Full text of Bank Suspensions, 1892-1935
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332.11 Federal 1936 Bank Suspensions, 1892 - 1935 Federal Reserve System. Board of Governors Preliminary draft Confidential BANK SUSPENSIONS, 1892 - 1935 September 26, 1936 Preliminary draft Confidential BANK SUSPENSIONS, 1892 - 1935 Table of Contents Chapter I - Pa#e INTRODUCTION AND SUMMARY Introduction Summary II - 1 3 DISTRIBUTION OF BANK SUSPENSIONS Number of bank suspensions By years and periods By classes of banks By geographic divisions and States Deposits of suspended banks By years and periods, and by classes of banks By geographic divisions Ratio of nuraber of suspended banks to number of active banks By years and periods E y classes of banks j By geographic divisions and States Size of suspended banks, measured by loans and investments By classes of banks By geographic divisions Average size of suspended banks Suspension of very large banks 9 17 21 26 Size of suspended banks, measured by capital stock 37 Bank suspensions distributed by population of cities 38 Overbanking and bank suspensions 4-1 The age of suspended banks /+2 BANK SUSPENSIONS, 1892 - 1935 Table of Contents (Cont'd.) Chapter III Pagfc - SUSPENSIONS DURING 1930 - 1933 4-6 Effect of bank moratoria, holidays, etc., on bank suspension statistics IV 59 - FEDERAL AID TO BANKS Loans to open banks 6/+ Loans to closed banks 67 Strengthening of the capital structure of b?.nks following the banking holiday V 69 ~ LOSSES TO DEPOSITORS OF SUSPENDED BANKS Source and scope of data Losses in suspended banks reopened or taken over Losses in suspended banks which have been comjxLetely liquidated National banks State banks By geographic divisions and States Explanation : f differences in rate of loss in < national banks c spared with State banks 86 Losses by size of towns 88 Losses by year of suspension - 76 Losses by size of banks VI 72 89 80 EXPENSES OF LIQUIDATION AND LOSSES TO STOCKHOLDERS OF SUSPENDED BANKS Expenses of liquidation Losses to stockholders VII - 91 95 CAUSES OF BANK SUSPENSIONS 99 Preliminary draft Confidential BANK SUSPENSIONS. 1892-1935 CHAPTER I INTRODUCTION AND SUMMARY Introduction More than 13,500 banks with deposits of nearly $8,000,000,000 suspended operations on account of financial difficulties in the 13 years ended in 1933. About 7,800 of them with deposits of $6,000,000,000 closed in a period of slightly more than three years — from the beginning of 1930 up to and including the banking holiday in March 1933. Large as these figures are, they do not fully measure the extent of banking difficulties experienced during this period because many banks which were not technically classed as suspensions were reorganized through waiver of deposits. Local and finally State banking holidays were declared and various emergency measures were adopted to permit distressed banks to adjust their affairs without the intervention of receivership, but in spite of these measures banking difficulties became greatly intensified and culminated in the national banking holiday declared by the ^resident on March 6, 1933. Between 4,500 and 5,000 banks were not permitted to reopen following the holiday, of which more than 2,100 were eventually placed in liquidation or receivership. Because of the lack of essentietl data and of the fact that many of the banks that suspended during recent years are sti^.1 in process of liquidation, it is impossible as yet to determine definitely the amount lost to depositors t y reason of this volume of bank failures. Nor is it > possible to measure the inconvenience, indirect losses and paralyzing effect on business in general caused by the withholding in suspended banks of depositors' funds, even though ultimately in the liquidation process a fair percentage of return may be realized. It has been estimated^/, how- ever, that depositors of suspended banks sustained losses during the period 1865 to 1934 of about $3,4.00,000,000, of which amount nearly $3,150,000,000 was lost in banks that closed during the years 1921 - 1933. In the following chapters bank suspensions are analyzed in some detail by periods, geographic divisions, classes and sizes of banks, etc. In addition, available data are presented on losses sustained by depositors and stockholders and expenses of liquidation, followed by a general statement of causes underlying bank suspensions. Loans made by the Reconstruc- tion Finance Corporation to open and closed banks and purchases of capital obligations of banks by the Corporation are also discussed briefly in Chapter IV. 1/ Estimate prepared by the Federal Deposit Insurance Corporation. (See Table 33 of the 1934 Annual Report of the Federal Deposit Insurance C orporati on.) — 3 — Summary The principal points brought out in the following compilations and analyses are: 1. During the nine-year period 1921 - 1929, suspensions were concentrated largely in the agricultural sections of the country, but during 1930 - 1933 suspensions increased in number and spread into the industrial sections and financial centers of the East. Even during the later period, however, the agricultural sections of the country continued to show the largest number of suspensions. 2. The rate of suspension during the fifteen-year period 1921 1935 was considerably lower at member banks than at norimember banks: 32 national banks suspended in 1921 - 1935 per 100 active banks on June 30, 1920, 38 State member banks, and 51 nonmember State banks (excluding private .banks). 3. Many of the banks that suspended were of very small size. About 42 percent of the banks that suspended in the period 1921 1929 had loans and investments of less than $150,000, 62 percent less than $250,000, and 83 percent less than $500,000. During 1930 - 1933, with an increasing number of suspensions in larger cities, the size of suspended banks increased, but even in this period suspensions were relatively more numerous among small bcnks. The suspension rate was much higher at small than at large banks: The rate for banks with Ijans and investments under $150,000 was — 4 — 73 suspensions per 100 active banks on June 30, 1920j for banks with loans and investments of $150,000 to $250,000, 47 per 100 active banksj and for banks with loans and investments of $250,000 to $500,000 it was 33. As the size of banks increased, the suspension rate decreased. The higher rate of suspension among the smaller banks was due in part to the fact that the great majority of suspensions occurred in the agricultural sections — in small towns and cities — where the typical bank is relatively small in size. In the New England states, however, the small banks made a better showing than the larger institutions, and in the Middle Atlantic states the suspension rate was fairly uniform for banks in all size groups. As the depression grew steadily worse in 1930 - 1933 there was an increasing number of suspensions among banks in the larger size groups. A number of very large banks suspended during the later period — 30 suspended banks had loans and investments ranging f : r r>a $20,000,000 to $330,000,000, aggregating nearly $1,850,000,000, and 87 had loans and investments of $10,000,000 and more. Size alone, therefore, does not make banks failure-proof in the face of such difficulties as ?ro experienced during the depression. — 5 4. The majority of banks suspended during 1921 - 1935 were located in small communities — 33 percent in places with a population of under 500 and 72 percent in places with a population of under 2,500, The rate of suspension in places with a population under 500 was 52 banks suspended per 100 active banks in 1920, and in places with a population under 2,500 the rate was 4-9 banks suspended per 100 banks in operation; The rate of suspension declined as the size of community increased. Suspensions were most numerous, in general, in those regions where the number of banks showed the greatest increase prior to 1920 and where the population per bank was smallest in 1920. This supports the general opinion that overbanking was a prime cause of suspension. 