract until 1932 and
the early part of 1933. History likewise tells of nation after
nation which had miscalculated the terrific pressure and
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention--Nov. 1955
CLEARING HOUSE ROUND TABLE CONFERENCE
(UNDER AUSPICES OF BANK MANAGEMENT COMMISSION)
AMERICAN BANKERS' ASSOCIATION
Meeting Held at New Orleans, La., Nov. 11 1935
INDEX TO CLEARING HOUSE ROUND TABLE CONFERENCE
Bank Earnings and Expenses and What to Do About Them,
by Orval W. Adams
Page 74
The Problem of Bank Earnings, by Robert M. Hanes
75
Reducing Losses orx Investments, by William R. Biggs
Reducing Losses on Loans, by Ronald Ransom
Service Charges as a Source of Revenue, by Claude L. Stout
Page 76
76
77
Bank Earnings and Expenses and What to Do About Them
By ORVAL W. ADAMS, Vice-President Utah State National Bank, Salt Lake City, Utah
Experience teaches us that close attention to details is the great essential
in all business success. Observance of this fundamental principle has
brought bank management to its present high point of efficiency. Those
of us upon whom the responsibility for this achievement has rested, have
kept constantly before us: the ratio of general overhead expense to gross
income;the cost of handling accounts;the earnings obtainable from deposits;
the security of investments; adherence to specific standards governing loans
and discounts, with due regard for the position of the borrower and a wise
balance as between different classes of borrowers.
We have cut down overhead. Shortcuts and saving devices have increased our efficiency. Losses on unprofitable accounts have been reduced
by the imposition of service charges, so that every transaction is handled
with a consistent profit. The earning value of deposits has been the
barometer by which we have gauged the rates of interest to be paid on
various classes of deposits. Careful scrutiny has preceded the granting of
loans. Our investment portfolios have been kept under our constant personal supervision. Just to the extent that these details and policies ave
been religiously observed, solvency has been vouchsaved our sepa te
institutions.
Outlook Changed
To-day this type of management, which heretofore has provided stability,
solvency and success for our banks, is being subjected to vigorous, ruthless
assault so that true and tried practices no longer count for us at their
intrinsic value even though no one has as yet been able to point out any
worth while alternative to the established, traditional profitable use of the
funds of our depositors and of the capital represented in the investment
of our stockholders. Application of fundamental banking practices has
been checked for the time being at least, through the low interest rate
policies of the Federal government, through its wholesale entry into
banking and credit, and its invasion of the field heretofore regarded as the
rightful, exclusive domain of private industry.
Those who have inaugurated this wide departure from accepted principles
of sound Governmental finance, send out frequent but faint appeals that
it is intended only to meet what is conveniently termed "an emergency,"
the extent and duration of which cannot be foretold. Also the authors
contend that the purpose is to restore prosperity and rebuild private industry. If the powers-that-be were to herald the end of the emergency, a
rapid demand for business credits would ensue immediately. Who then
would be the first to suffer ? Obviously the bank depositors and stockholders of the entire nation, who number more than 45 million people and
who represent the backbone of our economic system. Their losses would
come from an unavoidable drop in the market value of Government bonds,
60% of which the banks are now holding.
Impending Danger
It is clear that a drop of 10 'Mints in the market value of Federal obligations—and this would be the inevitable sequence of revived business activity—would wipe out approximately 40% of the total invested capital
of our National banks. A business revival with its expanding need for
credit, would at once reduce the market value of all low interest bearing
obligations, including those of the Federal Government. What would
the Government do under such circumstances? Would it attempt to refund
its debts into securities carrying a higher rate of interest, knowing that
such a program would aggravate the problem of balancing the annual
budget? Or would the Government employ artificial props to support a
sagging market for its securities ? Would it rush to the aid of the banks
by using the equalization fund, either before or after the value of bonds
had been partially wiped out? Would the Government apply to the then
banking problem the same plans of artificial control as have been extended
to agriculture in the case of cotton, tobacco, peanuts, and the humble spud?
It is a matter of common knowledge that because of Governmental
policies, we have been obliged to violate the principles of sound banking
and sound economics. The borrower has been allowed to dictate to the
lender—in fact we are practically at the mercy of the borrower. We have
just begun to realize the extent and the magnitude of the existing Governmental control of our banking system as well as the momentum which
this new order has already acquired. It can mean but one thing, namely,
a unified system of banking under socialized Federal Government control.
All that is needed to destroy what remains of the traditional freedom of the
independent banker is his compulsory membership in the Federal Reserve
System and the Federal Deposit Insurance Corporation. May I here
pause to offer an observation. The Federal Reserve System, if kept free
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Federal Reserve Bank of St. Louis
from political influences, will continue to be a stabilizing factor in the
welfare of the entire country. On the contrary, if the banker is shorn of
his independence, he will be a mere robot, galvanized at the behest of the
Federal Government, with no power of his own and stripped of all authority
in determining policies within his own institution. He will be the purchaser
of such securities as the Government will lay before him. His subjection
will be made complete.
A Major Consideration
It appears therefore, gentlemen,that as bankers we must look beyond the
less consequential features ot our profession and take up this one outstanding, vexing, challenging problem, viz., how to preserve the indePendence of the banking system and the security of the savings of the
millions upon millions of sound-thinking, trustworthy, industrious men,
women, and children of America. If we fail to act in this crucial test, then
the banker himself belongs to an order that is past and gone. The answer
is plain: strengthened State bank supervision, independent of our two
Federal agencies, the Reserve System and the FDIC. Apparently by this
path alone, can we escape the corrupting, corroding political domination of
our banking system and at the same time preserve banking as an integral,
indispensable factor in the future economic development of our country.
One of the causes contributing to the ease with which the overthrow of
ccepted principles has been achieved, is the silence of the bankers of
America. We have not taken our own depositors and stockholders into our
confidence. We have not told them what this revolutionary procedura
means to them. Thus they have been led to believe that their own personal
interests are not involved in it. In view of their imminent peril, it would
amount to little less than a betrayal of their confidence at our hands, if we
continue to permit them to be kept uninformed. We must agree with
Lincoln when he said: "Give the people the facts and the country is safe."
Since bankers are in possession of the facts, it is logica,1 that they should
see that they are properly presented to the public. We are in position to
make a great contribution to our country's safety. All that is required is to
tell these millions of depositors, and stockholders, why it is that their
investments have shrunk almost to the vanishing point; why the interest
on their deposits is almost negligible; why the fruits of their thrift and
economy are disappearing; and why their anticipated security and comfort
in old-age, resulting from their own industry, is now going aglimmering.
As intelligent folks. they are sure to fix the blame somewhere. In the
presence of the most calculating system of propaganda that the world has
ever seen, the odium will, if possible, be kept from resting where it properly
belongs. As bankers we will be made to bear the stigma. Through our
silence and the consequent public lack of essential information, we will be
branded as modern Atillas, plundering and pillaging the people, and as
having betrayed our sacred trust. Further silence on our part will be
shrewdly capitalized upon. So long as we remain mute, denunciation will
be hurled at us by those who are assiduously broadcasting the seeds of
banker-distrust.
The conviction is growing more and more among the people, that had the
alleged "recovery measures" been long ago discarded, a condition of relative
normalcy would already have resulted from natural forces of recovery. To
this belief, we conscientiously subscribe.
Our Good Name Involved
If we are to accept the charge of dereliction in having permitted the
American public to be kept uninformed, then for the sake of our future good
name, of the institutions we represent and of the welfare of the country
at large, inaction can no longer be justified. In simple terms we must tell
the people that the Federal Government alone is responsible for our present
low interest rates, thus reducing earnings on deposits and bank shares by
millions and millions of dollars every year. We must tell them that so long
as the Government's present fiscal policies are continued; so long as industry
is kept in its present state of suspense and uncertainty; so long as the hand of
paternalism stretches like a shadow across the land; so long as the morale
of the people is broken; so long as gigantic borrowing and spending in the
face of an ever increasing deficit continues: just so long shall we hope in
vain for the advent of recovery, long deferred because of the effects of these
gravely mistaken policies.
The Call to Public Duty
If as bankers, we shall now solemnly determine to conduct an intelligent,
nation-wide. educational campaign, public opinion will immediately be
aroused. From every point there will come definite demands that the
SAVINGS DIVISION.
cash, and is not promised the total amount until a lapse of three years, with
a material loss of interest.
In all fairness to those people who may become customers of banks and
building and loan associations, this difference in the types of insurance
provided should be made known. Many at the present time regard this
insurance as that of the Federal Government without distinction as between
banks and building and loan or savings and loan associations. file insurance, of course, is not that of the Federal Government, but rather that of
corporations organized under Federal authority. It may never be possible
to dissociate this insurance from the Federal Government in the minds of
the saving public.
One great need at the present time is for greater earning's on the part
of banks. Many avenues of business for tli9 banks have been closed,
possibly forever. With normal business at low ebb, banks in order to
earn a reasonable income must seek new ways for earnings. Prior to the
business collapse of 1929, a number of banks had organized personal or
small loan departments where character and employment served as a
credit basis.
The widespread unemployment as well as banking difficulties served to
stop the growth of personal loan departments, and in some cases caused
their discontinuance. Within the last few years the tendency toward
creating these departments has again gained headway. The Savings
Division recently in conjunction with the magazine "Banking" and the
Russell Sage Foundation, conducted a survey. Replies to the questionnaire were received from more than 400 banks throughout the United
States having personal loan departments. A preliminary analysis has
already been made of the replies and is being published in "Banking."
A more comprehensive analysis is now under way by the Committee on
Personal Loans of the Savings Division. After its work is completed,
the Russell Sage Foundation will utilize the results in further intensive
study on Indebtedness in the United States.
There possibly is no one well-defined method which will serve to take
the place of practices once profitable but which are now in abeyance.
It should be possible, however, in the course of time, for banks to organize
services which will be appreciated by their customers and remunerative
to themselves. Banks interested in the savings business cannot exist
simply as reservoirs for funds contributed by their customers and utilized
in the pmchase of Federal, State, or municipal securities, while tbe needs
of the community are being met by funds advanced by Federal, State
and local Governments. Such a situation can end in only one way.
During the year, progress has been made by banks in restoring normal
functiona. The vitality of savings has proved remarkable. Despite the
many plans which would utilize people's savings deposited in banks for
consumption purposes, they remain largely as before, a reservoir for permanent investment in those enterprises which continue over a long-time
period.
It is not possible to state how much of the funds deposited in savings
during the past year arise from the increase of earnings over expenditures
and how much has come from hoards taken from banks when people were
fearful of their stability. Because of the great amount of Government
spending at the present time, many people have forgotten that threequarters of the normally employed population are at work and, true to
American instinct, are laying aside a part of their earnings and depositing
them in banks against a day of need.
Postal savings continues as unfair competition with the savings business
in banks. Most of you know that the sponsors of postal savings advocated it as supplementary to banks. It was to give opportunity for
savings in those areas where population was not sufficient to make possible
the support of a bank, and to act as a depository for money of foreign
nationals resident in America who were familiar with the postal savings
system abroad and who needed a little time to become familiar with tho
Ame,ican banking system. Otherwise the money would have been shipped
abroad.
At first a large number of depositors in postal savings were foreign
nationals, but now the great bulk of the depositors are American nationals.
Frequently it is found that in those remote areas where banks do not
find it profitable to operate, post offices do not accept postal savings. Conversely, in the populous areas of the country, where banking service is
adequate for all the financial needs of the community, the post office
affords opportunity for postal savings.
It is not necessary at this time to rehearse the efforts which have been
made by the American Bankers Association through the Savings Division,
to bring the operation of postal savings in line with the intent of the sponsors.
Stripped to the core. prior to the Banking Act of 1933, the deposit of postal
savings in banks was simply a bond-buying proposition. Banks eligible
to receive postal savings deposits bought bonds in an amount equal to or
greater than the amount of postal savings to be received, and deposited
the bonds in Washington as security for the postal savings deposits.
The receipt of postal savings deposits by a bank did not aid the bank
one whit better to serve its commu iity. The enactment of the law which
insures deposits in banks up to $5,000 eliminated the necessity of the
banks' depositing bonds in Washington against the amount of postal
savings deposited in their institutions.
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Federal Reserve Bank of St. Louis
73
A grea.t menace both to banks and to the progress of communities exists
in postal savings—that of syphoning money from areas where it is most
needed both to insure the permanence of banks to the community and to
form a backlog of funds for community development. The "Federal
Reserve Bulletin" of October 1935, indicates that postal savings as of
the end of May 1935 amounted to $1,237,000,000. Of that amount,
according to the "Bulletin," only $412,000,000 was redeposited in banks.
The rest, over $800,000,000, had been taken out of the various communities and sent to Washington for investment.
Since the amount of postal savings deposited in banks decreased by
almost $100,000,000 in the five months preceding the close of May, it
can readily be assumed that if the ratio of decrease has been maintained
to the present time, the deposits of postal savings in banks is not now
greatly in excess of $350,000.000.
The greatest hardship is not wrought on those areas which have a great
backlog of savings deposits, but rather in those States where funds are
particularly necessary for the upbuilding of the community. In some
States from one-third to one-half of the time sand savings deposits are
in postal savings, with only a small percentage redeposited in the banks
of that area. It seems wasteful for the funds needed in the helpful development of a State to be syphoned to Washington by one agency, later to
be returned, and at considerable expenses, by other Government agencies.
At present the rate established by the trustees of the postal savings
system, the Postmaster-General, the Secretary of the Treasury, and the
Att,orney-General, and charged banks on postal savings, equals or exceeds
the maximum rates permitted by the Federal Reserve Board on savings
deposits in banks. The rates are also higher than are yielded by the shorttime obligations of the Government itself. In other words, the Federal
Government is paying to postal savings depositors a rate of interest higher
than that at which money can be borrowed in the open market.
The pity of it is that the greatest injustice from postal savings has
fallen upon the wheat- the corn- and the cotton-producing States, whose
people have become impoverished through the unjust policy of this Government over a period of one hundred years, which policy has gradually but
constantly worked toward the destruction of the foreign markets for these
Products, because of the fact that we are not permitted to buy from those
to whom we mut sell our exportable surplus.
In the report of the Secretary of the Treasury for 1924, in discussing
Treasury Savings Certificates, generally known as War Savings Certificates,
he said that, because of the strained financial conditions in the agricultural
sections of the country, all publicity and sales of the Treasury Savings
Certificates had been suspended in many of the agricultural States, and
that shortly thereafter, because of the fact that such Treasury Savings
Certificates paid interest which was out of line with other interest rates,
it was deemed advisable to suspend all such sales throughout the United
States. The heaviest toll taken by the postal savings is in the very States
which were mentioned in this report by the Secretary of the Treasury.
Is it too much to hope that similar action may now be taken in connection
with postal savings?
Eventually the leadeis and the voters in the agricultural States so
adversely affected by those governmental policies must join hands in an
endeavor permanently to stop them.
Report of Committee on Nominations
The following report of the Comrnittee on Nominations
was presented by W. R. Morehouse of Los Angeles:
Mr. President and Members of the Savings Division and Priends:
Your nominating Committee makes the report as follows for your consideration:
For the President of the Association for the ensuing year, Philip A. Benson, President of the Dime Savings Bank, Brooklyn, N. Y.
Our job of getting a Vice-Prsident was a rather difficult one because
we were confronted with the job of selecting one of two very excellent and
very much beloved members of our Association and our only way out was
to retain the services of both of them. So we have recommended to you
the member whose term expires on the Executive Committee first. The
other member will continue and we hopIR to see a lot of service out of him
later. Therefore I have pleasure in preAriting for Vice-President, Noble
R. Jones, Manager, Savings Department,.First National Bank, St. Louis,
Mo.
For members of Executive Committee for ne-year term: W. W. Miller,
mfield, N. J.
President, Bloomfield Savings Institution, B
year term: E. K. WoodFor members of Executive Cortunittee for th
worth, President, New Hampshire Savings Ban Concord, N. H.; A. Geo.
Gilman, President, Malden Savings Bank, Mal n, Mass.; H. E. Blair,
Vice-President, City National Bank & Trust Co. Oklahoma City, Okla.
inducted into office.]
[The report was duly adopted and the new offici
Besides Mr. Morehouse, the members of the Nominating Committee were
A. C. Robinson of Pittsburgh, Charles H. Doeppe of Cincinnati, E. L.
Robinson of Baltimore and Thomas F. Wallace of Minneapolis.
•
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention--Nov. 1935
CONSTRUCTIVE CUSTOMER RELATIONS CLINIC
AMERICAN BANKERS' ASSOCIATION
Meeting Held at New Orleans, La., Nov. 11 1935
INDEX TO CONSTRUCTIVE CUSTOMER RELATIONS CLINIC PROCEEDINGS.
The Customer—A Key to Public Relations,.by Robert M.
Hanes
Page 79
A Bank Conference in Action, by Fred W. Ellsworth
Page 80
The Customer—A Key to Public Relations
By
ROBERT M. HANES, President
Waeliovia Bank & Trust Co., Winston-Salem, N. C.
Of the many lessons learned from experiences of recent years one stands
out above all others. It is this—successful banking must be supported
by public confidence and respect. It was not enough that banks should
be ably managed, for many good banks were drawn into the maelstrom
of financial disaster and suffered the fate of less competently managed
institutions.
It was not enough that banks should loudly proclaim their soundness
and safety while the storm was raging. Their proclamations were drowned
in the noise and violence of the times. It is indeed true that "hysteria
has no ears."
It was not enough that bankers should vigorously deny the accusations
of the muckrakers and the political opportunists who blamed banks for
all the economic sins of the new era. A denial. even though it be the
essence of truth, seldom overtakes a false rumor or accusation. It was
not enough that voluminous laws regulating and controlling banks should
fill our statute books; the native instincts of fear and distrust are stronger
than man-made laws.
Able management and wise governmental supervision will produce sound
banking, but unless sound banking is supported by public confidence and
respect it cannot be impervious to the attacks of those who, for selfish
reasons. seek to discredit it in the public mind. True, the factors that
produce soundness in an institution generate confidence and respect, but
not in sufficient force by themselves—they must be aided by informative
interpretation.
That which men do not understand, they often distrust; that which is
strange or mysterious, they often fear. 13anking, unfortunately, has long
been a thing of mystery and misunderstanding to the average citizen.
To him, the intricacies of credit, exchange, money and finance seem
unfathomable. It was not surprising, therefore, that the propagandists,
the political spellbinders, and the radical soap-box orators should find
in banking an easy target for their vitriolic attacks. Banking has been
the straw man set up for ready annihilation by the politicians. It bas
been the scapegoat upon which has been piled all the sins of the former
era. It has been pictured as the personification of some greedy capitalistic
system supposedly gnawing at the vitals of an enslaved people. Bankers
have been accused of being cold, indifferent, selfish, incompetent and
dishonest.
To the informed, the falsity and unfairness of such a blanket indictment
against all bankers is immediately apparent, but to the average citizen
who has never quite understood banking, the innocence of most bankers
has not been so apparent. In fact, his suspicions have increased as some
bankers have been publicly convicted for practices of which all have been
accused. fherefore. it is highly important that this indictment be removed.
that the average citizen get a proper perspective of banking's faults and
virtues, if banking is to regain its deserved place in public esteem and
protect itself against future attacks
We must not be convicted at the
bar of public opinion by default.
We must build a solid foundation of public understanding upon which
to erect our structure of public confidence and respect. Thera must be
a broader understanding of banking's functions, its motives, as well as
its limitations.
We must disprove harsh accusations of personal shortcomings, not by
simple denial, but by constant demonstration of opposite qualities in our
daily contact with the public. We must demonstrate that banking is a
constructive factor, an essential factor in community welfare and progress.
We must turn the public's attention from laws, and point it to sound
management as the ultimate protection against banking and financial
troubles. We must preach the efficacy of bank credit when soundly and
safely used; we must warn of the dangers of easy credit and unsound loan
policies.
We must interpret the rules of banking in terms of benefits to those
we serve--not as protective me,asures for the bank—remembering that
self-interest is always the strongest motivating power in creating public
opinion. We must disprove the fallacy that banks control all economic
trends and are therefore responsible for all financial disturbances, and
establish the truth that the economic habits of the people are always the
controlling factor and that only through the consistent practice of sound
financial habits by individuals and governments, as well as by banks.
can a stabilized economic system be maintained.
We mtkst establish the in3Isputable fact that the American banking
system, despite its admitted defects, has been attuned to the needs of
American business and has been a vital. constructive force in making this
the greatest country in the world and giving our people the highest standard
of living in all history.
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Federal Reserve Bank of St. Louis
In seeking ways and means of accomplishing the task set before us.
it is at once obvious that we can not employ the methods used by those
who have sought to discredit banking in the public mind.
Bankers cannot stoop to the practices of those who hurl their innuendos
and false accusations from radio amplifiers, political platforms and by
whispering campaigns. To employ such tactics would at once discredit our
motives. Furthermore, our critics are often more adept in the art of
propaganda and spellbinding than bankers can ever hope to be.
At the same time there are legitimate and effective channels for creating
and correcting public opinion which can and should be intelligently and
consistently used by banks, both co-operatively and individually. At the
outset, we must recognize that the task cannot be accomplished with one
fell swoop, in a day or in a month. Building confidence is a continuous
undertaking. It is a job that is never finished. We are "talking to a
parade, not to an audience." This does not mean that good results cannot
be accomplished—it does mean that our efforts must be consistent and
continuous. In seeking some way to unlock the door that leads to better
public understanding of banking, we find within easy rcach a key that can
be used most effecitvely. This key is the bank customer. It is estimated
that we have approximately 50,000,000 bank customers in this country,
and this means that nearly half of our total population has a direct, personal
contact with some banking institution.
The impression of banking gained by the average citizen from radio and
press and private gossip may be one thing. The impression of banking
gained by the average customer from his actual contacts with banks and
bankers can be a decidedly differentj thing; it all depends upon the
manner in which bank staff members interpret the institution to this
costumer.
If they are indifferent, aloof, lacking in sympathy and interest, then the
customer is in a frame of mind to believe and repeat any derogatory statements he hears about bankers. If. on the other hand, staff members are
cordial, if they exhibit interest in the customer's problems, if they try to
get his viewpoint in explaining bank policies and regulations. then the
customer is likely not only to doubt unfair criticism, but actually to assist
in defending bankers against unjust attacks.
With 50,000.000 customers ready to testify as to their experiences with
bankers, we have a potentialforce that can mold public opinion favorably or
unfavorably. according to the nature of these experiences. It is therefore
obvious that the bank customer is an important key in public relations.
It is likewise true that bank staff members are the key to customer opinion
and respect.
We have 275.000 bank officers and employees in this country who are in
daily contact, directly or indirectly, with our customers. I wonder if we
stop to realize the importance and significance of these hundreds of thousands of day-to-day, person-to-person contacts? We train our tellers to
scrutinize checks closely and count tbe cash accurately and quickly. Do
we at the same time teach them the best methods of interpreting the bank
and its policies to tbe customers who come daily to their counters? We
train credit officers in all of the details of statement analysis and credit
procedure; they must be able to distinguish a good loan from a bad one,
but have we developed their ability to decline loans in a spirit that holds
business and increases customer respect?
Perhaps the bookkeeper on the XYZ ledger does not contact bank customers during the day. He is trained to operate bis machine efficiently
and to file checks accurately, but when he and his wife attend the monthlY
meeting of their bridge club and some one around the table criticizes a local
banking pra,ctice, has this bookkeeper been intelligently instructed as to
1.4
the manner of bis answer to this criticism?
These are some of the questions which bank executives must ask in their
own institutions and they should seek frank and candid answers. Upon
bank management rests the responsibility to see that staff members are
not only carefully selected and drilled in the mechanics of their jobs. but
also that they are trained in the art of dealing with people.
It is most timely and fitting that the Public Education Commission of the
American Bankers Association, acting under the capable leadership of its
Chairman, Frank M. Totton, and its Educational Director. Dr. Harold
Stonier, has developed a definite plan for training bank employees and
officers in customer relations. Tbe favorable response of bankers throughout the country to the suggestion of this plan has proved its worth and
effectiveness. In furthering this program the A. 13. A. has had the active
co-operation of the Financial Advertisers' Association and practically all
of the State Associations. It is to be hoped that thousands of additional
banks will adopt this plan to the end that our 275,000 staff members may
become more skilled in explaining and interpreting banking procedure.
A
80
BANKERS' CONVENTION
Before starting a definite program of training in customer relations, I
and fairly followed. can be built the most satisfactory relations between
/I believe it is necessary for the bank executive to do some careful checking
management and employee.
of his management and policies. The manufacturer constantly checks the
During the past two years our bank has been giving definite, systematic
quality of his product lest at some point it should fail to meet the claims of
attention to our customer relations and has followed a planned program
his salesmen. The banker likewise must be sure that his institution and
of employee training in our efforts to improve these relations. With the
its methods are right before he can expect them to be favorably explained
textbook of the American Bankers Association a,s a basis of our study, we
to his customers.
organized throughout all of our offices a number of groups which, over a
His must be the type of institution that keeps abreast of the latest and
period of a year or more, made a systematic study of customer relations
best methods of operation; he must not only know what sound banking
in all of its phases. At regular intervals, these groups met under the
principles are, but he must have the courage to follow them consistently
leadership of one of our vice-presidents, and not only studied the material
in good times and bad. He must have faith in the sense of fairness of his
in the textbook, but discussed the best methods of handling customers.
customers and the public, knowing that if a policy is right, if it is sound,
basing these discussions upon actual experiences in the daily routine.
and if he takes the trouble to explain it properly—he will have no diffiThese conferences or group meetings were beld in the afternoons of days
culty in gaining wise acceptance for that policy. Unless the management
when the work was lightest. Each meeting lasted one hour and special
can assure the community that a sound and profitable.institution is being
fea.tures were employed to attract and hold the attention of all members
operated, all efforts to sell that institution to the community must ultiof the group. Specific problems were discussed and staff members were
mately fail.
given suggestions and instructions for handling all sorts of situations arising
/
The staff personnel should be regularly and carefully checked, particufrom contacts with customers.
.1arly to see that those who come in direct contact with customers possess
An analysis of all complaints that were heard by staff members was made
the necessary personal qualifications., If tellers or officers are by nature
and employees were instructed as to what type of complaints they should
lacking in tact and patience, then personnel changes may be advisable.
attempt to handle themselves, and how to handle them, and the type that
Let us not forget that a discourteous teller can destroy more good-will in a
should be referred to officers for attention. The different services of the
day than an advertising program can build in a month. The personnel
bank were explained fully, their advantages to customers were pointed out,
itself must be thoroughly sold on the bank and its policies. This is a point
and staff members were. given training as to the best methods of selling
we sometines overlook. I think senior officers are sometimes prone to
these services to customers. The rules and regulations of the institution
take it for granted that employees down the line are sold on various policies
affecting customers were fully discussed, and demonstrations were given
and practices merely because the bank adopts them. This is often not
as to the best ways of interpreting these rules to the public.
true. If they do not understand the necessity for changes they are likely
While our original program has been completed with favorable results,
to adopt a negative attitude toward them, and thus be totally unprepared
we are not stopping there. This matter of staff training is an educational
to meet criticisms and answer questions fairly and intelligently.
process, and education is never finished. We regard such a program as a
This was demonstrated in our own iristitution some months ago when we
fixed part of good bank management. At regular intervals we shall call
were about to put in a new schedule of metered service charges to replace
staff members for further discussions of customer relations, and whenever
the old flat service charge plan. Upon investigation, we found that many
any basic changes are made in policy or in rules and regulations affecting
of our employees were not thoroughly sold on the necessity for the new
the business of customers, officers and employees will be given full opporcharges and felt that in many cases they were too high. We immediately
tunity to understand the changes so they in turn can explain them to others.
called a meeting of staff members, explained to them how we had arrived
I believe that more of our advertising efforts should be directed to cusat the charges by a careful and fair analysis of our costs, and showed them
tomers rather than appealing for new business. Several years ago, we
that if the bank expected to eliminate losses it must base its service charges
devoted a large portion of our advertising program to an explanation of the
on actual operating costs. We invited questions and criticisms of the new
bank's policies and methods. First, we took the much misunderstood
schedules and by frank and full discussions were able to sell employees on
requirements of sound bank credit and in a series of newspaper advertisethe necessity for the change.
ments, supported by booklets and other material, we set forth the proper
We then demonstrated the best methods of selling customers, giving the
uses and functions of bank credit. Weshowed the necessity for sound credit
staff full information with which to answer all questions and criticisms.
policies, not alone for the protection of the bank, but as a safeguard to
They went out of these meetings with a new conception of a banking practice
borrower against over-extension. One by one we explained our credit
which many had formerly regarded as a nuisance; they were armed with
requirements covering such points a,s balance sheets, operating statements,
information and facts to sustain our position in the minds of our customers.
self-liquidating loans versus capital loans, the repayment of loans within a
The result was that our new schedules were adopted with a minimum of
specified period of time, and other features of good credit procedure. We
complaint and criticism. Staff members must not only be chosen for their
sought to dispel the idea that prospective borrowers must ask for a loan as
personal qualifications, but they must feel that their relations with the
they would seek a iavor. We interpreted the lending functions of a bank
management are based upon a policy of fairness and frankness. A dissatisin terms of a sale, explaining that bank credit wisely and safely used waa a
fied or disgruntled employee can never make a good salesman for the
profitable and desirable business transaction both to banker and borrower.
bank.
Following this, we took up the theme of bank management, and in a
Taking advantage of a recent holiday, all officers and employees of our
series of advertisements set forth our conception of the true functions of a
institution from five cities in North Carolina were called together at our
bank; namely, first, to offer the public a safe place to deposit moneY:
main office at Winston-Salem for a full day's program which included
second, to provide for the community adequate credit and banking facilities:
third, from these operations to earn a reasonable profit in order that
both entertainment and study of the bank's policies and plans. At a meetadequate reserves might be maintained and that stockholders might have a
ing which was addressed by senior executives, employees had set before
fair return on their investment. We explained how sound bank managethem frankly and fully the management's policy as to promotion and
remuneration. The opportunities for growth with the institution during
ment functions to accomplish these main purposes. We set forth our
requirements as to officers and staff personnel. We stressed the need for
future years were pointed out. They were told that it was the bank's
policy to make advancements from its own organization whenever this was
diversification, the advantages of group judgment, the need of keeping
at all possible. However, they were warned that the mere fact a person
abreast of modern methods and developments and, above all, the necessity
had been with the institution for 10, 15 or 20 years was not in itself a basis
for courage to carry out decisions based upon a knowledge of what is right
for promotion or increased salary. It was emphasized that advancement
and sound.
was based not only upon length and faithfulness of service, but also upon
We compiled a list of questions that are most frequently propounded by
ability to fill the position.
customers on matters relating to bank credit and management, and in a
Staff members were urged to examine thernselves critically to see whether
booklet distributed to thousands of our depositors we attempted to answer
they had at all times given their best to the jobs they held: whether they
these questions in non-technical, easily readable language.
had constantly tried to learn.the job ahead of them; whether they had made
At the same time these advertisements were appearing in print, they
intelligent suggestions for the improvement of services or criticisms of
were being studied by our staff members in group meetings. As a result of
existing conditions; whether by their personality and energy they had
this program we believe we have developed a customer understanding of
attracted new business to the bank and had satisfactorily held and pleased
our bank and its management that is productive of increasing confidence
the customers with whom they daily come in contact. It was stressed that
and respect.
our management was constantly striving to appraise fairly and honestly
It is high time that we dispel the air of mystery and misunderstanding
the value of each one, but if any employee was satisfied with simply going
that has long surrounded banking in the public mind. After all, banking is
through the motions of the job he held without any effort to improve
nothing but a specialized form of business conducted on the same general
himelf or his work, be had only himself to blame if he was not promoted
principles as all other types of business. With our customers as the keY.
in position or salary. Finally, staff members were urged to discuss with
let us turn the light of undertsanding, full force, upon our Institutions, our
policies and our practices. By so doing, we will create a new public consenior executives any point in their relatioias with the bank with which
ception of banking that will protect us from future depredations against
they were not thoroughly satisfied or about which there was any misunderthe American banking system.
standing whatever. I believe that upon the basis of such a policy, honestly
A Bank Conference in Action
By Mum W. ELLSWORTH, Vice-President Hibernia National Bank, New
For the purpose of this discussiohich will be devoted exclusively to
our constructive relations with the . -called "trouble customer," bank
clients may be divided into two general' classes—(a) t se who apparently
are continuously satisfied with the services that they r
ive, and (b) those
who are chronic kickers. I shall dispose of the non- cker in a few words.
In the first place, he makes a mistake when he f Is to complain about
service that obviously is bad, or against a rank e ibition of discourtesy.
All banks just have to be operated by human bel
,some of whom are not
perfect, and therefore lapses from a 100% batting ver\age are bound to occur.
when
And
they do occur the customer certai y shduld protest, otherwise
the discourtesy or error is likely to be repeated: If a customer will register
a first class kick right on the spot, not only with the offending person, but
with the official of the bank whose job it is to look after Or personal, nine
times out of ten the trouble can be quickly straightened out td the advantage
of the customer, the clerk, and the bank.
Here's an example: A good customer was transacting busin
at a bank
window when the teller, without any explanation or apology ab
tly left
his cage and was gone so long that the customer was very much p out—
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Federal Reserve Bank of St. Louis
rleans, La.
and properly so. He finally went
another window, was promptly taken
care of, then went to his office and
ote the President a red hot letter reciting the details. When the Seller was asked about it he admitted that he
had been most discourteous, but explained that it was because he suddenly
had been informed that a check for $200 which he had O. K.'d for a friend
a few days before had been returned N. S. F., and he saw visions of losing
$200. That to him wak so stupendous a catastrophe that he completely
forgot his customer, and Started right out to round up the offending friend
who had handed him the rtibber check.
The teller's explanation afforded so logical an alibi that it was suggested
that he go to the customer's office immediately and tell him the exact
facts. The customer was a good sport, and, while he had been very much
incensed at his treatment by the teller, and had declared in his letter to
the President that never again would he perknit that teller to wait on him.
he accepted the teller's story at its face value, and they have been firm
friends over since.
Yes, when justified, the customer should klck. For it is by intelligent
protests against specific instances that banks are enabled to correct and
1
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 1935
NATIONAL BANK DIVISION
AMERICAN BANKERS ASSOCIATION
Thirteeth Annual Meeting, Held at New Orleans, La., Nov. 12 1935
INDEX TO NATIONAL BANK DIVISION PROCEEDINGS.
Address of President C. J. Lord
Government Lending Agencies and Their Relationship to
Page 43
Commercial Banks, by Wood Netherland
Committee Report for Change in By-Laws
Mortgages Insured Under Title II of the National Housing
Act as Investments for Banking Institutions, by Richard
Report of Committee on Nominations
46
R. Quay.
Page 48
49
49
Government Lending Agencies and Their Relationship to
Commercial Banks
By WOOD NETHERLAND, Vice-President Mercantile-Commerce Bank & Trust Co., St. Louis, Mo.
Now that the Banking Act of 1935 is a part of our legal
code, and as the banking business settles down on a somewhat more even keel, there has developed a growing concern
over the activities of Government lending agencies and the
extent of their competition with commercial banks. In a
recent address at Babson Park, President Rudolph Hecht
said:
. . . I confess that I am deeply concerned over the prospect that the
supposedly temporary activities of the Federal Government in practically
every phase of the banking business threaten to become permanent.
There are now more than a dozen different Government lending agencies
which have accumulated assets of about $10,000,000,000. While no one will
deny that many of these organizations were necessary at the time they were
created, to bring about a prompt and safe adjustment of the nation's
financial and banking structure, which had been shattered by the forces
of the depression, still we seriously question wilether it is desirable from
any standpoint that so large a part of our credit activities should remain
permanently under the control of these Government agencies instead of
being gradually taken over by the private instrumentalities which, under
the changed conditions, should now be able to carry on their proper part
in the nation's economic life.
It was, no doubt, this same concern that prompted your
Committee to give place on the program to a brief presentation of this subject.
To consider the problem fairly and logically, we must bear
in mind throughout our thinking the causes which impelled
the Government to enter the lending field ; we must examine
the nature and scope of its operations, determine whether
or not it is advisable for the Government to remain in the
field, and if not, how its retirement can be justified.
The economic storm which precipitated the crisis into
which the Government projected itself was not new. The
history of finance tells of errors similar in nature, though
not in scope, to the one which was at the heart of our
trouble. Year after year we had gone along assuming that
values would continue steadily upward, and the undue expansion of credit on that premise proved to be a colossal
mistake. A corollary to that error was the belief that constantly-rising prices would in time liquidate mounting obligations; but the inevitable result followed, and when the
mountain toppled over and the decline had spent its force,
debtors and creditors alike found themselves prostrate.
There were, on the one hand, debtors whose assets and whose
earning power had been subjected to serious depreciation ;
and. on the other hand, creditors holding* obligations which,
if collected by force, undoubtedly would have invoked serious
social consequences. Numbers of our people, those charged
with a management of banks in particular, found themselves in the dual role of debtor and creditor, and the interests of the two groups lay so far apart that intervention
by some neutral agency was essential to recovery. It seems
perfectly reasonable to assume, when any two groups of citizens such as those represented by capital and labor, or by
debtor and creditor, find themselves in a desperate situa-
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Federal Reserve Bank of St. Louis
tion of this kind, that it is the function of Government to
intervene and to help find a way out of the difficulty. This
was the Government's principal reason for entering the lending field, and the action met with universal approval. Moreover, it gradually dawned upon society that if the gap between debtor and creditor was to be bridged and chaos prevented, much of the loss incident thereto must be distributed
upon the whole citizenry through the medium of the public
treasury. I hold no brief for the abuses that seem to be an
unfortunate adjunct of most Government operations, nor
for the political exploitation that accompanied much of the
activity, but when the final cost has been assessed, the
Government's lending program will stand out as the most
effective part of its major reconstruction efforts.
For the purpose of our discussion to-day I shall eliminate
extensive comment on such lending operations as are exemPiffled in advances to the Secretary of Agriculture for the
purchase of commodities in the attempts to peg prices; to
emergency relief and construction projects ; to the Secretary
of Agriculture and to the Farm Credit Administration for
so-called "feed, seed, drought loans," in the belief that no
one attempts to classify these advances under the category
of credit, but rather understands that they represent, for
the most part, outright gifts to a stricken citizenship by a
paternalistic Government which seeks to help its people
through the economic storm and to afford them a kind of
shelter until the skies are clear again. There may be some
difference of opinion as to when and how these operations
are to be discontinued, but surely there exists no thought
that they shall occupy any permanent place in our credit
structure. It would seem, therefore, that in the brief time
at our disposal we can consider only the activities of those
lending agencies which affect directly the operations of
commercial banks, and that we should determine what, if
anything, we are going to do about them. They are:
The
The
The
The
Reconstruction Finance Corporation.
Home Owners' Loan Corporation.
Federal Land Banks.
Short-term Credit Agencies for Agriculture.
It was unquestionably intended that the lending operations
of the Reconstruction Finance Corporation should be distinctly of a type calculated to bridge the gap between the
debtor and creditor ; that it should be a financial power
'house, so to speak, from which should flow the current of
assistance necessary for our private institutions to assume
a lenient attitude toward all debtors who had done their
honest best, and to insure a normal rather than a forced
program of liquidation. Approximately 50Vo, or $1,884,164,964 of its loans, made under Section 5 of the Reconstruction Finance Corporation Act, were made to 7,439 banks
and trust companies, including receivers, of which 75%, or
8
44
BANKERS' CONVENTION.