5. Unsecured depositors of national banks which suspended and were completely liquidated during 1921 - 1930 received about 50 cents m the dollar, while unsecured creditors of national banks completely liquidated during 1931 - 1935 received about 62 cents the dollar. Unsedured depositors of State banks which suspended and were completely liquidated during 1921 - 1930 received approximately 58 cents on the dollar, but this higher rate resulted in part from the payments made out of deposit guaranty funds in the early years. Corresponding „ 6 — figures for State banks liquidated during 1931 - 1935 are not available. In general, the rate of loss to depositors of small banks and of banks in small communities was somewhat larger than the rate of loss at the larger institutions and at banks in larger cities. The rate of loss per $1 of deposits also was higher in the states where most suspensions occurred. Banks suspended during the early part of the period 1921 - 1930 generally paid a lower percentage of unsecured claims than banks suspended during recent years, partly because of the large amount of borrowings by banks that failed in the earlier years. In the case of suspended banks reopened and taken over during 1921 - 1930, unsecured dep )sitors sustained relatively small losses compared with those incurred by depositors in banks which were completely liquidated. About three-fourths of such banks paid depositors in full and about 11 percent paid under 60 cents on the dollar. Comparable figures for the period 1931 - 1935 are not available, but int the case of national banks unlicensed following the banking holiday in March 1933 and later reopened depositors received about the same return as in the case of suspended national banks reopened or taken over during 1921 - 1930. 6. An'?:.n^lysis of expenses of liquidating closed backs shows that in the case of national banks completely liquidated during 1921 - 1930 expenses averaged about 5 percent of the total resources of the banks at date of closing and 8.5 percent of total collections from assets. In the case of nati>nal banks completely liquidated during 1931 - 1935 expenses of liquidation declined to 4 # 7 percent )f total resources and 6.4 percent of total collections. Corres- ponding data f > State banks are not available except for three r States, where it appears that the ratios of expenses to total collections were slightly higher than the ratios for national banks in those States. During the period 1930 - 1933 many banks obtained agreements s with depositors to waive or surrender or t > defer the withdrawal of a part of their deposits. Local and State bank holidays were declared in order to give banks time in which t: do this and to readjust their affairs without the intervention of receivership. Because of these changes affecting the status of large numbers of banks and the intervention of the banking holiday in March 1933 and the reorganization of banks which followed, bank suspension statistics understate iho difficulties c mfrenting banks and depositors during this period. Early in 1932 the Reconstruction Finance Corporation began making loans to banks in an effort to prevent wholesale suspensions. By the end of 1932 loans amounting to $810,000,000 had been made. After the collapse of the banking structure in March 1933 the Reconstruction Finance Corporation began making loans on assets of closed banks to aid in the liquidation process. These loans enabled bank receivers to make available to depositors substantial sums that in the ordinary liquidation process would have carried over a long period of time. Loans of this kind amounted to $876,000,000 at the end of 1935. Folloy/ing the banking holiday the reorganization of the capital structure of banks presented a problem of sizable proportions. The Reconstruction Finance Corporation was authorized to purchase capital obligations of banks and, in addition, some local subscriptions to capital were obtained. At the end of 1935 the Reconstruction Finance Corporation had outstanding an investment of $865,000,000 in preferred stock and capital notes and debentures of banks. A clear-cut and well-defined enumeration of the causes of bank suspensions is difficult, or next to impossible, because the factors underlying suspensions are not of equal importance and usually occur in combination with many other so-called "causes". The principal factors generally recognized as responsible for bank failures, however, are weaknesses in the banking structure resulting from the chartering of too many small banks; incompetent bank management and improper supervision, resulting in lax loan and investment policies and heavy losses; over-extension of credit to directors and their interests; and general economic disturbances such as the recent depression, over which even competent bankers have little control. Dishonesty and criminal acts seem to be prime causes of failure in times when failures are relatively few in number, as has been the case in the last three years, but a general ?/ave of suspensions is not brought about by such acts. Preliminary draft Confidential ~ 9- BANK SUSPENSIONS. 1892 - 1935 CHAPTER II DISTRIBUTION OF BANK SUSPENSIONS Number of banK suspensions By years ana periods. In the years 1892-1935 a total of 16,562 banks suspended-i/, of which 2,926 closed during the 29-year period 1892-1920, 5,712 during the 9-year period 1921-1929, and 7,833 during the 4-year period 1930-1933. The number of suspensions each year from 1892 to 1935 is given in table 9; satisfactory statistics on bank suspensions prior to 1892 are not available. During the period from 1892 to 1921 there was a gradual but very great increase in the number of banks in operation, from about 11,500 in 1892 to a peak of 30,600 in 1921, after which there was a steady and eventually a sharp decline to 13,000 (licensed banks) in 1933. The great increase in the number of banks in operation during the period 1892-1921 reflects the easy chartering policies of supervisory authorities during a period of comparative banking prosperity. Because of the increase in price levels and land values and ex- pansion of agriculture and industry generally, many banks were able to operate 1/ Banks closed to the public, either temporarily or permanently, by supervisory authorities or by the banks1 boards of directors on account of financial difficulties, whether on a so-called moratorium basis or otherwise, unless the closing was under a special bank holiday declared by civil authorities. If a bank closed under a special holiday declared by civil authorities and remained closed only during such holiday or part thereof, it has not been counted as a bank suspension. Banks which, without actually closing, obtained agreements from depositors to waive a portion of their deoosits or to defer the withdrawal of a portion of their deposits have not been classed as suspensions Banks which were reopened or taKen over by other institutions after closing have been included as suspensions. For further statement regarding b^nks included as suspensions in 1933, incident to the banking holiday, see Chapter III. ~ 10 successfully under a loose loan and investment policy. Relatively few banks suspended during that periodl/, and in the case of those that did suspend the closing in many? Stanc€ ^as brought about by dishonesty or grossly injudicious management^/. When price levels declined in the post-war deflation period beginning with 1921 bank* suspensions became very numerous. This epidemic of suspensions continued during the generally prosperous years following and reached its peak in the depression years 1930-1933) culminating with the crisis in March 1933. 1/ The following quotation is taken from "American Bank Failures" by C. D. Bremer, p. 38: "Since the absence of any great number of failures during these decades of expansion and prosperity1 was rather an accidental occurrence, it cannot properly be cited as evidence of the soundness and adequacy of the banking system as a whole. It is true that depositors enjoyed safety, and that stockholders were paid large dividends. But it is not less true that during these years the foundation was laid for future difficulties. The belief in the permanence of this fortuitous state of affairs predominated, and the majority of bankers, located as they were in more or less isolated communities, paid little, attention to what was happening outside their immediate territory, and did not try to ascertain the trend of business and economic conditions in the country as a whole, let alone abroad. When war prosperity came, it was looked upon as a normal acceleration of the natural course of events, -and the possibility of a reaction was seldom, if ever, considered. Outward signs probably justified this optimism, but a consideration of the extravagances that were being indulged in — the unlimited granting of charters to all applicants, resulting in admission to the banking fraternity of thousands of incompetent individuals ana the establishment of a bank in practically every village or hamlet, the enactment of banking statutes of the flimsiest substance, and extreme laxity of supervision — would undoubtedly have resulted in the realization that it would be impossible to escape the consequences of such fair-weather banking." 2/ Fifty-eight percent of the failures of national banks during 1892-1920, as tabulated from the Annual Reports of the Comptroller of the Currency, were reported to have been caused by unlawful acts, and twenty-three percent by grossly injudicious acts. With the exception of the panic year 1893, the rate of bank suspensions from 1892 to 1920 was below or not far above 100 banks per year. In 1921 the number of suspensions increased to 505, in 1930 the number reached 1,350, in 1931 - 2,293, in 1932. - 1,453, aid in 1933 - 2,737^/With the closing of the weak banks and strengthening of the banking structure generally, following the banking holiday in March 1933, and the establishment of Fedc?ral deposit insurance for banks in January 193S suspension? decreased in number to 57 in 193^ < i 34 in 1935. ud By classes of banks. Of the 13,636 banks (exclusive of 12 mutual savings b.anks) that suspended in the 15 years from 1921 to 1935, 2,558 were national banks, 521 were State member hanKn, 9,968 were nonmember State banks, and 589 were private banks. in the appendix. Corresponding figures prior to 1921 are c > o ? :hvn The figures for the 15-year period, by years and by classes of banks, are summarized in Table 1? 2/ Includes, (l) 447 banks suspended from January 1 to March 15, 1933; (2) 179 banks that were licensed .after the banking holiday but which later closed (between March 16 and December 31, 1933) because of financial difficulties; ana (3) 2,111 banks which were not licensed following the banking holiday and which were subsequently (between March 16, 1933, and December 31, 1935) placed in liquidation or receivership. ~ 12 Table 1 — NUMBER OF BANK SUSPENSIONS, BY CLASSES OF BANKS A1ID BY YEARS, 1921-1935 Member banks Uomaeiriber banks Year Total, . All b-uiKSi/ 1921 192?. 1923 505 366 646 52 49 90 19 13 32 390 281 501 44 23 23 192-4 1925 1926 775 618 976 122 118 123 38 28 35 578 433 766 37 39 52 3.927 1928 1929 669 498 659 91 57 64 31 16 17 514 406 547 33 19 31 1930 1931 1932 1,350 2,293 1,453 161 409 276 27 107 55 1,104 1,697 1,085 58 80 37 1933 193-4 1935 2,737 57 34 941 1 4 103 1,593 43 30 100 13 13,636 2,558 521 9,968 589 National j State i — — State j Private — 1/ Exclusive of 12 mutual savings banks; for information with regard to such banks, see appendix. HOTS J Detailed figures by states, geographic divisions, classes of banks, years, etc., corresponding to this ana other text tables, appear in the appendix. By geographic divisions and States. While suspensions were numerous in all parts of the country during the 15-year period ended in 1935, the agricultural sections of the country were particularly affected by bank suspensions. Of the total 13,636 suspensions, 5,039 or 37 percent occurred in the V/est North Central states, comprising Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska and Kansas. The South Atlantic and the West South Central states, also largely agricultural, and the semi-agricultural East North Central states contributed another A3 percent of the total number of bank suspensions. The number of bank suspensions during the years 1921-1935 are distributed by geographic divisions in table 2? Table 2 — NUMBER OF BANK SUSPENSIONS BY GEOGRAPHIC DIVISIONS, 1921-1935 Number of suspensions Percent of total New England Middle Atlantic East North Central 130 721 2,638 1.0 5.3 19.3 West North Central South Atlantic East South Central 5,039 1,80-4 729 37.0 13.2 5.3 'west South Central Mountain Pacific 1,381 805 389 10.1 5.9 2.9 13,636 100.0 Geographic division!/ Total 1/ New England? Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut. Middle Atlantic: New York, New Jersey, Pennsylvania, Bast North Central? Ohio, Indiana, Illinois, Michigan, Wisconsin. West North Central? Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, Kansas. South Atlantic? Delaware, Maryland, District of Columbia, Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida. Bast South Central? Kentucky, Tennessee, Alabama, Mississippi. West South Central? Arkansas, Louisiana, Oklahoma, Texas. Mountain? Montana, Idaho, Wyoming, Colorado, New Mexico, Arizona, Utah, Nevada. Pacific? Washington, Oregon, California. - 14 More than 11,000 of the bank suspensions during the 15-year period, or 81 percent of the total number of banks suspending, occurred in 21 states, mostly agricultural states. In Iowa 1,197 banks suspended during the period, the greatest number reported for any state, in Illinois 918 banks suspended, in Missouri 808, and in Nebraska 737. Five other states, Minnesota, North Dakota, South Dakota, Indiana and Texas, each had a total of more than 500 suspensions during the period* The states in which the largest number of bank suspensions occurred are shown in table 3- Table 3 — STATES IN WHICH THE LARGEST NUMBER OF BANK SUSPENSIONS OCCURRED, 1921-1935 State Number of suspensions Iowa Illinois Missouri 1,197 918 808 Nebraska Minnesota North Dakota 737 69^ 587 South Dakota Indiana Texas 574 532 506 Georgia Kansas Michigan 466 442 442 Pennsylvania Oklahoma Ohio 431 406 387 Wisconsin North Carolina Arkansas 359 351 335 South Carolina Florida Montana 326 279 252 Total, 21 states Total, 28 other states!/ 1/ Including District of Columbia. 11,029 2,607 Hot only do the above States account for the great majority of all bank suspensions during the 15-year period as a whole, but the waves of bank f.ailures were more pronounced in these states than in other sections of the country. For example, in 1926 there was a sharp rise in the number of sus- pensions in most of these states with but little change in other sections of the country; in the South Atlantic states the rise in suspensions in 1926 was precipitated by the collapse of the Florida real estate boom and the failure of the Witham chain of banks; in the West North Central states crops were smaller in 1926 than in the previous year and prices lower, resulting in an increase in the number of bank suspensionst The New England and Middle Atlantic states were comparatively free from bank suspensions until the depression years of 1930-1933. In the U-year period 1930-1933, however, 116 suspensions occurred in the New England states, compared with but lA in the period 1921-1929; in the Middle Atlantic states 638 suspensions were reported during the four depression years, compared with only 68 in the previous 9 yearsf Nevertheless, even for the 4-year period, the Hew England stakes contributed only 1.5 percent and the Miudle Atlantic states about 8 percent of the total suspensions in the country. Differences in the geographic distribution of suspensions during the depression period 19301933, compared with the 9-year period 1921-1929, are shown in table ~ 16 - Table 4 — NUMBER OF BANK SUSPENSIONS BY GEOGRAPHIC DIVISIONS, 1930-1933 AND 1921-1929 Geographic division 1930--1933 IJuaber Percent of of suspensions total 1921-1929 Number Percent of of suspensions total Mow England Middle Atlantic Sast North Central 116 638 2,157 1.5 8.2 27.5 447 Wast North. Central South Atlantic Sast South Central 2,366 809 527 30.2 10.3 6.7 2,652 985 200 West South Central Mountain Pacific 694 680 536 130 11.9 258 8.9 3.4 3.3 7,833 100.0 5,712 100.0 Total 268 14 68 .3 1.2 7.8 46,4 17.2 3.5 9.4 2.3 A distribution of suspensions during the four depression years and during the 9-year period 1921-1929, among the ten states -vith the largest number of bank suspensions in the respective periods, may be seen in table 5. It will be noted that in both periods Iowa, Minnesota, Nebraska and Missouri were among the ten states with the largest number of suspensions. ~ 17 Table 5 — TEH STATES IN v f l H THE LARGEST NUMBER OF BANK SUSPENSIONS fiC OCCURRED DURING 1930-1933 AND DURING 1921-1929, RESPECTIVELY Number of suspensions 1930-1933 S.Tt t-.e State Number of suspensions 1921-1929 Illinois Iowa Missouri 783 668 501 Iowa North Dakota Minnesota 529 427 419 Indiana Pennsylvania Michigan 403 389 374 South Dakota Nebraska Georgia 396 366 357 Nebraska Ohio Minnesota 367 326 274 Missouri Texas Oklahoma 295 284 264 Wisconsin 271 South Carolina 225 4,356 Total Total 3,562 Deposits of suspended banks. By years and periods, and by classes of banks. Satisfactory figures of deposits of banks suspended prior to 1921 are not available. Deposits of banks suspended in the 15 years ended 1935 aggregated nearly §8,000,000,000. In 1933 alone deposits of suspended banks amounted to $2,883,000,000. In 1930 deposits of suspended banks were $837,000,000, in 1931, #1,690,000,000, and in 1932 $706,000,000. The total for the four depression years 1930-1933 was over $6,000,000,000. Deposits of national banks suspended in the 15 years ended in 1935 amounted to £2,646,000,000, of State member banks to $1,378,000,000, of nonmember State banks to $3,652,000,000, and of private banks to $110,000,000. Table 6 gives these figures by years and classes of banks. ~ 18 Table 6 — DEPOSITS OF SUSPENDED BAHKS, BY CLASSES OF BANKS AIJB BY YEARS, 1921-1935 Total, , All bank si' Year Member banks National State llonmember banks State Private^/ (in thousands of dollars) 1921 1922 1923 172,188 91,182 1-49,601 20,777 20,197 34,244 17,363 7,113 12,559 125,159 61,964 101,025 8,889 1,908 1,773 192-4 1925 1926 210,151 167,555 260,378 64,890 55,574 43,998 13,645 9,883 23,466 123,888 94,547 183,517 7,728 7,551 9,397 1927 1928 1929 199,329 142,386 230,643 45,547 36,483 41,614 17,942 10,247 16,459 131,503 92,710 164,858 4,337 2,946 7,712 1930 1931 1932 837,096 1,690,232 706,188 170,446 439,171 23.4,150 202,399 293,957 55,153 448,989 935,947 429,079 15,262 21,157 7,806 1933 1934 1935 2,882,712 36,937 10,099 1,453,898 40 5,313 697,529 718,932 35,456 4,786 12,353 1,441 7,786,677 2,646,342 1,377,715 3,652,360 110,260 Total — 1/ Excluding t'30,474,000 deposits of mutual savings banks suspended during the period. 