$1,428,236,858, has been repaid. During the recovery pro- ship, settlement of estates, &c., these mortgages will filter
gram, however, the Corporation has invested approximately
back into the private market on sounder terms, and the HOLC
$1,000,000,000 in preferred stock, capital notes and debentures will pass into disuse with a feeling of satisfaction over havof banks and trust companies from the-proceeds of which we ing made a major contribution to the recovery program.
assume at least a part of the original loans were retired
No such machinery as Title II of the National Housing
and the collateral returned. It is difficult, therefore, to Act has been devised for farm mortgages, and although in a
estimate to what extent the underlying collateral has been
recent short comparative period, private agencies have made
liquidated, but we are, I am sure, in general agreement that
more of this type of paper than have the Federal Land banks,
liquidation has exceeded our expectations. Moreover, there the supply of funds for farm mortgages is yet far too limited
is no reason to conceal the feeling of satisfaction that has for us to dispense with the services of these institutions.
come to the business community as a result of the increase
The greatest adverse feature of farm mortgages for comin the values of equities both in the portfolios of our own
mercial banks, now, as in the past, is the element of nonbanks and that of the RFC ; and whether we view this as a
liquidity. There is no well-developed market where such
temporary situation created by Government spending or as securities may be disposed of in the event of necessity, as is
definite progress on the road to normalcy, our ability to the case with urban mortgages, and those interested have,
adjust many otherwise impossible problems has been due for nearly half a century, endeavored to devise some system
to the far-reaching activity of the fountain-head of all Gov- whereby this liquidity might be supplied for farm mortgage
ernment lending agencies. It might not be amiss to say loans. The farm loan system, originally represented by the
that the problem confronting the RFC would have been ma- Joint Stock Land banks and the Federal Land banks, was
terially simplified and the necessity for loans to banks and
an effort to supply ihis liquid requirement. It is unfortrust companies considerably decreased, had not the Corpo- tunate that because of the depression and, in a few instances,
ration been forced to publish its commitments to commercial
because of mismanagement, the Joint Stocks were obliged
banks. Notwithstanding the ever-present danger of mal- to enter into liquidation. But as mortgages made to a Land
feasance, the reputation of a bank is not unlike the fair
bank are pledged as security for its outstanding bonds, and
name of our women folk—a thing the mere discussion of as these bonds enjoy a ready market, the net effect of the
which invokes unintended but infinite harm. Whether we sysfem is to provide commercial banks and investors genwould have escaped the same baptism of fire in the end is erally with an avenue for financing farm mortgages without
debatable, but the publication of these commitments was sacrificing the all-important element of liquidity. It is to
unquestionably the greatest single factor contributing to the
be hoped that the Federal Land Bank System may soon bring
progressive failures which culminated in the bank holiday. to an end its emergency program, and that the direction of
The principle of the necessity for secrecy, for the common
its operations be returned to a nonpartisan board, as
good, in certain financial operations is well exemplified by
originally provided for under the administration of Woodrow
the secrecy which surrounds the operation of the $2,000,Wilson. It is contrary to our sense of democracy that the
000,000 stabilization fund now in the hands of the Secretary
management and power incident to the operation of so vast
of the Treasury for administration. It also serves to exem- a financial structure should, in the last analysis, be lodged
plify the disposition to proscribe for private industry certain
in a single individual, as the Governor of the Farm Credit
practices and principles of conduct which, when indulged
Administration. This is merely the statement of a prinin by the Government itself, through some hocus-pocus, beciple and is in no way intended to reflect on the man who
come surrounded with a halo of righteousness. However
presently occupies the position, one whom I regard as the
that may be, the RFC has by no means completed its work. most efficient Administrator in Washington to-day.
The railroad program, the real estate mortgage problem
In reviewing the activities of the two great agencies
in all of its ramifications, many drainage, levee and irriga- handling real estate mortgages, namely, the HOLC and the
tion district situations are yet unsolved, and while progress Federal Land Bank, we should not be unmindful of the valuis being made in all these fields, the liquidating services of
able aid they provided for our commercial banking system
the Corporation will likely be needed for some years to
during the rehabilitation period. Initiating their emergency
come. But as the ability of the Federal Reserve banks, activities for the avowed purpose of relieving banks of slow
under the provisions of the Banking Act of 1935, to assist and uncollectible paper, they have made a definite conin certain emergency situations increases (under proper regutribution to a more liquid banking condition, and the relatory provisions whin will prevent abuse), it would seem
opening of many of our banks is directly traceable to the
that we should look forward to the eventual retirement of activities of these two Government agencies. This is aside
the RFC from the lending field. Recent public information from the service rendered to hundreds of thousands of borto the effect that the Corporation has been making loans rowers who were saved from foreclosure by having their
for the construction of new factories to manufacture goods loans refunded on more liberal terms than it was possible
in lines in which there is already serious overproduction for other creditors to grant.
seems almost incredible. If this is true, there must have
Notwithstanding the fact that many of our members do
been some extraordinary circumstances which allowed no
not feel that real estate mortgages are desirable investments
alternative, for surely sun action does not represent a gen- for commercial banks, further and continuous study should
eral policy of the Corporation. Certainly with the increased
be given to the real estate mortgage problem by both our
latitude now accorded private instrumentalities both by law
State and National Associations. Real estate loans prediand by our present economic situation, it is not too much to cated upon sound appraisals are still prime investments, and
insist that the RFC underwrite no new projects which will
we should not content ourselves with the conclusion merely
compete with those already struggling for existence.
that they do not at present fit our investment program. The
The Home Owners' Loan Corporation, which rendered an
field is too large and too lucrative to abandon simply beexcellent emergency service on urban mortgages, now holds cause, for the time being, we do not have the proper manearly three billions of home mortgage paper, secured by chinery within our banking structure. We should further
approximately one million urban homes. With the rehabili- explore the possibility of such a deposit contract, on time
tation of our building and loan associations, the re-entry of
deposits, as will permit investment in sound real estate
insurance companies into the home mortgage field, and with
securities without subjecting our institutions to the danger
the keen competition now in progress between private lend- of non-liquidity.
ing agencies, including banks, under the provisions of
Perhaps the most potential source of competition for the
Title II of the National Housing Act, there would appear to country bank in the future, and the one which is now a
be no compelling reason for further expansion of this
matter of deep concern, is in the short-term credit field,
agency ; but, on the other hand, there should be a steady
which has been invaded by the Government-sponsored shortcontinuance of the liquidating program in which it is now
term credit agencies, authorized to make loans for general
or soon will be engaged. Gradually, by change of owner- farming purposes and chattel mortgages on crops and
live
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Federal Reserve Bank of St. Louis
•
•
NATIONAL BANK DIVISION.
stock. Here, again, our criticism should be temperate, for
both immediately preceding and directly following the bank
holiday, when deposits were shrinking, country banks were
unable to make loans of this kind, and thus the Production
Credit Associations and the Agricultural Credit Corporation
filled a very definite need. As a matter of fact, had not
this system been in operation during the years 1933 and 1934,
it is difficult to see how farmers in many sections would
have obtained their legitimate credit needs. But with the
banking situation stabilized, bankers, for the most part, feel
that the country banks are now in a position to take care
of all the sound short-term credit needs. In many sections
of the country, notably in territories containing large terminal markets for commodities and live stock, commercial
banks and private loan companies are experiencing substantial competition from these Government agencies. They
handle a sizeable volume of a most desirable type of paper,
such as commodity loans, feeder cattle loans, and others,
much of which, if made by a commercial bank, would be
eligible for rediscount at the Federal Reserve Bank. With
the initial capital structure of these institutions, as well as
organization and promotional expense, underwritten by the
public treasury, and their debentures enjoying a close relationship to Government obligations both as to tax-exempt
privileges and intimate association in the public mind, obviously they are able to quote more favorable terms to borrowers than can be justified by actuarial experience. Although we are nonplussed by this situation for the time
being, it would not be the part of wisdom for commercial
banks to engage in credit transactions below the cost of
doing business, and while interest rates may be for a time
abnormally low due to Government fiat, there will eventually
be such a reaction to Government expenditures that rates
inevitably will be adjusted to a level in keeping with lending experience.
Our approach to this problem should not be merely one
of protest, but likewise one of self-examination, for I am
firmly convinced that by proper and sympathetic attention
on the part of country bankers to the sound credit needs
of farmer borrowers, whatever advantage the Production
Credit Associations may have from the treasury subsidy will
be overcome. Farmers entitled to credit, for the most part,
will much prefer to obtain it from their local banker, where
the transaction may be closed without delay, and where the
personal contact is an important consideration. If we are
to succeed, however, in handling this credit, I should like
to say courteously, but nevertheless emphatically, that we
must have the proper conception of our duty toward farmer
borrowers. It is no affront to remind you that in many
sections of the country, particularly as respects tennantoperated farms, unconscionable interest rates formerly prevailed under the burden of which no form of agriculture
could survive. Bankers themselves were not altogether responsible for this situation, one of the major causes being
the fact that although the bank had two classes of customers,
depositors and borrowers, one of these, the borrowing class,
was carrying the entire cost of bank operating expense and
the payment of dividends to stockholders. Heretofore, to
those who had money, banks rendered service without charge,
and all of the cost of operation was laid on those who had
use for the funds. This has now changed. With the installation of service charges, which are presumed to reimburse
the bank for service rendered to those who want their money
taken care of, and a lower interest rate on deposits, it is
not now necessary to ask such high rates from borrowers in
order to produce the same income as was formerly obtained.
In short, having found a new source of revenue, we cannot
appropriate it all to ourselves ; a part of it, at least, should
be shared with those who in previous years have carried the
entire burden of our operating expenses.
Finally, I would recommend to our captains of finance and
to those charged with the operation of our Federal Reserve
System a more tolerant and sympathetic attitude toward
the credit needs of small independent operators, farmers in
particular, than has been heretofore displayed. According
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Federal Reserve Bank of St. Louis
45
all due credit to our great corporate enterprises for their
magnificent contribution to our commercial supremacy, it
is in the combined efforts of our independent individual citizens that, after all, lie our greatest hope for national
security.
This reference to the subject of Government lending would
not be complete without some discussion of the moral effect
of such activities on our composite national character.
More than 4,500,000 of our citizens are now indebted to these
agencies—a sizeable voting block, the potential political
strength of which is too obvious for comment. Within this
group are hundreds of thousands of men and women who
have done their honest best and are entitled to the utmost
of consideration from their more fortunate fellow men.
Again, there are other thousands who are hopelessly involved
and for whom liquidation was, is and will be the only solution. Between these two classes there are speculators,
minors, estates, old people with no income, and a host of
others who make a ready audience for those who have no
regard for the sanctity of obligations and who preach the
gospel of repudiation. No political administration, however
well intentioned, can supply those restraints and restrictions so necessary to sound credit practices without incurring
the ill-will of the voters who borrow from it, and thus it is
persuaded to follow the line of least resistance. This is
particularly true, in a democracy such as ours, where succession is thought of from the short-range viewpoint, and
where prosperity now seems to be the real forgotten man.
Few people question the necessity for many of the lenient
policies adopted to help those who have honestly tried, but
the high delinquency record on loans made by the Government lending agencies discloses altogether too much disregard for promises made and is but a practical illustration
of what invariably happens when the sovereign enters the
lending business. This has the double effect of imposing
unnecessary losses on loans already disbursed and serves to
retard the flow of credit from private sources, and is altogether an unhealthy sicuation. No system of credit can
function long, or in the end survive, when those who are
able to pay find refuge in measures designed to assist only
those who are in actual and unavoidable distress. It is
essential, therefore, that the granting of credit be restored
to private instrumentalities with the greatest possible disatch in order that our traditional respect for obligations
- --____-_:_- -,---kay not suffer wholesale collapse.
Whether we like it or not, we are operating banks in an '
era when there is a great wave of socialistic thinking which
has been interpreted into laws that will be in force for many
years to come. Under these conditions our banks have been
more and more converted into a public utility with less
and less freedom of operation. Perhaps this is well. Time
only can prove the value of these changes. It is our obligation to apply ourselves diligently to the task of adjustment
ihe end that our private banking system
to the new order, to
--roarmay be preserved. ,,If I read the temper of the American
people aright, the have no desire to see our financial resources directed toward political ends. A sense of the value
of individual initiative and of private control is too deeply
rooted in our national character to be destroyed even by the
most terrific of economic storms. For in this is represented
the fundamental tenets of the American faith, the principle
upon which our country was founded, by which it has grown
great, and to which it must adhere if the republic is to
endure. My conception of a well-ordered credit system, and
one which older governments have long since found most
desirable, is one operated for private profit, alive to its obligation to serve, with such supervision by the Government as
will minimize the abuses which all intelligent men condemn.
I believe that our private banking system is the one best
adapted to the peculiar needs of our wide and diversified
national life. It is due to this system, in no small measure,
that we have produced 50% of the world's wealth with 6%
of the world's population, and notwithstanding statements
of reformers to the contrary, this wealth is so evenly divided
that immigration barriers must still surround this land of
•
46
BANKERS' CONVENTION.
opportunity lest the peoples of a troubled world make a
beaten path to our door.
C. W. Allendoerfer, Vice-President of the Division, who
temporarily occupied the chair, had the following to say
following the presentation of Mr. Netherland's address:
I am very happy that we have had Mr. Netherland with us. Mr. Netherland knows that subject, as a successful banker in Arkansas, with a knowledge
of the needs of country banks and of larger banks. He became President
of the Federal Land Bank of St. Louis, which position he left only about 18
months ago to become an officer of the Mercantile-Commerce Bank & Trust
Co. of St. Louis. So, when Mr. Netherland brings us that messag-e, it is
not based entirely on outside observations; it is the result of his own experience, his own knowledge, his own philosophy gained from that intimate
acquaintance with the whole subject.
Mortgages Insured Under Title II of the National Housing Act as Investments for Banking Institutons
By RICHARD R. QUAY, of Counsel, Federal Housing Administration
[The following address of Mr. Quay was delivered before both the State Bank and National Bank Divisions of the Association.]
Mr. Chairman, Gentlemen:
In behalf of the Federal Housing Administration, I wish
to express my appreciation of the courtesy and co-operation
shown by the officers of your Association in according us
an opportunity to appear before you here to-day. I propose
to cover briefly those features of a mortgage insured under
Title II of the National Housing Act, which make that mortgage an eminently desirable investment for banking institutions. Let me at once allay your fears by saying that I
have just now used the term "briefly" advisedly and not
rhetorically, for I know that convention seats are hard and
that your schedule is a full one. I ara also not unaware
of the fact that conventions—even of bankers—do not find
their sole justification in deliberation upon matters of routine
business, nor yet in a preoccupation with the problems of a
liquidity which is purely financial in nature. This is all
to the good and, as a grateful beneficiary of your hospitality,
I should be the last to wish it otherwise.
Being one of those slightly anachronistic individuals who
sometime_s suspects that bankers, as well as lawyers, have
souls, I shall, accordingly, take to heart the truim of the
pulpit that "no souls are saved after the first 20 minutes,"
and, improving upon the clergy, rest content if I can influence the salvation of one or two in 10 minutes. My task
is greatly facilitated by the fact that the National Housing
Act has now been in existence for almost a year and a half,
and that many of you represent institutions which have been
actively engaged in the insured mortgage program as approved mortgagees since the first of November a year ago.
I am more than willing, therefore, to take judicial notice
of the fact that most of you are thoroughly familiar with
the broad outlines and general details of that program as a
realistic attempt to re-establish our $21,000,000,000 home
mortgage debt on a common sense basis, and, at the same
time, provide a private capital solution for the already
serious and constantly increasing housing problem which
confronts this country.
The National Housing Act is simply the statutory expression of the lessons of a very bitter experience in the field
of real estate and mortgage finance. I assume that, by the
accident of circumstance, all bankers and business men
tasted more deeply of that bitterness than (lid I, and that
the lesson which it has for all of us, if we Are wise, is. thus,
correspondingly easier for you to appregiate than it was
for me. I can, therefore, address my rem4rks to-day, from a
mutually understood and brutally factital basis, directly
to your intelligence, for ours is a co 'mon ground upon
which the controversial aspects of social economic or political vagaries have no place.
I wish first to tell you exactly wha kind of a thing a
mortgrage eligible for insurance under Title II is. I then
wish to describe precisely the nature and extent of the
additional protection provided for that mortgage by the
insurance. After that the issue can safely be left in your
hands, since it would be sheer presumption for any mere
lawyer to pretend to lecture a group of bankers upon those
more refined questions of investment policy and banking
practice which fall purely within your own expert province.
Once it is accepted that an insured mortgage is. from every
point of view, one of the very best investments available
to-day—and if that proposition is not now accepted by all
of you, I am certain that it eventually will he--I have no
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Federal Reserve Bank of St. Louis
7
doubt whatever that, as bankers, you will understand better
than any outsider, who might assume to point them out to
you, the possibilities which the insured mortgage offers for
that proportion of your portfolios w(hich your applicable
law allows you to carry in real estate.
This is equally true whether one is dealing with a
National bank of a State bank, for I know of no differences
in the situation as it affects either the one or the other,
except such arbitrary and technical differences as arise
because of the fact that State banking laws vary both among
themselves and from the National Banking Act as to particular capital percentage limitations for the several classes
of permissible investments. There may also be a further
difference between the National bank and the State bank in
connection with rediscount privileges. In this respect, however, every State bank which is a member of the Federal
Reserve System stands, of course, on a parity with National
banks. As I have already indicated, therefore, my only
purpose in this address is to emphasize the inherent soundness of the insured mortgage, as such, and not to discuss
such legal or other ditinctions as exist between State and
National banks. Those distinctions for the most part are
simply mechanical, and hence, largely immaterial, as regards
their implications for general participation by banks in the
insured mortgage program.
1. The long-term amortized mortgage. Apart from any
question of the contribution to security made by the insurance, any mortgage eligible for insurance under Title II is
necessarily, in and of itself, a double A real estate investment. The double A rating is appropriate, not only as a
statement of fact, but also as a figure of speech, for the
letter A is the first letter of two words which represent the
very foundation of the whole insured mortgage program,
namely, Appraisal and Amortization.
Sound appraisal bears the same relation to a mortgage
transaction as a fulcrum does to a lever. For a mortgage
loan, it is the one virtue without which the preservation of
any other is practically impossible. After the event it is
now easy for anyone to see that the appraisal methods commonly used in the past were shortsighted and utterly haphazard. Their deficiencies were not attributable to stupidity
or negligence on the part of mortgage lenders. They were
partly the result of tte accepted system of home mortgage
finance, based upon the short-term, unamortized mortgage
partly the result of the absence of statistics capable of supporting reasonable estimates of actual and continuing value.
Little attention was paid to, and less was known of, such
thin* as neighborhood trends, population trends, design and
const ction trends, the relationship between house and lot,
and be een property and neighborhood or community, to
mention s eral of the intangible hut very real factors bearing directly, ot upon the present value of a piece of property,
but upon its v ue at the end of five, or 10, or even 20 years—
the only value stifying a borrower in contracting a mortgage obligation arid,a lender in advancing money upon mortgage security.
The system of appraisal developed by the Federal Housing
Administration gives careful study and specific ratings to
all these elements in accordance with a prescribed routine.
The appraisals are made ,by specially trained appraisers in
possession of all available information—information which
is continually growing and being classified and assimilated
SAVINGS DIVISION
AMERICAN BANKERS ASSOCIATION
Thirty-Fourth Annual Meeting, Held at New Orleans, La., Nov. 11 1935
INDEX TO SAVINGS DIVISION PROCEEDINGS
Co-operation of Banks in Mortgage Lending, by Philip A.
Page 67
Benson
70
Thrift Lessons of the New Deal, by Dr. A. H. Giannini
Address:cf[President T. J. Caldwell
Reportiof[Committee on Nominations
Page 72
73
Co-operation of Banks in-Mortgage Lending
By PHirzp A. BENSON, President Dime Savings Bank of Brooklyn, Brooklyn, N. Y.
freely discounting or purchasing mortgages from holders. I
am convinced that no bank should by means of rediscounting
mortgages, assume contingent liability. The mortgages we
hold present problems enough without adding problems that
would arise should we hold mortgages that were discounted
with some mortgage bank.
2. Securing adequate income.
Real estate itself is something that is owned for the purpose
3. Being able to obtain cash In exchange for the Investment with a fair
of use, income, or appreciation. It is usually considered an
degree of promptness.
Means to securing these ends are undoubtedly made by asset of a more or less permanent character. It is real
goveach institution that makes mortgage loans. Their success- property and differs.from personal property, and it is
real
nature
should
estate
very
its
By
erned
laws.
by
special
ful accomplishment can be aided by co-operative action
among a group of institutions. Before describing in some be financed on a long term basis. It seems to me that short
detail an effort that gives great promise of success and which term mortgages are inconsistent and illogical. Does it not
borrow on an asset that cannot
is now being conducted by savings banks in the Borough of seem unreasonable that a man
pay
back the debt in three or
to
agree
readily
be
and
sold
Brooklyn in the City of New York, I would like to make
neither the borrower
made
is
five
loan
years?
When
the
and
mortgage
mortgages
regarding
observations
some general
lending, which will illustrate the need for such co-operation. nor the lender expect it to be paid when it is due.
Investment in mortgages, or in any other type of security,
Real estate mortgages bear higher rates of interest than
most of the other investments into which savings funds are is, as I have already mentioned,for the purpose of obtaining
placed. There are certain risks involved in mortgage lend- income. If, in making the investment, we lose part of the
net result
or
ing—but then, every type of investment has an element of principal through bad judgment misfortune, the
from
Whatever
far
of
is
our
favorable.
investing
mortgage
not
are
risk. Unlike some of our investments, mortgages
liquid. No plan, so far as I know, has yet been proposed we lose over a period of time in connection with mortgage
we receive
that will give a more liquid character to mortgage invest- investment must be charged against the income
from
a fund
let
assume
To
us
such
illustrate,
investment.
that
something
requires
liquid
mortgage
a
ments. To make
will enable it to be quickly transferred from a holder to some- of $100,000 invested at 5%. In three years we will have
Let us assume that at the end
one else by means of a sale or a loan. There can be no collected $15,000 in income.
mortgages
market, of course, unless there is a buyer as well as a seller of three years we had to foreclose one-fourth of the
costs and
taxes,
foreclosure
paid
and
we
that
doing
this
in
found.
be
must
buyer
and therefore to sell a mortgage a
There are agencies such as the Federal Home Loan Bank the expense of rehabilitation. We then sold the buildings
which make mortgages somewhat more liquid investments, we took in but got back only the principal originally invested
for cash can be obtained on them by banks which belong to in the mortgages. If the expense incurred in acquiring the
the system. However, it seems to me that borrowing on $25,000 worth of real estate, of carrying it and selling it,
mortgage investments is an emergency measure. Mortgage amounted to only S7,500 (and it is not inconceivable that it
investments should be made only by institutions that can should amount to as much as this) we would have spent, or
hold them for long periods of time. A mortgage loan is an lost, as the result of these foreclosures as much as half the
investment witb peculiar characteristics--when we take it entire income received for the previous three years.
Let me state briefly some of the dangers that seem inherent
we know the limitations upon its marketability. We know
in the business of lending money on real estate.
of the inability of owneri to pay the principal sum ex t b
a series of small instalments. It seems to me, then,
. Depreciation and obsolescence of the property mortgaged. Every building
has a limited life. It depreciates constantly and eventually its value will
the very character of the mortgage, holders should no
disappear. Even buildings maintained structually sound become obsolete
expect to be able to readily obtain cash for them. Of course, and tenants prefer other buildings for use and occupancy. Knowing this.
would
it
how can we fail to insist on amortization?
perhaps
this is an argument for amortization and
Overproduction of buildings. We may make a loan on a new building.let
not be amiss to state here that if the experience of mort- us2.
say an income producing apartment or commercial building. The value
gagees in recent years has taught them anything, it has of this building can be partly destroyed by the overproduction of similar
buildings in the nieghborhood. A danger such as this can be guarded
taught them that, with scarcely any exceptions, mortgages against
by co-operation among lenders.
must be amortized.
3. Faulty construction by "Jerry" builders. There is a big difference bea structure erected by a good builder. one who uses good materials
I am not in sympathy with rediscounting mortgages in tween
and workmanship, and those who "skin the job" as much as they are able.
I
do
not
mortgages.
more
make
to
funds
order to obtain
Co-operation among lenders means that we can demand standard specificawe should do.
believe mortgages should ever be used as a basis for the tions, and this is surely somethingand
affect the ability of tenants to pay
4. Economic conditions change
a
for
need
issuance of currency, nor do I believe there is a
rent and home owners to pay interest and taxes. Here it will be seen that
National Land Bank operating on a nation-wide scale and a loan made in good times for the fullest amount possible, and not reduced
The principles underlying investment of funds in mortgates are the same as those underlying any investment of
funds. They are comparatively simple and so well known
it seems hardly necessary to repeat them. They are, as
we all know,
1. Safeguarding the principal.
//
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Federal Reserve Bank of St. Louis
- 20
•
68
BANKERS' CONVENTION.
by instalments during those good times, will prove a problem when distress
occurs.
5. Neighborhoods change. People move away from neighborhoods that
are deteriorating. Trade changes its location. Sometimes a different race
comes into a neighborhood. These trends can be watched and it is evident
that studies made collectively by lending institutions may be of value to
all of them.
6. We have overvalued property in making appraisals of both land and
buildings. We have assumed that because a fine structure has been put
on a piece of land it has increased its value. overlooking the fact that there
is much more land that can be similarly improved. We have also valued
buildings at cost when costs were high due to unusual demands for labor
and material. Let us remember that the value of any piece of property is
never more than its net income capitalized and that net income must be
estimated on what we believe the building will be sure to produce over
some period of time in the future.
7. Loans on buildings of a special type have been made, and these are not
easy to adapt for other purposes. Let us remember that money spent on
a building does not always create market value. The building may have
no market. I am sure that in the future we will either avoid lending
properties of this type altogether, or lend on them very conservatively.
8. Some properties, while having buildings that are really the proper
improvement, are of such a type that buyers for them are hard to find. I
refer especially to very expensive private residences. Some of these may be
magnificent homes but they can be used only by those capable of supporting
them.
9. We may overlook the fact that the income producing possibilities of a
building is the principal basis for its value. From its location, its construction, its arrangement, is it a structure for which people will pay rent
sufficient to support the value we assign to it ?
10. Last, but not least, the danger in mortgage lending lies with the lenders
themselves. When monqy is plentiful they compete for loans. A borrower
does some shopOing and goes where he can get the largest amount on the
best terms. We are desirous of getting our money to work and this has.
I am sure, led us to bid against each other. Co-operation can, to a great
extent, remove this danger. Banks in the same locality should not as a
rule take loans away from each other. They should know what other
banks are offering and should not play into the hands of the borrower by
ncreasing an offer made by another bank.
There are always dangers in mortgage lending and the best
we can do is to minimize mistakes. We can also profit by
each other's experience and we can exchange information.
We can, I am sure, formulate principles based on these
experiences.
It is with some idea of the value of co-operation in mortgage lending that a group of savings banks in Brooklyn in
April 1934 started what is known as Group V Mortgage
Information Bureau. At the end of a year and a half, this
Bureau numbers 26 savings banks among its members, 18 of
which are in Brooklyn, 4 in Queens and one in Manhattan,
two in other parts of the State, and a mortgage company
owned by all of the savings banks of the State. These banks
pay dues at the rate of $20 per million of mortgages held. At
present the Bureau is running on a budget of approximately
$15,000 a year.
It has been the policy of the Bureau to stick as closely as
possible to the practical problems confronting banks owning
real estate in the two Boroughs of Brooklyn and Queens.
That does not mean that it has gone in for elaborate reports
or studies of general conditions other than those that affect
our immediate problems. Individual inquiries regarding
conditions are answered. By means of the Bureau the
experience and knowledge of one institution are made available to all. It has been possible for the Bureau to make
available to each bank information concerning their practices, collections, sales and loans, whereby comparisons could
be made with other institutions and with the average of
other institutions. Reports have been sent out in connection
with collections of mortgage interest and vacancies in rentable property. These show the average for all institutions
and along side of this the actual figures of the member bank
to which the report is being sent. These comparisons lead
to constant efforts on the part of member banks to improve
their individual records. In order that this information may
be kept confidential, numbers are used on the reports instead
of the names of the banks, and the figures of the bank to
which the report is sent are marked in red.
These comparisons have led banks to compete in efforts to
improve their records. Such competition is constructive and
in some cases has resulted in changed methods and policies.
Interest Collections—Statistics regarding interest collections
are sent to each member bank monthly% These show the
amount of interest due the first of each month and the amount
collected in 15, 45, 75 days, and so on. The total figures
indicate whether interest collections for the banks as a whole
are improving.
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Federal Reserve Bank of St. Louis
Vacancies—Studies of vacancies are made by locations and
types of properties. Vacancies, as we all know, represent
a definite loss of income and to minimize vacancies is the
constant effort of every real estate owner. You,as an officer
of a bank, on studying vacancy ststistics, would be alarmed
to find out that your bank had a larger percentage of vacancies of property of a certain class in a given location than
other banks. You would want to shake up your agents and
rent collectors and learn the reason for it. It seems clear
that this co-operative study must result in improved income.
Undesirable Tenants—Information is exchanged regarding
undesirable tenants and in some cases houses have been
emptied of undesirable tenants by a member bank for the
general good of the neighborhood. This can be done where
banks owning real estate wish to improve it for use and
occupancy for people of a better class.
Another result of co-operation through the Information
Bureau has been the refusal of banks to make sales of property at an unreasonably low figure and agreements have
been made to maintain rental prices for store properties on
particular blocks. The Manager of the Bureau reports that
she has experienced an almost unanimous willingness on the
part of the members to furnish the Bureau with the fundamental data necessary to carry on these services.
The Bureau has a record of some 100,000 mortgages held
by member banks in the Boroughs of Brooklyn and Queens.
Also information regarding some 6,000 parcels of real estate.
All sales are recorded and their monthly reports include
not only all sales but all foreclosures, new loans, collections
of interest, and arrears of taxes.
New Loans—Member banks reports to the Bureau the
location of properties which they are planning to inspect on
loan applications. When the Committee of a bank goes out
to look at the property they have with them a report from
the central organization detailing the number and amount of
mortgages on the block, their position on arrears, the foreclosed properties in the neighborhood, new construction and
sales, and sometimes rentals. Reference is frequently made
to neighborhood trends. There is included a statement as
to whether the property has previously been inspected by a
member bank on a mortgage application. We have found
that some applicants go to three or four banks with the same
application. It certainly is important that the amount offered by different savings banks on the same piece of property should not vary. This exchange of information results,
too, in banks not taking loans away from each other.
vi) Assessed Valuations—Property in the City of New York is
supposed to be assessed for its full market value. Much
of it, as a matter of fact, is overassessed. This is particularly true of real estate acquired through foreclosure and
it is often necessary for us to file a protest in order to secure
a reduction in assessed valuation. This work is being coordinated by the Bureau for all of the member banks. Conferences have been held with the tax authorities whereby
hearings in connection with all protests made by savings
banks are grouped. This will save time and effort on the
part of the bankers and city officials and we believe will lead
to better results.
p. Once a month the Bureau brings together the real estate
men and some of the officers of the member banks for a
general discussion. Speakers of note are invited to address
these meetings and real estate and mortgage problems are
freely discussed. Participation in the meetings by the junior
men in the banks is leading, we believe, to a development
of some of the talent among these men.
The Bureau maintains an exhibit of modernization plans
of both members and non-members. Pictures of properties
are taken before and after renovation. The plans and costs
are furnished the Bureau. Figures are also furnished showing
gross and net income before and after the modernization.
An extremely important and forward looking step was
taken by the Information Bureau publishing minimum requirements for new construction. A committee of able men
prepared a standard specification. Members have agreed
not to make loans on new buildings unless the builders agree
•
4
SAVINGS DIVISION.
upon these specifications as a minimum requirement. About
2,000 copies of these specifications have been distributed to
builders and supply men. Surely the knowledge of what the
lenders require will lead to sounder construction and therefore better security for our loans.
Published reports of the Bureau which have been found of
considerable interest include the semi-annual survey of
vacancies mentioned above. In this study as in so many
done by the Bureau, Brooklyn is divided into several sections
and data are taken on the different districts and are further
broken down according to type and age of house. Thus it
was found that in one section of Brooklyn, large apartments
were at a premium whereas small apartments showed many
vacancies. This report naturally served to deter the making
of alterations in this district along the line of cutting up
large units. The vacancy survey indicates relative rentability of different types of units and is one of the factors in
the recently expressed opinion of the Bureau that two-family
houses would prove unattractice investments in the future.
Based on this survey and others, the Bureau has recommended that loans be not encouraged on all multiple-family
on a
dwellings of houses of under 25 families and based also
25% vacancy in stores in Brooklyn, members of the Bureau
are making very few new loans on store properties.
house
Other studies include an analysis of new apartment
and
construction in Brookyn and of its effect on owned
graphic
in
showing
maps
of
series
;
a
mortgaged properties
the
form the location of the negro population and its spread,
of
types
different
in
areas
e
location of heavy foreclosur
monthly
a
property, and an analysis of neighborhood trends;
and
report on sales, foreclosures, and new loans by sections;
districts.
several special reports on trends and rentals in small
sales
One of the most recent reports brought out covers all
type
from 1930 to July 1935. Breaking down these sales by
mortgage
the
using
district,
of property and by residential
at foreclosure as a basis of comparison, it was found that
of
whereas properties had been selling in 1934 at an average
$1,450 above the mortgage at forelcosure, that they are
per
being disposed of in 1935 for an average of only $679
were
sections
certain
found
that
further
It
was
property.
showing lower sales and greater losses from year to year,
whereas other sections were indicating the advisability of
retaining properties since sales were increasing both in volume
and average profit.
The Bureau stresses tbe fact that at no time does the
Bureau presume to give advice on policy or practice of the
different banks. In all cases, it attempts to present every
possible fa,ct and all pertinent information which should be
used in arriving at a decision. It is not the intention of
the Bureau in any way to usurp the duties of the real estate
departments of the banks but rather to supplement their
work and to give to each institution a knowledge of the best
that is being done by other savings banks.
Another important co-operative effort among mortgage
lenders carried on in the City of New York is known as the
Mortgage Conference. Members of the Conference include
not only savings banks but also life insurance companies and
trust companies. The object of the Mortgage Conference is
to promote the stabilization of real estate values, secure cooperation of institutional owners of real estate for the purpose
of reducing vacancies, maintaining rental schedules and
eliminating undesirable tenants. It further seeks to promote sound principles of mortgage lending a.nd to eliminate
competition for loans. The value of the Conference has been
demonstrated recently, when, knowing the pressure of funds
seeking investment, certain mortgage brokers attempted to
break the rate a "runaway" market might have resulted—
that is, there might have been a great many transfers of
mortgages from one institution to the other merely for the
purpose of securing a lower rate of interest. Information
furnished by the Conference showed lenders that a 4% rate
for mortgages was needlessly below the market. The result
was that a tendency to make loans at that rate was checked.
The Conference has made information available regarding
the amount of new construction within the city. It was
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Federal Reserve Bank of St. Louis
69
evident at one time that there threatened to be an overproduction of elevator apartment houses, particularly in the
Borough of Brooklyn. Facts regarding this furnished to
members have enabled institutional lenders to direct the
financing of new buildings to those areas that seemed to be
able to absorb new apartment houses.
The value of co-operation of this kind cannot be overstated for nothing will increase vacancies and reduce rentals
in existing buildings more than the construction of unnecessary new buildings.
The Mortgage Conference keeps records not only on new
construction but also on alterations and on sale of real estate
and new mortgages made. They are working on a system
of card records of all mortgages held on properties owned by
the member institutions. They are also working on an
analysis of the experience of some of the member institutions
with mortgage loans over a period of years. These statistics
should show what type of mortgage, classified as to kind of
property, location, amount of loan, &c., proved to be the
best investment.
A study of the results of a period of mortgage lending has
been made by an institution in the Borough of Brooklyn.
This study, entitled "A Mortgage Analysis," was made for
the Home Title Guaranty Co. by Edgar A. Lodge, its
Comptroller, and is published in book form. It is an analysis
of a 28-year record of the mortgages made by the Home Title
company.
The total loans made in the period were $138,053,000.
Of this, 34.7% has been paid off, 53% is still open and, with
no serious arrears, 12.3% has been foreclosed or is in trouble.
The analysis shows the amount of loans in different years
and the per cent that turned out well. In grouping the
loans by amount, it seems the smaller amounts show better
results, for of loans under $7,000 only 4.3% got into trouble,
whereas when we get into loans of $200,000 or over, 43% got
into trouble. Percentage of trouble seems to increase as
the amount gets larger.
The analysis as to type of property shows some strildng
results. One-family houses account for 32.2% of all loans
made. Of this type of loan 4.87% got into trouble. The
loss on those, however, was only about 6-10ths of 1% of the
total amount of all the loans. Two-family houses were
19.6% of the loans made; 9.68% of them got into trouble
and the loss was 1.3% of all loans made. When we get to
apartments of more than eight families, which account for
13.1% of the loans, 30.86% of them got into trouble and
the loss was 2.72% of the loans made. Stores with from
one to four apartments do not show up very well, for while
the loans were 9.2% of loans made, 16.4% gave trouble
and the loss was 4.97% of the loans made. Factories,
garages, churches, schools, motion picture theatres show up
rather well in the analysis. These loans, however, were
comparatively few in number and I will not bother you with
the figures.
I was rather surprised to see that on semi-improved property, where the loan was made principally on land value
(and which loans were only 2% of the total made), over
18% got into trouble and the loss on them was 6.69%.
Probably we would call the buildings on property of this
type taxpayers. Evidently too great faith was placed in a
taxpayer as security for a loan.
My conclusion of all these efforts is that we have come t•3
a realization that we must be informed as to the results of
our past mortgage lending practices; that we must co-operate in order to avoid the continuation of bad practices; that
we must be informed as to what each one is doing and that
we must unite in order to reduce as far as possible the dangers
inherent in taking real estate mortgages as security in lend.
ing our funds. In the past I think we have been overoptimistic in making our appraisals. I do not think we
were as fully informed as we might have been of the facts
affecting land values. I am quite sure we failed to see the
importance of the extinguishment of debt. To be better
informed, to profit by each other's experiences, to unite
against common dangers—these mean co-operation, and
V
70
BA_NKERS' CONVENTION.
(
I am glad to say that co-operation is actually working in
the city from which I come.„,...-'
The business of mortgage lending is essential to the growth
and development of all of our American cities. This business must remain in private hands. It is not a function of
the government. Proper methods can but lead to better
buildings, sounder growth and development and a greater
degree of true prosperity for all of our people.
I do not know the problem in your city, if 3-ou have a
problem. Many localities will no doubt require a great
deal of mortgage mom y for future development. There will
J6
be tendenoies to over-produce buildings and pressure to
make unwise loans. A study of the record and considerstion of plans to stabilize values and promote safe practices
will be profitable. There must be reforms in mortgage lending practices in many cities if the mistakes and losses of the
past are to ge avoided in the future. The experiences of recent years must not be lost sight of as the tide of prosperity
comes in. Can we not, as bankers, take a leading part in
efforts to make mortgage lending safe in our respective communities? There is a challenge in the thought. Shall
we accept it?
Thrift Lessons of the New Deal
By DE. A. H. GIANNINI, Chairman Executive Committee, Bank of America
National Trust & Savings Association,
Los Angeles, Calif.
Prior to the presentation of his address Mr. Giannini
commented as follows:
Last night, on returning to the hotel after having attended the
delightful
dinner of the Reserve Bankers, I was reading the morning "Picayune,"
and glanced at a telegraphic dispatch reporting the Stavinsky scandal.
You will ask, why this strange reference in this orderly and well-disciplined
proceeding?
Apropos of the subject, for which I have a prepared address—I will
read it to you in a few minutes—I desire to present for your consideration
a few excerpts or parts of an article which won the first prize in a competitive
contest engaged in by the senior officers of the savings banks of Great
Britain. The article was called to my attention by Mr. Gregory, the
financial editor of the London "Times," while I was in that city a few weeks
ago.
Because of its award of merit, that article provoked much discussion and
much comment. The prize was won by a certain Mr. C. W. Dick, and in
it he endeavored to determine the position of thrift as a factor in the life
of a nation. He was careful not to confuse the causes and the effects of
thrift. He feared, on the one hand, that he might credit thrift with virtues
it did not possess, and on the other hand, he did not wish to withhold
attributes to which thrift was rightly entitled.
He said that thrift implied self-denial and careful management, two
excellent virtues for an individual or a community. He said that much
had been spoken. and more had been written, about the high moral value
of thrift, but what he was anxious to determine was what proportion of
the people were thifty because of the moral value involved.
Ile said that if thrift connoted careful management, then a man may
manage his affairs with the utmost care without thought of benefitting the
community, without thought of contributing to the public good, and
whatever benefit might accrue to a community would be purely incidental
and not as a result of deliberate planning. Here he saw what he called the
selfish motive of thrift.
Personally, I have not much patience with that concept. I would just
ae soon condenm religion because of an occasional manifestation of extreme
fanaticism. I would condenm patriotism because of an occasional act of
treason, or condemn music because occasionally a saxophone player in a
night chib may sound a discordant note.
Then he presented and pursued his argument by stripping thrift of all
motives and all attributes. Ile said that thrift fundamentally was a form
of old age policy for self-preservation. It was a man's natural desire to
school himself in the ways of frugality in order to provide for old age, to
provide against incapacitation, because he feared the operation against
himself of the law of the survival of the fittest.
Then he continued, a man feeling that way has an interest in the life
of his nation. He begins to study thrift agencies, he begins to feel that he
wants to know that his savings are secure, that his sat ings are available
when he wishes them and this justifies bim for denying himself luxuries or
for achieving or attempting to achieve financial independence. Then he
pursues his argument further. saying that if one evinces an interest in the
life of the nation, he naturally then would manifest interest in the government of his country, and the thrifty man would be fearful of any jugglery
on the part of the government officials in rmpect to governmental
finances.
Then he further stated that the responsibility of an individual in his
government increased with the savings he had on deposit in the banks.
In other words, his interest in government, his interest in his nation was
commensurate with his savings, and then he made this remarkable point.
You all know better than I how the National Government, the tmification
of the three, the liberal, the labor and the conservative governments, under
the National Government, started Great Britain out of the depression.
He maintained that the high majority given the coalition party was due to
the fact and due to the statements made by Lord Snowden and Runciman
when he called the people's attention to the fact that the savings of the
people of Great Britain were in jeopardy and he remarked more particularly
about the Postal Savings, because as you know, there are branches in
every corner of Great Britain; they hold the deposits of nine millions of
British people; and Runciman and Snowden, very shrewdly and very
adroitly referred to the apprehension that the people had as to the safety
of their moneys in the Postal Savings bank.