2/ Deposit figures for 115 of the 589 private banks which suspended during 1921-1935 are not available. By geographic divisions. Table 7 shov/s the distribution, by geogranhic divisions, of deposits of bomcs suspended during the 15—year period 1921-1935. Table 7 — DEPOSITS OF SUSPENDED BANKS BY GEOGRAPHIC DIVISIONS, 1921-1935 Deposits of suspended banks (in thousands of dollars)! Geographic division Percent of total New England Middle Atlantic East North Central 374,076 1,371,544 2,515,502 •4.8 17.6 32.3 West North Central South Atlantic East South Central 1,269,437 884,677 319,236 16.3 11.4 4.1 West South Central Mountain Pacific 539,413 251,348 261,444 6.9 3.2 3.4 7,786,677 100.0 Total It will be noted that the East North Central states account for nearly one-third of the deposits of all suspended banks, although as previously indicated only about one-fifth of the number of bank suspensions occurred in these states. In contrast, the West North Central states in which 37 percent of the total number of bank suspensions took place account for only 16 percent of the deposits of suspended banks. The differences in the geographic distribution of bank suspensions, based on the number of suspensions and on deposits of suspended banks, respectively, are shown clearly in table 8. The differences reflect the closing of many large banks in the later years, since the percentage distribution of the number of suspensions was similar to the percentage distribution of deposits of suspended banks .in 1921-1929 but not in 1930-1933. ~ 20 Table 8 — PERCENTAGE DISTRIBUTION OF THE NUMBER AND DEPOSITS OF SUSPENDED BANKS, BY GEOGRAPHIC DIVISIONS, 1930-1933 AND 1921-1929 Geographic division Hew England Middle Atlantic East North Central 1930-1933 1921-1929 Percent Percent of Percent of Percent of total total deposits of total total deposits suspensuspenof suspended of suspended sions banks sions banks 1.4 5.7 1.5 .3 20.6 4.8 8.2 1.2 38.6 7.8 9.1 27.5 West North Central South Atlantic East South Central 30.2 10.3 6.7 10.4 9.4 4.4 46.4 17.2 3.5 38.9 19.0 3.2 West South Central Mountain Pacific 8.9 3.4 3.3 6.2 1.7 3,0 11.9 9.4 2.3 10.0 9.0 4.6 100.0 100.0 100.0 100.0 Total It will be noted that, in the period 1921-1929, susoensions in the West North Central states constituted 46 percent of the total number and 39 percent of the total deposits of suspended banks; in the South Atlantic states the ratio was 17 percent as to nuiiber and 19 percent as to deposits; and in the East North Central states 8 percent as to number and 9 percent as to deposits of suspended banks. In the period. 1930-1933, however, due to the failure of larger banks in the eastern section of the country, the West North Central states with 30 percent of the total number of bank suspensions accounted for only 10 percent of the total deposits of suspended banks; the South Atlantic states accounted for 10 percent of the number and 9 percent of the denosits; and the East North Central states (in which the largest banks suspended) accounted for 28 percent of the number and 39 percent of the deposits of suspended banks. ~ 21 Ratio of number of suspended banks to number of active banks. By years and periods. Differences in the annual rate of bank sus- pensions during 1892-1935 are brought out in table 9, which gives the number of suspensions per 100 banks in operation. The table shoxvs that the annual rate of suspensions during the period 1892-1920 was less than 1 bank per 100 in operation, except in 1893, 1896 and 1897. During the period 1921-1933 the ratio of suspended banks to active banks was much higher. In 1930 nearly 6 banks suspended per hundred active banks, in 1931 - 11, in 1932 - 8, and in 1933 - 19 banks suspended per 100 banks in operation. Table 9 — NUMBER OF BANK SUSPENSIONS PEE 100 ACTIVE BANKS, BY YEARS, 1892-1935 If Number of suspensions Year Number of suspensions Suspensions per 100 active banks 1892 1893 1894 1895 1896 80 491 83 110 l4l .7 4.1 .7 .9 1.2 1914 1915 1916 1917 1918 149 152 52 49 47 .5 .5 •2 .2 .2 1897 1898 1899 1900 1901 139 63 32 35 65 1.2 .5 .3 .3 .4 1919 1920 1921 1922 1923 62 167 505 366 646 .2 .6 1.7 1.2 2.2 1902 1903 1904 1905 1906 54 52 125 80 53 .3 .3 .7 .4 .3 1924 1925 1926 1927 1928 775 618 976 669 498 2.7 2.2 3.5 2.5 1.9 1907 1908 1909 1910 1911 90 153 78 58 85 .4 .6 .3 .2 .3 1929 1930 1931 1932 1933 659 1,350 2,293 1,4 53 2,737 2.6 5.7 10.6 7.8 19.4 1912 1913 78 103 .3 .4 1934 1935 57 34 .4 .2 Year Suspensions per 100 active banks 1/ Includes national banks, State banks, and private banks suspended; excludes mutual savings banks suspended, See appendix for corresponding figures by class of bank, for information with respect to the 12 mutual savings banks reported suspended 1921-1935, and for statement of how the number of active banks each year was derived. ~ 23 In the following discussions the number of bank suspensions during the period 1921-1935 is compared with the number of banks in operation on June 30, 1920. The year 1920 was used as the base because it marked approximately the beginning of the banking difficulties experienced during 1921-1933 and because it was near the peak in the number of banks in operations!/. By classes of banks. Table 10 shows that during 1921 - 1935, 32 national banks suspended for each 100 national banks in operation in June 1920, compared with 3S State bank members, 51 nonmember State banks and Uk private banks, respectively, per 100 of such banks in operation in 1920. Although the suspension rate2/ was high for all classes of banks, it is apparent that national banks had a better record than other c?uasses of banks. Table 10 — NUL1BER OF BANK SUSPENSIONS 1921-1935 PER 100 ACTIVE BANKS ON JUNE 30, 1920, BY CLASSES OF BANKS Class of bank National banks State member banks Nonmember State banks Private banks Total , all banics Number of suspensions during 1921-1935 per 100 active banks on June 30, 1.920 31.9 37.9 51.2 A3.6 -45.1 1/ A comparison of suspensions each year with active banks in that year would be jnore logical than the use of June 30, 1920, as a base of comparison for the entire period, but figures by size of active banks (used hereafter in connection with the size of suspended banks) are not available for each year. 2/ Except where otherwise stated, the terra "suspension rate" as used here and in subsequent pages means the number of suspensions per 100 active banks on June 30, 1920. ~ 24 By geographic divisions a i States» rd In proportion to the number of banks in operation, there were more suspensions in the South Atlantic and the West North Central States than in any other groups; in each of these groups suspensions during the 15-year period amounted to about 55 for each 100 banks in operation in June 1920. In the East North Central States there were 45 suspensions per 100 active banks, and in the East South Central and West South Central States the rate was 40 suspensions per 100 active banks*. There were fewer suspensions compared with banks in operation in the New England and Middle Atlantic States than in other groups; the States comprising the New England division showed 17 banks suspended and those comprising the Middle Atlantic division showed 25 banks suspended for each 100 banks in operation on June 30, 1920. The rate of bank suspensions in each geographic division is shown in table 11. Table 11 — NUMBER OF BANK SUSPENSIONS 1921-1935 PER 100 ACTIVE BANKS ON JUNE 30, 1920, BY GEOGRAPHIC DIVISIONS Geographic division Number of suspensions during 1921-1935 per 100 active banks on June 30% 1920 New England Middle Atlantic East North Central 44.7 West North Central South Atlantic East South Central 5-4.6 55.5 40.0 West South Central Mountain Pacific 40.2 50.7 Total, all banks 17.3 25.2 28.0 45.1 ~ 25 Table 12. shows the 18 States in which there we re more than 50 suspensions during 1921-1935 per 100 active banks on June 30, 192,0, The suspension rate was highest in Florida!