Then be stated that the fall of the government in France at the time
of the Stavisky scandal was due to the fact that the peasant of France. the
farmer of France, the backbone of France, was apprehensive of his savings
and he manifested fears as to their safety and because of that and the lack
of confidence in the government, there was a demand for an immediate
change of government. Thus he concludes that the thrifty man has a
very important place in government, that thrift is an important economic
factor that has much to do with the stabilization of the financial life of a
nation; that the thrifty man feats unwise inflation or extravagance or uneconomic borrowings, or the mortgaging of the future, lacking practical
foresight; that the thrifty man sees to it that the public officials elected have
a high regard for the task before them and that they perform their duties
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Federal Reserve Bank of St. Louis
with due regard as to the ability of the people to bear the burden. Then
he states that the fundamental motive back of thrift is the preservation of
the individual and with the preservation of the individual you have the
preservation of the state or the nation. And in these days where so many
look to the state for assistance, the thrifty man views with alarm the
gradual disappearance of the old spirit of independence. There is growing
up and around us a new generation which looks upon the State as the
inexhaustible provider. This tendency to look to the state rather than to
personal effort or to individual initiative alarms the people and the thrifty
man may very properly perform a meritorious service in counter-acting the
drift toward improvidence and irresponsibility. The thrifty man who has
a stake in terms of a savings deposit becomes a powerful stimulus to good
citizenship in any nation.
This was the burden of Mr Dick's article which won the competitive
prize in a contest participated in by the senior officers of all the savings
banks in Great Britain.
Mr. Giannini's prepared address follows:
Experience, as some one has said, is a highway to truth
which unfortunately sometimes becomes a bypath through
a jungle. I think that this is a fairly accurate observation,
especially if we remember that in getting through a jungle we
not only have to hack our way through underbrush, but
keep our minds free from a confusion of lights and shadows
and savage noises while we are hacking. Permit me to
state at the outset that it is something to a man's or a nation's
or even to a banking association's credit when it emerges
from a peculiarly difficult stretch of jungle terrain with
any sense of the truth at all and without being totally lost
in the tangled thickets of sheer experience.
If we should consider the depression as a jungle, then it
might be said that we have cut our way through along the
improvised and at some points circuitous path of the New
Deal. The task has been overwhelming. For more than
two years it absorbed all our capacities for hard work, and,
as I have often felt, our powers of imagination and our
faculties of judgment as well. There were times when we
no doubt were very near to losing our bearings. It was so
important to move on from the peril we seemed to be in for
the moment that it was morally if not literally impossible
for most of us to pause and question where we were ultimately
going to arrive. We were literally immersed in the complexities of our day-to-day experience.
But to-day we have reached if not the end of the journey,
at least a higher and clearer ground, where we may look
around us once more and get our bearings. Our jungle path
has led us back within sight of the truth again and I think
this organization may take a proper pride and satisfa,ction in
the fact that the truth we see in the aftermath of our experience is the truth as we have always proclaimed it.
We may safely proceed, I believe, through whatever difficulties the future may have in store for us on the ancient but
no longer old-fashioned hypothesis that thrift is the cornerstone of business prosperity and civilized progress, all the
more because so much of our experience seemed shattering
and bewildering at the time that we have a surer sense to-day
of the relative worth of the economic forces at play around
us, a surer confidence in the economic truths by which we
live.
I do not say that I am glad the depression came to test
the worth of our fundamental heritage as business men,
but much that has happened has confirmed our judgments
and strengthened our trust in the institutions and the quali-
1
1
'
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov.
1935
CLEARING HOUSE ROUND TABLE CONFERENCE
Federal Government put an end both to experimentation and t,o its unsound
fiscal policy; and that it confine its activities to legitimate governmental
functions. We shall soon discover that the knowing ones in the Administration will respond accordingly. They will recognize the significance of this
program. politically—the one factor above all others for which they have
due regard.
It goes without saying tbat the Administration will not voluntarily change
ita determined course of action. In the nature of things, one act of violence
done to good government imposes another of the same sort. The process
always gains momentum as it rolls along. Threatened national bankruptcy can be averted only when an informed public calls a halt. Therefore,
in this heretofore unequal contest with hordes of entrenched official idealists
and reformers, we must put the weapon of facts into the minds and hearts
of our 45 million depositors and stockholders, who are to be relied upon
to Join hands with us in an undertaking bound to be successful. All they
need is leadership.
Do you think an informed public would greet with applause the announcement that the Federal Government is securing its money at the lowest
rate in its history when this is being done at the direct expense of the thrifty
under a form of legalized confiscation? Do you think that an aroused
public would complacently consent to a continuance of this injustice and
that they would not hurl themselves against the offenders? Do you
believe that they would continue to sit back and see their savings dwindle
and their losses increase? Would they not in fact see in this whole procedure the disguised form of intolerable despotism which it embodies?
Once this hand of the destructionist is stayed, bank earnings will be
restored. Armind this pivotal point, we can rebuild a dependable fiscal
system. Security in bank earnings must return as an inescapable result
of restoring sound Government fiscal policies. This in turn will give
us a sound banking system. preserve the savings of the people and restore
75
permanent confidence. Then will the "more abundant life" be more
than just a beautiful phrase. It will have bcome a reality in America.
Conclusion
And to summarize: As long as the Federal Government can get money
without limit, it will spend without limit. As long as the Federal Government can sell its "promises to pay" to us the custodians of the savings
of our citizenship, the Government will continue to issue them. As long
as this reckless public spending continues, private business will remain
in its cyclone cellar, banks must operate without profit and the depositors
and stockholders of this country will be gradually deprived both of their
savings and their security.
This is a disease. We must provide the remedy. Clearly the seat of
the disease is found in the Federal Government. Since it cannot spend
without using the bankable funds of the nation, it is up to us to declare
an embargo. We must decline to make further purchases. We must
declare that we will not finance further spending by the Government until
a genuine, honest, sincere effort is made by the Federal Government to
restore a balanced budget. This promise must come in such convincing
manner and the evidence of an awakened public opinion must be so overwhelming, that the plighted word will no longer be violated. The bankers
of America should resume negotiations with the Federal Government only
under a regime of rigid economy,a balanced budget and a sane tax program;
all of which means that the moneys of our depositors and stockholders,
will be turned to safe, sane, sound and profitable use.
Failure to apply this remedy now means that we shall be submitting
ourselves to the charge that the bankers of America are lacking in candor.
in courage, in intelligence and patriotism—that we are eitner incapable
of assuming or unwilling to assume in a time of crisis this solerrui public
duty now resting upon us.
Forty-five millions of people are out there awaiting our answer.
The Problem of Bank Earnings
By
\
ROBERT M. HANES, President
Waehovia Bank & Trust Co., Winston-Salem, N. C.
As pointed out by your Committee on State Bank Research in the
August issue of "Banking," "the acid test of bank management is its ability
to earn." There has never been a time. I believe, in this generation, when
sound management was so necessary as it is to-day. An almost unprecedented scarcity of acceptable commercial loans, the lowest yield on hi
grade bonds in 30 years, call money rates which produce almost no yield,
and the very low rates which prevail on any available loans—these conditions make good management imperative.
The figures of the Federal Deposit Insurance Corporation for the year
1934, covering 14.124 commercial banks, show that these banks had gross
earnings of $1,510,000,000, and operating expenses of $1,065,000,000,
leaving net earnings of $445,000,000. This represents a return of $1.25
for each $100.00 of deposits, and $7.27 for each $100.00 in capital funds.
These earnings were augmented by $290,000,000 of recoveries, making
total profits to these banks of $735,000.000. This would seem at first glance
to be highly satisfactory, but during this period these banks found it
necessary to charge off losses of $1,130.000,000, thus causing a deficit for
the year of $395,000,000 before paying any dividends or interest to the
Reconstruction Finance Corporation, and, of course, before any dividends
to stockholders. A study of these figures, it would seem, would prove
positively the necessity for not only very sound, but continually improving,
bank management.
With income so greatly reduced, every banker should give serious and
constant attention to his loan and investment policies. Loans must be good
and investments sound. Banks cannot take the losses they were able to
absorb when they were getting from 4 to 6% yield on their invested funds.
Loans and investments must be made with absolute knowledge and with
all the obtainable facts, and not on hearsay and belief as has been the
gustom of many bankers in the past. In order to maintain any semblance of
reasonable earnings under present conditions, the volume of every banker's
business
.
nriust be increased. This calls for an intelligent and effectively
applied business expansion program, which means, of course, attractive
and forceful advertising and courteous and personable solicitors both of
accounts and loans.
Supposing, then, that we have done all we can to perfect our loan and
investment policies, that we have an efficient business expansion program.
let us see what else can be done to improve bank earnings. I believe the first
and foremost thing that can be done by a great many banks is to honestly
and courageously charge fairly for every service rendered. I don't imagine
there is a banker in this audience to-day who has not long since put in a
schedule of service charges. If there is, his directors should be looking for
someone to fill his plac-e. Recent conditions have forced many of us to
adopt sound charges which should have been adopted many years ago. Let
us not, however, treat these as temporary expedients, but as a permanent
policy of sound banking that must remain.
The experience of one typical country bank is sufficient to illustrate the
effects of fairly assessed service charges on its income. On. a loose, hit-ormiss basis of service charges, its income from this source was equal to .16
(annual interest equivalent) on its total average deposits. Feeling that its
charges were totally inadequate and that many services were bAng rendered
without any charge at all, this bank made a very thorough analysis of its
costs, and in the light of this information established its service chargeli
on a precise and scientific basis. Its income from this source was immediately
stepped up to .26, which made a tremendous difference in the net earnings
of this bank.
Interest bearing deposits are a terrible drain on any bank which has a
considerable portion of this type of deposit. Many banks are to-day paying
a great deal more on savings and certificate accounts than they can safely
earn. I do not believe any bank can afford to pay more than 2% for purely
thrift accounts, and for investment accounts. such as certificates of deposit
and large savings accounts; 1% or ;i of 1% is all they should pay. Many
banks have limited the amount that they will take from any one depositor
on interest.
I know of one bank which pays on its savings and certiticates of deposit,
2% up to $5,000, 1% from S5,000 to 310,000, and nothing above 310,000.
Paying tbe same rates ol interest, with all other conditions the sarne, a
bank having 25% ot its deposits bearing interest will have an interest ratio
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Federal Reserve Bank of St. Louis
on all deposits of just two and a half times that of a bank with 10% of its
deposits bearing interest, while its other operating expenses will be no
lower. Good management to-day dictates that both the maximum rate
paid on time deposits must be low, and that there must be a limit on the
amount that will be accepted from any depositor or his family on interestbearing accounts.
Bankers ane to-day seriously cutting each other's income by a senseless
bidding for loans at low rates. Many bankers are going outside of their
regular trade areas, offering money to non-customers at lower rates than
they are willing to offer their regular customers, simply to employ their
idle money.
This practice is just as bad as was the old habit of bidding for deposits by
paying high interest rates. As a result, many borrowers are shopping
around to get the best possible rates, and in order to make any loans at all,
banks have had to reduce rates almost to the vanishing point. I believe
there should be more co-operation on this point between bankers and that
we should not allow senseless competition to deprive us of a reasonable
return from our loans.
Excess reserves must be watched more closely to-day than ever before.
There was a time when we received interest on these reserves when they
were carried with our correspondent banks. The Banking Act of 1933 made
it illegal to pay interest on anything but thrift accounts, and therefore
income on our excess reserves was cut off. Between the Banking Acts of
1933 and 1935 we received no income from our excess reserves, but it did not
cost us anything to carry this idle money. With the advent of the FDIC
in the Banking Act of 1935, excess reserves not only produce no income, but
we must pay seven cents per thousand per month for carrying them. It is,
therefore, essential that bankers keep their idle money at a minimum, and
at the sam time maintain a high degree of liquidity in their secondary
reserves.
These statements are more or less trite and apparent to everyone. Efficient
operation of banks, I believe, offers the greatest source of increased net
income to-day. It is amazing how many bankers are still operating with
the same methods they inherited from their predecessors, which have in
many cases been handed down for generations, and, by comparison, the
ox cart and the horse and buggy, of which we have heard so much recently,
are modern methods of conveyance.
Efficient operation does not mean long hours or an underpaid staff, nor
does it mean the use of obsolete methods and equipment. We can all
remember when 10, 12 or 14 hours was the accepted day's work for bank
clerks and officers. These hours were due primarily to bad management.
A great many of them were wasted each day in waiting for work to come
through, and because bank clerks and officers had for generations worked
long hours, it was thought by many that this was the price paid to be a
banker.
Under modern methods the slack and wasted time ot the bank staff is
cut to a minimum and modern equipment and devices permit the production
of a great deal more work in the same number of hours. As an illustration,
an individual bookkeeping department of one bank, which only recently
required 14 persons and 11 bookkeeping machines an average of 10 hours a
day, now produces higher quality work on a far larger volume with eigbt
persons and six machines, with an average of 40 hours per employee per
week. The employees are much better satisfied and the bank is making a
considerable saving.
The elimination and standardization of forms in any bank will result in a
great saving. 1 know of ono bank which recently had a firm of paper
engineers make an analysis of its forms and the types of paper it was using,
the result of which was a saving of $6,000 a year to the bank. A,central
purchasing department is capable of producing large savings, and this,
coupled with a printing department, will increase net income many bun- •
s, or possibly thousands. of dollars each year.
d
-Dank management must be alert to every change in trend. It must adopt
eVery new idea that is sound. and must be continually looking for better
and less expensive methods of doing its job. The day of the loose, happy-golucky, back-slapping, politician banker is over, and each of us must have the
courage to adopt sound policies and carry them out, regardless of the
temporary unpopularity which may be suffered.
1 21
‘4,
76
BANKERS' CONVENTION
Reducing Losses on Investments
By WILLIAM R. BIGGS, Assistant Vice-President Bank of New York & Trust Co., New
York City, N. Y.
When Mr. Simmonds asked me to lead a discussion group and mentioned
the topic as "Reducing Losses on Investments," it at first appeared to me
to be a very negative one. However, after studying the figures prepared
by the Conunittee on State Bank Research of the American Bankers
Association, I can understand the necessity of getting out of the red collectively before we can hope for profits collectively. About the only way
to be sure of keeping out of the red would be to restrict investments to two
or three-year Governments and even this might result in temporary red ink
figures in the event of wide fluctuations. Anything shorter than this would
preclude any return and anything much longer might result in losses due to
fluctuatioias in money rates.
The whole problem reminds me of my reaction to a recent advertisement
run by the Government to sell Baby Bonds. A subcaption in this advertisement read a,s follows, "In Ten Years Your Investment Earns 33 1-3%."
It occurred to me that perhaps we could all build up our trust business if
we would advertise "Open a Trust Account and Make 50% on Your Money
in Less than 12 Years." As a matter of fact, 50% on yotir money in twelve
years is less than 3M % compound semi-annually, and if we are any good as
investors, we ought to be able to invest money over a period of 12 years
reasonably safely at 3 %. However, perhaps our consciences would make
us put at the bottom of our investment, "If you make this 50% you will
receive no income, and will have nothing to live on in the meanwhile."
And our banks will have nothing to live on if we restrict our investments to
two-or three-year governments. (In all fairness, I should add that the
Baby Bond advertisement has recently been changed.)
There are many times when it is desirable to sacrifice income through
the maintenance of just such a short bond position for perhaps the greatest
single cause for the red figures in investment accounts is the tendency of
banks to be forced into bonds by low interest rates, and out of them by
high rates, and obviously such a policy can never pay. This, however, is
a problem in itself, and as I understand the topic presented to me, it is that
of reducing losses in investment accounts which cannot be limited to shortterm governments. Consequently, I shall confine my remarks strictly to
that subject, giving no consideration to the desirability of maintaining a
short or long position at any given moment.
The first and most important point I c,onsider to be the necessity of having a fixed investment policy. It is not possible for any one to make a
general statement as to how large a proportion of bank funds can be fairly
safely invested in bonds. The amount invested must be considered in
relation to capital funds, the relationship of time and demand deposits, and
the fluctuation of deposits as a whole. It is vital, however, to establish a
figure small enough so that the chance of having to sell bond's under stress
is as remote as possible, because if it is necessary to sell bonds at unfavorable
times, as mentioned above, it is practically impossible to make an investment account pay. My belief is that it is essential to decide on a maximum
amount which might be invested in securities and a minimum amount, and
then to determine from time to time, based on conditions at the time,
whether it is desirable to have an amount, near the maximum or near the
minimum. In this connection, it is very necessary to be aware of the general situation in this country and outside as well. For instance, it seems to
me it would have been a most unwise policy to have had an account near
its maximum in long term bonds this August, with the war situation on
the horizon and bond prices about as high as they had ever been.
One had little to gain and much to lose in high grade bonds at that
time.
If these maximums and minimums have been set, it enables the adoption
of a systematic policy of purchasing. rather than a "helter skelter',' policy.
Bonds are bought too often merely because the salesman happens to come
in to sell them rather than because they fit into a well conceived plan of
investment. In this connection there would seem to be little incentive for
the small bank to buy new issues except under unusual conditions of attractiveness, and it is better to wait until they become more seasoned, and
have established their level in the market. To the buyer of bonds in big
blocks, like the life insurance companies and large banks, a new issue is an
excellent way of obtaining a block which it might not be possible to acquire
otherwise, but the average small bank has no necessity for buying in big
blocks, and the advantage of being able to consider a bond issue minus
the sales "ballyhoo" is very large.
There are times when almost anyone can make profits on a bond acc,ount,
but it is inevitable that such periods are followed by times when every one
will lose money on a bond account. For this reason it should be a fixed
policy to place all profits in good times into a special reserve account for
the bad times which are sure to follow. Such a reserve account is also a
factor in affecting ones psychology in regard to taking losses, and refusal or
inability to take losses is one of the most important elements in putting
investment accounts into the red.
Andrew Carnegie is reported to have said "put all your eggs in one basket
and watch it," but I can hardly advocate this for a bond account. It
seems to me that it is most important to decide on a definite unit and stick
to it. For example, I should say that for a million dollar account, the units
should consist of blocks of from 20 to 25 bonds each. It is just as unwise
to diversify too much because then it is impossible to watch the number of
issues, and over-diversity can force one into less desirable bonds.
There is one phase in the diversity situation which I think
is most important. It seems to me that a bond account should
be considered as a
way of obtaining diversity not possible through
loans, and obviously as
such should be invested as far as possible so that it will
not be affected by
local conditions which may affect loans. In other words,
as a general
principal. loans should be local and investments should
not be. I know
that it is easy to argue that one knows more about some local
company,
but it is better to have ones investments subject to a definitely
different
set of factors than those affecting ones loans, in case of local
troubles or
disasters.
In this connection, I cannot emphasize too strongly the
importance of
limiting investments to really marketable issues. Look at
the investment
as being a long loan which you may want to call by selling
it before it
matures. A good rule of thumb is to have only a very
limited amount of
the total invested in issues outstanding to an amount of less than
$10,000,000
per issue.
We now come to the selection of the bond itself, and I might
emphasize
as the most important point the necessity of buying really good
bonds if
you are going to get a low return and not being deluded in a period
of low
interest rates into buying second-grade bonds at high-grade rates. We
have certain industries which may be characterized as being of a "Prince
and Pauper" nature. Care should be taken when such an industry has
assumed the role of the "Prince" that our vision is not clouded by the
immediate condition to the extent of placing money into such securities on a
basis comparable with rates prevailiug for securities in industries of a stable
nature.
I cannot, for example, think of a situation when it would be wise to buy
a bond of this kind on about a 4% basis when sound utility operating company bonds could be obtained on the same basis. If you agree to take
a low return for a number of years, insist on the best security and only buy
second-grade bonds if you are adequately compensated by yield or opportunities for appreciation. A good way of approaching this problem is to
decide what the highest grade type of bond is bringing; in the case of long_
term corporate bonds I would say at the present time about 3
to 4%,
and if you put your money out at that rate under present conditions, be
sure that you have a really good bond.
It is possible to obtain a better than average yield on a portion of an
investment account by careful study and by taking advantage of other
people's prejudices. Two or three years ago certain oil company bon&
could be purchased at a substantial discount and to yield between 7 and
83,5% which was 2 or 3% more than the rate for high grade issues.
Analysis of oil company achievements that far in the depression indicated
that there had been few defaults and that the strong companies had gradually been reducing their debt. . . . This was due to their very large
charge-offs for depreciation, depletion, intangible drilling costs, &c., which
charges were largely not cash charges, so that the companies were building
up cash at the same time that they were losing money as far as their reported
earnings were concerned. Here waa an excellent example of the points
referred to, for if companies in this industry, which is also a "Princeand
Pauper" industry, could reduce their debt during a period of intense
depression and at the same time build up cash, and the bonds could
be
bought on a much better than average yield basis, they were undoubtedly
attractive.
Last winter fear of utility holding companies, due to pending legislation
in Washington, was so great that it was possible to buy the bonds of
some
of the bolding companies at an amount only slightly in excess of the cash
resources of the bolding company itself. It wa,s obvious that with this
legislation pending, cash would not be spent for new properties, and that
furthermore, directors would hesitate a long while befor declaring dividends
that were not earned. Therefore, the cash appeared safe, and this was
an excellent opportunity to take advantage of other people's prejudices.
I cannot emphasize too strongly that unless a bank is itself equipped
to
develop and follow such situations, or unless it can avail itself dt
reliable
and expert advice, it will certainly do better to stick to the high grade issues.
Whatever the source of information at time of purchase, it must be supplemented by frequent revision, and this applie,s not only to higher yield situations, but also to the best grade issues.
In concluding, let me urge the importance of open-mindedness and
flexibility of opinion. No investment is static or safe from developments
which may over a period of years vitally alter its quality, and nothing
appears to be safe from political tampering. Caught between the dilemmas
ot record low money rates and record high prices ior the best bonds, the
manager of an investment portiolio has indeed a difficult problem. An
investment account cannot be handled in odd moments stolen from other
duties, tor to be profitable it demands eternal vigilance in buying the securities and in following them from day to day. It requires unceasing study
and a definite systematic policy. Given these, however, and the intelligent mobile direction, such an account may well become a source of income
instead of loss over a period of years.
Reducing Losses on Loans
By RoNALD RANSOM, Executive Vice-President Fulton National Bank, Atlanta, Ga.
In the beginning of such a discussion, it seems obvious that reference
should be made to the fact that the easiest way to reduce losses on loans is
by engaging the services of one or more good credit men. This in turn
would promptly raise the question, What is a good credit man?
First of all, he is a genius. He has clairvoyant powers and by looking
at a sheet of intricate figures can see through and beyond them and instinctively know that the loan can and will be repaid. Admitting at once
that I claim none of the qualifications which make a good credit man and
that I am looking at the question objectively and not subjectively, I can
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Federal Reserve Bank of St. Louis
say that there are such people in the world and that, fortunately for Amerlban banking, there are many of them in our banks.
I am quite serious when I say that the qualifications for such an officer
are in part a gift, but beyond the gift and supplementing it there must be
the usual many years of hard work,sound experience, an intimate knowledge
of many lines of business and industry, a capacity to judge human nature,
some faith, some hope, and a large dash of pessimism.
I have often heard clients remark that they did not like some lawyer
who was representing them because he would never tell them how to do a
1
•
CLEARING HOUSE ROUND TABLE CONFERENCE
thing, but would merely tell them that it could not be done. Business
men like constructive lawyers, those who can see how what should be done,
:an be done legally and safelY•
A good credit man must have something of the same gift. He must
not simply say, "No." He must be able to see that many loans which
are applied for will be repaid and where there is some inherent defect obvious
to his gifted eye on the application, he must be able to point out how the
defect can be corrected, how the application can be strengthened, and
how the borrower can make the loan an attractive and safe one for the bank.
Seeking some answer to the problems which must occin• to the good credit
man examining an application, I am reminded of a rule of tnumb announced
many years ago by an Atlanta banker. He called this,"The Rule of the
Three C's," meaning that the borrower must have character, that he must
have collateral. and that he must have capacity to repay the loan.
I arn satisfied that any credit man considering an application looks first
to character. Without this on the part of the borrower, few loans can be
safely made. Without it, none of the necessary information which should
be before the bank may be safely relied upon. Beyond this, however, are
the cold simple facts of the financial statement. It is a rather safe rule
to say that no loan should be made without full and complete financial
information. It is surprising how many are made without it and it is not
unreasonable to assume that many of the slowest and most doubtful loans
are made without adequate financial and credit information. Such information should not only be considered by the lending officer but should be
thoroughly analyzed by the credit department of the bank and given closest
scrutiny by tbe financial or discount committee.
If the loan is being made not on the strength of a financial statement but
on the adequacy of the collateral, we are then confronted with the problem
of determining whether the collateral is all it should be, is liquid, even in an
emergency, and that the borrower has the right to pledge it. Of course,
the problem is simple where it is a listed security, but many of the best
loans in American banks are secured by collateral other than listed securities
and in these cases some knowledge of the company whose securities are
being pledged is essential.
No loan should be made without full knowledge on the part of the bank
as to the use to which the money is to be put. If it is to be used in the
business, does the history of the business justify the borrower putting more
money into the business? If it is to be used for other purposes, are these
77
purposes valid, economically sound, and all of obvious benefit to the
borrower? If the proceeds of the loan are to be used in the borrower's
business. thought must be given to whether the business is making moneY
and again whether it is a necessary and economically sound business.
All of this leads to the further question, and is part of the answer. namely,
the ability of the borrower to repay and this, of course, presupposes full
knowledge as to his other existing obligations. The factors suggested are
closely related to the borrower but beyond this, and as part of the general
picture, a lending bank should always have in mind the business and financial trends of its own community and the country generally. All of
us have in mind instances where businesses which had been successful and
profitable have ceased for one reason or another to serve the conununity
or to be necessary to the community, or where some general trend had
eliminated or was eliminating that particular line of business from the
picture. Under such circumstances, why not recognize the inevitable?
Why aid the owners of the business in sinking more money into a useless
and hopeless cause even if the other factors involved indicate the probability
that the loan could be repaid?
This discussion has assumed that the question of reducing losses on loans
referred to the petiod when the loan was first made. Once made, the
problem may become an entirely different one. During the life of the
loan, the information in the credit files of the bank must at all times be
current and full. I have sometimes thought that the credit files of the
banks should be the joint production of the aforesaid credit genius, a highly
imaginative and inquisitive newspaper reporter who would find out facts
not generally known about the borrower and his business and put these
facts in narrative form into the credit files, and an independent certified
public accountant, whose duty it would be to constantly report on the
financial condition of the borrower or his business.
Three such men working together should produce the perfect credit file
which any official of the bank could pick up at any time and know the
whole story. If such were the case, we should always know the moment
the loan commenced to weaken.
In closing, this only need be said: the moment you think a loan is weak,
collect it. Assuming that you are able under the terms of the loan to
acquire additional collateral, this should be done at once. If such is not
your right, then lose no time. As a general thing, the older a poor loan,
the less the chance of collecting it.
Service Charges as a Source of Revenue
By CLAUDE L. STOUT, Vice-President Poudre Valley National Bank, Fort Collins, Colo.
An appreciated honor has been conferred in inviting my appearance
before so distinguished an assemblage of bankers. My topic should have
been "Banking Merchandise—How to Make It Profitable," rather than
"Service Charges as a Source of Revenue." The subject is of vital importance and can not be adequately covered in the short space of time allotted. As never before, there is the need for local leadership. Leaders
who blend old fundamentals with new policies of application. We need
thousands of such leaders. It is time to do away with the fallacious beliefs
and superstitions which surround simple fundamentals governing banking.
You should take the lead in directing your community's progress.
Our institution, we believe, established a precedent in public education
by calling depositors into the bank in groups of 20 to 40. Not only did we
discuss with them the necessity and need for adequate compensation for
bank services, but laid before them many other matters which should have
been openly discussed many years ago.
Every one knows that a valuable commodity can not be free. When time
and material belonging to another are consumed without remuneration,
they may be free to the one receiving but costly to the person or institution
who gives. If you are providing expensive services witbout adequate comPensation, this must be offset by starvation salaries, contributions by shareholders or individuals, dissipation of earnings, or in the instances of a
bank, if these three sources are insufficient, then we must look to the
Federal Deposit Insurance Corporation for any remaining deficit. If the
FDIC is founded upon members who are operating unprofitably, then its
failure is inevitable. Any institution which is directly or indirectly spending
more than it earns, is headed for insolvency.
In explaining our charges to customers, we assumed the position that
every person is a merchant, whether professionally engaged selling time and
knowledge, as in the instance of a doctor, or whether selling material goods
in the form of groceries, clothing, coal, &c. Bankers are selling money and
service, and are on no different basis than merchandising has always been.
If we persist in disposing of "Service" at less than cost plus a fair profit,
volume will not save our business from insolvency. Certain fundamental
principles underlie every industry, applying alike to the man selling
knowledge or service, and the man selling merchandise. Inasmuch as these
principles and facts remain constant when applied to any type of business,
we should be able to find a common meeting ground for discussing our
problems with depositors, converting these problems into explanations
applicable to the particular industry or business of each customer. Merchandise must be sold upon a cost plus basis, with profit sufficient to preserve capital intact. These problems are not theoretical, they are very real.
The system maintained by the A. T. & T. is no more intricate or far
reaching than the system of financial communication developed by bankers
of this country. Neither is it more valuable or necessary. Each has
direct facilities reaching into every hamlet of the United States. But
neither the telephone company nor the bank can produce profits through
any mysterious, sleight-of-hand operation. Endless confusion and trouble
would result if facilities of either were removed.
We are not in competition with our public. Not an item for sale In any
bank IS of the type displayed by our customers. Our merchandise is new,
it is not shelf-worn. Service essential to our present civilization cannot be
worthless. The idea that bank services must be provided free developed
from cutthroat competition. Bankers conceived the idea that volume was
all-important, and practiced any means to attain large totals regardless of
cost. With few exceptions, every person should have a bank account. if
they will accept the age old merchandising principles. Volume at a profit
is one of the most constructive agencies known to finance. Reasonable
profits in volume build safe banks. Losses in volume destroy. Unprofitable banking has been tolerated in the United States at a terrific
cost, represented not only in funds lost by depositors and stockholders in
failed institutions, but to a much greater degree by the depressing effect
L
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Federal Reserve Bank of St. Louis
of these failures on general commercial business throughout the United
States.
There is a vast difference between good will and respect. We had the
good will and friendship of those anxious depositors who filled our lobby
on March 4 1933. but we did not have their respect. A very important
lesson learned at that time, resulted in a study of changes necessary to
command their respect. A cost plus basis, we believe, to a very large
extent, has solved that perplexing problem.
Depositors are mainly interested in a safe place to leave their money. If
properly educated, they are willing to pay for sound banking. Education.
only. was required to place liver in the butcher shop's social register. The
department store manager can not successfully load his entire operating
expense upon the clothing department, neither can we expect the profits
from lending and investments to cover all bank overhead.
No merchant supplies the "Little Fellow" with beans and bread, clothing
and fuel without charge. Certainly, we must not make a leader of 50% •
of °lir merchandise. We should not assume charities of such huge proportions. True, grocer's oft times offer for sale at cost certain commodities of
a limited amount, but never more than 2% of the total on display. We
have been offering one-half of our merchandise free, which will destroy any
individual or institution.
We must sell our program of banking. Policies must be based upon
proper principles. Know your costs. The public will gladly accept charges
which can be convincingly defended. It is easier to sell 500 depositors than
five bankers. I speak from actual experience. We thoroughly enjoyed
selling service charges to the unprofitable accounts. Their response was
gratifying. But we did take the precaution of requiring every employee
to thoroughly acquaint himself with the fundamental policies of our system
so that that he might defend the necessity therefor whenever or wherever
necessary.
We are the only lending agency which attempts to provide any other
service than that of furnishing funds as agreed by loan contract. All other
agencies lend upon what is believed to be perfectly sound security at a rate
of interest almost as high as ours, yet provide no other service. The rate
of interest agreed upon is the lender's own fair compensation for the act of
providing capital. He is entitled to preserve, intact, the profits derived.
We lend $1,000, place it to the borrower's credit, and parcel it out in a
hundred transactions without thought of the cost involved in distribution.
Only 15% of depositors ever apply for credit. The most important community function, therefore, is not lending, but is that of serving the remaining 85%, providing facilities whereby commercial transactions may
be cleared with the least delay possible.
Deriving sufficient profits from their proper source removes the most
compelling incentive for the acquisition of unsound investments and substandard individual loans. Therefore, the answer to the public's demand
for safe banking is to place each department of the bank upon a profitable
basis. There is no magic wand that can be waved above the individual
ledger which will fill to overflow the undivided profits account and result
in satisfied customers.•
I suggest that you turn to page 57, table 19, Annual Report of the FDIC
for the year ending Dec. 31 1934. If you believe the business of banking
was profitable the past year, this table will clarify that point considerably.
Next, turn to page 238, table 129, where there is more food for thought.
A study of these tables is enlightening.
Our own institution is small, only one million in individual deposits.
Our commercial department cost $20,000 in 1934, while charges of all types
produced $21,363. This represents cost plus approximately 7%. Is this
not proof that our system is substantially correct?
Cost analysis iti a profession in itself, just as banking is a profession. Our
employees compiled daily records of the total number and type of each
item flowing through our institution from April 1931 until August 1933.
•
•
78
BANKERS' CONVENTION.
At the end of this period we employed a nationally known firm of accountants who used these records in determining our costs.
Reading from the analysis made of our institution by this firm: We had
3.289 commercial accounts, of which 1,644, or 49.98% (in the class from
one cent to $50) had 3%% of the total funds on deposit, or $27,000. They
consumed 25% of the activity. In the next bracket, depositors ranging
from $50 to $100, there were 529 accounts representing 16% having 4 A %
of the total funds on deposit, or 338,000. They consumed 16% of the
commercial activity. rhus, 2,133 depositors represented between the
balance of one cent to $100, constituting 68% of our customers, had 7%%
of the total funds. They consumed 41% of the commercial department's
overhead and yet had only $65.000 of the total funds on deposit. How
can we invest this $65,000. representing 7%% of our deposits, so that it
will return enough to offset 41% of our commercial overhead? It is impossible.
This analysis further revealed the actual c,ost of handling a check to be
4.4 cents. That of handling a deposit of 5.6 cents, transit items 2.3 cents,
and clearing items three-tenths of one cent. These costs are accurate. The
following charges were determined to be fair not only to the customer
but to the bank as well:
Deposit slips
5c. Transit items
3c.
Checks
5c. Clearing items
lc.
Using these charges, it has been determined that the average small commercial account will constnne $14.40 each year in banking merchandise.
So, every account is valuable. You may hear the statement that this is
unfair to the small depositor, but remember this fact, that depositors whose
accounts range from one cent to $150, represent more than two-thirds of
bank customers. therefore two-thirds of the criticism concerning unsound
banking practices must emanate from them. Yet their deposits aggregate
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Federal Reserve Bank of St. Louis
less than 10% of all conunercial funds. The vigorous pressure brought
upon Congressmen and Senators t,o proN ide satisfactory protective bank
legislation, must have been fore,ed by this class of depositors. They demanded some type of bank guarantee, so it is not unfair that they should
directly or indirectly pay their proper proportion of this protection. It is
manifestly unfair to load the profitable accounts with the deficits of the
unprofitable. If you believe these charges are unfair, may I direct your
attention to charges of the Post Office Department. I'lease remember
postal deficits are absorbed by the United States Treasury. You would
be charged eight c,ents for a $5 money order, likewise 22 cents for $100.
and if you send $500 the cost would be $1.10. This merely serves to prove
that banking services on a cost plus ba,sis are more economical than those
provided by any other institution.
It is more beneficial to the community and economical to depositors and
stockholders, if banks operate upon a deliberate, fair program of profit.
Bank failures, or dissipation of capital and depositors'funds, never represent
free banking. The responsible depositor who is involved in a bank failure
knows services given to the small depositor were not provided without cost.
He readily understands the statement "There is not such thing as 'Free'
Bank Service."
When the small depositor pays for banking merchandise he is merely
returning a portion of the bank's profits which have previously been expended on his behalf. The bank has really opened a 30-day charge account
wherein the customer may come to the bank, secure the type and quantity
of merchandise desired, settling at the end of each month for the merchandise constuned during that 30-day period.
And so we find that banking principles and management policies run
strictly parallel to the age-old merchandising principles and their application.
•
ANCIAL CHRONICLE--ABA Convention-Nov. 17, 1934
SOURCE: THE COMMERCIAL & FIN
Doing the Job Ourselves
Wis.
Marshall & Ilsley Bank, Milwaukee,
By JOHN H. PUELICIIER, President
cher, the following
Preceding the remarks of Mr. Pueli
er, presiding as
Stoni
ld
Haro
Dr.
by
made
were
comments
:
Chairman
due to the illness in
regret to us that
It has been a source of very deep
the
opportunity of having with us during
his family. we have not had the
resronsible
the man who has not only been
last two sessions of the Clinic
a greater
work in customer relations but for
for the administration of our
fifteen or sixteen years—
some
over
ing
extend
fact,
period than that--in
can
Education Commission cf the Ameri
has been Chairman of the Public
.
.
.
ation.
Associ
rs
Banke
day
he was able to leave his home yester
But I am delighted to know that
deep
I know that you would feel a very
and is with us this afternoon.
e I
becaus
him,
from
were not possible to hear
personal sense of loss if it
r and
country who is an outstanding banke
tbe
in
man
any
of
know
don't
everywhere in academic circles an outstanding
at the same time is considered
of
equipped to set the setting of this type
educator, any man who is better
had during the last fifteen
he
ship
leader
ing
inspir
the
it
work and give
arn about to introduce.
years than the gentleman I
after
I am always at a loss how to begin
Mr. Puelicher: Mr. Chairman.
much is expected of one. The public
So
kind.
this
of
uction
an introd
ings.
develored from very small beginn
educational work is a wort_ that
tandpublic confidence and the public unders
It was being realized that the
sucng
make banking safe and to mak‘ banki
ing of banking was needed to
part in the game of banking,
their
tooa
unders
public
the
cessful. Had
ned.
three or four years would not have happe
much that happened in the last
civic
with lectures in schools and before
The public education work began
ed its
the radio, and in many ways achiev
organizations with speeches on
for the time being. But
work
the
ed
achiev
but
ty
work not to its entire
e of the
it should have been done, not becaus
the work was not done as
the part
e of the lack of understanding of
becaus
but
r,
banke
the
of
fault
years.
in the (lark days of the past few
was, as I said before, evidenced
have
the confidence of the public to
We know that banking must have
repeatedly found that all
was
it
days
dark
those
g
banking safe. Durin
ng bad done a wonderful piece of work
thought American Institute of Banki
In its
employee, officer and clerk alike.
bank
the
of
ion
educat
the
in
g with
for a course of instruction dealin
courses there had been no place
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Federal Reserve Bank of St. Louis
much cf our trouble during the days of the
relations with the public, and so
behind the counter.
runs on banks emanated from
what }lapped in our own institution, of how
I told the story repeatedly of
courage to say,"That is not in my depart
a clerk because he hadn't the
y
a statement which had it not immediatel
made
"
know,
I
don't
and
ment,
t
customer rushed to some officer—migh
been corrected—because the
have led to a catastrophe.
inown
our
relations, I mean in
In our dealing with the work of public
oring to impress upon the young people
stitutions, we start out by endeav
that honesty is one of the main issues
who come in contact with the public
d to' know a thing that they do not
that confronts them, never to preten
in
and inquires about a line of credit
know. If a man goes to a teller
nct to pretend knowledge, but to
g,
nothin
knows
teller
the
regard to which
should know.
send the customer to the man who
to admit a lack of knowledge that a
It is because of an unwillingness
during the runs of 1930 and 1931 and
banks
great deal of trouble came to
1932.
altant that for my own institution.
I look upon this work as so impor
it to
capable, I would not even trust
though there may be others more
e
to lead the conferences myself, becaus
others. I insist on being permitted
in the inimportant things that I can do
I regard it as one of the most
stitution.
r in regard to your own Association.
I want now to say one word furthe
r of it. I know what the Secretaries'
I am proud to have been a membe
banking field.
r anything worthwhile in the
organization can do to furthe
attempt some things along educato
been
have
would
it
I know how futile
k for this
aries' organization, and I bespea
tional lines except for the Secret
you may
thorough tmderstanding, so that
work your interest and your
.
jurisdiction of your State organization
further it in every bank within the
you.
to
come
to
me
ting
I thank you for permit
it
have ample demonstration of what
Chairman Stonier: I think you
her, who
leadership of a man like Mr. Puelic
ive
effect
the
have
to
means
customor
this partciular job in constructive
has actually not only done
years carhas also during the course of the
relations in his own bank but
going to
of
way
advocating for others in the
ried out what he has been
wherever he is called upon to speak
and
es
colleg
and
clubs
and
schools
on behalf of good banking.
(13
THE COMMERCIAL & FINANCIAL CHRONICLE,-ABA Conventioa—Nov
. 17, 1934
What Constitutes a Sound Real Estate Loaning Policy—b Wi
y
ll C. Wood,
VP and Geal Manager Bank of America N.T. & S.A.