/, South Dakota, South Carolina, Arkansas, North Dakota, Nevada, Iowa, Nebraska and Georgia, ranging from 60 to 107 suspensions during 1921-1935 per 100 active banks on June 30, 1920. It will be noted also that such States as Nevada, Arizona, New Mexico, Idaho .and Louisiana, where the absolute number of suspensions during the 15-year period was not large, the number of suspensions expressed as a ratio to the number of banks in operation was quite high because of the relatively small number of banks in operation in those States. 1/ In some States, particularly Florida, the use of June 1920 figures for active banks -as a base for comparison with suspension figures gives a somewhat distorted picture becauso of the organization of new banks after 1920/ ~ 26 Table 12 — STATES WITH MORE THAN 50 BANK SUSPENSIONS DURING 1921-1935 PER 100 ACTIVE BANKS Number of suspensions 1921 - 1935 Suspensions during 1921-1935 per 100 active banks on June 30, 1920 Florida South Dakota South Carolina 279 574 326 107.3 82.7 71.8 Arkansas North Dakota Nevada 335 587 21 68.9 65.4 63.6 1,197 737 466 61.9 61.6 61. i North Carolina Mississippi Montana 351 198 252 60.5 58.9 58.5 Arizona New Mexico Idaho 49 69 120 56.3 56.1 54.1 Michigan Indiana Louisiana 442 532 134 51.0 50.5 50.1 States Iowa Nebraska Georgia Size of Suspended banks» measured by loans and investments^ Of the 13,636 banks suspended in the 15-year period 1921-1935, 5,138 had loans and investments under £150,000 each, 7,618 had loans and investments under §250,000, and 11,959, or 88 percent of the total number of suspended banks, had loans and investments under $1,000,000 each* Because of the pre- 1/ Loans and investments, rather than deposits, were used as a measure of size of suspended banks and of active banks by the Federal Reserve Committee on Branch, Group, and Chain Banking. In order to tie in with the data prepared by that committee, loans and investments have been used as a measure of size of banks in the present study. Total loons and investments bear a close relationship to total deposits; consequontly,*..for the purpose at hand the use of total loans and investments as a basis of classification ^ives as satisfactory results as the use of total deoosits. ~ 27 ponderance of small banks in the banking structure, the rate of suspensions per 100 banks was not quite as high at snail banks as these figures indicate; it was, however, much higher than at the larger banks, as may be seen from the percentages shown in the last column of table 13» Table 13 — NUMBER AND PERCENTAGE DISTRIBUTION OF ACTIVE BANKS ON JUNE 30, 1920 AND OF BANK SUSPENSIONS DURING 1921-1935, BY SIZE OF LOANS AND INVESTMENTS Size group — loans and investments Active banks on Bank suspensions, Ratio of suspensions 1921-] June 30, 1920 L935 1921-1935 per 100 Percent Percent active banks on Number Number June 30, 1920 of total. of total Under §150,000 §150,000 to $250,000 $250,000 to §500,000 7,066 5,321 7,165 23.4 17.6 23.7 5,138 2,480 2,728 37.7 18.2 20.0 72.7 46.6 38.1 $500,000 to$l,000,000 $1,000,000 to $2,000,000 $2,000,000 to $5,000,000 5,059 2,755 1,577 16.8 9.1 5.2 1,613 791 457 11.8 5.8 3.4 31.9 28.7 29.0 $5,000,000 to $10,000,000 $10,000,000 to §50,000,000 §50,000,000 and over 508 369 72 1.7 1.2 .2 143 82 9 1.0 .6 .1 28.1 22.2 12.5 Not available 343 1.1 195 1.4 56.9 30,235 100.0 13,636 100.0 45.1 Total ~ 28 It will be noted that among banks with loans and investments under 0150,000 the suspension rate was 73 banks suspended during 1921-1935 per 100 banks in operation on June 30, 1920^/; in the size group with loans and investments from $150,000 to §250,000, 47 banks suspended per 100 active banks; and in the group with loans and investments from $250,000 to banks suspended per 100 active banks. $500,000, 38 The rate of suspension declined from group to group with the increase in size of banks. Due, however, to the failure of quite a number of large and medium size banks in the latter part of the 15-year period 1921-1933, the percentage distribution of the number of bank suspensions changed considerably between 1921-1929 and 1930-1933• Table 14 shows that about 83 percent of all banks suspended during the 9-year period had loans and investments below 0500,000, while during the 4-year period 1930-1933. banks of that size accounted for 70 percent of all suspensions. Conversely, banks with loans and investments over $1,000,000 accounted for 16 percent of all suspensions in 1930-1933 and only 8 percent in 1921-1929. 1/ As previously indicated, June 30, 1920, has been used as a base for active banks, though the distribution of banks by states and by size groups changed somewhat from year to year during the 15-year period. For example, most of the suspensions during the period occurred among the relatively small banks, with a consequent decrease in the proportion of active banks in the smaller size groups; the number of banks in the larger size groups on the other hand, was increasing at the same time through mergers, consolidations, etc. Hence the use of 1920 as a base against which to compare suspensions tends to show lower suspension rates for banks in the smaller size groups and higher rates in the larger size groups. This tendency is partly offset, however, by the fact that banks ordinarily liquidate loans and investments in meeting deposit withdraxvals prior to suspension and at the time of suspension, therefore, banks are usually smaller than they are as active solvent institutions. This factor tends to raise the suspension rate among small banks. These factors exist with more or less equal force whatever year or combination of years may be taken as a base and usually affect a relatively small number of cases which fall close to the border line between the various size groups. In any event, figures of active banks by size of banks are not available by years and it is not possible, therefore, to compare suspensions each year with the active banks in that year. ~ 29 - Table lA — NUMBER AND PERCENTAGE DISTRIBUTION OF BANK SUSPENSIONS GROUPED BY SIZE OF LOANS AND INVESTMENTS, 1930-1933 AND 1921-1929 Size group — loans and investments 1930-1933 Number of suspensions 1921-1929 Percent of total Number of suspensions Percent of total Under $150,000 150,000 to 250,000 250,000 to 500,000 2,681 1,32-4 1,532 34.2 16.9 19.6 2,404 1,1-47 1,182 42.1 20.1 20.7 500,000 to 1,000,000 1,000,000 to 2,000,000 2,000,000 to 5,000,000 1,068 583 379 13.6 7.5 -4.8 539 206 74 9.4 3.6 1.3 128 78 9 1.6 1.0 .1 13 4 .2 .1 51 .7 143 2.5 7,833 100.0 5,712 100.0 5,000,000 to 10,000,000 10,000,000 to 50,000,000 50,000,000 and over Not available Total — — It is apparent from the above table that, although the proportion of suspensions among banks of larger size increased in the latter part of the 15year period, the small banks continued nevertheless to show the highest mortality rate. Prolonged depression in agriculture affecting primarily the small communities with their small banks explains to some extent the continued poorer showing for the small banks. The fact that an increasing proportion of large banks suspended in the A years 1930-1933 suggests, however, that mere size alone in banks does not make them failure-proof. By classes of banks. An analysis of the number of suspensions by classes of banks and by size of loans and investments indicates that the rate of suspension during 1921-1935 per 100 active banks on June 30,1920 was somewhat higher at small national banks (with loans and investments below $250,000) ~ 30 - than at small State banks. In all size groups comprising banks with loans and investments of $250,000 and over, the rate of mortality was higher in the case of State banks than in the case of national banks. This is brought out in table 15. Table 15 — BANK SUSPENSIONS BY CLASSES OF BANKS AND BY SIZE OF LOANS AND INVESTMENTS, 1921-1935 Size group — loans and investments Member banks Total, All National State banks Number of bank suspensions Nonmember banks State Private Under ^150,000 150,000 to 250,000 250,000 to 500,000 5,138 2,480 2,728 273 405 701 74 71 114 4,555 1,937 1,844 236 67 69 500,000 to 1,000,000 1,000,000 to 2,000,000 2,000,000 to 5,000,000 1,613 791 457 559 340 189 111 57 41 921 386 2.24 22 8 3 5,000,000 to 10,000,000 10,000,000 to 50,000,000 50,000,000 and over 143 82 9 62 26 3 23 24 6 58 32 ——«• Not available 195 — 11 184 Total 13,636 9,968 589 — 2,558 521 Number of bank suspensions 1921-1935 per 100 active banks on June 30, 1920 Under £150,000 150,000 to 250,000 250,000 to 500,000 72.7 46.6 38.1 79.1 53.4 34.5 2/7A.6 500,000 to 1,000,000 1,000,000 to 2,000,000 2,000,000 to 5,000,000 31.9 28.7 29.0 25.7 23.9 23.3 36.7 33.8 34.8 5,000,000 to 10,000,000 10,000,000 to 50,000,000 50,000,000 and over 28.1 22.2 12.5 23.8 14.1 8.1 32.7 30.3 17.1 45.1 31.9 50.3 Total 46.1 39.6 1/ The suspension rate (per 100 active banks) is not shorn for private banks because loan and investments figures are not available for 3^3 active private banks and for 184- private banks suspended. This would impair the value of figures for private banks, but, as may be seen by reference to table 16, it affects the suspension rate for all banks only slightly. 