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Federal Reserve Bank of St. Louis
To conclude the
discussion of
amortization of
point out that re
loans, may I
al estate loans,
all things cons
stood up well du
idered, have
ring the period
of depression.
assets of banks
Among the
on which losses
have been take
loans have been
n, real estate
responsible for
a
smaller percenta
computed on the
ge of losses,
basis of volume
carried, than an
of loan or inve
y other type
stment. The pe
rc
en
estate loans the
tage of loss on
country over is
total real
less than the pe
loss on total co
rcentage of
mmercial loans
; less, in fact,
ic
oentage of loss on
than the pertotal bond inve
stment. This is
f the fact that a
true in spite
large percenta
ge of real est
been flat loans.
ate loans have
)
q9
SOURCE: THE COMMERCIAL & FINANCIAL CHRONICLE--ABA CONVENTION
Nov. 17, 1934
Deposit Insurance as an Aid to Banking--by Leo T. Crowley, Chmn. FDIC
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Federal Reserve Bank of St. Louis
1 '/
The two more general fa,ctors relate (1) to the re-chartering
of banks, and (2) to the sound management of institutions
that are members of the Fund.
The failure of 14,000 banks in 13 years is unmistakable
evidence of the gross error thatiivas made in the almost indiscriminate licensing of banks. AVe should not repeat that
error. We are concerned about it because the unnecessary
multiplication of banks will vitally affect our Fund. No new
1:i4nk or bank branch should be licensed or chartered uttiess
it is economically necessary in the particular community.
This is a problem upon which your judgment and your
voice will be serviceable.
The other general factor relates to the management of the
bank. We have previously touched upon it, and now I
urge it upon all as a general practice. It is the current
absorption of all losses and the building up of reserves for
any future losses. This is part of that capable management
of banks which we expect from all members of the Fund,
and which we desire to promote.
Possible changes in the permanent Deposit Insurance
Statutes, which, I believe, merit consideration as a means tI
help achieve the public purpose of the Act are:
Good Management of Banks
It has been a definite part of the policy of the Corporation
to promote and stimulate good management. We are concerned vitally in the character of the management of banks
because the success of our whole plan is intimately related
to it. There are many details of banking administration and
practice that we are interested in. One, particularly, I
wish to call to your attention at this time, and that is the
practice of writing off losses currently. We have found
ingtitntiong that paid dividends that should have been
1
t
used to absorb losses then on their books and carried for a
long time, and to build reserves to take care of losses as
they occur. Such things are indicative to us of the character
o the management of a bank, and do have their influence
o our judgment. Insurance is no substitute for good
m nagement or the character and judgment of a banker.
Insurance must go along with these things and this will
keep cost of insurance down to a minimum.
C - -4"it -°141
-2-
Commercial & Financial Chronicle—Nov. 17, 1934
Leo T. Crowley (Contd.)
Page 14
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Federal Reserve Bank of St. Louis
Intelli4pnt Conservatism
I realize that bankers are a conservative
group. This is necessarily so because such a great
public responsibility is placed on them in handling
other people's money. I would
not have them otherwise. But conservatism can be intelligent, and it may be hide-bound. We look to you confidentl
for an intelligent conservatism. We look to sou for co
structive criticism of proposals in the light of your experienc
and your thinking. We expect you to face the facts, particularly of an emergency, and to follow the facts wherever
they lead.
Perhaps the problem uppermost in your mind is the cost
to you of membership in the Fund. I know your concern
regarding the present unlimited liability of each bank whic
is a member of the Fun.d. I can perhaps present my view
best if I call your attention first to two general factors an
to certain related proposals for legislation. These vitally
affect the insurance hazard, which will find expression in
the premium.
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Nov. 17, 1934
Savings Banking in an Era of Change--by L. Douglas Meredith, Comm. of
Banking & Insurance, State of Vermont
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Federal Reserve Bank of St. Louis
Designation of savings banking as a specialized type of
business immediately implies that the executives of saving
institutions may be expected to measure up to the size o
their tasks and responsibilities. Legislation was early enacted for the purpose of protecting the public from the incompetency of bankers, and numerous aniendments have
since been enacted at almost every session of legislativle
assemblies. Bankers have also been partially responsible for
such legislation because they have sought enactment of measures designed to prevent them from making mistakes and to
provide them with alibis for the mistakes they are likely to
make. This policy of banking by statute has converted savings banking into a rule-of-thumb business in which executives have been compelled to rely upon laws, particularly i vestment laws, frequently outmoded at the time of their e actment. Not satisfied with the inhibitions which detail
laws impose, numerous bankers have still further avoided responsibility by relying too largely upon pretentiously named
and highly priced advisory services instead of exercising
their own judgment. Of course, advisory services may be of
great value so long as they present useful factual information and so long as their advices are accepted as informative
opinions,but their recommendations should not be substituted
for the decisions of hankers. The savings business cannot
satisfactorily be conducted by puppets. It calls for men
steeped in the best traditions of banking, versed in the history of nations, familiar with basic principles of economics,
and ever alert to changing conditions. As Walter Bagehot
said more than half a century ago:"Good banks are made not
by good laws but by good bankers." This statement is as
pertinent now as it was them, but might well be amended to
read : "Good banks are made not by good lavvs and by good
advisory services, but by good bankers."
The present period of drastic change in
American econoinic
life Ims produced among bankers a new
attitude toward collective action. The old independence
which prompted oach
bank to seek its own survival even at
the expense of nVighboring institutions disclosed innumerable
weaknesses (hiring
recent years of distress. The continue
d existence of !many
institutions was assured only by group
action in the determination of general policy and in the introduct
ion of it'll-101'ations essential to adjustment to new
conditions. Collective
action has developed not only between
groups of banks, but is
gieatest between the banks of the country
and Federsi agen-
-
0
dlIM24•111.
L. Douglas Agleredith (contd.)
"
cies such as Reconstruction Finance Corporation and Federal should
possess, will result in innumerable benefits to the
]
Deposit Insurance Corporation.
banking structure of the country. Regardless of the ultimate
The tendency always exists for a spirit of co-operation
to outcome of deposit insurance, the co-operative spirit in which
degenerate into ruthless competition as soon as the conditions FDIC
officials seek to aid in solution of pertinent banking
fostering collective action have passed, but bankers should problem
s should produce results unattainable without that
not allow the strength which has come from co-operation
to spirit. This attitude on the part of FDIC officials has probe dissipated in the future. This is true not only of the
co- duced innumerable pleasant surprises among those of us who
operation between groups of banks but between banks and are close to
banking in Vermont.
Federal agencies. Whether you agree or disagree with the
The history of savings banking embraces the finest tilt.
principles underlying these agencies is immaterial now that ditions
of the banking profession. For decades savings bankthey are here. FDIC has become an established part of the ing
has been the economic stronghold of the people of this
American banking system. Bankers can accomplish little or country
. In the face of an economic tidal wave which has
nothing by displaying an attitude of obstinate hostility to- shaken
the confidence engendered by decades of experience.
ward it. On the other hand, a truly constructive attitude,
savings bankers must face the future with courage, clearly
prompted by the courage and vision which savings bankers
recognizing the new conditions which confront them.
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Federal Reserve Bank of St. Louis
•
SOURCE:
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention
Nov. 17, 1954
Annual Address of Pres., Francis Marion Law, Pres., First Nat. Bk., Houston
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Federal Reserve Bank of St. Louis
At this time I wish to direct your particular attention
to the Advertising
)
Department. This has been created to work in
close co-ordination with the
Publicity Department and authority has been given
for the development of
a service of general bank advertising copy, which
will be offered to our
members for subscription. It is the aim of this
service to do two things:
1. To aid the individual bank in promoting the
use of its facilities in its
own community.
2. To aid the bank, tlirough its advertising and
in bringing about a more solid foundation of publicits customer contacts,
understanding of the
unctions. services and obligations of banking.
1
It is the basic aim of this advertising material, which
will be offered to
member banks, to awaken in both the banking and
general public a deeper
consciousness not only as to the importan
ce of the bank in respect to the
life of its community, but also as to the necessity
of that community's
extending to the bank the confidence, understa
nding and moral support
which are easential elements of sound banking.
lit short, it is the aim of
this Advertising Department to imbue into
bank advertising. as far as
possible, a broader and deeper social philosop
hy in respect to banking.
The vast number of people who have deposit
accounts in banks would
constitute an impregnably loyal public defense
for their banks against any
danger of destructive interference if only they
thoroughly understood more
about their banks, their problems, their
difficulties and their sound principles of operation, and if they had a more
understanding faith In the
ability and good intentions of their bankers.
THE COMMERCIAL & FINANCIAL CHRONICLE,-ABA Convention--Nov. 17, 1K4
First Th-ings First
By
FR.ANCIS MARION Law, President American Bankers Association, President First
National Bank, Houston, Texas.
r•••••
CONSTRUCTIVE CUSTOMER RELATIONS CLINPC
we command the undivided confidence and faith not only of our customers
but of the public, depends largely upon us. . . .
I have not had an opportunity at this convention to say ore thing that I
think ought to be said. We talk about legislative committees, and we talk
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Federal Reserve Bank of St. Louis
71
about a program at Washington. Mere isn't anything in the world, gentlemen, that is comparable in importance to this thing that we call bank management. A bank is just as good and no better than its management, regardless of what kind of a program we have at Washington.
;
•
PROCEEDINGS NEW JERSEY BANKERS ASSOCIATION—MAY 1934
The Pres's address—Carl K. Withers, Tr. Officer, First—Mechanics Nat. Bk.,
Trenton
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Federal Reserve Bank of St. Louis
If we are to have a Code of Fair Competition—and we
should, by all means—let us have one which can be interpreted ;
one that will be workable and equitable alike to depositor and
bank, and one which shall not require of every institution the
elaborate system of costs apparently necessary in the present
regulations. Let us assume for once that most bankers are
honest, and ready and willing to cooperate in every way possible
to bring about a return to more nearly normal condi—
tions. Permit us to get together in our local clearing
house or county associations and trade areas, and work out
a code of compliance which shall be fairly based upon
average conditions in our individual communities. Let us
have cooperation, not recrimination, and our Codes will be
speedily completed--and enforced.
Ar.•
•
The Commercial & (financial Chronicle--ABA Convention--Nov. 17, 1934
"Trust Department Policies as Seen by the Bank President--by Tom K. Smith
57
TRUST DIVISION.
While a great many banks were performing some trust services, very few had organized specifically as trust companies.
Thus in 1800 there were only 63 trust companies in the United
States, and the movement to add the word "trust" to the
bank title was only beginning. No National bank was permitted to perform trust duties at this time ; trust powers for
National banks were not fully confirmed until after the passage of the Federal Reserve Act in 1913 and the decision of
the United States Supreme Court of 1924.
At the present time there are in excess of 3,328 trust institutions in the United States listed as members of the Trust
Division of the American Bankers Association. The Comptroller of the Currency, in his report of June 30 1933, points
out that there were 1,845 National banks having authority
to exercise trust powers, with combined capital of $1,285,523,255 and banking resources in excess of $18,300,000,000,
and representing 87.8% of the resources of all the banks in
the National banking system. These National banks were
administering 100,356 individual trusts with assets aggregating $6,311,000,000. In addition, they were administering
10,784 corporate trusts and acting as trustees for outstanding
note and bond issues amounting to $10,400,000,000. There
was a definite increase in each classification over 1932. No
reliable figures are available for banks other than National
exercising trust powers. It is clearly apparent that trust
business in the United States to-day has reached very remarkable and impressive totals, and that the conduct of trust
business to-day constitutes a very considerable portion of the
total activities of the banks and trust companies in the
United States. It is evident that present day trust policies
have come into being only after many years of trust experience. The record over the years in the development of these
policies is a long and honorable one, and, when one considers
the character of the service rendered, the history of trust
9ervice as developed by the banks and trust companies of
the United States is found to be one of which we all can feel
justly proud.
Against the background of this history and development I
wigh now to discuss certain phases of the conduct of modern
trust business. I shall begin by considering what I regard
as the most important entity in the modern trust organization—the Trust Estates Committee. This Committee, drawn
from the bank's board of directors, constitutes a small board
of directors for the trust department alone. It determines
trust policies and it authorizes and passes upon specific
transactions. I regard the selection of the Trust Estates
Committee as the most important duty which the bank President has to perform.
I believe the Committee should be made up of men who
through their own lives and by the acquisition and successful
management of personal fortunes have demonstrated that
they will bring to the Committee strength and first-hand
business experience. If possible, I would choose men from
different types of business, so that the sources of information
available to the Committee may be broad and varied. I do
not believe in rotation of membership on the Committee, if
this is done simply to give other members of the hank's board
an opportunity to sit on the Committee. I believe the Committee should be strongly constituted at all times, and, if a
man has demonstrated his fitness for a position on the Committee, I would keep him there just as long as he continued
to show his interest. I believe strongly that the meetings of
the Committee should be held regularly, and that the members of the Committee should be faithful in attendance.
The Committee members must have a broad understanding
of the constantly changing trends in business and governmental affairs. Their viewpoint cannot be merely local ;
they must see nationally and even internationally. Our Government announces a great public utilities enterprise in the
Tennessee Valley Authority, and immediately the Trust Estates Committee must consider what effects this announcement will have, not merely upon the securities of utility companies operating in the Tennessee Valley region which their
trusts may hold, but upon public utility securities of all
kinds. The Committee members should be men of both
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Federal Reserve Bank of St. Louis
strength and courage—strength to withstand pressure to buy
common stocks or to sell high-grade bonds when considerable
pressure is brought to bear, and courage to take steps, vigorous and decisive, when losses must be faced.
It is essential that the members of the Trust Estates Committee know, as far as possible, the history of each individual
trust. One trust is quite different from another. Certain
policies must prevail in the handling of one trust and totally
different policies with respect to another trust. Over the
months, the members of the Committee become familiar with
each trust and are able to make intelligent and helpful suggestions as the trusts come before them.
It has been pointed out repeatedly that there are at .east
two respects in which the corporate fiduciary is clearly
superior to the individual acting in the same capacity. One
of these is the quality of the service performed, and the
other is the continuity of existence enjoyed by the corporate
form of organization. I should like to emphasize in this connection that the personnel and personnel policies of the corporate fiduciary are of foremost importance. A trust department or a trust company which failed to exercise the
utmost care in choosing its staff, and which failed to keep
that staff, once chosen, intellectually alive and alert and
abreast of current developments in its field would certainly
lose the advantage which it inherently possesses over its
individual competitors.
Fiduciary services are fundamentally different from the
services performed by other types of business. In general,
a business organization is responsible only to its stockholders ; it stands or falls by its ability to make money. The
officers of a trust department have this responsibility to
their stockholders, of course, but they have another responsibility which ranks ahead of it—their responsibility to their
beneficiaries. The fiduciary is not working with its own
capital alone ; it is the custodian of the funds of others entrusted to its care, in many cases the money of women and
children unfitted by training and experience to administer
it themselves. In the light of this fact the demands of the
fiduciary upon its personnel are more rigorous than in other
forms of business. Dependability and intelligence and integrity are at a premium. Standards of judgment and of
honor which will sometimes get by in other vocations will fail
hopelessly in trust work.
The selection of new employees for the trust department is
therefore of paramount importance. The considerations
which have to be borne in mind in hiring an applicant for
trust work are not quite the same as those which apply in
other fields ; character comes in for much greater emphasis,
and ability for no less. The applicant's past record. his
environment, the way in which he spends his spare time. all
count heavily. No one should be taken into the trust department without a definite educational background. I am not
advocating a rigid rule of employing only college graduates,
although under present conditions that would not be difficult. I recognize that many exceedingly able men and women
have not had the advantage of college training. Nevertheless, it cannot be denied that a broad, cultural background
is of inestimable value in an employee, and it matters little
whether that background is acquired in a university or
through individual effort. Nor do I refer to highly specialized training in one narrow field. I believe that a broad and
liberal training will in the long run make itself felt in judgment, character and personality.
The employee, moreover, once he has been hired, must not
be content to sit still. Fiduciary service requires alertness,
adaptability to changing conditions. Trust personnel should
be encouraged to continue their education. The courses
offered by the extension divisions of many urban universities
are of obvious value. In this connection I wish to say a word
in praise of the educational activities of the American Institute of Banking. Much of the material in the A. I. B. program is not available in the universities and colleges, and
the work fills a very definite need. During the preparation
of this talk I have had an opportunity to look over the book,
"Trust Business," which has just been published under the
26
•
58
BANKERS' CONVENTION.
panies in conserving the principal and maintaining tile inauspices of the A. I. B., and which is used as a text in one
of the courses on trust work offered by the Institute. This come of their trusts is one of which we may very justly be
text represents one of the ablest presentations of the general proud. My opinion is supported by statistics compiled by the
Federal Bureau of International Revenue in connection with
principles of the subject that I have ever seen. I recommend
that each of you bring this book to the attention of your the income tax. These figures indicate that the decline in
trust personnel and urge them to enroll for the course based income derived from trust funds during these last depression
years has been only about half as great as the decline in
upon it. In my own institution it is our practice to encourage
employees who show a desire to take the courses offered by reported income from investments for all individuals filing
the Institute by defraying tuition charges, and I suggest this income tax returns.
The reasons for this excellent record are not difficult to
for your consideration.
understand. The science of investments is by no means a
A broadening influence Which should not be neglected is
attendance at meetings of the Corporate Fiduciaries Associa- simple science. The baste principles, it is true, are relations and similar organizations in most of the larger cities. tively few, but the successful application of these principles
The interchange of viewpoint between different institutions requires mature judgment and broad experience, combined
with close familiarity with an enormous quantity of statisis very much worthwhile.
material. It is becoming increasingly difficult for a
tical
a
make
to
want
I
personnel,
considering
While we are
single individual, even if he devotes his full time to investpoint in connection with the continuity of existence enjoyed
ment problems, to understand and appreciate the broad genby the corporate trustee as compared with the individual. I
wish to state most emphatically tbat this continuity of suc- eral trends and the complicated currents and cross-currents
cession may be no more than a legal fiction if understudies in the business situation which operate to the advantage of
are not being definitely and consciously groomed for the key one class of investments and to the detriment of another. It
positions in the departmen0 One of the things that influ- is becoming very nearly impoisible for him to digest and to
ences the donor or testator .So name a bank or a trust com- retain the mass of material relating to the earnings records
pany in his agreement or his will is the policy and the char- and capital structures of particular corporations. This is a
acter of the institution, and it is essential that this policy job which clearly calls for specialization and division of
and character shall not alter with the removal of a few key labor, a job for an organization.
The type of organization which has been built up by trust
officers. It is the responsibility of the senior executives to
institutions to handle their investment problems is excelsee that their junior officers are made familiar with their
mental processes and their points of view, so that the char- lently designed to perform such service under present-day
acter of their department is not dependent upon the identity conditions. Investment policies and transactions are shaped
of the person at the trust officer's desk. I am devoting only and determined by three co-operating entities--the statistione paragraph to this point, but, on the basis of its impor- cal department, the administrative officers of the trust intance, it ought perhaps to occupy half my talk. I wish I stitution, and the Trust Estates Committee. The statistical
department will be composed of specialists in this field, men
could speak in italics.
whose full-time job it is to take the prodigious amount of
The emphasis I have placed upon this matter of training
relating to the 'world's economic mechanism
imporinformation
very
successors for key positions will indicate how
tant I feel the trust officer to be to the trust institution. which is available from every conceivable kind of source,
The trust officer is the pofnt of contact between the institu- and to correlate it and arrange it in such a way as to impart
tion and its clients ; to thE public he personifies the depart- meaning and significance tp the complicated mass of figures.
ment. A tactless and unsympathetic officer might easily ruin The statistician reviews constantly the securities in the portan efficient and competent institution. The integrity and folio of the various trusts administered by the department
intelligence which count so heavily in all fiduciary employees against the background of the general business picture, bringmust be developed to a superlative degree in their chief, but ing facts and developments into their proper perspective. He
even these qualities are not enough. He must, of course, be an communicates his informatia to the administrative officers
who know the human story behind each trust, who know the
executive, able to keep his department operating smoothly
beneficiaries and the trustors to whom these facts, in the
and to command the respect of his subordinates. But more
than this, he must be an understanding, considerate gentle- statistician's impersonal report, have a highly personal significance. These officers present the situation to the Trust
man. one to whom bewildered beneficiaries can come with
Estates Committee. The functions and qualifications of this
an assurance of kindly and calm and sympathetic aid.
department
Committee have already been described, and I should like to
trust
a
which
in
quarters
the
of
Consideration
point out merely that these gentlemen are in something of a
is located, its physical appearance and arrangement, may
I
Nevertheless,
Court position, far enough removed frdm the actual
Supreme
superfluous.
appear at first sight rather
think something more should be considered than the arrange- administration of the trusts to be cool and objective in their
ment and the location conducive to greatest efficiency of judgment but having the benefit of the information which
has been accumulated by the statistician and the human
operation. The city desk of a metropolitan newspaper, for
viewpoint of the officers. There in committee the course of
example, is usually highly efficient, but none of us would
want to sit down in the city room to discuss his will. The action is determined. I cannot coneeive of a procedure bettrust department must be calm and quiet, and it should be ter adapted to determine a wise and sane course, adapted to
substantial ; there is no necessity for expensive elegance, but fit the particular needs of each separate group of beneficiaries.
there should be an atmosphere of quiet friendliness. Much
It is almost unnecessary for me to reiterate the counsel
of the discussion between officer and client will be confidential ; in the very nature of things, moreover, the client that no trust institution should purchase securities for trust
will frequently be under a certain nervous strain. The de- accounts from itself or from any affiliate. It is quite true
partment should not be crowded into unattractive, inacces- that this procedure may, in some cases, yield thoroughly satsible corners. It should give an impression of unobtrusive, isfactory results, but at the same time I believe it advisable
competent permanence, and withal convey the idea that it is for the trust institution to be beyond any suspicion of bias
or ulterior motives. In my own institution we have always
considered as an important department of the bank.
the
made this an iron-clad rule from which we have never
of
to
high
quality
service
the
alluded
already
I have
which the corporate fiduciary is equipped to render to its deviated.
The President of a bank can take a very definite part in
clients. An excellent illustration of this point lies in the
by
enjoyed
trust
field of securing new business. He should by all means
been
genthe
has
institutions
which
success
erally in investing and reinvesting the funds entrusted to be available for con 1 when questions regarding newspaper
by mail and other _We's- campaigns are
their care. Trust institutions, of course. make no claim to advertising, di
ability to enhance the principal amount of such funds—this under confAderation. He can sugge‘that a call be made
would be speculation--but I feel that the record of trust com- on a certlin individual or corporation. In important situa-
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Federal Reserve Bank of St. Louis
STATE BANK DIVISION.
53
Fundamental Banking Policies and Principles
By H. N. STRONCK, Bank Management Consultant, Chicago.
After a disastrous conflagration or storm, it is the custom
to make a careful survey and inventory of the wreckage.
This is done in order to determine what might be salvaged
and what might be a,ccomplished to rebuild the structure.
Furthermore, plans are made for protection against a recurence of the catastrophe.
Banking has passed through the greatest and most disstrous storm in the history of the present type of banking
system. This storm has overwhelmed thousands of banks.
Unfortunately, many a good bank was caught in the frenzy
of public fear. Fortunately, however, some 19,000 banks
have fought the battle and won. It is self-evident that a
large percentage of the banks which have successfully
weathered this storm bear some marks of damage. Hence,
believe the time is most opportune for each and every bank
to take a careful inventory of its present position. Then
this position should be checked against known, sound fundamentals of financial and operating policies and practices so
that these banks may be intelligently and courageously rebuilt to a point of adherence with sound principles of bank
administration and management.
It is a well-known fact that during periods of prosperity
it is most difficult for institutions and individuals to recognize and adhere to sound fundamentals. These appear to
be too restrictive and too burdensome. Business increases
and book profits come so easily that an attitude of "Well,
what of it?" prevails.
It is during periods of contra,ction of business volume and
earnings and shrinkages in asset and collateral values that
it is relatively ea.sy to perceive the effects of former unsound
policies and practices. We then appreciate the value of
sound fundamentals.
So many diterent factors of fundamental importance are
involved in the process of commercial banking that all of
them catmot be covered in the short time period allotted to
this paper. I therefore shall limit my discussion to some of
the fundamental factors involved in the asset administration of commercial banks. It is now admitted that asset
administration is by far the most important function of commercial bank management, a fa,ct which was lost sight of
during the period of prosperity. Weakness in this phase of
hank management has been the cause of more bank failures
and subnormal positions than any other factor or group of
factors.
The greatest task of bank management at present, and
for some future time, will consist of a rebuilding of the asset
position structure and the salvaging of assets. Just from
a standpoint of profit and loss, the following figures will give
an indication of the truth of that statement:
During the very profitable banking year of 1928, when, as
an avera.ge, all member banks of the Federal Reserve System
earned a net profit of 8.96% on their average invested
capital, the net losses charged off were but 7.3% of the gross
income. The operating profit, before losses, was 29.3%
of gross income. Net losses absorbed only 24.9% of this
operating profit. Contrast this with similar figures for
1931. The net profit to invested capital dwindled to the
insignificant figure of 0.19%. Net losses charged off were
29.5% of gross income, or about four times as great in ratio
as in 1928. The operating profit ratio to gross income was
30.1%, or slightly greater than in 1928, but the net losses
on assets absorbed 98% of this operating profit. To make
this contrast even more significant, every Federal Reserve
District average in 1928 reflected a higll net profit ratio and
a relatively low net loss ratio, whereas tiuring 1931 the averages of five districts out of the 12 indi6ted net loss ratios
to invested capital. In these districts the net losses on
,assets were greater than the operating profit for the year.
It can now be appreciated that in many a bank there is
.no better way of making money during the current year,
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and for several years to come, than by the conservation
and salvage of assets.
The conversion of funds function in the commercial banking process is quite simple in its fundamentals. The fundamental process consists of the gathering together of excess
funds in a community and the investment of such funds in
a manner that will make possible the meeting of the demands
of depositors, the safeguarding of income and principal on
investments and the development of a profit for the stockholders. In other words, a process for which Craig Hazlewood years ago coined the simple and very effective phrase
"management for liquidity and profits." The problem of
converting deposit funds into easning assets in such a manner
as to be able to meet the requirements of the depositors at
all times, and at the same time produce satisfactory earnings for the stockholders, is the most vital of all bank management problems.
In the process, we are purchasing "raw material" on the
one hand, and on the other are converting these funds into
income-producing assets. The profit margin consists of
the difference between the net income from assets and the
total cost of funds. The profit margin is affected by two
fundamental factors:
1. The Correct Purchase of Funds.—The cost of funds is not only the interest paid thereon, but also the cost of servicing these deposits. The payment of too high a price for funds, either in the form of interest or services.
has had a most detrimental effect on the investment policies of thousands
of banks. High yield investments were literally forced into such banks in
an attemPt to obtain a profit margin.
2. The Net Rale of Income from Assets.-1 mean net, not gross. The
customary bank income statement seta up merely the gross. The net rate
is obtained by deducting from the grass rate of income received from in
terest and discount, Per S100 of assets, an asset loss rate per $100 of assets.
based upon a past loss experience or a future anticipated loss rate. An
experience of examining many banks indicates that banks with an unusually
high gross rate have but a small net rate, whereas banks with a relatively
low gross rate are apt to have a satisfactory net rate.
Perhaps the simplest manner in which to observe the fundamentals of fund conversion and asset administration and
management is through a functional grouping of the assets
of typical commercial banks. These groups are:
(1) Primary reserve.
(2)
(3)
(4)
(5)
Secondary reserve.
Loans and discounts not eligible for secondary iwerve.
Investment account.
Banking house, real estate and other fixed investments.
Each of these groups is created for a distinct purpose and
the purpose is different for ea,ch group. An effectively
managed bank has worked out a well-defined policy with
regard to the proportion and composition of each asset
group.
In an effort to formulate some definite and sound investment policies for banks and to specify, in a braod way, items
which may be eligible for the various asset groups, the Bank
Management Commission of the Association some time ago
appointed a special committee to make a study of these subjects. This study has just been completed and published
by the Commission. I had the pleasure of acting a,s Chairman of that committee. In conjunction with my most able
colleagues, Messrs. Andrew Price of the National Bank of
Commerce of Seattle and J. Harvie Wilkinson of the StatePlanters Bank & Trust Co. of Richmond, Va., and in collaboration with many bankers, we were able to reach some
basic conclusions. Since the information thus gathered
represents a cross-section of the present thoughts on the
subject, I will reiterate some of the major conclusions developed from that study.
The proportionate size of ea,ch of the functional asset
groups is largely dependent upon the following:
1. The Primary Reserve is entirely dependent upon current depositors'
requirements and legal reserve.
2. The Secondary Reserve is dependent upon the intensity of predictable
seasonal fluctuations in deposits and local loan demands and is dependent
upon possible, but non-predictable, emergency deposit withdrawal re- in
quirements.
-1
25
54
BANKERS' CONVENTION.
3. The Local Loan Portfolio is dependent upon the availability of sound
and liquid local loans, properly diversified as to economic, security and size
factors.
4. The Investment Account Portfolio is dependent upon the volume of
remaining available funds, after the volume requirements of the Primary
and Secondary Reserve and Local Loan Portfolio have been established.
5. The Bank Building, Real Estate and other fixed investment grouP
of assets is dePendent upon the volume of invested capital funds. A sound
policy dictates that not more than 50% of the invested capital should be
absorbed by such assets and preferably much less.
Current cash requirements, for the purpose of determining
the ratio of Primary Reserve to the various classes of deposits, under ordinary circumstances, can be calculated
from a study of the daily fluctuations in deposit volumes, the
inflow and outflow of deposit and withdrawal dollars and
the volatility or stability of the large deposit accounts. It
is usual to express this Reserve requirement as a percentage
of the various classes of deposits.
The size position of the seasonal, or predictable, part of
the Secondary Reserve can be calculated from a trend study
of the seasonal fluctuations in deposits and in local loan
demands. The dollars necessary to liquidate a high seasonal
deposit position to a low sea,sonal deposit position, under a
well defined plan, will come largely through the liquidation
of Secondary Reserve items, provided local loans do not
seasonally decrease also as deposits decrease. If the seasonal increased local loan demand is concurrent with the
seasonal deposit decline, then the size of Secondary Reserve
should be ample to meet both the deposit volume decrease
and local loan increase. The .seasonal, or predictable, part
of the Secondary Reserve is also usually expressed as a percentage of the various deposit classes.
The volume requirements of the emergency part of the
Secondary Reserve are entirely a matter of judgment.
Emergencies, as to their time and intensity, are difficult to
predict. A bank can view these requirements only from its
own experience over a period of years and through intimate
contact with the trend of the various factors which might
create emergency situations. Recent banking history appears to indicate that the idea, or necessity, of the creation
of an ample emergency secondary reserve has not been
recognized in the past in the majority of banks. The experience gained by the surviving banks in fa,cing emergency
situations should impress them with the importance of
establishing a reserve for this purpose. If the banks of this
country had adopted this principle and provided ample
emergency reserves, both in volume and in qualified items,
that is, items which could have been turned into cash without
an appreciable loss, probabilities are that the necessity for
the creation of emergency lending agencies, such as the
former National Credit Corporation and the present Reconstruction Finance Corporation, might not have materialized
or the demands on these agencies would not have been as
great. A substantial number of banks, however, did provide
for strong downward deposit tendencies and were able to
liquidate a substantial proportion of their deposits without
resorting to borrowed money. The percentage of emergency
secondary reserve is the same for all classes of deposits for,
under emergency conditions, all deposits are apt to be
demand deposits.
After the Primary and Secondary Reserve volume requirements have been established, the balance of the deposit funds
and that portion of the invested capital funds not invested
in fixed assets are available for conversion into local loanS
and investment account items. The proportionate allocation of these funds, as between the local loan portfolio and
investment a,ccount portfolio, is very largely dependent upon
the demand or outlet for local loan items which will meet
the liquidity, safety and diversification specifications of a
sound, local loan portfolio. If an appreciable volume of
such eligible loans can be written, then the local loan portfolio will be proportionately large and the investment
account small. If the obtainable volume of such items is
small, then the local loan portfolio should be small and the
investment account proportionately large. However, even
though the balance of available funds could be converted
into conforming local loans, prudence would dictate that at
least a small proportion be converted into investment account
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Federal Reserve Bank of St. Louis
items, for the establishment of wh7,rmight be termed
"tertiary reserve." The thought in mind is, shoulditasti
deposit liquidation situation arise, which would m
dee
inroads into the secondary reserve, the liquidation of this
"tertiary reserve" might make unnecessary the forced liqui
dation of a substantial number of the best local loans and
thus avoid the possible destruction of local business enterprises. Also, forced liquidation of local loans invariably
carries with it substantial further deposit liquidation and the
bank drifts into a vicious circle of liquidation which is
difficult to stop.
The establishment of definite and correctly proportional
functional asset groups should be the first step. This th
becomA the financial program of the bank and it clear
defines the major financial policy. A periodic regroupin
of the balance sheet items in accordance with these functional asset groups and a comparison of this actual position
with the desired program will indicate the over and under
extensions, both in dollar volume and in ratio, so that the
management of the bank may be governed accordingly.
In all instances where deposits still indicate non-seasonal
downward characteristics and where there is as yet a probability of development of an emergency situation, it is a wise
plan to make an accurate determination of the maximum
liquidation capacity. New borrowing channels have been
created, which make possible a far greater maximum liquidation capacity than under former, or normal borrowing
facilities. The possible capacity of these channels should be
tested, even though it might not become necessary to make
an actual loan.
The second major step in the development of sound asse
administration and management consists of a clear definitio
of items which may be deemed eligible, from every point
of view, for inclusion in the various functional asset groups
or portfolios. In the determination of eligibility specifications, it is of utmost importance to bear in mind the prime
object or purpose of each group of assets.
The purpose of the Primary Reserve is to be able at all
times to meec the withdrawal requirements of the depositors
and to maintain the required legal reserve. Absolut
liquidity is the exclusive consideration in the Primary It
serve. Items eligible for this reserve are limited to cash on
hand, balances with the Federal Reserve Bank in the case
of member banks and deposit balances with unquestionably
strong correspondent banks. Whatever earnings accrue to
the cash reserves, such as interest paid on balances by correspondent banks, are incidental.
The Secondary Reserve at all times must be ample to
replenish the Primary Reserve when it has been depleted
below the set requirements, due to seasonal or extraordinary
reductions in deposit volumes, or to seasonal increases in
local loan demands. Liquidity is also the dominant emphasis
in the Secondary Reserve, for the prime purpose of thi;
reserve is to guarantee a supplemental or short notice liquidity
to meet periodic cash requirements or emergency situations.
In a study to determine specifications for items eligible for
inclusion in the Secondary Reserve and Investment Account,
it was found that the most frequent laxity in matters of asset
administration are to be found in connection with the
Secondary Reserve and Investment Account. This may be
explained by the fact that these groups of assets are relatively
new, hence, there is a minimum of precedent and recognized .
principles by which to be guided. The items comprising
such portfolios, that is, bonds, bills and general market ,
paper, originate, for the most part, outside of the bank in
highly specialized processes of finance. Therefore, the purchasers, in the main, have been less well informed than the
sellers regarding such credit instruments. The distributors
have taken the initiative in most of these transactions, and,
in many banks, have influenced the buying policy of such
banks more than have the purchasing institutions themselves.
An important consideration in the specification of items
for the Secondary Reserve is in connection with the maturity
distribution. The items should be timed with the seasonal,
low deposit position and (or) the seasonal period of high
local loan demand. This matter of maturity distribution,
STATE BANK DIVISION.
\-1 55
as not been gi,toPt nearly the attention it requires in a great obligation. If the entire liquidation does not take place at
ik
l y banks. It should be remembered that liquidity, that time, the balance of the loan becomes a "hang-over."
gh maturity distribution, is the most inexpensive of all This bala,nce usually is non-liquid and difficult to collect
me ods for providing against seasonal demands. If these until the business of the bo/Tower again passes through a
maturities are properly arranged, it will prevent the neces- successful seasonal cycle of operations. Any loan for comsity of sacrificing security values in an unfavorable market, mercial or agricultural enterprises, which is not of the selfor the necessity of borrowing outside when rates are un- liquidating type, is a "capital" loan. An undue proportion
favorable.
of such "capital" loans in the local loan portfolio, even though
Items eligible for the seasonal Secondary Reserve must the security behind them, from a standpoint of value, may
have properly timed maturities and be of such high quality appear ample, will seriously dilute the liquidity factor of the
that there is an absolute certainty of cash payment at ma- entire loan aggregate. In the majority of smaller banks, a
turity. Another type of eligible security consists of items large proportion of the local loans are represented by loans
whose maturities may not be timed with seasonal require- to individuals, secured by endorsements or by collateral that
ments, but which can be disposed of for cash at a moment's is not readily marketable, and loans secured by real estate
notice without a loss in the acquisition cost price, in other in the form of mortgage loans. Under an unsound liquidawords, items with instant marketability, coupled with price tion policy, these loan aggregates are decidedly non-liquid.
stability.
Under a sound policy, these loans are operated under a
Since the time element of the emergency part of the "periodic amortization liquidation plan" and the aggregate
Secondary Reserve may be impossible to predetermine, the has a good rate of liquidity or turnover.
maturity factor of items for this part of the Reserve cannot
Items eligible for the local loan portfolio, therefore, must
be so definitely planned. Since its object is to meet unex- lend diversification, must be of the self-liquidating type, or
pected conditions, it is obviots that maturities must be must be of the partial payment amortization type.
relatively short. The plan would be to have a continuously
Before presenting an outline of item eligibility for the
maturing flow program, that is, a certain percentage should Investment Account portfolio, some general statements as
he scheduled to mature each month over a period of but a to this a,ccount are in order. So many institutions have
few years, with tbree years as a possible maximum. Again, suffered large losses from their investment account, both
items eligible for this part of the Secondary Reserve must be actual and on paper, that the mood—not necessarily the
of such a nature that there is an absolute certainty of cash logic—of the moment is anti-securities. Comparative
collectibility at maturity, or that they can be disposed of at statistics of losses charged off on bonds and loans of all
a moment's notice without loss in the acquisition cost price. National banks indicate that such loss ratios on bonds were
The current consensus of opinion is that the major part substantially greater during the four year period 2918-1921
of the seasonal seeondary reserve should consist of items than on loans. In spite of this poor record, the volume of
selected from the following classifications:
bond investments very greatly increased in the si.cceeding
years and from 1922, through 1928, the loss ratio on bonds
1. Bankers' acceptances.
2. Commercial paper.
was substantially below that on loans. Commencing again
3. Brokers' loans.
with 1929, and through the current year, the loss position
4. Highly liquid loam to concerns with a high national credit rating,
on bonds is substantially greater than on loans. If losses
to which no line conunitment has been made and which are collectible at
maturity.
on securities, to such an extent as to cause impairment of
5. Short term U. S. Government obligations.
the soundness of banking systems, are unavoidable, as a
A minor position for seasonal secondary reserve should result of inherent clashing with the other functions of banking,
then the banking investment policies will need be changed on
comprise very high grade, listed, active short term bonds.
The emergency part of the secondary reserve should be a nation-wide scale by National legislation. There is no such
limited to short term, high grade, listed, active bonds, or inherent clashing between the security investment and other
other active high grade bonds with a stabilized price position. functions of banking. The losses suffered by banks in their
Carefully selected bonds, the bulk of which mature within security portfolios, as well as in their loan portfolios, are
one year and none to exceed three years, are worthy of con- distinctly a management problem, a problem which cannot
be done away with or solved by legislation. Competitive
sideration.
securities
conditions
of
which involved the payment of too high a price
portfolio
a
on
The average rate of income
eligible for the secondary reserve will be comparatively low. for deposits, the desire to earn enough money to stay in
It must be borne in mind, however, that the prime object business and sheer ignorance of sound investment policies
of this portfolio is not for high earnings, but to insure the have been the chief contributing factors which produced
unsound investment portfolios in many banks.
strength of the financial position of the bank.
Suppose a good bank does not invest a portion of its funds
The local loan portfolio should first be developed to give a
proper balance between the economic, security and size of in securities, in what category will such funds be placed? A
loan diversification. If the loan demand is from but a limited good bank will have an ample secondary reserve, which will
number of kinds of business, or if practically all local busi- consist largely of short-term U. S. Governments, commercial
ness is subject to the same economic factors, then it would paper and bankers' acceptances, all with low yield. A bank
not be good policy to allocate a large percentage of funds to so fortified cannot have an endless amount of funds in these
local loans; the economic credit risk would be too great. categories, otherwise, the earnings will be very meager.
Security diversification also is important. If the demand for Assume also that such a bank has absorbed all highly qualified
loans is centered on but few types of securities, such as real loans offered. The placement of the remaining available
estate, for example, or securities of but few local enterprises, funds in marginal or weak loans would be courting disaster.
too large an allotment of funds for such loans would be The problem then is not one of complete abstinence from
unwise. As to size, situations are frequently encountered securities, but one of buying the proper bonds in the proper
where but a few loans in number constitute a very high per- amounts.
Bonds for the secondary reserve and bonds fcr the investcenta.ge of the total local loan dollars. The "freezing" of
but two or three such large loans considerably dilutes the ment account are two very separate and distinct things.
liquidity of the entire loan dollar aggregate. The eligibility A confusion as to the function of these two portfolios has
of any item, which might qualify from a standpoint of lending led to troubles in many banks. Secondary reserve bonds,
diversification, must be judged from a standpoint of col- because of the object of this reserve, must be of a kind that •
lectibility. The borrower must evidence both capacity and can be liquidated at all times without a loss. Any other
willingness to pay the loan in full at maturity, or over a kind would not qualify. To regard an investment bond
fixed period of time. The purpose of a true commercial or account as a secondary reserve is to indulge in an illusion.
It savors of triteness to say that high-grade bonds are the
agricultural loan Is well defined. It serves to finance a purely
seasonal operation and, at the end of this operation, there only type of security which a bank should buy and yet it
should be available sufficient cash to liquidate the entire has been the departure from this practice which has caused
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Federal Reserve Bank of St. Louis
56
BANKERS' CONVENTION.
the trouble confronting bank investments to-day. When it
comes to determining which are high-grade bonds, it seems
hardly necessary to state that issues which are considered
prime investments in certain phases of the business cycle
are not prime investments in other phases. Bonds, so far
as a bank is concerned, represent loans, and as such should
be followed as would any other credit.
The yield obtainable at any given time on any specific
bond will vary with the relaLive weight of two factors—
money rates and credit risks. Whether a bank should only
buy money bonds, that is, bonds of unquestioned credit,
which will be affected solely by the interest rate obtainable
in the open market, is a question to be solved by each institution, but it does appear advisable that the major portion of the account be composed of money bonds. The
extent to which a bank wishes to buy credit risks will depend
upon the bank's qualification in so committing its funds.
When an institution is not set up to carefully scrutinize
credit conditions, then the account should be composed
entirely of money bonds.
The question of buying listed bonds has often been de
bated. With the exception of municipal bonds and possibly
equipment trusts, there appears to be no valid reasons why
banks should ever purchase securities unless they are listed on
The New York Stock Exchange or the New York Curb.
The presence of a bond on either the Exchange or the Curb,
however, in no sense is a recommendation as to its fitness.
Such listings do make possible the obtainment of current
information as to the degree of marketability, market price
and periodic published information as to the status of the
borrower.
As to the maturity position of investment account bonds,
under normal conditions it would appear advisable that from
30 to 40% be short-term bonds, with a minimum of 15%
maturing within 18 months. In times when it is believed
with sufficient certainty by a bank that high-grade bonds
are at a high price level, there is no theoretical reason why
a bank should not liquidate its long-term bonds and place
the total account in short-terms. It is not intended that the
investment account be a trading account, but if, under normal conditions, around 30 to 40% of the issues mature
within 18 months to two years, which are readily marketable,
advantage can be taken of breaks in the long-term market to
advantageously purchase some long-terinTrds. It should
be the aim of the bank's investment account to obtaiilli•
that institution a good average return over a period of y
.
With reference to consultation with a city correspondent
on the part of small banks on items suitable for its investment account, it cannot be too emphatically stated that the
correspondent should be given a complete picture of the
status of the bank seeking such advice. This will involve
intimate conta,ct, not only on investments, but also on other
phases of banking. This, together with other considerations, may necessitate the large bank's withdrawing from
the security underwriting business and from participation
in selling group syndicates for new issues. The correspondent bank, by nature of the case, may be required to deal
only in seasoned securities, either for only a nominal commission or a service charge, so far as its country banks are
concerned.
The development of an investment account of a bank and
the purchase of securities for same must be definitely related and interlocked with the general financial policy and
program for the entire bank. Such a bank always will have
a definite proportion of its funds invested in bonds. Permanency of funds and the correlation of the bond account
with the general financial policy of the bank are the foundation stones of successful operation of an investment account.
Moreover, as a practical matter, there is little reason why
these two principles should not be followed. When one
considers how bankers are prone to eternally sit with poor
bonds, there should be far greater justification for eternally
sitting with good bonds.
ln Conclusion.
Under a sound financial policy and effective management,
the earning assets of a bank are in a constant stage of liquidation as a result of normal commercial banking processes.
The more rapid this rate of liquidation, the more "liquid" is
the position of the bank. In this orderly liquidation process
there is a constant flow of maturing and collectible obligor.
tions, the proceeds from which temporarily increase the
primary reserve and seek time and opportunity to re-invest
in secondary reserve items, loans or investment securities.
This condition must be dynamic and never be permitted to
become static.
A Code of Sound Bank Operating Practices
By A. G. KAHN, President Union Trust Co., Little Rock, Arkansas.
Once upon a time--of course all happy stories begin
"once upon a time"—in a quiet, pleasant, contented town
there was a bank. It was the only bank in town. It was a
good bank. It was a profitable bank. It made good loans
and charged 10% for them. Life was placid. It was the
bank in your town, wherever that may be. The President,
by common consent, was the town's citizen number one.
He loaned the bank's money by his personal knowledge of
every borrower, which was intimate, and which transcended
all rules. Interest was high. Overhead and losses were
low. Profits were inevitable. Does this sound like very
long ago? In most cases it was not. Twenty-five years
would take us ba,ck.
Now this bank performed its function and discharged its
obligations without distinctly knowing what they were.
There was no particular necessity for introspection nor
analysis. The function was to provide facilities and service
for ail comers. Its obligations were three-fold—to depositors, to stockholders, and to the public. They were, respectively, to operate safely, to earn satisfactory profits,
and to provide sound, progressive support for the community in its activities. It did these things.
But no such heavenly condition could be permanent.
There came a second bank to town. Lured by rumors of
vast potential profits, manned by an aggressive group of
go-getters, it opened its doors in the next block. Every
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Federal Reserve Bank of St. Louis
thing changed. Competition opened a Pandora's Box of
troubles. Bad practices crept in. Interest rates came down
and losses and overhead went up. You have heard all of this
before. Is it trite? I hope not. For I feel that the constant repetition of hard, unpleasant facts associated with
proper suggestion of constructive remedies is the medicine
that cures. Otherwise this address would have no place on
the program.
There are of course two main divisions of banking. The
first relates to the acquisition of funds, and the second to
their conversion. I shall deal almost entirely with the first,
which relates to profits, rather than the second, which relates
to the sound note case. This is not easy, because the two
are so closely intertwined. Ordinarily, the worst notes in
the note case get there through a desire for unusual profit
or even for adequate profit which has not been otherwise
earned. At any rate, it is certainly true that inadequate
profits are as dangerous to a bank as potential bad notes.
We still think that the 1931 slogan of the Arkansas Bankers
Association is fundamentally sound. It was:"Only a profitable bank is safe." When bank number two came to town,
in the course of time banker number one discovered that his
customers' route passed his competitor's door. The resulting competition and the technique of credit and activity
gradually changed the nature of his deposits and therefore
the basis of acquiring them. After all, acquiring deposits
11"
simply means borrowing money. Banks are necessarily the
est borrowers of all. They pay for the funds in service,
ty, convenience, and sometimes interest. They add
overhead and expect a satisfactory profit from the yield of
converted funds. All of this was possible under the old
system until bank number two was opened. Then dwindling
profits compelled introspection and diagnosis. The patients,
if we may refer to both.banks as such, had gradually gotten
sick. So they sent for a doctor and found out strange things
about themselves. They had invited the public to pay by
check, to start a savings account with $1.00; to have them
draw their deeds, make their tax returns, buy their auto
licenses, &c., &c. They had become to a large extent eleemosynary institutions. The fault did not lie with the public.
They thought the banker knew his business. They accepted
his invitation, and nearly ruined him with kindness. So the
financial doctor uncovered these bad practices and started
a study of costs. Astonishing revelations ensued.
I pass now from the realm of the more or less abstract to
a few specific facts and figures with which I happen to be
familiar. How many of you know your costs? In the
institution with which I am associated we think we know
ours pretty well. When we started taking our own financial
temperature, so to speak, we found that it was costing us
1c. to handle a clearing
5Yie• to cash a check on ourselves; 2Y
house check; 2c. to handle a transit check on another point.
We found it took 10 cents of good money to cash a check.
Wefound—and here I tread on very sacred ground—that it
cost us 260. to open a savings account, and furnish a passbook; that it cost us 66c. to carry such an account without
activity the first year, and 40c. in subsequent years. We
found that on savings accounts under $5 we lost 58c. the
first year, 3243. annually thereafter. On accounts between
$5 and $10 51c. the first year; and 25c. annually thereafter.
On accounts between $10 and $2530c. the first year, and
4c. thereafter; and only when we got above $50 did the
account show a profit of 5c. for the first year, yet 48% in
number of savings accounts fell in the above group. We
were paying 4% on savings. In other words, it took the
total income from a $13.33 deposit a year to pay for opening
the account. On the conversion side 23% in number of our
borrowers borrowed less than $100 ea,ch, or a total of 3-10ths
of 1% of loaned money, 18% borrowed between $100 and
$250 each, or a total of 7-10ths of 1% of loaned money;
13% borrowed between $250 and $500 or a total of 1% of our
loaned money, &c.; 18% borrowed over $5,000 or 86% of
our loaned money. Consider, if you please, the tremendous
cost of this unbalanced public relationship. We arrived at
these various figures by an analysis method which we considered eminently fair. We figured for inescapable overhead
the cost of a single teller's window with one teller, a single
bookkeeper, eric. In other words, a tninitnurn skeleton
organization for the service. We pondered this knowledge,
and disseminated it to the best of our ability. Our competitors, just as smart as we, were making the same studies and
groping for the remedy. We believe that we found it. It is
simply a new slant on the old idea of benefitting by knowledge plus co-operation.
In its convention of 1930, the Arkansas Bankers Association had formally adopted another slwan for the year.
We seem to like slogans. It was "Know your costs--know
your loans." The incoming president, to carry out the
purposes of the slogan created a committee on bank management of which I was chosen Chairman. He turned the committee loose without instructions, literally upon an uncharted
sea. The committee took up where the individual banks
left off in studying costs, recommending better practices,
and adequate specific charges. We felt that we were making
satisfactory progress until November of that year when a
very severe drouth coupled with the collapse of our largest
banking chain precipitated a number of failures and a vast
amount of banking confusion. The Bank Management
Committee at once set about the inauguration of a program to
consolidate and strengthen the position of the remaining
banks, and to improve their practices.
"r
1
STATE BANK DIVISION.
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Federal Reserve Bank of St. Louis
57
Bear in mind, if you plea,se, that the State Association
itself was in a dire extremity. It was necessary to develop a
method of holding the allegiance of its members. We
decided that the first step should be the promulgation and
adoption of a code of sound banking practices, which would
be so fundamentally correct that every bank in the State
could adhere to it. Why a code? Because, in other basic
industries, actual experience had proved that a code of
ethics or practices was a very valuable--in fact almost
indispensable--foundation upon which to build the organization itself and to guide the conduct of its members. There
were several types of codes which might have been developed.
One extreme would have been the "God bless our Home"
variety expressing the usual ideas of mutual goodwill. The
other extreme would be a code which would really survey the
major phases of managerial problem.s and lay down correct
principles with regard to each. We decided upon the latter
type.
Another fa,ctor in our decision to create such a code was
the necessity for focusing the attention of the officers of
small banks as well as those of large city banks on the
principles of sound banking. After all most of our members
were small banks. A code provided the rather tangible and
spectacular attraction for the purpose. There was also the
extreme desirability of organizing the State into regional
clearing houses, each with a sense of local pride and with
responsibility to the balance of the State and to the State
Association. Such a code was formulated and presented to
the membership. It met with instantaneous approval. It
was adopted formally at the 1931 convention. It has since
been read to the Boards of Directors of a vast majority of
the banks in the State, and has been formally signed by an
executive officer. We are sure that we were right in our
opinion that the very fact that this code was formally read
at a directors' meeting, and formally executed by the bank's
president would of itself focus their attention on the necessity
for better practices. It is made up of 12 articles. I will read
one or two of them in full.
Article Number 1.—"Management hereby is definitely
committed to adjust its operation to a profitable basis or go
out of business. Too much emphasis cannot be placed on
adequate earnings. Unprofitable institutions are a menace
to society and the integrity of banking. Solvency can be
strengthened only when adequate profits are made. Earnings other than interest on loans must be depended on.
Inadequate revenue is ultimately paid for by the depositing
public through insolvent and closed banks, by stockholders
through loss of invested funds and the double assessment, and
by employees through the loss of good jobs. Sound business
principles shall he applied to banking to correct unprofitable
practices. Bidding for business because of a desire for
volume whether it is profitable or not shall be discontinued."
Article Number 2.—"Adequate compensation shall be
charged for services rendered. Banks shall cease performing
needed and useful functions without pay. Adequate compensation for certain services may be paid for by the maintenance of profitable accounts. Customers, however, whose
accounts are not sufficiently large and profitable to completely service themselves shall be charged. Minimum
charges, such as on small accounts and small loans, shall be
made. Adequate charges for activity (item handling) and
"float" (compensation for use of uncollected funds) shall be
made. All banking and non-banking functions performed
shall command reasonable compensation.
Article Number 3 prescribes the use of careful cost finding.
Article Number 4 contains a pledge not to pay too much
for funds, and not to be extravagant. Article Number 5
prescribes adequate reserves, and a growing surplus. Article
Number 6 demands basic tests applicable to all loan applications. Article Number 7 specifies an adequate secondary
reserve. Article Number 8 emphasizes the necessity of fearlessness in collecting and in recording losses where necessary. Article Number 9 covers insurance protection.
Article Number 10 contains a pledge of directors to maintain
contact with the institution and to direct. Article Number
11 prohibits senseless competition. Article Number 12 con-
58
BANKERS' CONVENTION.
41111410
tains the final pledge of the subscribing bank to strive for are on the way. The District Clearing House Association in
better bank management and to support the Arkansas which Little Rock is located has traveled far in spi
B an kers Association.
adverse conditions. Every bank in it has placed e ,
There is also a supplement to this code which suggests account on its own bottom. Every out of town item is
specific charges for all various types of service,—also certain subjected to a fair float charge. Savings interest has been
sound practices. These suggested charges embrace practi- reduced from 4% to :3%. Small unprofitable accounts to
cally every service which a bank of any size may be called the extent of approximately 17% of the total disappeared at
upon to render to the public, such as activity charges, once from the books of our banks, rather than yield the banks
charges on savings accounts, exchange charges, charges on a profit. Loss of savings accounts was negligible. All these
small loans, charges on drafts, charges for safe-keeping, for things and others were done in the closest spirit of co-operaescrows, for drawing deeds, &c. The charges recommended tion. They were done in spite of gloomy forebodings of
are not mandatory.
disasters to follow. They benefitted all the banks, and the
Following the adoption of the code in 1931, the State was public. The public learned a new respect for the banks, and
divided into 16 regional clearing house associations, each each individual banker gained a new respect for his comembracing a compact trade and banking territory, each petitor. The great truth was brought home to us that we
having its own officers, and each being expected to place its fear both—the public and our competitors—unnecessarily.
own interpretation upon the code in the form of specific It will take time but eventually we will approach the standard
uniform charges, exchange of credit information, and other laid down by our code. Then, to carry out the fairytale
desirable objectives. These regional clearing houses have language with which I started, we hope to live happily
been in existence now for over a year. Some have been ever after.
active, some la,ckadaisical. They have of course had their
existence only in a period of extreme stress. I have person- Discussion Following Address of A. G. Kahn
on "A Code
ally visited some of them, and find their enthusiasm for the
of Sound Bank Operating Practice."
code and for self-betterment very great. They are certainly
A discussion as follows ensued after the reading of tile
developing within the regions a better spirit of co-operation.
of A. G. Kahn:
address
We have not tried to push them too hard nor to enlarge their
Mr. E. V. Krick (American Trust Co., San Francisco): I would like to
activities unduly. We have rather attempted to maintain
ask Mr. Kahn this question: In Arkansas did 3 ou run into any feeling
the nucleus of organization for each one so that they can the part of the bankers there that this was an inopportune time to put on
in
move right along when conditions become normal. Their service charges of the kind you mention?
Mr. Kahn: Yes. indeed. We found it very strong. It was only, I
importance can not be over estimated.
think. by the example which was set in three or four of the larger cities of
Now a pertinent question might be "have we all in the State that we were able to overcome, in a large measure, this feeling
a bad banking period is an inopportune time in which to install charges.
Arkansas put our own houses in order in accordance with the that
That idea is wrong. The manifest proof is that it is the only time in which
precepts of this code ?" We have not. But we are neither you can install it. When conditions are good the member banks will not
pay attention to that phase of the situation and will not install them.
discouraged nor impatient. Strenuous times, unprecedented When
times get hard. they get over that idea. In eur case it has worked
in severity have intervened. But it is our objective and we successfully.
COMMITTEE AND OFFICERS' REPORTS-STATE BANK DIVISION
Address of President of State Bank Division, Felix M.
McWhirter, President
Peoples
State
Bank, In-
dianapolis, Ind.
This. the State Bank Division, encompassioLt a. it does, more in memberA 7,500 of a total of
ship than any other of the divisions of the \
15,000. and not unlike other divisions, has in its progr.am of work some
continuing subjects and some that arise from time to t e for particular
action.
One cannot, review the resolutions of the State Bank I) ision over th
past several years at annual meetings without being co cious of t
profound, deliberate and far-sighted manner in which the
ivision
how er,
prosecuted its work. To indicate but a few typical exempt
I would mention resolutions on reserves, unit banking, dual Vyst s of
banking, clearing houses, profitable operation and regional caul' ences.
Our Committee on Banking Practice has been actively co-opera g with
tion of
the Bank Management Commission and inaugurating the inst
city and regional ('learing House Associations; also in urging em ers to
recognize the importance of setting up definite budgets.
Our Public Service Committee is assisting in customer/relation ip
cultivation, supporting those banks which have more recent/y underta
service charges of various kinds and has, through contact wit the memb
to the benefi
brought about a better co-operation on the part of the pr
of banking generally.
Our (7ommittee on State Banking Departments has
n in close cooperation with the supervisors of banking of the ;roils States. This
d the use of studies
contact has been most helpful in gaining co-operation
of the Bank Management Commission.
The Committee on Federal Legislation has been w0rking with the Federal
Legislation Committee of the A. B. A.
Our Committee on State Legislation has beftn actively co-operating
with the State Legislative Committee of the 4. B. A. in the promotion
of State Bank Legislation recomirendad by th,e Association. To mention
the more important topics the Coniwittee on/State Legislation is working
on in connection with the National Associatizin of State Bank Supervisors,
you will see that the better and time-tested provisions in vogue in many
states are being suggested and urged for other states, such as:
While such is perhaps a scan of the work of our Division, I wish for a
few mo erns to challenge the attention of each of you to a most important.
if not
e most important, emergency facing each of us to-day. You may
mine! ber that among the resolutions adopted by our Division last October.
t her were two dealing with issues current to-day—these I wish to read
t o ou.
Making Fundamental Changes.
Developments of the past few years have again attracted the attention
of the nation in an important way to its banking structure. Numerous
proposals for fundamental changes are current. While recognizing that
there are decided values in periodic,a1 reviews of the existence of any
undesirable elements in our economic and financial systems we recommend
that Congress and State Legislatures when dealing with banking matters
should be impressed with the special hnportance during the coming months
of conservative action based upon thorough analysis.
No Time for Controversies.
Among other subjects our dual system of State and National banking
is being considered and there are far-reaching proposals affecting the
status of each system. As a public benefit and in the interest of banking
as a whole, we believe it is desirable at this time that controversies between
banking groups be elhninated. We believe there should be a suspension
of all endeavors to produce by means of legislation competitive advantages
for either State or National banks.
It should be emphasized to all patrons of banks in their common interest
and for the public good that a bank is dependent upon general community
support and that any action outside of, as well as within, a bank that,
weakens its community sumx:trt is a blow to the community itself. Even
the highest efficiency in technical operation can be imperiled by unjustified
exhibitions of timidity. unwarranted pessimism as to general conditions.
and by unintentionally or deliberately false allegations, concerning a
articular bank, banking system or banks in general. It is time for conrvative, well founded public expressions.
he foregoing, of course, formed our planks, if you please, upon which
ou Division would operate.
It
only necessary to mention the violent manner in which there has
been launted article after article, some subtle, some crude and others
just w ully malicious and bold reflecting upon that larger portion of banking
in our ::untry—State chartered banking. All institutions of discount and
deposit
d-or savings opexating under State charter as opposed to those
banks op ating under National charter are termed State Banks by the
proponent of so-called unified banking. It is evident they would have the
public bell e that metropolitan member banks of the National system
are sacrosanq in their several instances and capabilities.
1. Supervision agency—appointment—term of office—compensation.
Whether or\not we care to have persist and grow, feeding upon itself, a
2. Authority to grant or refuse charters.
great bureaucracy of centralized finance in Federal Government is for the
3. Requirements for creation of surplus and expense fund at time of
determination of our citizens.
organization.
4. Capital requirements providing minimum for both banks and trust
The remrd of State chartered banks, by comparison and by any fair
companies.
comparison is one at which we marvel. What with the great propagandh
5. Loans to officers, restrictions and security requirements.
attempting to aggrandize and nuiltiply itself and its powers,
machinery
6. Loan limitations.
yet the banks of the country. those closest to the people of the country',
7. Limitations on power to hold real estate.
Reserve
requirements.
S.
the main streets of your town and mine, have more solidly indoctrinated
9. Limitations in investments in banking buildings, furniture and
their customers with proper uses and purposes of banks and banking and
fixtures.
with State's rights than has been done in three decades before.
10. Limitations on borrowed money and collateral security.
Unless responsiole officers, directors and stockholders of the State
11. Definition of bad debts and provisions for elimination.
12. Complete and current credit information.
[
chartered bank and trust company. together with those active in National
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Federal Reserve Bank of St. Louis
1
•
STATE BANK DIVISION
AMERICAIV BAIVICERS ASSOCIATION
Eighteenth Annual Meeting, Held at Washington, D. C., Oct. 22 1934
INDEX TO STATE BANK DIVISION PROCEEDINGS.
Some Practical Phases of Bank Management, by R. M. Hanes_Page 41
The Frazier-Lemke Bill, by John G. Brown
43
48
What the Country Wants, by Clinton B. Axford
52
Address of President of State Bank Division, Clyde Hendrix
Remarks of Francis Marion Law, President of A. B. A—
Declares Belief in Soundness of American Banking
Page 53
Report of Committee orx Nominations—Newly Elected Officers
53
No Resolution Committee Named
53
Some Practical Phases of Bank Management
By ROBERT M. HANES, President, Wachovia Bank & Trust (Co., Winston-Salem, N. C.
Bankers to-day are facing the most difficult problems of would be. By adding to this the proportionate cost of
light, heat, janitor service and other incidentals, the actual
management that have confronted them in a generation.
On one hand, they face increasing costs of operation. The rental cost of the space occupied can be accurately deBankers Code, higher prices on all equipment and supplies, termined. Each department is then charged at the determmore taxes—these and many other things have greatly in- ined rate for the square feet of floor space it occupies.
All salaries paid in each department are, of course, charged
creased the cost of doing business. On the other hand,
former sources of income are drying up as good, liquid com- to that department, plus stationery, supplies, the cost of
mercial and personal loans pass out of the picture and the machines, etc. In addition to this, the supervisory cost of
yield on government, municipal and county bonds rapidly the bank must be apportioned to the various departments
as fairly and a,ccurately as possible. When all of these costs
approaches the vanishing point.
In spite of this situation, there is the urgent need of earn- are totaled for each department, the gross cost of the departing enough to cover increased losses, to rebuild reserves, and ment is ascertained. Then by dividing into this cost the
to pay a reasonable return to stockholders. To the solution total number of transactions handled by the department for
of this problem bankers must apply, vigorously and fearless- the given period, we have the average cost for each transN.,. action, which is as far as we need go for all practical purly, the principles of sound management.
r- I am convinced that our most effective approach to the poses.
The time and effort required to make such a study will,
problem at present is through a more detailed study of our
operating costs. There must be no guessing, no generaliza- I believe, prove eminently worthwhile to every banker, and
tions. Our cost systems must reflect a true picture if they the facts revealed by the resulting figures will probably
are to be the basis of sound management policies and fair a.stound him.
I know of a fairly well managed bank which has recently
service charges. Every well managed business concern has
a cost system which will correctly show at the end of each made a thorough and detailed cost analysis of its operations.
11 four, five or six weeks' period just what the profits or losses The management was astounded to learn that in its Savings
from operations have been, not only in totals but by depart- Department, with average deposits of about $10,000,000 it
ments and for each item manufactured or sold. No com- was losing $55,000 a year. It learned that the average cost
mercial concern can be successfuly operated to-day without per transaction in this Department was 25 cents. The
periodic reports of costs and earnings in detail. In this analysis also revealed that a great many customers, in order
respect banking is no differect from any other type of busi- to avoid service charges in the Commercial Department,
ness.
were carrying active a,ccounts in the Savings Department.
'We must know just what it costs us, to the fraction of a In order to eliminate further losses, the management imto 2%, doubled the
cent, to run a check, deposit, collection, or transit item mediately cut its interest rate from
through our banks. We must know just what it costs us to size of the initial minimum deposit, and limited the number
run each note through our note cages. We must know ex- of free withdrawals to 3 each quarter, with a charge of 5 cents
actly what ea,ch entry into the Safe Deposit Department for each withdrawal above three. On this basis this Departcosts. We must know what each deposit and withdrawal in ment is now earning as satisfactorily as possible under exour Savings Department costs and whether or not we are isting conditions. The result is a saving of considerably
making money in this department.
more than $55,000 annually in the operation. of the deReasonably accurate costs can be determined for each partment.
banking operation by any banker who is willing to expend
This bank found that it was losing about $5,000 a year on
some energy and time. The cost analysis must be made care- its Safe Deposit Department with a total of 6,212 boxes.
fully, accurately, and every item must be included, else the It found that it was costing 25 cents for each entry, and that
resulting figures will be incorrect and misleading. In de- there was an average of 8 entries per box per year, wnich
termining the operating cost of any department, or the meant a cost of $2.00 for entry service alone. It found that
handling cost of any single item, the principal factors are the average maintenance cost for each box per year was
rent, salaries, equipment, supplies and supervisory services. $2.19, making a total cost in the Department of $4.19 per
Rental costs are determined by computing the amount box per year. Since the majority of the boxes were being
of spa,ce occupied by each department and charging a rental rented at $:3.00 per year, it was quite easy to see why the
value per square foot at a rate based either on actual rent loss was occuring. Steps have been taken to eliminate this
paid or on what a satisfactory return on the investment loss.
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Federal Reserve Bank of St. Louis
42
BANKERS' CONVENTION.
sulted in a total saving of about $85,000 a year to the bank.
The general public was prepared for the increased service
charges by two advertisements published in the newspapers—
one entitled "Where Can You Buy So Much Service So
Cheaply?" and the other "Your Bank's Profits Become Your
Protection." In neither of these advertisements were service charges discussed as such. In one the value of a checking account and the low cost to the customer were pointed
out; in the other, the fact was strongly emphasized that
banks must operate at a profit in order to be safe and sound.
Reprints were made of each of these advertisements and
every customer of the bank received a copy with his monthly
statement. Every employee of the bank was thoroughly
instructed as to the service charges, so that he could intelligently interpret them to anyone either during or outside of
business hours. In addition to all of this, ea,ch checking
account customer received with his monthly statement, 30
days prior to the changing of the service charges, a frank
statement as to the new charges, the necessity for them and
the fairness of them. Very few criticisms of the new charges
were received. They were a,ccepted by the customers with
no ill feeling and with a minimum of complaint.
I believe every banker can charge fairly for every service
he now renders at a loss, provided he will clearly and fearlessly tell his customers the truth about his costs. Of course,
he cannot do this until he has fully and accurately informed
himself as to his costs.
There has been much discussion of service charges throughout the country during the past twelve months. There has
been a serious lack of inforrnation, but a great abundance of
misinformation, in the newspapers. I believe we bankers
are to blame for the fact that the public has not been given
the whole truth regarding service oharges.
With labor costs and supplies materially increasing under
the NRA, and with cotton doubling in price, no one
would argue that a shirt should sell to-day for the same price
it sold in 1932. The same holds true of almost every manufactured product. There is certainly just as strong reason
for the banker to adjust the charges for his services in proportion to the increased costs under which he has to operate,
and the banker who does not realize this, and does not properly charge for his services, is surely courting ruin for his
bank.
The job of every banker to-day is to ascertain accurately
his costs; then, to see that he is compensated for his services either by adequate balances or by fair charges. Any
banker who persists in giving away his services is headed
for one or two things: Either the directors will replace him
with someone of sufficient intelligence, ability and courage
to do the job, or else the Federal or State authorities will
sooner or later take over his institution.
small
Alert management in banks to-day is considering more
how
of
regradless
accounts
Three free checks were allowed on all
the average balance might be;
seriously
the type of personnel it is securing.. Instead of
Accounts averaging less than $100, and having more than 3 checks,
director's son because he wishes a job, or some
some
taking
were charged 31.00, with no limit as to the number of additional chocks
local boy because he needs work, wide awake bankers are conthat might be drawn without further charge.
•
No charge was made on any individual account averaging above $100.
sidering seriously the educational qualifications of the applicant, the stand he took in college, both in his studies and
Commercial
the
in
costs
After studying the transaction
and
Department, it was seen that these charges did not nearly other college activities, but especially his background
they
that
realize
inheritance..
believe,
Most
I
bankers,
I
measured
new
cover the cost of the services rendered. A
system of service charges was immediately put into effect, have to make their own men. It is almost impossible to
under which no free checks are allowed on the small a,ccounts. get a properly trained and efficient man from the outside
Every account averaging under $100, which has one or more who will fit into an organization. The cost of training each
withdrawals, is charged $1.00, and for this $1.00 ten with- employee is considerable, and unless the proper material is
drawals are allowed. For ea,ch withdrawal above ten, 4 started in at the bottom, it is impossible to get well-qualified
cents is charged. On accounts averaging above $100, the efficient officers out at the top.
With acceptable commercial and personal loans so greatly
first $100 of the balance is deducted for account maintenance
and no activity is allowed therefor. For each $10 of col- reduced, the commercial banker to-day has also to qualify
lected balance above the first $100, one withdrawal is allowed as a bond expert. In order to keep his funds employed he
and 4 cents is charged for ea,ch withdrawal above the al- has had to go more and more into bonds as an investment.
lowed number. Whereas under the old system of service Good management dictates that bond investments be concharges, this bank was losing an average of about 75 cents fined to only the highest types and those of early maturities
and in amounts which the bank can reasonably hold until
on each small account, it is now makin.g a few cents.
Accounts having any considerable activity are closely maturity; otherwise very serious losses may be suffered.
Of the total Government indebtedness of 27 billion dollars,
analized on a monthly basis, out of pocket costs are charged
directly to the account, and the activity cost is computed on the banks of this country are holding approximately 15 bilthe same basis as allowed above. These changes have re- lions, or more than 50%. In other words, our banks have
The Trust Department of this institution had for many
years made it a practice to handle every executorship, administration, guardianship or trust offered it, without attempting to determine in advance the cost of handling the
business or the possible return from it. After making a
cost analysis it was found that a great ma,ny accounts were
being handled at a distinct loss, and that even many of the
larger accounts did not pay their way. State laws and
court officials fix the maximum charges that can be made
for trust services, so it was impossible for this bank to increase its charges to cover the ascertained cost in each trust
now being handled. In order to avoid these losses in the
future, this bank is requiring a detailed inventory of ea,ch
piece of business before it is accepted; then, after analyzing
the cost of handling the account on the one hand, and estimating the probable return in fees on the other, it can be
reasonably determined in advance whether or not the account
will be profitable. If it is definately ascertained that the
account will not produce a profit, it is refused. It would
not be possible, however, to tell whether or not the account
could be handled at a profit without a knowledge of the cost
of each transaction in the Trust Department. It was necessary to ascertain, for instance, that the cost of handling each
piece of real estate in the Department was $13.48 per year;
the cost of handling each mortgage loan was $2.72 per year;
the cost of handling each security investment was $1.37 per
year; the maintenance charge for each account was $15.58
per year; the cost of each voucher written in the Department
was 26 cents, and so on through the whole list of operations.
I know there are many of you who will say that these
costs are exorbitant and that you can perform these operations in your bank for a great deal less. You may be entirely right, but unless you are speaking from facts and knowledge, you are bound to be guessing and comforting yourself on account of your lack of adequate information. The
management of the bank I am speaking of laughed when the
results were presented. It tried in every way to discredit
the costs, but after a thorough study of them it has decided
they are correct.
I have said that this bank was fairly well managed. Before these cost analyses were made, the management, by
putting in a new system of individual bookkeeping in the
the Commercial Department, had cut its bookkeeping costs
37,500 a year; by getting advice from a firm of paper engineers it had cut its paper costs $8,000 a year, and these
economies, together with many other savings, had resulted
in a decreased operating cost of $50,000 per year. I say all
of these savings were made before the detailed cost figures
above given were determined.
This bank had previously had a service charge on small
checking accounts as follows:
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Federal Reserve Bank of St. Louis
STATE BANK DIVISION.
invested approximately 30% of their deposits in United States
Government bonds. It is not to be wondered then that
bankers are deeply concerned about the fiscal policies of the
Administration here at Washington. They have a right
to be concerned. Furtherrnore, they have a right to be
heard on this subject of the rapidly increasing governmental
debt, and their admonitions of caution and conservatism
certainly deserve to receive thoughtful consideration rather
than explosive criticisms of "reactionary," and "moss back."
The continuous streams of criticism which have been leveled at bankers, both from Governmental sources and the
public press, make no distinction between good and bad
banks. There has been no discrimination between the great
body of honest, capable and conscientious bankers of the
country who have brought their institutions through all the
vicissitudes and trials of the past few years, and those comparatively few inefficient, dishonest bankers who proved unfaithful to their trust. We have all been tagged with the
43
same label. This critical attitude has made our position and
work increasingly hard. I think the President's inferential
comparison of the bankers of this country with those of
England, in his last fireside talk, was totally uncalled for
and unfair. We are accused of not co-operating with the
Government's financial program when, as stated before, we
are carrying over half the Government debt, whereas the
British banks hold only 11% of their Government's internal
debt. Very few chances have been missed to hold bankers
up to ridicule on the one hand, while on the other we are
being asked to co-operate and assist in the support of all the
Government's financial operations.
I admit, frankly, that I am quite too stupid to understand
the economic theories which are being expounded here at
Washington. It is entirely foreign to my thought that any
individual, group of individuals or branch of Government
can borrow its way out of debt or, by destroying what we
have, increase our assets.
The Frazier-Lemke Bill
By JorrN G. BROWN, Counsel, Montana Bankers Association, Helena, Mont.
tive foundation for the great principles cherished by the
English-speaking peoples of the world—that not only are
there immutable truths but also certain things that people
hold inalienable.
We who follow what is called the Christian religion, claim
that these come from a Divinity, and that we have the right
of life and of liberty and of the pursuit of happiness without
the grace of any man or any government; that these come
froni a Power Supreme.
The little convention on that wonderful day in July made
this declaration so gloriously and so vociferously that they
cracked the bell with which they proclaimed it. They, too,
made declaration of those inalienable rights of life and of
Thus the relation of the lawyer to the people he comes in liberty and of property, and of the principle that to secure
contact with in daily life.
t ese rights governments are instituted.
My studies of this bill and of this law, and of the circumFrom those principles, and from those early teachings. and
ith that wonderful background, the business world of to-day
stances surrounding its enactment, made me want to go as
particularly that part of it that deals with property left in
though to clients here and ask them to hear me in much the
rust to help another—has always felt that certain transacsame confidences as they would come to me with in the various inquiries that they would bring to a lawyer to discustl. tions were in their nature private. That when the oral negoIn other words, I trust that nothing I say will be miscon-\ tiations between the parties had culmina.ted in a written instrued, and that you will understand that I simply want to strument, that that instrument alone should speak the agreegive you sidelights and high lights so that you may not only raent between the parties. Furthermore, it was felt that the
get an understanding of what this law is and what it means, instrument was the private agreement between two people,
but also know something of its background, and of the glar- and being a private agreement, and not interfering with a
neighbor's life, or his liberty, or his pursuit of happiness, that
ing light that is now beating clown upon the people of thi
that amement or contract was inviolate, protected and
country to such an extent that we seem almost blinded an
secured by the Government. So deep seated was this belief
forgetful of some of those fundamentals upon which o
country has become great.
that the Constitution forbade legislatures from impairing the
The history of all governments indicates recognition
obligation of contracts.
higher laws. 'The Greek Antigone expressed it when she eIn due course of time orderly society suggested that "there
plied to an accusation that she had transgressed the la by are certain a ttreements" which, if you want to make inadmitting she had, since it had not come from Zeus nd violable and godl as against the world, you will take up to a
seemed to override "those unwritten and unfailing mand tes. place we will a?kange for, and put them on record, so that
which are not of to-day or yesterday but ever live and n one other people deal g with this man may know what his obliknows their birthtide."
gations are and y and your heirs will be protected. Thus
In the Romans we read in Cicero a description <if the was born the syst
of having a record of certain contract
higher law "which was never written and we are:never engagements betw
two individuals which were of small
taught, which we never learn by reading, but whieh was concern to the rest o the community.
drawn by nature herself." The Romans recognized it as jus
A great writer (He ry Main) has said :
naturale as distinguished from jus civile. But these ancients
All our beneficent prospe y reposes on the sacredness of contract and the
had to do more with self-evident truths than with the rights stability of private property the first impulse and the last reward of success
in the universal competition.
of the individual man.
It is that great princi le of the inviolability of private conSeveral hundred years ago, one morning in England, a
when you come to consider the
group of men met and demanded that their Icing appear be- tract that is in quest'
fore them. They told him that though they had pledged to Frazier-Lemke bill. Th question is whether or not those
him their lives, their fortunes, and their sacred honor, they private engagements be een two individuals, and that frewere also entitled to some consideration from him. They de- quently have to do with t ust funds, shall be the subject of a
manded that he grant them this, and that, and the other partisan basketball game, to be tossed from one political
thing. The second demand of the 63 made was for the pro- basket to another, with the score upon a political scorecard,
tection of their personal rights. There was laid the protec- watched with eager interest to see who wins by throwing it
Mr. President, Ladies and Gentlemen of th,e Convention:
"Mr. Brown, is that a good investment? Do you think these details are
all taken care of?"
"I think so."
"Mr. Brown, this attack is made upon me in such a way that it involves
my good name. I want to be sure so to fight it that both the people of the
community in which I live, and my family, and all, will know that I was
right."
"Mr. Brown, I wish you'd look over this paper and see what you think of
this new law, and whether or not under that I can do what I'm about to
propose."
Then maybe toward the close of the day the telephone rings. "Mr. Brown,
I wish you'd run over to the hospital."
I go over, and sonieone there tells me what he wants done, a will to be
drawn and how he wants it fixed, "to be sure that the wife is taken care
of, and that nobody gets avvay with what little I'm leaving her, and that the
children get an education."
1
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Federal Reserve Bank of St. Louis
•
44
BANKERS' CONVENTION.
this or that distance. That is a rough but vivid way to describe it. You see why I asked to talk to you this morning
more or less in confidence.
When those earnest men who struggled so nobly to establish a Government "for ourselves and our posterity" returned
home they found that their Articles of Confederation were
insufficient in a time of no value to money and almost anarchy as to law. Then came the convention that entered into
that famous contract or engagement to promote the general
welfare of the people. They gave us the Constitution of the
United States. Gladstone, you remember, said it was the
greatest instrument ever struck off from the brain of man.
The older we get, the more we think of it in just that way.
May I at the outset read to you what the Supreme Court of
the United States at an early time has said? That great
Court, sitting in time of high political and social feeling,
realized, and in that case foresaw, that troublesome times
might again arise, when rulers and peoples would become
restive under restraint, and would by sharp and decisive
measures seek to accomplish ends deemed just and proper
because of the exigenceis of the particular time. They saw
that great principles of human rights would be imperilled
unless established by the fundamental law, the methods of
changing which gave time for deliberate and careful thought.
The history of the world had taught them that what had been
done by rulers and mobs iri the Ost might be attempted in
the future. They bad the courage* adhere to these principles, although to announce them Wsks seemingly to act in
defiance of the dominant political par0 at the close of a
great war. That Court said:
prior to the Lemke Act, we find that the private engagements
of the bankrupt made prior to the bankruptcy were preserved,
provided, of course, they were entered into without fraud or
at times sufficient ahead to prevent any presumption of
fraud. Congress fixed that time as four months. Contracts,
agreements, and engagements, therefore, of a bankrupt, entered into more than four months prior to the bankruptcy
proceeding, will he recognized in the bankruptcy recognition
of the ancient principles which we first referred to.
Then along comes the so-called exigencies of the modern
time. VVe, a great pleasure-seeking people, cannot stop for a
minute in our mad desire for pleasure, and having a good
time, and what not. So rather than in patriotic and Christian fortitude, take the whiplash of emergency, and get to
saving, we say: "Let's have a law on this. The law will relieve us. We can go ahead and have a good time."
Some time ago they started in to amend the Bankruptcy
Act of the 'United States. They amended it so as to provide
that the farmers would be entitled to a different consideration from that accorded to other citizens of the United States.
This is a very large subject. The fine discussion it evoked
a few years ago defeated a very prominent candidate for
office when he asserted the principle that the farmer is entitled to no greater consideration than any other man. I do
not care to discuss itior to argue it. Why, however, should
there be a discrimin tion between members of the general
society? Should we tnot all be equal before the law? That
was the purpose at reserving the Bankruptcy Acts to
Congress.