2/ The ratios in this column relate to all State banksj separate figures are not available for State member and nonmember banks, respectively. The higher "rate of suspension" (per 100 active banks) at small national banks than at small State banks„ results from the fact that there were relatively fearer snail national banks than small State banks in operation in June 1920; conversely, the lower rate of suspension at large national banks conies about from the fact that there were relatively many more large national banks than large State banks in operation in June 1920. This shows ..also that the rate of mortality has been high in the case of small banks regardless of whether they were under national or State supervision, but that large banks under national supervision have been less subject to failure than large banks under varied State supervision. By geographic divisions. Corresponding information by geographic divisions indicates that, with the exception of the New England and Middle Atlantic regions, the highest rate of bank failures was among the banks with loans and investments under $150,000, also that the rate declined as the size of banks increased. In the New England states the suspension rate was highest among banks with loans and investments of #5,000,000 to $50,000,000; in the Middle Atlantic states the suspension rate differed relatively little by size of bank, ranging from 20 to 30 suspensions during 1921-1935 per 100 active banks in June 1920 in each size group under $50,000,000 loans and investments. ~ 32 Table 16 — Size group — Loans and investments (000 omitted) NUMBER OF SUSPENSIONS DURING 1921-1935 PER 100 ACTIVE BANKS O l JUNE 30, 1920, BY GEOGRAPHIC DIVISIONS AND BY SIZE OF i LOANS AND INVESTMENTs!/ East West South East West Total, New Middle North North South South MounEng- AtlanAtlanPacifi< All Cen- CenCen- Cen- tain land tic tic banks tral tral tral tral Under £150 150 to 250 250 to 500 74.9 47.2 38.1 6.7 4.6 26.0 30.4 26.5 78.8 85.0 86.7 53.3 48.4 53.7 52.8 33.6 37.2 41.0 49.7 38.1 59.8 33.0 29.9 70.8 50.5 43.5 55.5 39.5 31.4 500 to 1,000 1,000 to 2,000 2,000 to 5,000 31.9 28.6 28.9 15.5 18.1 22.0 27.6 23.9 25.7 37.0 31.2 38.9 34.2 26.6 39.8 42.7 22.8 41.3 27.9 29.1 23.1 45.7 31.9 18.5 15.9 17.9 13.5 5,000 to 10,000 10,000 to 50,000 50,000 and over 28.1 22.2 12.5 24.5 27.3 30.0 20.0 5.6 37.6 20.9 27.8 12.5 — 27.8 27.6 17.6 25.0 28.9 46.2 17.4 — — 100.0 29.4 — — 45.1 16.6 25.8 44.8 55.5 40.1 50.7 28.1 Total — 54.3 31.9 31.1 31.0 39.7 — 14.3 12.8 1/ Covers national and State bonks only, figures for active private banks on June 30, 1920, by size of loans and investments and geographic divisions not being available. The contrast in the rate of bank suspensions by size of banks, as between Northeastern states (Hew England and Middle Atlantic) and the other geographic regions suggests that the size of suspended banks is determined, in part at least, by the type of community in which the bank is located and by economic factors within the region. In the New England and Middle Atlantic sections agricultural activities differ from those in most other sections. There is a different type of agriculture, with big markets nearby for the in the East products, and outlying agricultural communities/have not suffered to the same extent as agriculture in other sections of the country. The re- sulting higher degree of stability has aided the snail b*?nks in outlying agricultural communities. On the other hand, in the large industrial and ~ 33 financial centers in the East which suffered from severe business depression beginning in 1929-1930, the larger banks were called upon to n;:et a constant and prolonged strain which proved too great for many of then, resulting in the later years in a high suspension rate among the larger banks. Average size of suspended banks. It has been previously pointed out that most of the suspensions during 1921-1933 occurred within the agricultural and semi-agricultural regions where the average bank is small in size. Table 17 gives the average size of active banks on June 30, 1920 and the average size of banks suspended during 1921-1935 by geographic divisions. Table 17 — AVERAGE SIZE OF ACTIVE BANKS JUNE 30, 1920 AND OF SUSPENDED BANKS 1921-1935, BY GEOGRAPHIC DIVISIONS Geographic division Average loans and investments per bank (in thousands of dollars) of active bantes of suspended banks on June 30. 1920 1930-1933 1921-1929 New England Middle Atlantic East North Central 3,488 4,73.8 1,357 3,746 2,630 1,338 2,420 West North Central South Atlantic East South Central 515 863 652 316 264 393 310 V/est South Central Mountain Pacific 623 623 1,824 612 464 829 295 345 651 1,252 958. 332 Total 869 657 4o4 It will be noted that the average bank suspended in the period 19301933 was nearly three tines the size of the average bnnk suspended in the 9-year period 1921-1929, because of the suspension/^juite a nunber of large banks in the later period. The use of average figures tends, however, to obscure the true size of the great bulk of the suspensions. For exanple, - 34the average size in terms of loans and investments of banks suspended during 1930-1933 was $958,000 but 30 banks accounted for #1,850,000,000 of the total loans and investments of all banks suspended during this period. If these large banks were removed from the figures, the average size of banks suspended during 1930-1933 would be »;7l4,000 in tern of loans and investments. On June 30, 1920, the average bank had loans and investments of $1,252,000. As table 17 shows, the average size of banks suspended increased in all sections of the country in 1930-1933 over 1921-1929, but particularly in the East North Central States in which the largest failures occurred. It will also be noted that in most regions the average size of banks suspended in 1930-1933 was close to the average size of active banks in the respective regions. Suspension of very large banks. As previously stated, 30 of the banks suspended in 1930-1933 had total loans and investments aggregating 01,850,000,000, comprising 2<5 percent of the total loans and investments of all banks suspended during this period. The individual bank figures ranged from v20,000,000 to §380,000,000 and five of the banks had loans and investments ranging from $100,000,000 to 0380,000,000 each. These five are the Bank of the United States, Hew York City, which closed in the latter part of 1930, and the Guardian National Bank of Commerce and the First National Bank, both of Detroit, the Union Trust Company and the Guardian Trust Company, both of Cleveland, which closed with the banking holiday in 1933 nnd were ultimately placed in liquidation or receivership. The suspension of these large banks had a direct effect on other banks whose correspondent accounts were deposited with them and a profound psychological effect on bank depositors generally, and doubtless contributed in an important degree to the closing of many banks in various parts of the country• The number of suspensions indirectly attributable to the suspension of very large banks cannot of course be measured, but it is obvious that the effect is much more disastrous than the failure of many small banks. Table 18 gives the name and location, date of suspension, class of bank, total loans and investments, and total deposits of the 30 largest banks which suspended during 1921-1935. - 36 Table 18 — THIRTY LARGEST BANKS WHICH SUSPENDED DURING 1921-1935 (Arranged according to amount of loans and investments) Name and location of bank Class Loans Date and in- Deposits of of i/ suspension bankR vestments (thousands of dollars) Nat. 379,788 373,360 5-12-33 S.M. 213,403 161,000 12-11-30 S.M. 189,563 194,906 6-16-33 First National Bank of Detroit Bank of United States Union Trust Company Detroit, Mich. New York, N.Y. Cleveland, Ohio Guardian Trust Company Guardian National Bank of Commerce Canal Bank & Trust Company Cleveland, Ohio 6-16-33 S.M. 122,038 109,752 Detroit, Mich. New Orleans,La. 5-12-33 5-22-33 Nat. S.M. 109,856 60,720 108,103 58,012 First Central Trust Company B m k of Pittsburgh, N.A. Baltimore Trust Company Bankers Trust Company Akron, Ohio Pittsburgh, Pa. Baltimore, Md. Philadelphia,Pa. 6-21-33 9-19-31 8- 7-33 12-22-30 S.M. Nat. S.M. Non. 59,795 58,426 57,832 47,932 41,845 43,759 30,642 44,497 Hibernia Bank & Trust Co. Ohio Savings Bank & Trust Co. National Bank of Kentucky Franklin Trust Company New Orleans,La. Toledo, Ohio Louisville, Ky. Philadelphia,Pa. 5-22-33 8-17-31 11-15-30 10- 6-31 S.M. Non. Nat. Non. 47,535 44,261 37,721 35,763 52,860 38,692 37,830 21,777 American Savings Bk. & Tr.Co. Fidelity National Bk. & Tr.Co. Federal National Bank Harriman National Bk. & Tr.Co. Davenport, Ia« Kansas City, Mo. Boston, MasSt New York, N. Y. 10- 1-31 7-24-33 12-15-31 10-16-33 S.M. Nat. Nat. Nat. 31,357 29,749 28,484 25,944 26,858 18,407 24,000 22,630 City Bank & Trust Company Security Hone Trust Company Fletcher American National Bk. Worcester Bank & Trust Co. Hartford, Conn Toledo, Ohio Indianapolis, Inc Worcester, Mass. 1- 2-32 6-16-31 8-24-33 6-12-33 Non, Non. Nat. S;M.. 25,755 25,148 24,235 24,045 23,512 25,192 15,269 23,453 Union Trust Company Union Savings Bk. & Trust Co. Central National Bank Commerce Guardian Trust & Savings Bank Dayton, Ohio Davenport, Iowa Oakland, Calif. 10-30-31 12-28-32 4-24-33 S.M. Non. Nat. 23,553 22,315 22,096 20,156 12,525 18,651 Toledo, Ohio 8-17-31 S.M. 20,756 15,458 The George D. Harter Bank Old First National Bank & Trust Company Central Bank & Trust Company East Tennessee National Bank Canton, Ohio 10-22-31 Non. 20,591 17,982 Fort Wayne, Ind. Asheville, N.C. Knoxville, Tenn. 10-30-33 11-20-30 1-20-33 Nat. Non. Nat. 20,175 20,124 19,952 12,464 17,563 9,000 Total 1/ Nat. - National bank* S.M. 1,848,912 1,620,155 State member bank; Non. - Nonmember bank. ~ 37 Size of suspended banks, measured by capital stock. Capital stock is not as good a measure of size of banks as loans and investments or deposits, because it is determined in part by requirements of law and because of the practice of some banks of building up large surpluses rather than increasing capital stock. Capital stock has been rather widely used, however, as a neasure of size of suspended banks and,accordingly, a summary in terms of capital stock is shown in table 19, with details in the appendix. Table 19 — BANK SUSPENSIONS 1921rl935, GROUPED BY SIZE OF CAPITAL STOCK Size group — capital stock Number of suspensions Percent of total Under $25,000 4,315 31.6 25,000 to 50,000 4,315 31.6 50,000 to 100,000 2,541 18.7 100,000 and over 2,465 18.1 13,636 100.0 Total It will be seen that 11,171 banks, representing 82 percent of the 13,636 suspensions during 1921-1935, had capital stock of less than $100,000 each; 8,630, or 63 percent of the total, had capital stock of less than $50,000? and A,315 suspended banks, or 32 percent of total suspensions, had capital stock of less than <£25,000 each. This again indicates that suspen- sions were more numerous among small banks than among large banks. ~ 38 - Bank suspensions distributed by population of cities. Of the 13,636 banks suspensions during 1921-1935, ^,524 or 33 percent occurred in towns of less than 500 population, and 9,748 banks or 71 percent in towns of less than 2,500 population. percent Only 734 banks, or 5- of total suspensions, were among banks in cities of a population of 100,000 and over. Corresponding figures by classes of banks show a much smaller percentage of national banks than of State banks suspended in places of low population — only 10 percent of the national bank suspensions we re in places of less than 500 population, compared with 39 percent in the case of nonmember State banks and lA percent in the case of State member banks% This difference in the rate of suspension of national banks and State banks in small places follows, of course, from the fact that relatively fewer national than State banks are located in small towns and villages. Although there were many more bank suspensions in small than in large places, the differences in the rates of suspension (per 100 active banks) were not nearly as marked, due, of course, to the fact that such a large number of banks (particularly State banks) cperate in small cities, towns and villages. This may be seen from table 20, which shows the number of bonk suspensions as well as the suspension rates. ~ 39 Table 20 — NUMBER AND RATE OF BANK SUSPENSIONS BY POPULATION OF CITIES 1921-1935 Population of city Total, All banks Nonmember banks Member banks National State State Private Number of bank suspensions Under 500 500 to 1,000 1,000 to 2,500 4,524 2,601 2,623 264 441 710 71 75 99 3,918 1,955 1,736 271 130 78 2,500 to 5,000 5,000 to 10,000 10,000 to 25,000 1,224 749 666 403 281 229 78 38 49 725 4l4 382 18 16 6 261 254 734 78 45 107 23 22 66 155 176 507 5 11 54 13,636 2,558 521 9,968 589 25,000 to 50,000 50,000 to 100,000 100,000 and over Total Rate of suspension per 100 active banks on June 30, 1920 Under 500 500 to 1,000 1,000 to 2,500 51.6 48.0 4 5.0 39.5 37.9 33.3 2/52.5 51.0 51.7 2,500 to 5,000 5,000 to 10,000 10,000 to 25,000 39.9 36.6 38.1 30.1 30.3 28.5 47.5 48.6 46.3 25,000 to 50,000 50,000 to 100,000 100,000 and over 34.1 38.1 41.1 10.2 19.6 23.6 41.3 47.8 48.4 45.3 31.9 50.3 Total i! 1/ The suspension rate in the case of private banks is somewhat impaired because a complete distribution of active private banks in 1920, by population, is not available. 2( The ratios in this column relate to all State banks; separate figures are not available for State member and nonmember banks, respectively. It will be noted that, talcing all classes of banks as a whole, 52 banks for each 100 banks in operation on June 30, 1920, suspended during 1921-1935 in places of less than 500 population, 48 in places of 500 to 1,000 population, ~ 40 and 45 in places of 1,000 to 2,500 population, with a somewhat further declining rate as the size of towns and cities increased. It will also be noted that there was considerable difference between national banks and State banks in the rate of suspensions according to the size of the community in which the suspensions occurred. While the suspension rates are higher for State banks than for national banks in all sizes of cities, the differences are particularly noticeable in the larger cities where the rate of suspension of national banks per 100 active banks was much below the suspension rate of State banks. The spread of suspensions during 1930-1933 into the larger centers was quite pronounced as may be seen from table 21, which compares the number of suspensions by size of community for the two periods 1930-1933 and 19211929. During 1930-1933, 29 percent of the suspensions occurred in places with a population of less than 500 and 66 percent in places of less than 2,500 population, compared with 39 percent and 79 percent, respectively, during the period 1921-1929. Cities with a population of 100,000 and over, on the other hand, contributed 7 percent of the total suspensions in 1930-1933, compared with only 3 percent in 1921-1929. - 41 Table 21 — NUMBER AND PERCENTAGE DISTRIBUTION OF BANK SUSPENSIONS BY POPULATION OF CITIES, 1930-1933 AND 1921-1929 Population .of city 1930-1933 Percent of of suspensions total NuEber 1921-1929 Percent Number of of suspensions total 2,254 1,422 1,490 28.8 18.1 19.0 2,234 1,165 1,116 39.1 20.4 19.5 2,500 to 5,000 5,000 to 10,000 10,000 to 25,000 775 510 455 9.9 6.5 5.8 446 234 206 7.8 4.1 3.6 25,000 to 50,000 200 182 545 2.6 2.3 7.0 61 68 182 1.1 1.2 3.2 7,833 100.0 5,712 100.0 Under 500 500 to 1,000 1,000 to 2,500 50,000 to 5.00,000 100,000 and over Total Overbanking and bank suspensions. With some exceptions, suspensions during 1921-1935 were most numerous in States where the number of banks increased rapidly prior to 1920 and in those which had a low population per bank in 1920. In the majority of States with a high population per bank,suspension rates were substantially below the average for the country as a whole. This reflects the x^eakening effect on the banking structure of the establishment of an excessive number of banks prior to 1920. Table 22 gives (l) the percent change in the number of banks from 3.900 to 1920, (2) the population per bank in 1920, and (3) the suspension ratio, for the ten States with the lowest and the ten States with the highest suspension ratios. - 42 Table 22 — PERCENT CHANGE I T THE NUMBER OF B A M S FEOM 1900 TO 1920, 1 POPULATION PER BASK IN 1920, 11® NUMBER OF BANK SUSPENSIONS DURING- 1921-1935 PER 100 ACTIVE BANKS ON J J 1 30, 1920, T1E FOR THE TEN STATES WITH THE LOWEST AND THE TEN STATES WITH THE HIGHEST SUSPENSION RATIOS Percent