They said in enacting the new law that the farmer could
By the protection of the law human rights are senred ; withdraw that
come in and have a group of 15 of his associates go in to the
protection, and they are at the mercy of wicked rulers, OK the clamor of an
bankrutcy court and represent that this farmer could not
excited people. . . . The founders of our Government were familiar
meet his engagements, and could not pay, and what not. And
with the history of that struggle ; and secured in a writte,n Constitution
every right which the people Iliad wrested from power durin0,,,a contest of
they provided a sliecial form of bankruptcy for the farmer.
ages. . . .
That, however, weis found not to be as effective as they had
Those great and good men folesaw that troublous times would atise, when
rulers and people would becour restive under restraint, and seek )ty sharp
hoped for. So thpy took it a step further last spring, and
and decisive measures to acconlplish ends deemed just and proper ; and that
provided
that he did not have to wait for his own associates
the principles of constitutional, liberty would be in peril, unless established
to help him out. They provided that in every comity of the
by irrepealable law. The his ry of the world had taught them that *tat
was done in the past might be attempted' in the future. The Constitution nf
State and of the nation, or of any municipal subdivision of a
the United States is a law for ulers and people, equally in war and in peace,\
of
and covers with the shield of ts protection all classes of men, at all times, \ certain kind described, there s'hould be appointed boards
and under all circumstances. No doctrine, involving more pernicious conconciliation for the purpose of investigating the question of
sequences, was ever invented by the wit of man than that any of its prothis farmer's liabilities and his capacity to pay. Now, mark
visions can be suspended dur g any of the great exigencies of government.
yo11, comes the first thing that is of importance to you as
Such a doctrine leads direct] to anarchy or despotism, the theory of necessity on which it is based is f se. (Ex Parte Milligan 88 L. Ed. 295.)
banXers wanting to get familiar with this law.
l*will find that in the Bankruptcy Act prior to the time
Those words are Ver old. They come from a time of great
national emergency, b t they sound as clear and as clarion I now efer to the secured claim was protected so as not to
here to-day as the co age of their utterance at that tem- be redu ed in amount nor impair the lien as against the
pestuous time made t em ring then. That Court said and security edged—not impair his contracts. To put that in
meant that those inali able rights of individuals were guar- words of sy understanding that means that in the bankanteed to them by tha great basic contract of society that ruptcy cou , and in the farmer's action to obtain relief,
of his payment might be extended, the lender
would stand the test n t only of war, but of the exigencies of while the ti
a particular time. Be ng that thought in mind, let us come would be prot tkl in the amount he had lent the farmer, evidenced in the c tract the farmer gave by way of note and
closer to the question in hand.
protected to th extent of the security given for the loan.
This is a discussion which I should like to present from
two standpoints. When we close the trial of a lawsuit, we There we find th situation when into the scene steps the
discuss, as you know, both the evidence and the law. So I Frazier-Lemke bill.
With all due resp t to the members of tbe "greatest delibshould like to discuss here both the evidence and the law, as
erative body in the h tory of the world," the Senate of the
it were.
In the early history of our country there was an imprint United States, I shoul like to call your attention to the fact
of horror of imprisonment for debt. The framers of the Con- that the sponsors of t s bill are Senator Frazier of North
stitution, when they held to the National Government certain Dakota and Representat ve Lemke; the chief speaker for the
ng of Louisiana and that group:
powers, that the citizens of the entire nation might have bill was Senator Huey
equality, reserved not only the right to handle the mail, the and that they who finally ot it moving to avoid a filibuster
right to'print the money. the postal service and other rights on their bill were those behi d another bit of class preference
of national aspect, but also the right to pass upon the ques- legislation, the railroad la r bill. Thus comes this Don
tions of debt and their adjudication in bankruptcy, wherein, Juan who proposed to change .basic law of the nation with a
whereby and whereunder a man might under certain con- law which overturns a principle which your fathers fought
ditions be forgiven of his debts without being imprisoned. for and established. That principle has perished in this Act.
What is the story of the introduction of this new bill? In
Thus we find that the law of the United States having to do
with insolvent debtors is called the bankruptcy law, and that the first place, it was referred to the Judiciary Committee
it is enacted by the Congress of the United States.
of the Senate. There three very able Senators said that they
Always, heretofore, our bankruptcy law preserved the prin- would not file a minority report, but would let the bill be
ciple of recognition of the recorded engagements of two indi- recommended back without further Committee consideration
viduals. From the time of its first enactment down through (C. R., page 8122; C. R., page 8124), provided it was not put
the fine Act of 1898, and even into the latest amendments upon the consent calendar. I am not thoroughly familiar
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STATE BANK DIVISION.
47
fundamentals that I thought we were getting away from.
Those great fundamentals were the constitutional provisions
relative to the powers of Congress and the relations of one
man to another. May I read you a portion of the Congressiohal Record?
I know of no warrant of law whatever by which the Constitution allows
back. Fear instead of legislative deliberation and judgment
was the impelling force. When I found that part of an extensive program might be involved, it seemed to me I better
understood.
Congress to permit municipalities to go into bankruptcy, because a municipality is a subdivision of the State, and in effect the obligations which the
Congress is undertaking to wipe out are obligations contracted under the
sovereig-nty of the State. I know of no jurisprudence or any precedent whateven which indicates that Congress may go in that direction in the cancellation of the debts through bankruptcy. In other words, I contend that if
Congress may grant bankruptcy to municipalities, it certainly may grant
bankruptcy to the State.
Do you realize what those words of the President mean?
When the great powers of government, used as though martial law existed, are necessary to enable the Government to
speed a refinancing program to put the people's debts within
the control of a political party in power, a program not of
your creation, not submitted to the people in constitutional
amendment, but of partisan wish and idea, it is time for us to
turn and listen to grave words of the past.
That is a surprising statement to come from Senator Huey
Long. But he is right. It takes us back to the words of the
Supreme Court of the United States. When we get into exigencies of war or economic depression and start running wild
and far and free from the restraints of the Constitution,
why, then, a man like Senator Long, the clever, smooth-arguing politician, is going to say: "If you can come in and let
cities go bankrupt I contend that you can let farmers do the
same thing."
Some other politician may say that we live in an era of
debt delinquencies for governments—why not have them for
farmers? Then laborers, any class or group that has the
power to get class legislation through. In other words, they
would argue that the exigencies of the times should suspend
the law.
Shakespeare aptly said:
Many an error by the same example will thus rush into the State.
In other words, we are going to be so class-conscious and
debt-forgiving-minded, to such an extent that we lose sight
of great principles. That is the position we are in. That is
the direction in which we are going. That is why I wanted
to discuss the evidence as well as the law in the hope that
without partisan slant or color I could rouse in the minds of
what I consider one of the finest thinking groups of men in
the nation, the men who deal with trust obligations daily, I
could rouse in their minds the resolve that they must remain
loyal to the responsibilities of citizenship and constitutional
government.
May I read to you this?
This bill is another bill on which arguments pro and con have been made.
There has been a serious lack of understanding of its provisions, and it has
been alleged that insurance companies and other mortgagees will suffer
severely through the use of the law by the farmers to evade the payment of
debts that are within their capacity to meet ; I do not subscribe to these
fears.
So says the President of the United States.
It is five years more for redemptions, three years more
than might be judicially allowed in the Minnesota case where
the present Supreme Court held that economic depression in
one State is similar to war (which no State can declare), and
that a State Legislature having the power to declare martial
law could in effect also declare economic martial law and
extend the time of foreclosure and redemption of mortgages
without regard to contract.
The President goes on to say. I beg of you, mark these
words well:
The mere threat of the use of this machinery will speed voluntary conciliation of debts and the refinancing program of the Farm Credit Administration.
A partisan might question the statesmanship of enacting
laws to be used as a threat for the purpose of carrying out a
new, untried political theory.
When we read the Congressional Record and found that
Senator Robertson of Arkansas indicated on the floor of the
Senate that he was opposed to the principles of this law :
when we found that Senator Pat Harrison of Mississippi is
quoted as saying no lawyer could understand this law ; and
when we turned to the rollcall and found that all these leaders finally voted in favor of its passage, I wondered what had
made the change. I wondered whether from some place an
ugly whip had cracked and a lash had been laid across the
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Federal Reserve Bank of St. Louis
The mere threat of the use of this machinery will speed voluntary conciliation of debts and the refinancing program of the Farm Credit Administration.
The Constitution of the United States is a law for rulers and people equally
in war and in peace, and covers with the shield of its protection all classes
of men at all times and under all circumstances. No doctrine, involving
more pernicious consequences, was ever invented by the wit of man than that
any of its provisions can be suspended during any of the great exigencies of
government. Such a doctrine leads directly to anarchy or despotism, but
the theory of necessity on which it is based is false. (Ex parte Milligan,
88 L. Ed. 296.)
Thus the picture of the Frazier-Lemke bill, and thus the
unhappy picture of a political dragon that might destroy cofistitutional rights and the private engagements of man to
man—aye, of man to woman. We have seen those private
vows between man and woman destroyed in yon unhappy
country of Russia. When to-day they can destroy a contract
between man and man, to-morrow some theorist may destroy
a solemn contract between man and woman.
"Oh," says someone, "you are a calamity howler." Maybe
I am, but I asked to talk to friends and clients about a great
and important piece of legislation that is destroying the principles their nation has always stood for. Do you remember
that the advocates of this bill said on the floor of the Senate:
"Only good for five years"?
When they say that to you, ask them to listen to words of
the President.
The bill, however, is in soine respects loosely worded, and will require
amendment at the next session of Congress.
So says the President. In other words, the principle has
got its toe in the door of the constitutional protection to your
home, and your contracts and your liberty to hold it open,
and to let yon mob rush in to make political panaceas in disregard of principles that have stood for centuries.
May I refresh your memory by referring you to one other
line? I think the time was about a year ago. I am not sure
that I quote it correctly. As I recall it, the line was that:
"It is time to drive the money changers from the temple."
If we destroy the faith and credit of the debtor and creditor policies and promises in a nation as great as ours with
political subterfuge and new-found ideas of emergency laws
and. set aside the Constitution because we think times are
tougher than those of the Revolution, the money changers
may indeed be driven from the great temple. But I hold that
the bankers, the trust companies, who have protected widows
and orphans, who have used the investments of deceased husbands and insurance moneys to help widows to live comfortably and to see the sons and daughters educated, who have
furnished funds for industry, the investor, the plain American citizen, all on American credit and .American protected
contracts, are not money changers.
I grant that you have builded a temple, but the temple of
American credit and American integrity of contract so
builded by our American banker is a temple not made with
hands, but eternal in the skies.
Preceding the presentation of the above address, President
Hendrix made the following introductory remarks:
The next gentleman on the program is one who comes to us as a graduate
of the University of Missouri, also the Law Department of Yale University.
For the last 30 years he has lived in Montana and is practicing law at
Helena. During the war he served as Attorney for the War Finance Corporation, and later for the Agricultural Loan Agency. For the last 14 years he
has been Attorney for the Montana Bankers Association, a position which he
still holds. More recently he has also served the Reconstruction Finance
Corporation as attorney and the Regional Agricultural Credit Corporation.
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48
BANKERS' CONVENTION.
What the Country Wants
By CLINTON B. AXFORD, Editor "American Banker," New York City.
Mr. Chairman, My Friends of the State Bank Division of the
American Bankers Association:
I trust that the pleasure of the next few moments may not
be wholly mine. It is truly gratifying to stand among you
and think of the many good fighters in your ranks and the
causes of American banking for which they have fought so
well.
I could spend much time in this talk in telling you how
good and how big you are. How the figures show that the
State banks and trust companies of the United States total
10,903, more than twice the 5,422 National banks in the country. How your institutions have resources of $32,621,000,000,
as compared with $23,901,000,000 in the Nationals.
I could give you figures to the effect that whereas the National banks have 39% of their deposits in loans and discounts, you have 51% of your deposits thus utilized, at a time
when such credit is the crying national need. I could point
out that of the $7,401,000,000 in capital funds of all banks in
the United States, 61% underlies the State-chartered institutions, and that you have a vested interest in American prosperity which makes your interests worthy of prime national
consideration.
I pay my respects to men like your presiding officer and
his predecessors, such men as Andrew Beebe, Mike Malott,
Grant McPherrin, Craig Hazelwood, J. H. Puelicher, and
others who have risen up among the State bankers of America to be the spearhead of their defense of the things which
are American in the American banking system. It is a fight
which can never end. Eternal vigilence is the price of all the
policies which we hold dear. Heresies within are as dangerous as attacks from the outside. Your leaders have derived
their strength from the solidity of the rank and file behind
them. It must not fail them in the strenuous period of reconstruction for the American banking system which evidently
lies ahead.
But there must be more than courage in the struggle which
lies ahead. There must be realization that merely fighting
for status quo is not enough. This is a changing world. The
New Deal means new objectives, despite the degree to which
it has used our resources to restore the status quo which went
down in wreckage in 1933.
We are in the midst of a great depression. A depression
is a period of readjustment. It continues as long as resistance to readjustment is continued. When the readjustment
is completed, the depression ends. Ever since 1929 we have
been running a race between readjustment and ruin. There
is serious doubt in my mind whether recovery has reallY begun, or whether, to-day, after using all available cash and
bank resources until 1933 to postpone essential readjustments, as individuals, we arc, not to-day merely utilizing the
equally ruinous processes of currency debasement to continue
on the road to ruin from which only completion of readjustment can save us.
The readjustment of which I speak is the reorganization
of our national productive activity to fit into the world of
peace. We quickly demobilized the armies of the war. But
the industrial and agricultural machine which we built up
to supply the war-time deficiency in world production is still
fighting to hold the advantages which it won in the war
against the resumption of production all over the world and
the change in internal economies which peace will finally
entail.
Our unbalanced budget appears the measure of the extent
to which we are utilizing to-morrow's money to postpone the
issue of re-employment of excess farm and city labor in productive enterprise, and the cost of that postponement must
be taken out of to-morrow's production by taxation, or yesterday's savings by currency depreciation.
Economies should be the keynote of a banking discussion.
But you cannot talk economies without talking politics these
days. And when it comes to banking—what would the poli-
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Federal Reserve Bank of St. Louis
tician of to-day do for other material for his little hammer
and chisel?
Once upon a time the great political fear of the country was
that the banks would take over the Government. To-day the
intelligent are fearful that the Government will take over the
banks. The banks have a 50% mortgage on the United States
Treasury—on June 30 they held $13,700,000,000 out of $27,000,000,000
Government issues outstanding. But Uncle
Sam has a preferred interest in the capital of the banks, and
if you sit on the sidelines you wonder what would happen if
either side attempted foreclosure.
Politics is a funny thing. Before election we hear on all
sides how much the candidates will save the country. After
election we get our eyes open and wonder how much of the
country can be saved.
My theme to-day is "What the Country Wants." My
answer is that it wants an impossible paradox, but that not
yet are its eyes open to this fact.
The statement of that paradox makes clear my thought
that banking, particularly State banking, cannot merely sit
back satisfied to maintain status quo and survive. It makes
clear my thought that we are in the midst of a great depression with no clear-cut national policy as to whether what we
are doing is really maintaining national solvency and fostering reconstruction, or whether we are merely freezing the depression where it lies, and waiting for the ultimate national
insolvency of currency inflation. Such bankruptcy would
bring about a period of national receivership in which we
will have no other alternative but to wash up our status quo
and get to work on the job of adjusting America to the opportunities of to-morrow.
What the country wants is first of all men at work. But
paradoxically paralleling that vvant is the fact that individually and collectively we want to maintain status quo as
though we could maintain status quo when putting 10,000,000
men to work means a definite change from status quo. Out
of that paradox comes the dilemma in which we adopt a
virtual do-nothing policy about re-employment, merely carrying surplus labor on the dole and wishing for some new
product or new magic whereby we can interest capital in
putting more men to work. When I say men at work I do not
mean that we lack jobs. There are millions of jobs waiting
for men to fill them. To say that jobs are lacking is to bold
that human beings have ceased to want the things which men
can produce. What is lacking is a formula which will span
the difference between men wanting jobs and people wanting
things.
The two cars in every garage and the chicken in every pot
are still the American ideal. They are as much the objectives of the New Deal as they were of the New Era. But
how are we to have them unless the 10,000,000 unemployed
get back to work earning their own keep, instead of being a
burden on the production of the 40,000,000 employed? How
are we to add to our national standard of living until these
10,000,000 unemployed are at work increasing rather than
decreasing our national production of all the desirable firings
which we do not yet have enough of—new motor cars, radios,
bathtubs, clothing, entertainment, and all the things that
make life richer and fuller.
Merely to pension the unemployed on a dole is not adding
to our stock of things and enabling us to raise wages, both
nominal and real. Merely sharing the work weeks with the
unemployed does not add to our national income. Both of
these methods merely freeze the depression at the bottom
where it hangs perilously near the edge of bankruptcy.
We have the raw materials, the men, the machines, and the
management. But half of the national plant is idle while
the Treasury is borrowing to the hilt to keep in the national
payroll for a minimum of food and clothing the line of unemployed who merely stand at the gates waiting for something
valuable to do.
1 20
IC DIVISION.
war4i3 of the American, people, the banker has made himself
Last week I had occasion to study the detailed results of
this NICB's questionnaire on the question of whether the
Government should take over the banks. Five thousand and
fifty editors from all over the country gave their replies on
this question. On the Pacific Coast, 45% of the editors declared that public opinion in their communities favored taking over the banks by the United States Government. As we
traveled Eastward, the pementage dwindled, until in New
England only 24% of the editors favored socialization of the
banking system.
That's 45% too much of the Pacific Coast and 24% to
much in New England. and an average of 35% too much fo
comfort for the entire country. But the banking world is
doing precious little about this ominous sweep of opinion toward the replacement of the system of individual and local
banking control and responsibility by some form of political
financial institution, from whieh heaven save the people of
the United States.
How powerful the dissatisfaction with banking and the
drive for banking socialization appears to be may be visualized from the fact that even in New York City and Middle
Atlantic States area, where the number of editors who see
their eommunities as favoring banking socialization reached
29%, actually more readers and voters are being reached by
the editors who favor banking socialization than by those
who oppose it.
Independent newspapers are 40% in favor of socialization
of the banking system. Democrats are 41% in favor of
socialization, while Republican paper editors are most conservative. Yet, 2(Wo of these Republican paper editors admit
that their communities want to see the banking system put in
the same category as the Post Office, with the local bank
office manager running errands for the local political boss.
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Federal Reserve Bank of St. Louis
49
Do the American people, even to the extent shown in the
Industrial Conference Board survey, really want such a thing
to come to pass'? We doubt it. What the country really
wants, we believe, is a banking system in private hands, controlled by local interests for the local interest, the ideal to
which the State Bank Division has always clung, because it
is fundamentally an Americanism. Why, therefore, judging
us by our results, are from 25% to almost 50% of the editors
in various parts of the United States ready to see us supplanted by a centralized, politically administered system of
banking, in which the most effective local voice is bound to
be the power for plunder of the local political machine?
Perhaps it is not too late to see our situation in its true
light to grasp our opportunities State by State, and to work
out a banking system which will not let our people down—
one that will not sell something in prosperity which it cannot
deliver in times of depression. Remember that from 50Vo to
75% of the editors still favor giving private bank ownership
a change. 'Whether they will continue on our side or not depends largely upon whether the banking system again muffs
its obligations as to public education on sound banking from
1934 to 1940 as it has bungled them right down to date.
Perhaps it is true that our errors have been part of the
national bungling about banking and economics. Perhaps it
is true that conversion of the American banking. system to
the pattern prevalent in Russia, Germany or Italy, where
the Government virtually owns or administers the banks,
would be merely the supreme blunder of a blundering national policy of abuse of the principles of money and credit—
perhaps these things are true, but it is bankers who are, and
will be, damned for the breakdown resulting from these
abuses, for that breakdown focuses directly on the banking
system. And we should have our eyes open to the fact that
it is in the banking system that the cure must be effective, or
the American people, in the name of reform, will most certainly sacrifice our present banks and bankers for something
perhaps better, but if the product of mass ignorance about
banking and politics, probably infinitely worse.
We want to say right here that the American people expect the impossible of their banking system. They expect it
to invest their savings and surplus cash so as to draw interest, and at the same time be liquifiable without limit or loss
in times of depression. This is demonstrably impossible.
Yet the blame for the public's desire lies right at the door of
the American bank which has made no effort to amend this
foolish concept of banking, but rather has fostered it and
ofited by catering to it. It is my well-considered belief
hat if the American banking system is to survive in piivate
hands and State it must retire fom its position of holding
forth savings as cash. It must return to the fundamental
principles of savings trusteeship which recognized early that
if principal is to be maintained unimpaired, liquidation of
the fund must be limited.
Your estimable past President, L. A. Andrew, is of the
opinion that no savings deposits should be underwitten or
undertaken by banks with less than 90 days' actual notice of
withdrawal at all times. I believe it can be easily demonstrated that even a 90-day clause would be inadequate to
prevent ruinous liquidation or spending of savings during a
period of cumulative depression.
I wish there were time to trace fully for you the sequence
of log4e-which backs up that statement. It is one of the most
interesting aspects of the depression that I know. I think
I could show you how the accumulation of savings and other
-
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50
BANKERS' C
How, when the decline in prices and profits et-Ane, indi
viduals, businesses, communities and finally the wh tle nation
began to supply the difference between outgo ar. 1 income
from their bank deposits. How, as deposits were tE its drawn
down, the intensity of profitless competition was ncreased
and liquidation of deposits demanded liquidation of -he loans
and investments through which they were once spen to make
an era of prosperity, but are now being called or lefaulted
to make an era of depression.
I think, finally, I could show you that instead if coming
to grips at once with the problem of readjustment; the savings reserves and bank deposits of the country are used to
finance year after year of competition below cost until either
of two things happens: Either the depositor, having exhausted his bank balances maintaining a standard of living,
i.e., a standard of spending. went bankrupt and finally faced
the necessity of finding new profitable occupation entirely
bereft of his capital. Either that, or his pressure for liquidation together with the withdrawals of his competitors in
profitless production exhausted the power of his bank to
liquidate and when carried to its ultimate national end, in
1933, closed every bank in the country, broke the Federal Reserve banks. bankrupted the Federal Treasury. I think, in
short, I could show :von how we prolong our depressions as
long as we can afford them ; that is, as long as we can find
funds from banks to finance the losses of the profitless competition which initiated the depression and need for readjustment in the first place.
I think I could show you that as long as banks stand ready
to supply cash to depositors who are losing money in their
businesses or out of work, their depositors will choose to go
on loging money rather than readjust their affairs so that
they are operating at a profit, spending less than their income. I think I could show you that during a period of major
readjustment, such a program of consuming deposits goes on
until either banks elose or the currency standard is repudiated in order to give a temporary respite to business by substituting currency depreciation for asset depreciation.
Under this analysis the depression of 1933 was more inevitable than that of 1907, because of the illusions created
by the Federal Reserve System's appearance of strength, and
some day in the future the FDIC will serve only to finance
a period of resistance to depression which will finally wreck
it unless it stops the liquidation of savings in the banks it
guarantees. In other words, the intensity and length of our
depression is in direet proportion to our accumulation of
bank term deposits or savings which bankers have guaranteed liquifiable without loss of principal or interest, no matter to what degree or when their depositors want to spend
them.
This is a dismal and depressing analysis, particularly so
to those among us who have persuaded ourselves that we are
public benefactors when we hold ourselves forth as the most
liquid, safest trustees for savings in the world. Yet it is
perfectly elear that our banking system would be impregnable if it were so operated that only commercial funds were
payable on demand, if they, in addition, bore no interest,
being risked only in self-liquidating advances of not more
than 90 days' maturity. while all other bank deposits bearing interest and invested in longer-term risks were liquifiable
only in the ratio to which the securities in which they were
invested were liquifiable without impairment. As it is operated, our banking system is as far from that as humanly
possible to imagine.
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Federal Reserve Bank of St. Louis
The fight of the "American Banker" against branch banking has been a fight against the illusion that to exchange our
preserit system for branch banking would be reform.
We ilave known and we believe that time has now demonstrated that branch banking is only a system of having bigger bank failures. Let us cite the fact that when the artificial support of big names was removed from the banking
system in the United States in 1933 the banking holiday
found 7 of the first 200 banks in the 'United States unable
to reo n, and, of the branch banking systems in the United
States, 9 were unable to reopen, and they carried down with
them 47 branches.
We k ow now that the reason why the United States was
within tWo weeks of going off the gold standard under President Hoover in 1932 was because we were within d s of the
collapse of the largest branch banking sysNikin oveerUnie
tendt
States, a system into which the United Stat
and correspondent banks threw at leasZ $150,1 i 1.000 uring
February 1932 in order to save it from a 6. apse w ich in
1933 came when the branch banking st ct res in 11 •troit
collapsed and finally brought the national'ash.
which saved the
Moreover, we know that the only t
big British branch banks in 1931 from he sa
sort of a
ternational
collapse as a result of the heav ntern
spended gold
runs upon them was the fact
payments, before they were for ed to e ose th• ikoors. We
method when they
relieved!Sur banks in 1933 by t e sa
have been off gold
were reopened. And Canadian
since 1930.
We have seen Germany's branch banks mortgaged to the
German Treasury and finally taken over. We have seen
French branch banks with hundreds of branches collapse.
Italian branch banks were rescued when Mussolini bought
their frozen assets. Yet despite the evidence which damns
branch banking as no better than unit banking when it is
If
STATE BANK DIVISION.
I
under pressure of the United States are going to take branch
banking in the name of reform if State and unit bankers do
not give them something better.
I hold no brief for the FDIC. It may have been a fatal
error because it has so thoroughly quieted suspicion and
satisfied us with a feeling that well enough can be let alone.
Yet every element of weakness in the American banking
system which led it down to the 1930-1933 gehenna of individual and mass failures is present to-day. And when the
test comes of declining deposits during a period of depression, when our customers in the mass are putting less money
into the banks than they are taking out, the FDIC as it now
stands cannot help but be a more complete failure than was
the Federal Reserve System. The Federal Reserve lasted
for 20 years, before the illusion that it would end runs on
banks and banking panics was burst. I give the FDIC less
than 20 years, unless bankers co-operate to so strengthen the
banking system internally that the FDIC will not be promising something which it cannot deliver.
What is needed in the banking system is a control of liabilities. Has it ever occurred to you that the banking business is the only one which boasts about the size of its liabilities? We have yielded to the mass illusion that money in
the bank is money. It is not. It cannot be withdrawn any
faster than it can be recovered from the investments into
which it has already been spent by borrowers. Yet we have
guaranteed that it can be withdrawn, and every time the
balance of trade and losses runs against our customers, we
.are in trouble. What I am saying is merely a reflection of
thought that is going on in more than one place where bankers are taking thought for the morrow.
Francis Marion Law, President of the American Bankers
Association, in his address to the gathered National bank
examiners in Washington, six weeks ago, declared that they
could not consider that the banking system or country could
be run so that it could be liquidated on a 90 days' basis.
The President of the United States, Franklin D. Roosevelt,
in his first radio talk on banking in 1933, won the plaudits
of both bankers and the public when he plainly told the
American people that they could not draw their money' out
of the banks.
The public is ready for reform. I trust that the committee appointed by President Law two weeks ago to study the
needs for revision of the banking system and laws will not
pass by the opportunity which presents itself to-day.
The crfficials of the FDIC themselves realize that they are
on the spot. They are guarantors of the entire bank deposits
of the United States if the bankers fail in their individual
bank guarantees.
The Congress of the United States has in it men who will
welcome a proposal for strengthening the American banking
system from the inside. The objective should be a banking
system safeguarded against more than runs. It should be
safeguarded against liquidation faster than the country can
afford. Safety should be built in, not plastered on the outside. Segregation of deposits comes first to mind. But
whether this should be in separate savings institutions according to the system which has worked out so well in New
England and New York and other States, remains to be
determined.
Capital adequacy is a well known formula for safer banking, but until capital requirements are adjusted so that the
greater the amount of a bank's demand or short notice liabili-
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Federal Reserve Bank of St. Louis
51
ties in relation io its quick assets, the greater must be a
bank's capital, there will be plenty of room for wreckage.
And I do not consider United States bonds quick assets by
any means. There was not enough currency in the Federal I
Reserve banks in 1933 to liquidate a small portion of the
'United States bonds which were being thrown at them. A /
belief in the liquidity of governments merely implies a belief
in currency inflation.
Another formula for safeguarding banking against the enforced liquidation of its savings accounts appears in suggestions that banks graduate the rate of interest paid on time
and savings deposits according to their maturity. Accounts
of less than a year's maturity would perhaps then draw 1%;
accounts of two years, 2%; five years, 3/
1
4; 10 years, 4%.
Conceivably, many benefits might come from a change in the
method of servicing savings. Banking would be immeasurably eased. Practically all of the pressure for liquidity now
restricting credit would come to an end, and bankers could
lend freely on term loans.
Federal authorities should be sympathetic to any program
which lessened bank demand liabilities and increased their
supply of loanable long-term funds. For the FDIC such a
change would be a life-saver, and its insurance premium
charges could be definitely lessened to the bank which thus
safeguarded its position. Conversion of the Federal debt in
banks to long-term issues would be logical when banks converted their demand liabilities into controlled liquidation
accounts.
The means of reaching for built-in bank safety should be
thoroughly canvassed. In the final determination of built-in
safety, however, it will be necessary to put a stop loss clause
on savings withdrawals such as the mutual savings banks
have found it wise to write into their deposit contracts,
which, in their case, of course, are really partnerships in
investment trusts.
Given a sound basis upon which banks can compete for
savings deposits most of the banking and monetary problems
of this country would be close to solution, for it is.in the
maintenance of the fiction of cash liquidity that we have
one after another broken our system of independent banks,
our Federal Reserve banks, and are now proceeding dangerously in the direction of breaking the United States
Tr sury.
So I stand here as an advocate of an open mind on internal
anking reform. We have had relief. Now if we can have
corrective internal change, perhaps we can end the need for
the reform from the outside which the advocates of centralization, branch banking, or some other sort of mere change
would apply.
This is not a suggestion of something that is to be taken
up next year, but a suggestion of something that should be
taken up during the course of the next 10 years, so that if,
and when, we arrive at another period of test for our banking system we will not be the victims as bankers of having
promised to do something which possibly in many individual
cases it was impossible to perform.
In the meantime, our national policy is something that we
all have close to our hearts. Our national policy has got to
come sooner or later to the point where people will vote for a
control of the national spending account rather than for the
pxcessive spending which sooner or later, unless the budget
is balanced, will lead us to a point where more currency inflation is absolutely inevitable.
_At
sr• •
5')
BANKERS' CONVENTION.
COMMITTEE AND OFFICERS' REPORTS-STATE BANK DIVISION
Address of President of State Bank Division, Clyde
Hendrix, President Tennessee Valley Bank, Decatur, Ala.
As we meet to-day in this beautiful and interesting city—under the shadow
of the Capitol and within a stone's throw of the Executive Mansion—and as
we view on every hand the magnificent and sturdy structures housing the
various departments of our Government, we are impressed with the magnitude
and power of this mighty nation which we proudly call our own. And as
we contemplate the workings of this wonderful governmental machine we are
filled with tme and wonderment at the greatness of it all.
It is well that we are meeting in Washington at this time, when our
National Governtnent is playing sucih a great part in the rehabilitation of
banks throughout the country, and through its various agencies is undertaking to place banking on a permanently sound footing for the future. And
whether or not we agree with all its policies, after all it is our Government
and it is our privilege to accept the good and it is our duty to undertake t
correct 1Nhatever may be wrong. Let us hope that from thia meeting here of
bankers from every State in this nation there may come some helpful, eon:
structive suggestions which may favorably affect future legislation and the
administration of laws governing banking operations.
In making this report of the activities of our divieion along with a survey
purporting to cover subjects closely related to and vitally affecting our
members, I am impressed with the practical impossibility of treating the
multitude of problems and subjects within the time allotted for this report.
It may be well, however, that much is omitted, for I suspect that the majority of those in attendance have come not for the purpose of being reminde
of the trying ordeals which they have undergone during the dark days o
the past 18 months, but rather to obtain encouragement and inspiration
with renewed hope as we look to the future. And, in this connection, whil
recognizing that our problems are many and great, it is obvious that ther
ia in the present situation and in prospect for the future much to hearte
us as the old order gives way to the new.
The State Bank Division has devoted a large portion of its t e
d effo
for the past year in co-operating with the Federal Gov
men in ts variou
recovery measures. Foremost among these was tb,e. wo
e Bankin
r
office staff,
Code Committee. Not only have we shared members
but also members of our official family for that itn
ork. All
through the year they have striven to make the code of fai
pe tion for
r gh se dules
banks an effective agency for assuring fair competition
of fair trade practice. A great deal haa been done towardiedutating banker's
to the importance of such schedules.
Our Committe on Federal Legislation has co-operated with the Association's Committee on Federal Legislation to the end that the vast amount of
new legislation on banking which has been pushed through might not contain measures inimical to State banks. In passing, attention
called to
the modification of the temporary plan for Federal ineurancei which has
been extended to July 1 1935, and the time for compulsory membership in
the Federal Reserve System postponed to July 1 1937 ; along with the repea
of requirement of increased stockholdings for qualifying dir4tors. I shal
refer to this subject later. The Committee was active in securing neede
amendments to the National Securities Exchange Act, the Att guaranteein
Home Owners' Loan Corporation bonds, the National Housing Act, the Re
enue Act of 1934, and other legislation in which our members are interest
A full report was made to our Executive Committee, which, if time p
mitted, I should like to reproduce for your information.
e
Our Committee on State Bank Legislation has been instrumental in
advocacy of needed new legislation and in opposing the passage of prop ed
ah
laws which although intended for good were unworkable or unsound.
praise is due this Committee for the effective work it has done.
lenmakes
a
Relations
and
Public
Practice
Our Committee on Banking
did report of its activities for the year. It has co-operated with other agencies in fostering confidence arid a better public feeling toward banks. It is
co-operating wholeheartedly with the program being put on by the Asaociation on "Constructive Customer Relations" and calls attention to the clinic
being put on at this convention, beginning to-night, affording an opportunity for bankers to learn at first hand more about this great work which
Dr. Stonier is directing.
Our Committee on State Banking Departments reports the continuance of
friendly and co-operative relationship with the National Association of State
Bank Supervisors. We are working together for better bank management and
for more uniform Stat,e banking laws ; and they are working hand in hand
with us in the fight for the preeervation of State chartered institutions.
Our Committee on State Bank Research has made its annual compilation
of the resources and liabilities of State banks and ia now engaged in a study
of these figures to determine, if possible, whether these figures can be used
to strengthen and improve the State banking system. We might add here
that the number of State chartered commercial banks (8,879) continues to
constitute more than half the total banks of the country ; while less than
one-third of the total number are National banks with approximately 41%
of total deposits—these figures being as of Dec. 31 1933.
Our Committee on the Federal Reserve System has watched with interest
developments affecting our membership. We are on record as favoring modification and liberalization of the regulations of the Federal Reserve Syetem,
t,o the end that non-member State banks may be encouraged voluntarily to
apply for membership. We are opposed to compulsory membership under
requirements now in effect.
It has been an unuaual year in all lines of endeavor, and banking has had
its full share of problems. Our division, composed of banks both large and
small, members and non-members of the Federal Reserve System, operating
under various and vary!rig statutes and supervisions, and numbering considerably more than 50%, of all banks of every type in the country, has borne
the brunt of these problems gTowing out of the general collapse of financial
institutions 18 months ago. A large majority of the State banks were not
members of the Federal Reserve System when the banking holiday was called,
and many could not qualify because of capital requirements or for other
reasons, and in the very nature of things it was more difficult for such
banks to become members of the temporary insurance fund.
Members of this division have sacrificed much and manifested the greatest
patriotism in their heroic struggles to promptly meet the requirements and
eonditions for qualification for depoeit insurance, in order that their re-
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Federal Reserve Bank of St. Louis
spectise communities might be properly served. Little has been said of
these hardships and losses sudtained by the officers and stockholders where
in thousands of cases all was placed on the altar to protect depositors. Fortunes were wiped out, but these courageous leaders, undaunted, put their
shoulders to the wheel and their banks stand to-day revamped, reorganized,
atrong and ready to serve their communities as they have so satisfactorily
d ne in the years gone by.
Along with the almost revolutionary changes in methods and policies being
dopted by industry and commerce, banks are now making and will con'nue to make adjustments and improvements in their methods of operation
in order to meet these changed conditions. We may look for more uniform
systems and procedure among banks, more research and analysis, more standirrdization, not only of operation but of supervision as well: Afore care will
be exercised in the selection of personnel, not only for executive but also
for clerical positions. In short, the banker of the future will be a trained
banker who keeps himeelf in training, and will surround himself with a
capable staff of trained and efficient assistants, each of whom will be
skilled in the technique of his particular work. He will know his own bank,
not only its condition but how that condition was brought about. He will
know the character and quality of the bank's assets based on dependable
data in the form of credit files, statements and reports.
I was interested recently in read;ng a letter addressed to National banks
by a former Comptroller of the Currency. It began with the statement that,
"While the country appears prosperous, such is not the fact," and goes 011
to say that "The seeming prosperity is due largely to expenditures of the
Government." Quoting further, thia letter reads:
"Keep these facts constantly in mind, and manage the affairs of your respective
banks with a perfect consciousness that the apparent prosperity of the country
. and be prepared, by careful management of the
will be proved to be unreal .
trust committed to you, to help save the Nation from a financial collapse, instead
of lending your influence to make it more certain and severe.
"Let no loans be made that are not secured beyond a reasonable contingency.
Do nothing to foster and encourage speculation. Clive facilities only to legitimate
and prudent transactions. Make your discounts on as short time as the business
of your customers will permit, and Insist upon payment at maturity no matter
whether you need the money or not. Never renew a note merely because you may
not know where to place the money with equal advantage if the note Is paid. In
no other way can you control your discount line or make it at all times reliable.
"Distribute your loans, rather than concentrate them in a few hands. Large
loans to a single individual or firm, although sometimes proper and necessary.
are generally Injudicious and frequently unsafe. Large borrowers are apt to control
the bank, and when this Is the relation between the bank and Its customers, it is
not difficult to decide which in the end will suffer. Every dollar that a bank loans
above its capital and surplus It owes for, and its managers are therefore under
the strongest obligation to its creditors, as wen as to its stockholders, to keep Its
discounts constantly under its control. Treat your customers liberally, bearing
in mind the fact that a bank prospers as its customers prosper, but never let them
dictate your policy.
"If you doubt the propriety of discounting an offering, give the bank the benefit
of the doubt and decline it. If you have reason to distrust the Integrity of a customer, close his account. Never deal with a rascal under the impression that
yott can prevent him from cheating you. The risk In such cases is greater than
the profits.
"In business, know no man's politics. Manage your bank as a business institution, and let no political partiality or prejudice Influence your judgment or action
In the conduct of Its affairs. As far a.s in you Iles keep your bank above partisan
influences.
"Pay your officers such salaries as will enable them to live comfortably and
respectably without stealing, and require of them their entire services. If an
officer lives beyond his income, dismiss him: even If his excess of expenditures can
be explained consistently with his integrity, still dismiss him. Extravagance,
If not a crime, very naturally leads to crime. A man cannot be a safe officer of
a bank who spends more than he earns.
"The capital of a bank should be a reality, not a fiction: and It should be owned
by those who have money to lend and not by borrowers. . . .
"Every bank under the National System should feel that the reputation of the
System in a measure depends upon the manner in which his particular Institution
Is conducted, and that, as far af4 his Influence and management extend, he Is responsible for Its success:.
. It should be the chief aim, therefore. of the managers
of the banks to make their respective Institutions strong, not only to keep their
capital from being impaired. but gradually to create a surplus that will be a protection to their capital and to their creditors in the trying times that sooner or
later happen to all banking institutions. There are few items that have a better
look upon the balance sheet, and none that is better calculated to give aid and
comfort to the managers of a bank, and to secure for it the confidence of the people,
than a large surplus fund. Create, then, a good surplus, even if you have for a
time to keep your stockholders on short commons in the matter of dividends to do it.
"Pursue a straightforward, upright, legitimate banking business. Never be
tempted by the prospect of large returns to do anything but what may be properly
done under the National Currency Act. Splendid financiering Is not legitimate
banking and 'splendid financiers' in banking. generally are either humbugs or
rascals."
This letter was written in December 1863—more than 70 yeara ago--by
Hon. Hugh McCulloch, then C,omptroller of the Currency. Conditions have
greatly changed since that day, and a reasonable modification of some of
these suggestions may be in order. But the fundamental principles which
were so clearly and emphatically set out in this letter are as sound to-day
as they were when the letter was written.
Much is being said nowadays about the banker's duty to his community in
the furtherance of business recovery, and in some quarters criticism is being
expressed of loan policies. There may posaibly be a few instances where
such criticism is due, but certainly that is the exception and not the rule.
The fact is. banks everywhere are eager to make loans, not only to be of
service to their customers, but as a means of creating revenues with which
to meet operating expenses. Banks everywhere are burdened with idle funds
seeking legitimate investment, and I seriously doubt if a single instance
can be cited wfiere an applicant for credit has been turned down if the loan
desired was a proper one for a commercial bank to make. There has been
no dispoaition, so far as I have been able to learn, on the part of banka anywhere to refuse credit where the loan would qualify as being proper for
the bank to make.
I may add here that banks are doing now, as they have always done, their
full duty in co-operating with the Government and its various agencies in
the common cause of recovery. They are buying freely all forms of Government issues at exceedingly law rates of interest ; they are aiding in the disbursement of relief funds ; they are servicing cammodity credit loans ; they
are extending credit under the Federal Housing Aet ; they are co-operating
with the Federal Farm Credit Administration in the rehabilitation and refinancing of farmers ; and, in ahort, they are lending their aid wholeheartedly
to the Government In all its plans, notwithstanding the competitive features
which in many instances are working hardships on the banka by depriving
them of revenues greatly needed at this time. As an illustration, banks
were given mileh credit for their patriotism during the World War by prir-
f
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention-Sept. 23, 1933
,;';"
Annual address of Pres. Francis H. Sisson, VP., Guaranty Trust Co., NYC
Insurance of Deposits.
The most questionable feature of the
Act is the so-called guaranty or
urance of deposits. It was opposed alike
by bankers and by the most
xperienced experts on banking matters
at Washington both in Congres
s
nd in the Administration, but they
were outweighed by popular clamor
and political pressure. Guaranty of
deposits plans have proved failures
wherever tried in many previous testa,
invariably causing weaker rather
than stronger banking and have been
abandoned in every case by sadder
but wiser States that embraced them for
a time. The present law largely
repeats the old mistakes on a bigger
scale. As have all su h plans
it
li,min seeks in practical effect to
substitute in part a public guarant
y of
anking deposits in the place of
individual banking competence, honesty
nd accountability.
t
4
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Federal Reserve Bank of St. Louis
1
When all is said and done,
no amount of legislat
ive restriction or
ministrative regulation can
adprovide an adequate
j dgment on the part of
substitute for sound
the individual banker.
This is the starting
point
i
in ally inquiry into possible changes in our
banking system. All our laws and all our
administrative policies should be aimed
primarily at raising the standard of bank
management. If the States will not or cannot
do this, then the National Uovernment must do
it. If branch banking is an indispensable
part of such a system, then we must accept
branch banking.
- 2.4
GENERAL SESSION.
rir into potisible changes in our banking system. All our laws
i,
iriaan in
and 11
ddmiuittrative policies should be airned primarily at raising
dard
atfiyoffnk management. If the States will not or cannot do this,
the
the
he N ' nal Governrnont must do it. If branch banking is an indirt nsable part of such a system, then we must accept branch banking.
More specifically, what do we need to insure a higher calibre of management throughout our banking system? First and foremost, we need much
stricter regulations covering the establishment of banks—not only with
regard to the number and size of banks, but, even more, with regard to the
qualifications of bankers. To become a lawyer or a physician, a man
must go through a long and arduous course of training, pass an exhaustive
examination, and obtain a public certificate of competence. But to become
a banker seems to be regarded as a sort of inalienable 'human right. If
every candidate for an executive position in a bank were required to produce
as good evidence of his knowledge, experience, and qualifications as is now
required of candidates for the bar, a prolific soiree of banking difficulties
_109*t be removed.
/There are a few principles of practical bank operation that have beenil
widely enough disregarded in the recent past to make them worthy of special!
mention. One of thes-F7Slates-liTihe liquidity of assets. Broad changes '
have taken place in the methods of financing business operations in this
country in recent years, and these changes made it more and more difficult
for banks to keep their assets in a liquid condition. There has developed
a widespread tendency to build up "secondary reserves" consisting of highgrade bonds, partly because large quantities of such bonds have been
available and partly because such bonds normally have a ready market
and are comparatively stable in price. Experience has shown that, when
banks in general need to avail themselves of the supposed liquidity of such
investments, the latter turn out to be less liquid than they are commonly
believed to be. At such times, values melt away. Under the pressure of
heavy liquidation, even some issues of United States Government bonds
.
recently declined 20% below their par value. The truly liquid bank assets
are those that are self-liquidating and rediscountable.
Closely allied to this problem is that of the segregation of deposit accounts
of different classes. The commercial banks of this country have a huge
amount of savings deposits. These are carried and treated as time deposits,
although in practice they are virtually demand deposits. Not enough;
attention has been given to the liquidity of the assets underlying this cla.s.4
of account.
Another related problem is that of bank investments in real estate
mortgages. It has been a recognized principle of banking for many years
that real estate is not a suitable investment for commercial banks. But
banks have never fully lived up to this principle, and in recent years both
legislative regulations and banking practice have, in many cases, been
deplorably lax in this respect. Many of the banks that have come to grief
in tbis country have done so largely because they have allowed themselves
to become involved to a shocking extent in real estate financing. The
bankers of the United States need to take renewed devotion to this timehonored and fundamental principle of commercial banking.
These few concrete suggestions are intended merely to point to some or
the more obvious ways in which our banking practice can be improved.!
'Underlying and antecedent to them all is the need for a more uniforml
high grade of bank management. Social progress consists largely in th
elimination of undesirable elements from the body politic, and banking is
not different in this respect from any other branch of human activity.
The weeding-out process has been going on very swiftly and painfully in
recent years; and, for all its disastrous features, our banking system is a
better and stronger system because it has taken place. It ought never to
have been necessary. The least we can do now is to avoid repeating the
____
mistakes of the past.
__--- _—_-__.— -- - -_
.. . . At' Me Concluakin Ofhis prepared paper. President Sisson made
the following extemporaneous remarks:
ill
•
In concluding these rernark.s I want to say in all sincerity that I feel ss.'
are facing better and brighter times in the banking business as well as in
the business world. Far out at sea the ebb tide is turning, and if our
governing officials and the American people don't do fool things to deflect
it„the tide of prosperity is coming back, we hope not in thc highly speculative
and extravagant form which it has had in the past.
1 was thinking as I stood here and heard Father Burke of the appeal
which the Apostle Paul made standing on Mars Hill, reflecting his conf deuce
in the salvation of the world, and appealing to Almighty God for guidance
and.for co-operation in his words to his people, "God has not given us the
cpirit of fear but of power and of los e and a sound mind."
So let us go forth to our job with a sense of human responsibility and social
service, which this new order is forcing upon us, and which has its place,
a higher degree of social responsibility perhaps than we have ever thought
of or tried to reflect before, the power of capacity and of resources and of
a sound naind which reflected in sound management and in sound public
Policies and which will not submit to anything else in the conduct of its
- ...,.
business.
We need to co-operate as we never have before. The banker is under
indictment the country over. We should stand shoulder to shoulder
through our great organization to meet this issue and to try to bring about
a better day not only for banking but for American business lite.ro :-.......,
Address of Welcome to Century of Progress by Captain
John W. Gorby, Speaking for Rufus C. Dawes.
1
Mr. President, Members of the American Bankers Association, Distinguished
Guests, Ladies and Gentlemen:
On behalf of Rufus C. Dawes, the President of"A Century of Progress,"
and his associate members of the I3oard of Trustees, we extend to you a
most sincere welcome.
You will witness here not only an international exposition worthy of our
country and of our great city now celebrating its one hundredth anniversary
but also a vivid and unforgettable dramatization of the past century's
industrial progress influenced by scientific research.
As financial leaders of a great Nation you will pause to inspect a 30 million
dollar show which aside from our bonds opened free from debt four days
ahead of schedule time, which marketed its $10,000,000 in bonds of gold
notes at par in a declining market, which sold more than $5,000,000 worth
of exhibit space for cash before opening date, and which negotiated a total
of more than $5,000,000 in concession contracts. All these objectives were
attained without the aid of a public subsidy, the first international expositklin tO be entirely privately financed.
The credit for this outstanding achievement is due to our financial leaders.
We commend to all the world their faith in our country's future and their
unconquerable courage.
We idsh yott, Mr. President, a most successful convention and a happy
visit at "A Century of Progress."
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Federal Reserve Bank of St. Louis
33
President Roosevelt's Message to Convention—Relies
on Organization for Co-operation in Furthering
Free Flow of Credit to Industry and Commerce
Incident to Recovery Program.
A massage from President Roosevelt featured the opening
session on Sept.5 of the general convention of the Association.
The message was read by Francis H. Sisson, President of
the Association, who said:
I have the great privilege of extending to you a greeting from your
President at Washington. President Roosevelt sends us the following letter:
I welcome the opportunity to send a message to the members of the American Bankers' Association. assembled for their 59th annual convention.
I express my sincere appreciation of the co-operation of many bankers in
what we have accomplished thus far toward national recovery. We are
counting heavily on your assistance as we forge ahead.
I know that events of the past half year have brought to all of us a keen
sense of the important part which a banking system plays in our lives.
Six months ago the first of the great obstacles which faced this Administration was the lack of confidence in banks. The situation had become so
serious that no other step could be taken until this difficulty had been met.
There had been such a rush to turn bank deposits into currency or gold
that even the soundest banks could not get enough currency to meet demands.
The banks of the country co-operated immediately with the measures
which we found it necessary to take. The banking holiday and the Emergency Banking Act brought splendid results. Both bankers and depositors
faced in good spirit the hardships which these measures entailed and by the
end of March the major part of the banking facilities of the country were
operating. Since that time steady progress has been made in liquidating
banks which could not be reorganized or reopened and in rebuilding those
which had not been weakened beyond repair. At the same time, we have
been accomplishing the objective we set for ourselves that losses of savings
be kept at a minimum.
I do not mean to suggest that the task is finished. We have before us
continuing duties for bankers, depositors and the Government in the
development and maintenance of the highest standards in bank organization and management. The work of your Association will be important
in supplementing what is accomplished by Government supervision. The
need for your services is greater to-day than ever before.
We still have much to accomplish in making credit facilities adequate for
the national recovery we are bringing about. The banks must play an
important part in making increased loans to industry and commerce.
After a period of drastic liquidation such as we have experienced, it
requires unusual courage and judgment to appraise security and to extend
credit. The vital importance of helping the wheels of industry to turn by
putting savings to gainful use must receive increasing and immediate
attention.
Loans can and will be made. I want you to know that we rely on your
organization for its co-operation in furthering the free flow of credit so
essential to business enterprises, whether they be large or small. Only if
this is done can employers do their full part in the great recovery program
now under way.
Never before in its history has this nation had greater need of courageous
bankers. I am relying on thena for prompt realization of the changes now
taking place in general conditions and of their part in the revival of economic
activities and the increased employment of workers. I am confident that
you will work with me to meet the credit needs of industry and trade.
Report of Economic Policy Commission by the Chair..
man Leonard P. Ayres, Vice-President of Cleveland
Trust Co., Cleveland, Ohio.
The most important development of recent months in the field of banking
is the marked and widespread improvement in general business conditions
that has taken place in this country since the close of the first quarter of
this year. Prices of both a ricultural and industrial commodities have
steadily advanced, the quotations for securities have moved up, the produ,:tion of manufactured goods has greatly increased, the volume of transportation has been enlarged, and conditions of employment and wages have
improved. Under these circumstances everything relating to banking is
more favorable than it was a few months ago.
in the banking crisis that occurred last March all the banks of the Nation
were temporarily closed. They numbered at that time about 18,400.
Those that have since resumed operations on an unrestricted basis constitute about 76% of tnat number, and represent about 94% of their
deposits. Further evidence of notable progress toward more nearly normal
conditions is to be found in the rapid and uninterrupted return of hoarded
funds. These probably amounted in early March to nearly four billion
dollars, of which more than half has now been returned. Moreover deposits
in the Postal Savings System which had increased by over a billion dollars
in the past three years have recently stopped growing and have begun to
decline.
Banking Act of 1933.
In June the I3anking Act of 19:33 was enacted. Among the more important
provisions of the new legislation aro those that provide for a system of
deposit insurance, forbid security affiliates, establish safeguards against
the speculative use of credit, broaden branch bankin •, limit the membership of boards of directors, remove double liability on the new stock of
National banks, and prohibit the payment of interest on demand deposits
while providing for the regulation of interest rates on other deposits.
During recent months banking everywhere in this country has been
busily engaged in adapting Its operations to the new business conditions
that have been developing, and to the changes required by the new legislation. Larger institutions have undertaken the tasks of absorbing or discontinuing their bond departments. and of divesting themselves of their
security affiliates. Banks everywhere have made readjustments necessary
to permit them to conform to the other provisions of the new law. In
addition banks have been busily engaged in the internal rearrangements
necessary to their operation under the regulations of the code of the NI ItA.
The provisions of the new banking act which prohibit the payment of interest
on demand deposits have resulted in a considers le shifting of funds, most of
which has been away from the larger centers and Into the smaller
communities.
BANKERS' CONVENTION.
34
Advance in Business Activity Without Increase in Flotation of New Securities.
'Unfortunately evidence has already begun to accumulate indicating that
some of the provisions of the recently enacted legislation are deflationary
rather than helpful in effect. The new laws have largely succeeded in
separating investment banking activities from commercial banks but in
so doing they have greatly reduced the effectiveness of a major part of the
Nation's credit machinery and this result has been further complicated bY
the passage of drastic legislation regulating the issuing of new securities.
For the first time in our economic history we have had an important advance
in business activity without an increase in the flotation of new securities
and without an expansion in bank credit. The commercial loans of member
banks have recently been shrinking rather than expanding, and they aro
smaller by many hundreds of millions than they were a year ago. These
are conditions that are not conducive to sustaining a durable business
recovery.
Deposit Insurance.
The new law provides for the organization of a corporation to administer
the insurance of bank deposits, as yet this has not been done. Neither hits
there been carried through the thorough examination of all banks contemplated by the new law as a prerequisite to admitting banks to the privileges
of the deposit insurance. Your Commission makes no present comment
concerning either the desirability or the practicability of deposit insurance,
because the Association has already declared its views in the matter, and
because National legislation providing for it has been enacted.
Your Commission does however earnestly recommend that the official
representatives of this Association be authorized to urge upon the National
Administration at Washington the desirability of postponing by new legislation or otherwise the initiation of deposit insurance until an adequate study
and report can be made of the probable results that would follow the putting
into effect next January of the provisions of the new Banking Law relating
to it. There are now more than 2,700 banks operating on a restricted
basis. These banks unhss reorganized would be unable to qualify for
deposit insurance. Presumably most of them would be forced to suspend
permanently, thus depriving many communities of any bauking facilities,
and entailing new losses and business unsettlement that would retard the
processes of recovery.
There are also many unrestricted institutions that are now rapidly gaining
in financial strength and liquidity as business recovery progresses, but
which nevertheless have little prospect of being able to qualify under
rigorous examination for deposit insurance by the end of this year. Moreover, there will not be enough time between the organization of the corporation which is to administer deposit insurance and the end of this year to
carry out the examination of banks provided for by the law to determine
qualifications for insurance, nor are there enough experienced examiners to
do the work in that time. We submit that the dangers involved in tho
prospective suspension and liquidation of some thousands of banks are so
serious as to warrant the National Administration in finding means to
postpone action until it can cause to be made an adequate study and report
covering the whole matter.
Double Liability.
Much confusion has resulted from the new provisions relating to the
removal of double liability from the owners of new stock in National banks.
As these are now construed a bank may have part of its stock still retaining
the double liability and part free from it while the same community may
have some banks with stock carrying the double liability and others with
stock not carrying it. Clearly these conditions need modification.
Your Commission views with apprehension the propaganda now being
featured in the public press which brings pressure upon bankers to adopt
ultra-liberal loaning policies in support of the recovery campaign now under
way. The objectives of the recovery campaign justify all the support
that banks can rightfully give, but they justify it just so long as that support
involves only good banking and does not jeopardize the funds of depositors.
Even in these times each loan should be considered on its merits, and only
granted when the credit of the borrower justifies it.
Proposed New Banking Legislation.
Informed opinion holds that the Administration at Washington plans the
enactment of new banking legislation during the coming winter, and it is
generally believed that this will introduce further important changes.
Your Commission urges that bankers use all the influence they can bring
to bear to the end that proposed new banking legislation may be considered
with calm deliberation, that it may be preceded by adequate hearings in
committee sessions, and that full opportunity be given for tho expression
of views by informed and experienced bankers while these discussions are
under way.
Sound Money.
Since your Commission last reported to the As.sociation this Nation has
suspended the gold basis for its currency and has enacted permissive legislation providing for inflation. Our whole monetary system is now in a condition of transitional experimentation. Under these circumstances we must
for the present limit our comment to taking cognizance of this situation
without entering into discussion of the issues involved, and without making
recommendations, or attempting to formulate principles. We do make
record here of our conviction that this Nation must steadfastly hold to
the ideal and retain the aim of establishing a policy and a system of sound
money in which all people at home and abroad will have enduring confidence.
Report of Bankers NRA Code Committee by Chairman
Ronald Ransom, Executive Vice-President Fulton
National Bank, Atlanta, Ga.
President Sisson: One of the most important tasks that your Administration in the American I3ankers' Association has had this year has been that of
attempting to adjust a I3anking Cade to the NRA requirements. Your
President appointed a committe of which Ronald Ransom of Atlanta is
Chairman and Robert Fleming, (3hairman of our Legislative Committee,
was an important factor to draft such a code.
They made temporary arrangements as you know with the authorities
at Washington and we have proceeded for the past month under that
arrangement. We now present to you a completed code which we hope
will be acceptable to the authorities and which we believe will be acceptable
to the banks.
Mr. Ransom will take the platform and we will be glad to hear him. Mr.
Ransom suggests that he would like to have the members of the Committee
come to the stage in order that you may know who they are and. if you
like. ask them questions.
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Federal Reserve Bank of St. Louis
Mr. Ronald Ransom'. Mr. President and Members of the Amerie.n
Bankers' Association: Your President has stated what led up to the preparation of this code. You will recall that the National Industrial Recovery
Act of 1933 makes provision for codes of fair competition in trade an
industry.
On July 27 1933, the President of the United States addressed an open
communication to every employer and requested that they sign a form of
agreement, part of the nation-N‘ ide plan to raise wages, create employment,
and thus increase purchasing power and restore business. This is known
as the President's Re-employment Agreement. By express reference,
banking employees were included among those covered by the agreement.
It further provided an obligation to employers to co-operate to the fullest
extent in having a code of fair competition subiatitted at the earliest
possible date.
Responding to the President's request and recognizing the necessity that
every one comply locally with the patriotic demands imposed by the National Industrial Recovery program, the Administrative Committee of the
American Bankers' Association authorized President Sisson to take steps
to contact the NRA with a view to co-operating in securing necessary
modifications. President Sisson appointed a Committee consisting of men
familiar with the problems involved, then consulted the officials of the
NRA on a number of matters connected with the preparation of codes.
National and State banking officials gave generously of their time in considering the problems involved. A preliminary code was submitted to the
NRA which approved the substitution of Sections 2 and 3 of the l'resident's
Re-employment Agreement. The Administrative Committee promptly
notified the membership of the Association that this had been done. Copies
were furnished and banks were authorized how to proceed until such time
as the Association could adopt a permanent code. as it was necessary to
submit a permanent code and as this had to be adopted by the Association.
President Sisson after the approval of the above referred to substitution
appointed a Committee on a I3anker's NRA Code. It met In New York
on Aug. 18 1933. It is that, Committee which is reporting to you to-day.
Its membership is representative of all classes and types of banking and
of the different sections of the country.
I3etween the time when the preliminary code was submitted to the membership and the meeting of the Committee on the Banker's NRA Code the
staff of the Association sought expressions of opinion from members and
was enabled to compile a large number of sugge.stions and comments on
many points for the guidance of the Committee.
I want at this point to express the very deep appreciation of the entire
membership of your Committee for the thought and effort which so many
of you have put out to assist us in this task. Many hundreds of letters
and many hundreds of verbal suggestions have come to us. They have all
been most carefully analyzed and considered. Any of them that are not
in the code could not be included for some good reason. It is really surprising to find how uniform was the thought of bankers on this problem.
The suggestions fall into only a few general classes and nearly evey one of
them can be fitted into one of those particular classes. So that it was
possible to embody in this code the expression of opinion and the thought
of many members of this Association.
I want to ask that when this code is read, you listen to it in the light of
certain facts. It hardly seems necessary to again refer in this convention
to March 1933. All of us know that story only too well. But I do not
recall that at any time during our sessions one aspect of that, and a very
important aspect, ha,s been brought to your attention.
When all the banks in the country were closed and commerce and industry was paralyzed, the President met that problem protnptly and
courageously and took the situation in hand and he worked out a plan by
which, as you have just heard the Comptroller say, a very tremendous
percentage of American banks were p'omptly reopened.
That was only one of the serious problems which faced President Roosevelt when he went into office. Probably the most serious was the problem
of unemployment. It is impossible to obtain any statistics which begin to
tell that story. They just do not exist. But it is no wild stretch of the
imagination to say that in March of this year,six months ago, there were
in this country sotne 30-odd millions of people who did not know where their
next meal was coming from. That problem on unemployment menaced
the very foundation of our Government and our civilization. Mr. Roosevelt
had no choice but to meet it promptly.
The NIRA is the answer of the Ad,i inistration to the problem and
I am going to ask that you bear that thought in mind, that your realize
that while this code may itnpose on banks as it would impose on all other
industry some additional charge and some additional expense, all of you
and all of your customers are actually paying a much bigger bill, although
you may not know it. The Government had to appropriate a half billion
dollars for einergency relief for unemployment. That is a lot of money.
Congress had to appropriate S3,300,000,000 to finance public works that
these men and women might be put back to work.
Those large MIMI and the other sums which unquastionably will have to
be appropriated by Congress to continue to meet this problem will come
out of the pockets of you men and of your customers. So that in considering the code in the light of what it may cost you, please remember
that the situation which it is directed to meet is already costing you a
great deal.
Please also remember, in listening to it, that it is drawn under tho terms
of an Act, an Emergency Act, which had to be thrown together rather
hastily and which has never been construed or interpreted by courts of
final jurisdiction.
So that we have not that guide to go by. Also remember that it has to
be vvritten in the light of the decisions, the rules and regulations of the
NRA, and that those people who are making those decisions are working
under terrifically high pressure, and I want to say I think they are doing
a remarkably fine job in a remarkably fine way.
I was greatly impressed and every member of your Committee was
impressed by the courtesy, the consideration, the time that the officials
of the NRA gave us when we were in Washington. They were most patient
with us. They listened to the peculiar problems of banking. They told us
to the best of their ability how far under the Act and under the rules and
regulations of the Administration a code could go. Of course, that does
not mean anything more than that they extended the same friendly help
to banking that they extend to other industries trying to formulate a code.
I also ask that you listen to the code in the light ofsome of the pecullarittes
of our business. Quite frankly, it is not drawn in such terms as mahe it
readily adaptable to the problems of banking. To the best of the, ability
of your Committee they have always had those peculiarities of battking in
mind and have tried to so word the code that they would take cr.,re of the
•
•
1
GENERAL SESSION.
we all had in mind when we considered trying to
apply an industrial code to banking.
It is rather impressive to know that this Committee which consisted of
12 metnbers--one has since been added—was attended at its first meeting
by all of the members except one who was unavoidablY prevented from
being there. They came from all parts of the country. They went to work
and they have stayed at work and I do want to express most sincerely the
appreciation of the Chairman for all the time and assistance they-have
given me. If it had not been for them and for the staff and for the help
that the members of the Association extended, we would have had even
greater difficulty in producing a document which would meet all of the
terms of the Act, which would come within the rules and regulations; this,
we think, formulates a code of sound banking practice which will be immensely helpful and beneficial to banking in the years ahead of US.
With that introduction, Air. President, I should like to read the code.
It falls into two parts; first, in connection with hours and wages. In that
connection we are in a new era whether we admit it or like it. It is only
reasonable to suppose that hours of labor are going to be shortened and
that wages are going to be higher, and that is necessary if the Administra1 *4
tion is to solve the problem of unemployment.
The second part of the code refers to banking' practice. It gives us an
opportunity at la.st. and perhaps for the first dine, to definitely announce
certain fundamental principles of banking which can be added to later on
and can be strengthened as time goes on.
. - . Mr. Ransom then pre.sented the Code of Fair Competition for
the banks of the United States which follows, making interpolations in
his presentation as follows:
I—Immediately preceding Article VI: I should like to call to your attention
the fact that we have tentatively been able to increase the period that wo
had in the preliminary code, so that it is now a period of 13 consecutive
weeks; that in addition to that, which is a very great concession if we are
able to sustain it on the public hearing, we have a provision to take care
of those seasonal peak loads which occur in certain sections of the country
during the moving of some particular crop or some particular product:
that we also have an exception to take care of the period of examination;
that we have an exception in favor of the smaller bank employing only
two employees in addition to its executive officers; and that we have a
provision which wa.s in general language in the preliminary code about
employees in a managerial or executive capacity or in any other capaeitY
of distinction or sole responsibility. That is of the utmost important to
banks, of course, for reasons which all of you know. A bank employee
cannot lay down the job when the clock strikes. That is not always possible.
2—Immediately preceding the words, "(3) The Banking Code Committee
may," in Article VII: That would enable your Code Committee in the
future to set up other sound banking practices than those which are now
enumerated in the code.
3—Immediately preceding subsection (a) under (4) of Article VII: I
ask you to consider that in this code as now written we have provided for a
great degree of local self-government on the part of American banks.
4—Immediately preceding subheading (b) under (4) in Article VII:
That takes care of the situation where you already have your organization
set up ready to function under the code. We took those organization which
were already in existence so that you could travel fast.
4 a lijor contingencies which
0
• • . Mr. Rantiorn then presented the Code as follows:
CODE OF FAIR COMPETITION
FOR THE BANKS OF THE UNITED STATES.
To effectuate the policy of Title I of the NIRA during the period of
emergency, the following provisions are established as a Code of Fair
Competition for the Banks of the United States.
Article I. Definitions.
The term "bank" as used herein shall include all National banks, State
banks, savings banks (both mutual and stock), trust companies, and
private banking houses accepting deposits.
The terms "employee' or "banking employee" as used herein shall mean
any person employed by a bank in any capacity in connection.with its
banking functions and operations.
Article II. Effective Date.
The effective date of this code shall be Oct. 1 1933, or, if not approved
•\ by the President of the United States by that date. then the second Monday
'
after its approval by the President.
Article III. Labor Provisions.
Employers shall comply with the following provisions of Section 7(a)
01 Title I of the NIRA:
I (1) Employees shall have the right to organize and bargain collectively
the\pugh representatives of their own choosing, and shall be free from the
inte‘rferenee, restraint, or coercion of employers of labor, or their agents,
in the. designation of such representatives or in self-organization or in other
conee14.ted activites for the purpose of collective bargaining or other mutual
aid or %prot ection.
(2) N -0 employee and no one seeking employment shall be required as a
condyi• of employment to join any company union or to refrain from
join; .ig. o-_tanizing. or assisting a labor organization of his own choosing.
(3) Empoyers shall comply with the maximum hours of labor, minimum
rates of pay. ,nd other conditions of employment, approved or prescribed
by the PresideJt.
Article IV. Child Labor.
On and after tba effective date of this code. no person under 16 years
of age shall be ennioyed by any bank, exc,ept that persons 14 and 15 years
of age may be empbyed tor a period not to exceed three hours per day,
said hours to be petveen 7 a. m. and 7 p. m., in such work as will not
interfere with hours o: day school; it is provided, however, that where a
State law prescribes a hgber minimum age, no person below the age specified by such State law small be employed within such State.
\
Artick V. Hours of Employment.
(1) On and after the etfeelve daae of this code no banking employee
shall work more than 40 hours per week averaged over a period of 13 consecutive weeks.
(2) The maximum hours of employment prescribed in the foregoing
paragraph shall be subject to the fallowing exceptions:
(a) In districts or sections of the country where the seasonal nature of
commet•ce, aiericulture or industry, rnaking necessary the moving of some
product'within a limited period, impoces upon banking facilities an unusual
demand, employees of banks subject io such peak demand may work 48
hours per week for a period not to exzeed 16 consecutive weeks in any
calendar year. Any such increase in Lure; of employment shall be reported monthly to the Banking Code Corrinittee provided for in Article
FRASER
VII hereinafter.
Digitized for
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Federal Reserve Bank of St. Louis
35
(b) All banking employees required to perform extra work or observe
later hours in connection with periodic examinations by Federal or State
banking authorities, over which the bank has no control either a,s to the
time of occurence or as to the duration, shall be exempt during such periods
from the limitations upon hours of employment prescribed in the foregoing
paragraphs.
(c) Employees in banking institutions employing not more thar two
persons in addition to executive officers, in towns of less than 2,500 population, not part of a larger trade area, and employees in a managerial or
executive capacity or in any other capacity of distinction or sole responsibility (regardless of the location of the bank) who receive more than $35
per week, shall be exempt from the limitation upon hours of employment
prescribed in the foregoing paragraphs.
(d) These provisions for working hours shall not apply to night watchmen employed to safeguard the assets of the bank, since such guards
cannot with safety be shifted or changed during the night period.
Population for the purposes of this Article shall be determined by reference to the 1930 Federal Census.
Article VI. Wages.
(1) On and after the effective date of this code no employee in cities of
over 500,000 population. or in immediate trade area of such cities, shall be
paid less than at the rate of $15 per week; no employee in cities between
250,000 and 500,000 population, or in the immediate trade area of such
cities, shall be paid less than at the rate of 314.50 per week; no employee
in cities between 2.500 and 250.000 population, or in the immediate trade
area of such cities, shall be paid leas than at the rate of $14 per week. In
towns of less than 2,500 population the wages of all classes of employees
shall be increased by not less than 20%. provided that this shall not require
wages in ekcess of the rate of $12 per week.
(2) It is provided, however. that employees without previous banking
experience or training employed as apprentices, may be paid during a continuous period of not more than one year at the rate of 80% of the minimum
wages prescribed in the foregoing paragraph.
Population for the purposes of this Article shall be determined by reference to the 1930 Federal Census.
Article VII. Administration.
(1) To effectuate further the policies of the NIRA, a Flanking Code
Committee is hereby set up to act as a planning and fair practice agency
and to co-operate with the Administrator in the administration and enforcement of this code. This Committee shall consist of representatives of
the American Bankers' Association who shall be truly representative of the
membership of the Association, and a representative or representatives,
without vote, appointed by the President of the United States.
(2) The Banking Code Committee may from time to tiine present to
the Administrator recommendations, based upon conditions in the banking
business, which will tend to effectuate the operation of the provisions ol
this code and the policy of the NIRA. Such recommendations shall, upon
approval by the Administrator after such public notice and hearing as he
may prescribe, become operative as part of this code.
(3) The Banking Code Committee may, subject to the approval of the
Administrator, require from all banks such reports as are neces.sary to
effectuate the purposes of this code, and shall upon its own initiative or
upon complaint of any person affected, make investigation as to the functioning and observance of any provision of the code and report the results
of such investigation to the Administrator.
(4) The Banking Code Committee shall, subject to the approval of the
Administrator, supervise the setting up of Regional Committees according
to the following plan:
(a) Where banks are now organized through State banking associations.
city Clearing House Associations, county groups or otherwise, such organization shall, with the approval of the Banking (lode Committee. appoint
a Committee for the purpose of assisting the Administrator and the Banking Code Committee in the administration and enforcement of this code
within such local region.
(b) Banks in regions or districts not now organized shall, within 30
days after the effective date of this code. send duly qualified representatives
to a joint meeting called for the purpose of organizing under the supervision
of the Banking Code Committee a Regional Clearing House Association
or such other committee along the line of procedure set forth in the Manual
of Organization and Management of Regional Clearing House Associations,
compiled by the American Bankers' Association.
(c) Where such action hereinbefore stipulated shall not have been taken
within 30 days after the effective date of this code. the Banking Code
Committee may set up through the State banking association, or associations, a Regional Committee or Committees.
(5) The Committees provided for in the preceding paragraphs shall
assist the Administrator and the Banking (lode Committee in the administration and enforcement of this code within local areas and shall.
subject to the approval of the Administrator and of the 'Banking Code
Committee, adopt local rules and regulations governing competitive practices within local areas.
(6) The Administrator may from time to time, after consultation with
the Banking Code Committee, issue such administrative interpretations of
the various provision-9 of this code as are necessary to effectuate its purposes
within the provisions of the NIRA of 1933 and such interpretations shall
become operative as a part of this code.
Article VIII. Fair Trade Practices.
To effectuate the purposes of the NIRA all banks shall comply with the
following rules governing fair competition in banking practices:
counties, or such
(1) Hours of Banking. Within cities, trade areas,
other area as is covered by the Regional Clearing House or other organized
(or) character shall
group. all banking institutions of the same kind and
but
establish and observe maximum uniform houns of banking operations
any bank in such a group may observe shorter hours than tho maximum
to
are
accounts
established. (Banks having both commercial and savings
be construed as of the same character). By hours of banking operations is
meant the time within which the doors of the banking institution are open
for the purpose of serving the public. It is not intended or required that
all banks within a given area shall maintain uniform banking hours, but it
is the express intention of this provision that all banking institutions of
like kind and character shall maintain uniform hours each with the other.
It is expressly agreed that the uniform hours so adopted shall not be leas
than those in effect in the majority of the banks within any given district
prior to Aug. 1 1933, and if the hours of any bank are so reduced to conform with the majority, or if any bank observes shorter hours than the
majority then it is expressly agreed that no such bank shall by reason of
36
BANKERS' CONVENTION.
this fact reduce the 'number of its employees below the number employed
at the time such reduction in hours is made.
(2) Interest. Subject to the rules and regulations of the Federal Reserve
Bp• d with respect to maximum rates of interest to be paid on time and
sav sgs deposits and the method of calculation thereof, as prescribed in
the 13anking Act of 1933. all banks within groups, or districts hereinbefore
referred to, except mutual savings banks,shall maintain the same maximum
rates of interest and the same method of calculation thereof upon deposits
of like character, but this shall not be construed to require any bank to
pay such maximum rates if it does not so desire. The Banking Act of 1933
(Section 11B) provides that no bank which is a member of the Federal
Reserve System may pay interest on demand deposits, and it is expressly
agreed that the rules and regulations provided by Clearing House Associations or other groups shall contain a stipulation that no interest is to be
paid by any bank within such group (whether member or non-member of
the Federal Reserve System) on demand deposits. provided that nothing
in these rules and regulations shall be in contravention of the permissive
provisions of Section 11B of the Banking Act of 1933.
(3) Service Charges. Each Clearing House, county association, county
group, or State bank association, shall adopt rules fixing uniform service
charges to be charged by banks within such district or group in accordance
with the practice now in effect whereby services rendered by banks shall
be compensated for either by adequate balances carried or by a scale of
charges. The Federal Reserve Act prohibits member banks from making
any exchange charge for remitting to the Federal Reserve Bank of their
district for cash items, and since the Federal Reserve System provides a
par clearance plan. exchange charges as such shall be left to the determination of each individual bank.
(4) Trust Service. Trust departments shall be operated in accordance
with the provisions of the Statement of Principles of Trust Institutions.
adopted by the Executive Council of the American Bankers' Association
on April 6 1933, as amended.
It is expressly provided that no provision of this Article shall be interpreted or applied so as to conflict in any way with any Federal or State
banking law or any rule or regulation issued by the Federal Reserve Board,
the Comptroller of the Currency, or by any State banking authority.
Article IX. General Provisions.
to
(1) Membership in the American Bankers' Association shall be open
all banks included within the provisions of this code and said Association
shall impose no inequitable restrictions upon admission to membership
therein.
(2) This code and all the provisions thereof are expressly made subject
to the right of the President, in accordance with the provisions of Section 10
any
(b) of Title One of the NIRA, from time to time to cancel or modify
order, approval, license, rule or regulation, issued under Title I of said Act.
approval
his
modify
or
to
cancel
and specifically to the right of the President
of this code or any conditions imposed by him upon his approval thereof.
as
are
not required to be included
code
this
of
provisions
Such
other
(3)
therein by the NIRA may, with the approval of the President be modified
or eliminated as changes in circumstances or experience may indicate.
Mr. Ransom: Mr. President, in moving adoption of this code on behalf
of the Committee, I should like to call the attention of the membership to
the fact that under the law there has to be a public hearing in Washington
on 10 days' notice before any code is approved by the NRA. Tentatively
the NRA has agreed to give us that public hearing on the 18th of this
month. I would like to say that if we are to obtain the advantages to banking which are embodied in this code, if we are to obtain the exemptions,on
certain hours and certain work periods which are so essential. it is of the
utmost importance that we should go to Washington to that public hearing
with a united banking association back of us, because an association has to
be officially represented by some committee or somebody on these public
hearings. We have drafted a resolution here which will in effect continue
this Committee until such time as that hearing has been had. With those
statements I want to offer this resolution:
Whereas, a code of fair competition for the bankers of the United States
has been prepared by the Bankers' NRA Code Committee of the American
Bankers' Association and has been submitted to the Association for approval, now therefore, be it
Resolved. That the said code is hereby adopted by the American Bankers'
Association as the Code of Fair Competition for the Banks of the United
States. and be it further
Resolved, That the said Conunittee is hereby authorized and directed
to be and appear at the public hearing in Washington on the said code with
full authority to represent the American Bankers' Association and to take
such steps as may be necessary to effectuate its adoption.
[A motion that the report be approved and the Committee be continued
with power was made, duly seconded and carried.]
Report of Committee on Resolutions—Finds Bank Act
Fails to Provide Adequate Basis for Banking- Proposes Study of Monetary ProUlems by Federal
Commission- Postponement Urged of Deposit Insurance Provisions- Commends Consideration of
Issuance of Preferred Stock by Banks.
The report of the Committee on Resolutions was presented as follows
by Colonel Leonard P. Ayres, of Cleveland:
met
The year that has elapsed since the membership of this organization
in convention at Los Angelts has been the most eventful in the long history
banking
the
experienced
have
We
of the American Bankers Association.
banks in
crisis that led to the temporary suspension of activity by all
period of
March of this year. Following the banking crisis there came a
pricts
extraordinarily rapid expansion of business activity during which the
of securities and commodities advanced, production of goods increased,
and unemployment was diminished.
During this recovery almost every operating condition relating to banking
has been improving.
While this betterment of general busimss conditions was in process this
nation suspended the gold basis for its currency, and enacted permissive
legislation providing for monetary and credit inflation. In the same
session of the Congress new legislation was enacted providing fer sweeping
changes in our banking system and procedure. These events and developments have been accompanied by many others almost equally important
and unprecedented. They have contributed in combination to make the
past 12 months a year beset by strange perplexities and grave difficulties
for bankers
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Federal Reserve Bank of St. Louis
Banking Act of 1933.
ea-•.
It has already become evident that the new Banking Act of 1933 does not
the
and
banking
for
basis
American
legal
and
adequate
provide a satisfactory
Reserve System. It is also clearly true that this nation cannot indefinitely
continue to carry on its business affairs with a monetary system in so unsettled a state as it is in at present. The American Bankers' Association is
of opinion that the vastly important problems of money and banking and
central banking, that are pressing for solution and settlement, should be
considered together and in relation to one another, and not separately and
piecemeal.
We believe that they should be made the subjects of searching and careful
study by a Federal Commission appointed to report on them and to draft
suggested legislation, and empowered to secure such testimony and advice.
and to employ such technical assistance as may be deemed necessary to
carry the work through to conclusion in the most competent manner.
This undertaking would entail prolonged effort, but we recommend that it
be initiated, and pending its outcome we commend to the Administration
and to the Congress the advisability of refraining from experimental
amendments to our banking legislation. and from experimental manipulations of our money system.
Deposit Insurance.
We reconimend to the National Administration at Washington that it
seek means for postponing the initiation of deposit insurance which under
the provisions of the Banking Act of 1933 would be put into operation at
the beginning of 1934. The new law provides for the organization of a
corporation to administer the insurance of deposits, but as yet this corporation has not been formed. The new law also provides that there shall be
made a thorough examination of banks to determine their qualifications
for insurance as a prerequisite to their admittance to its privileges. but
these examinations have not as yet been made. There is not now remaining
sufficient time before the beginning of next year to ca.rry through the examinations the law requires, nor are there enough experienced bank examiners
o do the work adequately even if the time were considerably longer.
There are now more than 2,700 banks that are operating on a restricted
basis. Most of these banks could not qualify for deposit insurance unless
reorganized. Nearly all of them would be forced to suspend. There are
also many unrestricted banks that are now making rapid gains in strength
and liquidity, but which have little prospect of being able to qualify under
rigorous examination for deposit insurance before the beginning of next year.
It is our considered judgment that means should be found to postpone
action in putting into effect the proposed measures for deposit insurance.
We believe that if the attempt is made to hurry through arbitrarily strict
examinations the result will be the suspension and liquidation of some
thousands of banks which would deprive many communities of any banking
facilities, and would entail new losses and new credit deflation that would
unsettle business and impair the prospects of recovery. If on the other
hand the necessarily hurried examinations should be lax and superficial
many institutions would be admitted to deposit insurance that cannot
rightfully qualify for its privileges. Under those circumstances we believe
that means should be found to postpone initiation of deposit insurance
until the authorities at Washington can cause to be made an adequate
study and report covering the whole matter.
The American Bankers' Association hereby records its deliberate judgment
that the dangers involved in attempting to initiate at the beginning of
1934 the provisions for deposit iru3urance contained in the Banking Act
project for deposit
of 1933 are genuine and serious. It holds that the whole
it reiterates
insurance embodied in that law should be reconsidered, and
of the project is
its conviction that the postponement of the first phase
of the first importance.
We pledge our support and co-operation in the recovery campaign that
is now under way, and we point out that the banking support that is in
to the printhe long run most effective and helpful is that which conforms
the inst
ciples of sound banking and which by so doing safeguards
and the funds of its depositors.
Issuance of Preferred Stork.
We commend t,o the thorough and thoughtful consideration of all bankers
the opportunities to expand and strengthen the capital structures of their
institutions that are being made available through the offer of the Reconstruction Finance Corporation to purchase freely the preferred stock or
capital notes of banks.
We express our sense of deep obligation to our retiring president, Mr.
Sisson. It has been his lot to have served the Association as ite
Francis
A'..s
h
chief during a year that has been difficult and trying in the extreme. Ile
represented this Association at all times with force, dignity and skill in is
contacts with the public, the press, the bu.siness world, and with the Nat
Administration at Washington.
The Association extends its sincere thanks to the bankers, hotels,,dress,
general public, and to the representatives of the Century of Progress/ in the
City of Chicago for the manifold kindnesses and gracious hospit ilitY exwise
tended to the delegates and their families. The Association is 11.,
indebted to the speakers at the various sessions of the Convention, divisi,
and sections, who by their carefully prepared addresses hav3 helped to
make this 59th Convention one of profit and enjoyment to all vho have been
privileged to be present.
Resolutions Committee.
Leonard P. Ayres, Chairman, Economic Policy Conmission. (VicePresident, Cleveland Trust Co., Cleveland, Ohio), Chtarman.
Irving W. Cook, Vice-President National Bank Division. (President.
First National Bank, Bedford, NIass.)
Henry S. Kingman, Vice-President, Savings Division, (Treasurer,
Farmers & Mechanics Savings Bank, Minneapolis..
Clyde Ilendrix, Vice-President, State Bank Division, (President, Tennessee Valley Bank, Decatur, Ala.).
Charles F. Ellery, Vice-President, Amertan Institute of Banking.
(Fidelity Union Trust Co., Newark, N. J.).
J. W. Brislawn. Vice-l'resident State Secretaries Section, (Secretary.
Washington Bankers' Association, Seattle, Wash.).
II. O. Edmunds, Vice-President, Northern Trust (7o., Chicago, Ill.
H. Lane Young, Chairman, Agri2ultural Commission, (Executive
Manager, Citizens & Southern National Bank, Atlanta. Oa.).
Ronald Ransom, Chairman, Bank Management Commission? (VicePresident, Fulton National Bank, A lanta, Ga.).
Fred I. Kent, Chairman, Commete and Marine Commission, (Director,
Bankers Trust Co., New York, N
John H. Puelicher,(7hairman. Public Education Commission, (President.
Marshall & Ilsley Bank, Niilvinkee. wis•)•
IP/
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention—Sept. 23, 1953
Remarks of ires.-Elect F. M. Law, Pres. First Nat. Bank, Houston, Te),as
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Federal Reserve Bank of St. Louis
my opinion, very few bankers who are actively engaged in the
bankin
ig
n
business to-day will in the course of their lifetime forget the lessons taught
by the past four years. Every man of us should be, and doubtless
is a
better banker by reason of those distressing experiences. Most, if not all
of us know better than ever before the requisites of good banking. We
know now, if we never knew before, the meaning of sound policies
and the
interpretation of them in the right running of a bank, and especially with
regard to the use of depositors' money in the making of loans. It is perhaps
not much of an over-statement to say that the average banker in this
country to-day knows how to be a good banker, but there still remain
two
big ifs in each equation—the "if" of courage and the "if" of energy. Ile
knows how, and he will run a goo,' bank and a succossful bank it he has
the courage to live up to his own convictions and his experiences. The
second "if" simply is—lf the banker, knowing enough and with sufficient
courage. will iNork hard enough to master thoroughly the affairs of his own
shop. Ability, even with experience added, is not enough. It must be
accompanied by a lot of courage and a prodigious amount of hard work.
A synonym for hard work in this connection is digging. There may be good
bankers who lack courage or energy, but they are the exception and in
such cases they are good in spite of their weaknesses.
100
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 25, 1933
Why the American Banking bystem?--by Dr. Harold Stonier, Nat. Educational
Director of AIB Section
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Federal Reserve Bank of St. Louis
To understand wh
y the American
banking system is
is to-day, we mu
as i
st consider not
only our political
but also our eco
theorie
nomic ideals an
d objectives.
believed in an eco
America has
nomic order whic
h gives wide opp
to all the people
ortunity
to enter any bus
iness or professio
choose. During at
n they
least two-thirds
of our banking
it thas thus bee
history,
n possible for
almost any one
banking business
to enter the
without training
or experience an
out very much
d withmoney. Through
the years we ha
ently supported
ve consistthe thought that
America was the
opportunity, that
land of
a man could ent
er any trade, pro
or calling whic
fession,
h his judgment
dictated. Is it an
then, that thousands
y won1er.
of incompetent
or irresponsible pe
bave entered the
ple
banking business
by the easy routes
our laws left ope
at
n to them?
THE COMMERCIAL & FINANCIAL CHRONICLE**ABA Convention--Sept. 23, 1933
Interest Rates on Time Deposits--by 0. Howard Wolfe, Cashier of Phila.
Nat. Bank, Phila., Pa.
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Federal Reserve Bank of St. Louis
Then, finally, what we have come to call the department
store banking system, by which we have commercial deposits
/
and savings deposits and trust funds all being invested,
relatively speaking, in the same funds.
As a result of those conditions I am afraid we have had
to accept, whether we like it or not, legislative action and
rigid supervision with respect to the problem of interest
on deposits.
Unfortunately I do not have enough tempered and soft
terms in my vocabulary where I am dealing with what we
are accustomed to call "banking problems." Therefore, you
will excuse me if I say that more crimes have been committed on the basis of interest than any other single feature
that I can think of in competition between banks. I will
mention just a few of them. I will let your own common
sense tell you whether or not I am correct.
First has been the competition on interest rates and the
ayment of interest that bear no relation whatsoever to
he return upon money or the return upon sound investments.
Second, time accounts have been treated as demand
deposits. You all know how true that has been; a secret
agreement with a customer to pay him his time account
whenever he needed the money. The third, allowing our
customers to put into savings deposits what are really
demand deposits, or at best convenience deposits, as against
keeping in savings accounts only simon pure tluift a,ccounts.
Then another crime of which many of us havp been
guilty is the payment of interest upon uncollected funds.
Finally, and one that Walter Wilson and his Committee have
been working on in Pennsylvania for many years, the matter
of the calculation of interest. No two banks calculate
interest in the same way.
Those, briefly, are the circumstances under which we have
been attempting to regulate the payment of interest among
ourselves.
Before getting on the matter of regulation, I would like
to remind you of the experience this Association has had
with another very important phase of practical banking—
that of check collection. For 20 years at least, the old
Clearing House Section of this Association endeavored to
persuade bankers to use some better method of check collection than the old disjointed, clumsy, indirect routing
system which they were then following, but without success.
I think finally we had six Clearing Houses out of 400 in
the United States that did use modern, efficient systems of
check collection, and the result was as we might have expected—the Federal Reserve Act wrote down what we must
do and so again we have had exactly the same experience in
connection with the payment of interest. And we have
seen Congress displaying. a courage which we bankers have
lacked.
1
l
)
1
1
The Commercial & Financial Chronicle--Sept. 23, 1933
O. Howard Wolfe--2
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Federal Reserve Bank of St. Louis
recent banking legislation, but at least I
think we can ad it
that Congress has had more courage than
we bankers h e
had in fixing the matter of interest.
I draw your attention to one sentence in
the Act of 1933
which I think is an indictment of banking
practices. It says
that we shall not pay interest on demand
deposits directly
or indirectly by any device whatsoever. Just
let that sink
in a little bit. The Senator or the Congre
ssman or the
draftsman that wrote that sentence may have
known very
little about banking, but he certainly knew bankers
. If you
will stop and think a moment, the customers
can't force any
banker to pay interest by any device and so
you are lef
with the conclusion that Congress intends
that bankers
must not be guilty of any device such as they
have been
guilty of in the past, of paying interest on dem.and
funds.
If you think bankers would not be apt to pay
interest or
want to pay interest by any device, I will ask
you to come
in to our bank some day and have lunch with
me and I will
dig out of our files letters we began to receive the
day after
the Act was passed—not from our customers general
ly, but
from other bankers who proposed, among other
things—
one letter I have in mind; this banker wrote
and said,
"Now that you have 3topped paying interest on
dema
deposits, what other service are you going to give
free th
you have not given us heretofore to take the
place of
interpqt,
"
Any number of bankers wrote to us ana
said, "the way to get around this is this: We
will put our deposits on a time basis and will
give you standing notice so that after 30 days
it can be paid at any time."
THE COMMERCIAL & FINANCIAL CHRONICLE-ABA Convention—Sept. 23, 1933
The Need for Revision of the Glass-Steagall Act and a Sane
Legislative Program for Banking—Geo. V. McLaughlin, Pres.
Bklyn. Tr. Co., Bklyn, N.Y.
_,
For example, the question of credit expansion is now
N'eI
V
much in the public eye, and has been more or less so for
tl
past two years. The cry has been raised, loudly and
fr
quently, that banks are hindering business recovery by
refusing to extend credit. Some financial news writers
have
been kind enough to answer for us by explaining that
banks
cannot extend credit beyond the legitimate demand for
i
without violating the principles of sound banking. Yet,
cannot recall that any banker (myself included) 'has
eve
come forward with any facts in defense of his policies.
(
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Federal Reserve Bank of St. Louis
_
— To sum up, I might say that a constructive legislative pro• am would include means for bringing about co-operation 'i
,tween the State and Federal authorities in the authorization of new banks and new branches, pending the ulthnate
accomplishment of a unified banking system; some method /
for divorcing bank supervision from politics; some perma- / '
nent modification of the eligibility provisions of the Federal Reserve Act, and a gradual extension of branch banking.
In conclusion, I would like to emphasize that, regardless
of legislation, the bankers of the United States must regain
confidence in themselves and banish the remaining vestiges
of the fear that so recently paralyzed us.\ .
Another important supervision problem is the necessity
for divorcement of supervisory authorities from political
influence. It has been said that we should not permit our
-
e,
l
banking system to become a football for speculators. To
)
his I vvill add that neither should we permit it to become a
ootball for politicians. In the past, it has often been kicked
all over the field by both teams.
111
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Sept. 23, 1953
Address of Pres. R. M. Sims, VP., American Trust Co., San Francisco
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Federal Reserve Bank of St. Louis
These are average figures and it is quite possible that in some cases
the earnings were above the average, especially where the President and
directors were trust minded and gave the trust department proper super-,
vision and support. Also, small earnings are not always a true indication
of the business transacted in the trust department. Only too often the
trust department is required to render free service for the bank, its customers and correspondents. Most trust departments would show better
earnings if freed from free service and given proper recognition for the
incidental business that comes from the department.
)
)
THE COMMERCIAL & FINANCIAL CHBONICLE--ABA Convention--Oct. 1932
Resolutions presented by R.S. Hecht, Pres., Hibernia Bk & Tr Co., New Orleans,
as Chmn of Resolutions Committee
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Federal Reserve Bank of St. Louis
____N
Guaranty of Bank Deposits.
uaranty of bank deposits carries an idea that naturally appeals to
I ple in general on casual consideration. However, in principle it is
unsound and in practice It Is unworkable. It has been tried in eight States
and it has not only failed in every case but it has resulted in Increasing
the number of bank failures. Taxing properly managed banks to make
up losses of failed banks is not only unfair and unreasonable but it weakens
the whole banking structure. Again guaranty of deposits places the
incompetent and reckless banker on an equal footing with the able and
conservative banker, which encourages bad banking at the expense of sound
banking. We are therefore opposed to the passage of any law carrying
guaranty of bank deposits and believe that it is against the interest of
he people of the United States to develop any such system.
I
gb,..
(
.0
•
I
1
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention--Oct. 22, 1932
Fundamental Banking Policies and Principles--by H. N. Stronck,
Bank Management Consultant, Chicago
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Federal Reserve Bank of St. Louis
fundamental importance ate
So many dif,erent factois of
ercial banking that all f
involved in the process of comm
time period allotted o
short
the
in
them cannot be covered
limit my discussion to some of
this paper. I therefore shall
ved in the asset administrainvol
the fundamental factors
It is now admitted that asset
tion of commercial banks.
important function of comadministration is by far the most
fact which was lost sight of
mercial bank ma,nagement, a
Weakness in this phase of
during the period of prosperity.
of more bank faihy
cause
the
been
has
bank management
factor or group
other
any
and subnormal positions than
rs.
facto
_.
•
THE COMMERCIAL & FINANCIAL CHEONICLE---ABA Convention
‘dct. 1932
Committee and Qfficers' heports--National Bank Div.--address of Pres.
Vvalter Wilson, Pres. First Milton Nat. Bk., Milton, Pa.
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Federal Reserve Bank of St. Louis
extent and the
_
ness can realize the
the banking busi
for the last three
Nobody outside of
bankers have labored
h
whic
r
unde
n
and for a heedlew
intensity of the strai
ing to popular dem
the option of yield
cient to preserve the
suffi
dity
liqui
a
Years. Faced with
in
or trying to atta
one sound course
loosening of credit,
sits. there was only
and without
ys carried in depo
g of credit conditions
sanctity of the mone
ndin
rsta
unde
without any
there might have been
' open. To one
of deposit banking
ities
nsibl
respo
e loans which offered
a recognition of the
full well that to mak
which
the banker knew
other commitments
any
e
mak
two courses, but
to
prompt repayrnent. kly, would be dangerous and an exlittle prospect of
quic
cash
erted into
bank credit is uncould not be conv
y a restriction of
practice. Obviousl
ceedingly unwise
f
•
1
ugh each vein of
. Its influence is felt thro
desirable and retards business
s owe their first
ged with management of bank
industry. But those char
ic will condone
rs, and neither they nor the publ
al
allegiance to their deposito
ty of those funds. We
safe
the
zes
ardi
y
jeop
aril
any act which unnecess
r functions
recognizes only three majo
tice
prac
ing
bank
d
soun
know that
rs.
the demands of the deposito
1. To meet promptly and fully
h are served.
nds of the communities whic
2. —o satisfy the credit dema
.
ders
khol
stoc
the
for
rn
3. To earn a fair retu
not hesi- ,
inking persons bankers did
So desPite the unfair attitude of unth
litYI
h seemed best to meet the responsibi
whic
se
cour
the
ow
foll
to
tate
which the acceptance of dePosits imPoses.
q7
•
THE COMMERCIAL & FINANCIAL CHRONICLE--ABA Convention-Oct. 1932
Remarks of Pres. Haas of ABA before State lank Div.--Comments on Unified
Banking—Comparison of U.S. and Foreign Banking Systems
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Federal Reserve Bank of St. Louis
it is not so much the system nor the laws that produce
good banks and
,..,_.d,banks. I do not mean to say that there
is no room for improvement
in our State bank laws as there are certain
changes and additions which
I am sure you and I will agree would be most
helpful. I have in mind a
more rigid scrutiny of applications t,o organiz
e State banks: their ca,pitalization; their prospects for building up a year round successf
ul business; the
examination of affiliates; the elimination of
all guarantees from banks of
deposit; but I sincerely believe the analysis of
our difficulties by State
bank supervisions will bring these matters
about. I attended the Annual
Meeting of the National Association of State
Bank Supervisors held at
Philadelphia and I can assure you that there
is no body of men better
informed and more keen to bring about certain desirabl
e changes than
these men.
What I am trying to get at is this: The laws governi
ng banks are well
intended and are enacted as a result of years of experie
nce. but laws of
themselves will not keep a bank from failing. After
all is it not a matter
f bank management, that determines the conditi
on of our banks. I say
his advisedly as I can point to many banks which
are so well and conervatively managed that they go far beyond any
legal requirements to
eep their bank in liquid condition
[
rf
In my address before the General
Convention I mentioned the
amount
;moss earnings of banks (membe
rs of the Federal Iteserve System
)I
required to meet the payment of
interest on deposits as 30.4%
and all'
banks as :38%. I also discussed demand
and time deposits. Since I
wrote
that manuscript another very importa
nt chart has come to my attentio
n
and I believe this is the first time a
calculation of this nature has
ever 1
been made public. I refer to the
trend of demand and time deposit
s
in
country banks. IklY calculation shows that
all banks not located in Reserve
cities or what we call country banks
had demand deposits in 1921 of
S3.788.000,000, while on June :30 19:32 they had
S2,915,000.000. a decrease of
S873.000,000, while dtudng the same period
time deposits increased from
S2,871,000.000 to S4,094.000.000, an increase
of S1,223,000.000. Stated
„.in percentages demand deposits decreas
ed from 56.9% to 41.6%,
while/
time deposits increased from 43.1% to 58.4%.
This clearly indicates the trend of the
depositors to maintain as small
italances as possible in demand deposits and
incre,ase the amount on savings.
While we might expect that the accumul
ated savings of our people should
show a material increase I believe that
these figures warrant our country
bankers in analyzing their savings account
s.
Perhaps they might find the same conditi
on as the city bankers discovered;
t hat all savings accounts are not real
saving's.
Many cities have remedied this conditi
on by united action in defining
satings. I realize that country bankers
cannot act. alone in matters
t his kind. They must have the
of
co-operation of all banks in their
section.
The establishment of country Clearin
g Houses nation-wide which
I
have advocated would in my opinion
be t,he best method of approac
h.
I
411
THE COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention
Oct. 1
- 075
t//
Nt4
7c12ort of hconomic Policy Commission—by R. S. Hecht, Pres., Hibernie
Co., New Orleans—"Bankers Fevor Unificstion of
&
Banking Through Federal %:;ervt: System"
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Federal Reserve Bank of St. Louis
:3. Banking Non-Liqu
iditU.
There is another particul
ar major aspect of the
banking situation that
calls for special discussi
on. It inVOIVCV5 developm
ents which dllring ret•.•,,t
years made our banks abno
rmally vulnerable to a gene
ral business reactioit
We refer to the marked loss
of liquidity on the part of
the whole commercial
banking credit structure.
This has truly importan
t social and econor
aspects, and is not mere
ly a banking technica,lity
Bankers all know individu
ally by painful first-hand
experieince, and
amply de ostrable stati
I
stically by total banking
fugures. how great ail
impairment in liquidity
has taken place. Without
going into detail, AN't•
define banking liquidity
as the maintenance of an
adequate cash position
by the convertibility of earn
ing assets into cash. This
Is ordinarily provided for through the auto
matic maturity of loans
and discounts and the
supplementary marketabilit
y if required of other pape
r and investments
without loss 4e.44•>#6
The lack of
commercial paper,
the failure of borrowin
create a sufficie
g custom(
nt volume of comm
ercial loans to keep
PloYed and other
banking fundkindred factors caus
ed a steady decrease
banking credit
in the COIrilller(.
component in earning
assets. The enforced sear
eznployment by
ch for oth
these funds was
reflected in various
shifts in the comp
other changes a d
osition of banking
resources,such as an incr
meats, a rise in loan
ease in inv ts on real estate
(often taken as addition
secure weakened
al collateral to
loans) and an expa
nsion in loans on
Period of the stock
securities during the
market boom, whe
n many dosirable
sisting on such
customer's were inaccommodations.
a_
07
•
THL COMMERCIAL & FINANCIAL CHRONICLE—ABA Convention6LLS
Oct. 1932
annual address of the Pres.--H.J. Haas, VP First Nat. Bk., Philadelphia
There is another
public aspect of
this bank failure
thrown entirely out
believ,
matter that has besto.......a
of focus. and that
embodied in our laws, I Have
is the question
of money entru
of the relative safety
sted to banks as
happened?
as can be
deposits compared
such banking reform
What has
it elsewhere during
to
wrong
.
..„_____
As
,,,,
with
see
what happened to
the year 1931.
past ha,s been
afraid not. We have
What was the loss
deposit in banks at
the approach in the
ratio for money on
forehanded enough? I amquestioned, but have we bee1
the outset of 1931
as compared with
stocks or bonds or
we bankers been
some of us
t
too,
that
money invested in
thing
banki
s
ng
commodities.
seen these
At the outset of
things developing in
them? Others have
an
1931 there was on
suddenly confronted with
aggressive enough against
sum of about
deposit in all banks
are
we
the aggregate
357.250,000,000. As we
we know
management for banking
then the first thing under skillful politic-al
have already
$500,000.000 of this
and
exper
or
ience
,
estimated, some
may ultimately be
be less than 9-10
insistent public demand
lost to depositors
based on practical
of 1% of the total.
. That would
than not were not
often
more
That is, the mone
that
99-1-10c,", safe throu
laws
extremes.
y in our banks was
ghout the most
ideas to bad
disastrous year in
nation.
else carried good
the history of the
How about dollars
invested in commo
dities? The Bure
Statistics wholesale
price index for all
au of Labor
opening of 1931 and at
commodities stood
well consider the Canadian procedure. where it is
-4-We mightll
t think
at 77 at the
66 at the dome
This was a drop
/low about bond
provided by law that everY 10 Years the bankers and the legislators shall
of 14%
s? A standard index
for a representa
stt 99 6 in January
togeth
revie
er',
w the banking laws, consider the economic chang
down
sit
tive group stood
1931 and at 81.6 in
December a loss of
.
that have developed study the lessons of experience, and then amicabl
18%•
work out a program of needed legislation
/
Finally, how about
,
stocks? A standard index
kinerican stocks suffered
comprising over 400 good
a depreciation of 48%
the end of that year it
durin
g 1931 alone, and at
was over 69% below
the 1929 average price
which a great many
level on
investors in this field
established their posit
Some one might very
ions.
properly state that this
many are still holdi
is not a fair comparison
ng their investments
as
and recently theY have
material improvement
shown a
marketwise so that it is
determine their ultim
impossible at this time
ate losses. This is
to
true and the calculatio
then be comparable
to the recoveries made
n must
on deposits in closed
do know, however,
banks. We
that during 1931
national banks reported
offs equal to 1.55
% of their total inves
charg
etment holdings which
excess of the ultim
is 65ate loss on closed
banks. Again one might 100% in
banks continued to
say that
fail during 1932 invol
ving further losses to
but here again we
depositors
find that bonds listed
on the New York Stock
dropped from 49i
Exchange
billion dollars in Septe
mber 1930 to 47
in JanuarY 1931, a
billion dollars
loss of two billion
dollars in only four
continued their losses
months and
for sometime durin
g the current year.
ing held true in
The same
stocks which showed
s ptember 1929
a drop of 40 billion
dollars from
to January 1931
and continued their depre
1 32 until only
ciation during
recently.
4
11
-"f- -* )k —*- -4(c * ./
There is another angle that
has not received due • •'• ic under
standing,
at is, the cause and responsibi
rity of bank fallur
he idea has become
idely prevalent that the blame
rests wholly wit
anks
and
banke
rs and
their faulty management.
I will say without reservation that
no class of business or business men
in the nation to-day represents more
capable management. sounder financial
conditions and a greater capac
ity for constructive public service than
do
the present 19,500 institutions that
make up our banking structure.
Nor will I *admit that the banks
that have passed out of the pictur
e,
through failure constitute the reflec
tion on banking as a whole that it
has
been made to appear.
Who is to blame if Government offici
als. in both the suite and national
systems, for over a period of more
than 20 years, permitted the organizati
on
of great numbers of banklr, with insuff
icient capital or in places where
theY
never could be successful? In many
instances in all parts of the country
this took place over the protest of
the well established banks. But what
happened was this —the applicant
for a charter would get the most influential
political sponsonship and the prote
st of the well established banks was made
to appear as selfishness on their part;
however, we all know nos
e
,at except
in rare cases they acted for the best
interests of the publi
3efore the
depression began in 1929. failur
es of the class of banks I have in mind were
raising the mortality ratio to a point
that was causing serious public distrust
against sound banking. It is
true beyond question that if
a great number
of uneconomic banking units had
not been allowed to enter the field, banking failures would have been
localized and would never have beco
me a
national problem.
This is not to say that all failur
eAs are attributable to these conditions
.
Some rural communities that once
were good bank locations have so
changed
as to be no longer able to support banks
.
kI
It certainly was not wholly the fault
of the banker if customers to whom
he had safely loaned money year after
year suddenly failed to moot their,
notes owing to the ruination that
had overtaken their own businesses.
Nor was he to blame for the fact that
the bapic securities of the nation's
industries. municipal government
s, even of the national Government, suddenly suffered such market depreciati
ons that he could not realize from
hem the deposits entrusted to them
rapidly enough to meet the hysterical
ernands for cash from his rumo
r-scared depositors.
1
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Federal Reserve Bank of St. Louis
C;)
f
01
7
o-
-2Commercial & Financial Chronicle-Oct. 1932.
,.
H. J. Haa s
r'?
/
,
Improvements for Bank
ing from IVithin.
Legislative measures
are not the only mea
ns for promoting
in banking. The
improvements
more fundamental
actions must come
and practice of bank
within the spirit
ing itself. Our bank
ing methods at hear
our established trad
t are sound.
itions are fundamen
tally true. If ther
e have been any
deviations front them.
the remedy is in a
return to standard
in a rigid formulation
principl
by law of those things
that must be left to the es. not
of experience and free
dictates
discretion.
I know of no more powe
rful means for keep
ing our banks of depo
discount sound. ca,p
able. public servants
sit and
than an unswerving
to straight. old fash
ioned commercial bank
adherence
ing. It has been the
ing in the past. It
best bankis the best banking for
the future.
This means that fro
m our commercial
banking operations
must be rigidly excl
capital loans
uded. They are prob
lems for private
bankers dealing in stoc
investment
ks and bonds. Neit
her should guarantees
the operations of this
enter into
kind of
Investments are the seco banking—they are for other kinds of busi
ness.
ndary interest of comm
only the highest grade
ercial banking:
of securities should ente
therefore,
r its portfolio and the
purpose should always
be ready convertibili
primary
ty into cash to take
bank's and its deposito
care of the
r's needs, not the
question of profits
The payment of inte
to be made.
rest on deposits is
one of great bank
of the day. Interest
ing
during 1931 amounted
problerns
to 30.4% of the gros
of all banks members
s earnings
of the Federal Rese
rve System. Und
percentage is greatly
oubtedly this
increased if all banks
are included. and
estimates have been
I believe some
made that the prop
ortion is 38%. Here
solution seems to be
along the line of a retu
. too, the
rn to first principl
commercial deposit ?
es. What is a
It is either a business
or it is a secure plac
convenience to the
e for idle funds. In
depositor
the former case the
all the yield the depo
convenience is
sitor should expect.
If the bank makes
on the aggregate of
a small profit
such deposit funds
it is entitled to it.
deposits that are idle
In the case of
funds, both equity
and competitive
particularly from non-b
factors, arising
anking sources, enti
tle the depositors
the profits in the for
to a share in
m of a moderate inte
rest on their bala
competition within bank
nces. A.s to the
ing for such idle fund
s, there unquestionab
be a higher degree of
co-operation than has
ly should
generally prevailed
Cut-throat competition
in the past.
for accounts by mea
ns of over-competi
rates on balances has
tive interest
been a prolific sour
ce of unsound ban
*In
where clearing houses
ing. Places
are in operation are
making goal hea
his evil and it has been
dway against
greatly reduced. Ban
ks everywhere shou
utual understandings
ld reach
in regard to it--for it
is a problem in whic
au hardly work sing
h banks
ly and alone.
Theee sound like simp
le principles, but it
was the violation
things like these that
of simple
complicated the bank
ing situation duri
=happy period.
ng its most
To this category belongs
that part of the bla
bank failure situatio
me
for the
n that must be assessed
against bankers--fo
candor bankers mus
r in all
t bear personally a part
of the responsibility.
admit that many
banks failed due to inte
We must
rnal policies that shou
been pursued by thei
ld never have
r managers. There was
a growing tendency
away from the hom
to wander
ely commercial bank
ing virtues of our bank
fathers. Bankers
ing forethat did this spent
many sleepless nights
depression. They
during the
realized then how easy
it was to run a good
right principles as
bank by
compared with the diff
iculties that mounted
Its they had wander
up according
td away from the
m.
I think the best
. the most effective
banking reform for
right in our own
the future lies
counting houses—an
d that is aloiag the line
the simple virtues of
s of a return to
abnking that experien
ce has proved best
We cannot made
.
banks fool-proof by
legislation—but we
doing so by good man
can come near
agement and common
sense.
Bankers Qualificatio
ns.
The country seems
to demand that bank
ers of the future shal
in their vocation as
l be trained
in other walks of life.
The ptinciples of
good bank managemen
t can be taught.
sense ca,n be cultivat
and common
ed, by means of tech
nical education.
Promotion of bank
ing education, ther
efore, is one of the
tions of organized
major obligabanking. The Ame
rican Bankers Asso
ahead in this fiel
ciation must step
d.
(
— In the Americ
an Institute of Ban
king we have what
the outstanding proj
is
considered to be
ect for adult educatio
n now being carried
and industry.
The Institute shou
on in business
ld be familiar to
1ssociation, and ever
every member of the
y senior banker
should insist that his
herever practicable
employees
shall pursue its cour
i ethods possible
ses. It is one of the
best practicsi
for bringing about
universal good banking
for America .
i
j' From time to time we hear much about
the licensing of bank officers upon
their passing examinations conducte
d by governmental agencies. The
evention of such a program ever bein
g forced on us by legislative action
I
i ainly depends on the American Banker Associat
s
ion pursuing a policy
(
' t at will raise the standards of ban manage
k
ment not only in its technical
teration but in its social, economic
and ethical phases as well, to such levels
as to make government paternalism in this
respect plainly uncalled for
_.... _
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Federal Reserve Bank of St. Louis
...-.-
•
THL CCWMEECIAL & FINANCIAL CHRONICLE--ABA Convention
Oct. 193'i-
Remarks of Harry J. Haas, Pres. of ABA, before Diat. Bank Div.-Additional Currency Under hider to Home Loan Bank Bill—Depression
and Test of Banks to Meet Situation
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
with the
We now know that banks cannot endure by simply complying
alike .
laws. The same yardstick cannot serve for all banks
and regulate
They must know and appreciate their own individual needs
in
everY
together
themselves accordingly. They must band themselves
and to eliminate
community in this country for their mutual protection
paying out too
now and forever' over-competition which has led them to
(30.4% of
large a percentage of their gross earnings in interest on deposits
and to
included)
all members of Federal Reserve System; 38% all banks
making undesirable loans.
to influence
Too frequently they have Permitted balances maintained
of the borrower..
their judgment rather than the actual financial condition
the depositor
It is well t,o bear in mind the principle that balances only entitle
and not the loan
to consideration and govern the rate of interest charged
i tself.
They must look more to net earnings rather than gross d osits.
They must eliminate capital loans from their portfolio.
not mean to
Directors of banks must really direct the management I do
insist upon
say that they should give attention to details but they should
of deposit should
their bank adopting sound principles. In short our banks
I
adhere to straight. old-fashioned commercial banking such as daicribed
in my address -before the general convention.
r - I03
e
II
•
THE COhiMERCIAL & FINANCIAL CHRONICLE--ABA Convention
Oct. 1932
PROBLEMS CONFRONTING AMERICAN BANKERS--by Francis H. Sisson, VP
Guaranty irust Co., NYC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
. ... ..... ,,___..
.
Recent events have unquestionably exposed weaknesses in our banking
°It"'"'afstem. When we consider the exceptional character of the period through
'
1.;'--"'
which we have passed, we are justified in congratulating ourselves that the
system has functioned as well as it has. Individual bankers, particularly,
are to be commended for the wisdom, forbearance, and courage they have
shown during one of the most trying episodes in the world's financial history. But when we compare our record with those of other nations that
have faced equal or greater difficulties, we are forced to conclude that
there is room for great improvement in our banking system. Even more
damaging than the history of the last three years, perhaps, is that of the
10 years preceding. In no year since 1920 has the number of bank failures
in this country fallen below 250. and in only one year since 1923 has it
fallen below 500. This heavy mortality occurred during a period in which
this country was generally regarded a,s enjoying the greatest prosperity
in its history.
When we consider this situation, we come face to face with the fundamental problem confronting the bankers of America. Our banks can and
must be made safer. What does this mean to the individual banker?
It means, first, that he must exert himself to the utmost to see that his
own bank is conducted along sound lines. The vast majority of bankers
are doing that already, and with increasing success as their experience and
background become broader. But beyond this, it means that the individual
banker must unite with the other members of his profession to throw their
combined influence into the scales on the side of a stronger banking system.
To do this, he must take the broadest possible view of his professional
function, of nis place in the economic world. In some cases, he must allow
considerations of immediate personal advantage to be overbalanced by
regard for the general welfare. Ile must also adopt an attitude of willing
compromise in the interests of united action.
In facing the future, the bankers of this country can find abundant
ground for pride in the fact that the greatest of all financial crises has
failed to shake the foundations of the American banking systeni. The
worst of that crisis seems to have passed, and the improvement that has
l
,
occurred in the last few months bids fair to continue into the future. But
•
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Clipping from Bkg. August 1935 on "State Bank Earnings and Expenses"
by Robert N. Hanes
SEE
File No. #2A
Letter of
Dated
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s oovsasserr rs,rrro ornce. 1933
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"Pwlic Prcof Banktriz"
by Ralp_h_ W. MFmue_1_,_ Pres. af the_ Marque_t_te
National Bk of Mpls, before the State Ba-k3rs Assoc. of Iowa -4De Moines, June 2, 1936
American Banker, June 15,
SEE
File No.Study #
Letter of
Dated
Remarks
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;10 0.3
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File No.
Subject
*Calls on Bankars to Awaken the People"
by ,,rval Adams
Complete speech in File # 18—General
MAIMPEXIE
SEE
File No.
St,Tdy # 7 fp'. Excerpts published in American Banker, May 2
Letter of
Dated
Remarks
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u
ooysammus,?ammo °rm., io.
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w_Bankere to AirAin. the People"
by Orvel idema
SEE
File No.
Study 7_
Letter of
Dated
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The Licuidity and Safety of Bank Assets
11
Nov. 1934
Article from
Stark file.
SEE
File No.
Study # 7
Letter o
Dated
Remarks
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Federal Reserve Bank of St. Louis
u
ooviamincr pitorrn4o °meg: ion
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THE FEDERAL RESERVE BOARD
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Subject
LEGIsLATIQN
ON BANKING
A report of_the Finance
Department Committee, Chamber of Commerce of the
Lashington, D. C., April, 1934.
U. S.
(a printed pamphlet conizting of 16_pagec)_
SEE
File No. SUdy 7
Letter of
Dated
Remarksfa
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Federal Reserve Bank of St. Louis
4
u. a. oovsamwsrr pReirrNo orncx: 1933
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Committee ReDor_t f_gr_ con§id_eraBANKING LEGISLATION
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Issued March 1933.
21st annual meeting (1953)
SEE
File No.
Study 7
Letter o
Dated
Remarks
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Federal Reserve Bank of St. Louis
f
u.
oonnundrrr immix° orncr: 19S3
178151
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THE FEDERAL RESERVE BOARD
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S COPE OF MEMBER BANK OPERATIONS - Commercial and Savings Depos t
Bmiking. Preliminary Notes 10/1/34
Article from Stark file
SEE
File No. See Study # 7
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
U. B. 1301riANYVVI. rancrixo
orncr
1933
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File No.
u
Natio el 'versus State, Banks by P.ay B. Westerfield
Subject Tha
Anns;Ize Zanuary 19154
SEE
File No. streTii?
Letter of
Dated
Remarks
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u.
oovremerwr rrivrma omcr, 1933
178151
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.Lessons of _Foreign Experiencen b
lhe AnnalE.; Januar-y _1954
SEE
File No.
_Stud,'y #_12_
Letter of
Dated
Remarks.ific
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"Branch Banks versus Unit Bankg" lpy Gaines_T,Lartinhour.
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SEE
File No.
Study 12
Letter of
Dated
Remarks
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Federal Reserve Bank of St. Louis
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Address by _C.
Tile_t_teraul__ American, Eatio.nal_ilank-r-lsia,s4ville,
Tennessee, before Ill. Bankers Asso. convention in St. Louis,
May M I 1936
SEE
File No._
2tudy #.1_5
Letter of
Dated
Remarks
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178151
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May 1954
Clipping from Proceedings of N. J. Bankers Asso./address by
Subject
Julius S. Rippe"
SEE
File No.#10A
Letter of
Dated
Remarks
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u.
eovsamicarr ram-mo °mat
1933
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Monthly _Balletin issued bry__Osoar_ lielsonvAuditor_ of Public
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SEE
File No.. study #3.
Letter of
Dated
Remarks
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11.11ENT
Timm.orricr: am
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"Says Public Must Be told of Higher Trust Costs"
article published
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SEE
File No.
Study # 2
Letter o
Dated
Remarks
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178151
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subjec4
146 9•Ceesere
aressipte nve *****. et Itiesselle
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SEE
File No, at*
Letter of
Dated
Remarks
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U. B. GOVERN., PRTNTINO
io.
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"Praises Federal Banking Measures" by Russell G. Smith published
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1936
SEE
File No. Study # 4
Letter of
Dated
Remarks
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#11
u. 5. ooriamrim
PR MING °WIWI: 1033
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Subject
Annual Addreas._of the President LesLie Z._ MoDouall
Delivered at the conven tion of the New j'ersey Bankers Assoc. at
the Aribasead.o0 Hotel, Atlantic City !:ay 23, 1936.
SEE
File No.
stAy 6
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
u.s. BOTIULNIMIT
'
,ammo °mar: ma
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No. _
Su bject
_ne-f-egiti4rding the Depaaltul"--by-41.--lhutte-e
SEE
File No.
Study 6
Letter of
Dated
Remarks -
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
v. 8. ooncarmerr mamma omcr: 1933
178151
P107
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
Cli,pping from the American Banker, June 42 19S62 "Fox Sayc FDIC
Offers no cure for problems."
SEE
File No.
Study !10
Letter of
Dated
3‘742
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
v.
ooTramorrer eirm.rtmo amyl: ism
178151
t—
f
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No. 11
Subject
"F. F. Brooks challenges banking morality" Atlantic City, May 21.
SEE
File No.
Study 10
Letter of
Dated
Remarks
•
-
6https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-------
U
OOTZRNMENT PRINTTNO °rem. 1933
178151
q-19
5-21-36
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
"Supervision of Chartered BanJce by
from Banking, May 1936.
J-J
Dandolpb_Burgaas -
SEE
File No. study 210
Letter of
Dated
S,
Remarks
-------
--------------------------------------------------
------------------------------------------------------------------------------------------------
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
u.
ooveRrrorr ramp.°mot
1933
---------------------------
178151
'`-212,0
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No._ u
Subject
Clipping of Ch. 18 of Rural plz. Reform b7 Charlea W. ColliDs
Chapter entitled "Government Control over Bank Management
SEE
File No. au
Letter of
Dated
Remarks
-------
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
--------
u. s. eovironvet P1InC1710 OPTIC.: 1033
178151
g92
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
Ithaparvisory.Probl_ama_Pert.aining_to Opera_tin,g_Banks and. to Banks in
Possession by Hon. William D. Gordon, Secretary of Banking, Pa.
Vol. LXV. No. 24
SEE
File No.
Study-10
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
_
u.
eovuntwer Parrrrrno orner
11133
178151
cv21_
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
Excerpt
/"Graft in Business; John T. Flynn, pp. -55 to 259, Lh. 11
Banking Rackets
SEE
File No.
Letter of
Dated
Remarks_
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
---------------------------
e. oorisotwewT reirrrea orrice: 1033
--------
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
"Says Must Put Hame Buying On Auto Basis"
11
clipping from American
Banker, Tune 15, 1936 by L. H. Brown, Tohns-Manville,
SEE
N. Y.
Study # 6
File No.
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
u. e. oovirrmon rruvrom ornciu
1933
178151
70
- 06
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Silbjett
American Banker, July 24, D36
Clipping:
Porcupine Officials
Eyeing the A. B. A. Program
Bankers As Hobby 'Riders
SEE
File No. Study # 7
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
s. Gov'Rvirrwr Parcrrfa onicx: 1933
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No.
Subject
Clipping from ALDILICAN BUM, September 215. 1936. Meeting
Lake Tax Reform*
SEE
File No, on
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
u. e.
GOVZIINIICNT PRIMING OFFICIC:
1933
178151
THE FEDERAL RESERVE BOARD
CROSS-REFERENCE SHEET
File No. 11B
Subject 9.34-Ninif ivat-swaria imarn,=ein,
far
Velusts.? Illeatsenap lit
SEE
File No.
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,
-no
7 7) '
Are as- am*
FEDERAL RESERVE BOARD
Form 156
THE FEDERAL RESERVE BOARD
CROSS REFERENCE SHEET
File No. 3.3.
"Roosevelt, As Candidate, Held FDIC infeasible"
Subject
AmeTIcan BanInT, Oct. 31, 1936
SEE
File No.
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
#7
FEDERAL RESERVE BOARD
Form 156
THE FEDERAL RESERVE BOARD
CROSS REFERENCE SHEET
File No. _#11B
from AMERICAN BANKER1 November 2, 1936, entitled Subject _flipping_
"Statement of Principles of Commercial Banking" prepared by
Bank Management Commission, kBA.
SEE
File No. #3A
Letter of
Dated
Remarks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
U. P.
.. ..Pit PRINTING MICK Iv2/
@FedFRASER