change in number of States banks | 1900-1920 10 States with lowest suspension ratios Hew Hampshire + 21.2 Delaware + 66.7 Bhode Island - 5O.7 Mas sachuse t ts - 54.1 Vermont + 79.6 New York - 42.7 California +l4s.5 Connecticut + 37.0 Maine + 7.3 Maryland + 79 .S Population per bank in 1920 5,550 4,97s 12,515 14,423 4,000 12,799 4,812 9,957 6,517 5,49s Suspensions during 1921-1935 per 100 active banks on June 30, 1920 10.0 10.3 12.1 15.5 15.9 18.2 18.5 20.4 24.6 25.0 10 States with highest suspension ratios North Carolina Georgia Nebraska Iowa Nevada North Dakota Arkansas South Carolina South Dakota Florida United States total h404.0 +252.5 +103.4 -- 67.4 i +371.4 +U6U.S +667.2 "^77.5 4,136 3.9^3 1,089 1,1+12 2,333 719 3,6l6 3,670 60.5 6l.l 6l.6 61.9 63.6 65.4 68.9 924 +U03.2 3,762 71.8 82.7 107.3 +118.3 3,713 45.1 +266.5 The age of suspended hanks. Data regarding the age of "banks at time of suspension are available at present for national banks ancl for State banks during 10 years only, 19211930. From table 23 it will be seen that 25 percent of banks suspended in ~ 43 1921-1930 were less than 10 years old at time of closing and 64 percent were less than 20 years old; 36 percent, on the other hand, had been in operation for 20 years or more. This clearly indicates that, although many of the sus- pensions occurred among recently organized banks, long established institu- tions have by no means been immune to the difficulties which have prevailed. Due, however, to such factors as conversions, mergers, absorptions and re- organizations, the "charter age" of some banks is not a good measure of their span of existence; technically, some banks that resulted from mergers or conversions have been in existence only a few years, while as a practical matter they or their predecessors have been operating without interruption for a long time. Table 23 — DISTRIBUTION OF BANK SUSPENSIONS ACCORDING TO AGE, 1921-1930 II Years in operation prior to suspension Number of suspensions Percent of total Less than 5 5 to 9 10 to 14 735 925 1,266 11.1 14.0 19.1 15 to 19 20 to 24 25 to 29 1,283 1,213 561 19.4 18.3 8.5 30 to 34 35 to 39 40 to 44 272 180 100 4.1 2.7 1.5 43 40 ;7 .6 45 to 49 50 and over Total 6,618 100.0 1/ Covers national and state bank suspensions only and excludes 85 such banks for which data are not available. ~ 44 Considerable variation among the several States and geographic divisions of the country obtained with respect to the age of suspended, banks, as indicated in table 24. Banks suspended in the West North Central states during 1921-1930 were in existence prior to suspension for an average period of 18 years and 9 months, the longest of any region, whereas in the Mountain states the average age was only 11 years and 7 months, the shortest for any geographic division. The range is somewhat greater in the case of individual statesr the age of banks suspended in Arizona, California, Colorado, Florida, Massadmsufcte,Montana and Wyoming is distinctly below the average for the United Rhode Island, States as a whole, while in/Delaware, Iowa, Kentucky, Michigan, Nebraska, Nevada, Pennsylvania and West Virginia the age of suspended banks is appreciably above the average for the country. Table 24 — AVERAGE AGE OF SUSPENDED BANKS, BY GEOGRAPHIC DIVISIONS, 1921-1930 1/ Geographic division Number of suspension? Average3 ase Months Years New England Middle Atlantic East North Central 18 64 631 17 17 16 10 2 5 West North Central South Atlantic East South Central 2,965 1,165 352 18 15 17 9 4 5 West South Central Mountain Pacific 811 470 142 14 11 14 1 7 11 6,618 16 8 Total 1/ Covers national and state banks only and excludes 85 such banks in Montana for which data are not available. - 45 Suspension of banks with branches. Of the 13,636 banks suspended during the 15-year period 1921-1935, 331 banks with loans and investments of §2,937,000,000 were operating 1,175 branches at time of suspension. The suspension of banks operating branches has been made the subject of a detailed analysis in the study of branch banking. - 46 Preliminary draft Confidential BANK SUSPENSIONS, 1892-1935 CHAPTER III SUSPENSIONS DURING 1930-1933 In the preceding chapter it was pointed out that not only were bank suspensions more numerous in the four critical years 1930-1933 than in previous years, but that suspensions became more diffused over the entire country among all sizes and classes of banks. During this period of nation- wide economic depression there was a rapid decline in the value of securities and real estate held as collateral for bank loans, as well as in the prices of agricultural products, livestock and other commodities, all of which resulted in a reduction in income of banks' customers. The consequent diffi- culty of liquidating loans at maturity, combined with severe drought in many of the agricultural sections, made it difficult even for institutions of long standing and sound condition to hold up in the enveloping tide. Another factor undermining the position of many banks was the withdrawal of funds by depositors for hoarding. A vicious circle thus was created — as economic conditions grew steadily worse suspensions increased, and as suspensions increased depositors became alarmed and withdrew funds, causing additional suspensions ana adding to the depth of the economic depression. Because of these factors and the large number of suspensions during this period, as well because of the various attempts made by supervisory and banking officials to avert the wholesale closing of banks, the period 19301933 is discussed separately, year by year, in this chapter. - 47 ~ 1930 During 1930 bank suspensions increased to 1,350 banks with deposits of $837,000,000, compared with 659 banks with deposits of $231,000,000 suspended in the previous year. The highest previous figure was recorded in 1926 when 976 banks with deposits of §260,000,000 suspended. From January through October 1930 the rate of suspensions reported for each month was not far above the monthly average for the previous 9year period. Near the end of 1930 difficulties centering largely in the East and West North Central states and in Arkansas, Kentucky, and North Carolina accounted for the suspension of 256 banks in November and 352 banks in December. In these months 9 large banks in different sections of the country suspended, including the Bank of the United States in New York City with deposits of ^161,000,000, the Bankers Trust Company of Philadelphia with deposits of §44,000,000, the National Bank of Kentucky and the Louisville Trust Company, both of Louisville, with deposits totaling. $52,000,000, the American Exchange Trust Company of Little Rock with deposits of $11,000,000, th6 Bank of Tennessee of Nashville with deposits of $10,000,000, and the Central Bank and Trust Company of Asheville with deposits of $17,500,000. The closing of these large banks resulted in the closing of many other banks, partly because of affiliated and correspondent relationships, and partly because the spread of fear among depositors, particularly in territory near the location of the banks. The bank merger movement, which had been started prior to 1930 through an open competition on the part of banks for size and controlling influence, continued in 1930 but generally for a somewhat different purpose — - 48 ~ that of taking over weak banks to prevent their closing and avert possible resulting runs on the absorbing banks and other institutions. 1931 Following January 1931 when about 200 banks suspended the nunber of suspensions declined to less than 100 each month until June when 167 banks suspended. During the last four months of 1931, 1,360 banks suspended, more than in any previous full year. The peak of this period was in October, after the suspension of the gold standard in England, when 522 banks suspended. By the end of the year a total of 2,293 braiKS had suspended. In 1931, as in 1930, the East and West North Central groups of states accounted for the largest proportion of suspensions - 610 and 717, respectively, or more than half of all bank suspensions in 1931and Iowa each reported more than 200 suspensions during the year. Illinois The Hew England states, which had previously been comparatively free from suspensions, reported 33 suspensions in 1931 and 11 in 1930, compared with a yearly average of 2 for the 9-year period 1921-3.929. The Middle Atlantic states also were seriously affected during 1931; 230 banks suspended in that region in 1931, compared with 30 in 1930 and a yearly average of 9 during 1921-1929. While the number of suspensions ?/as greater in 1931 than in any previous year — about 4 times the yearly average for the 9-year period 1921-1929, deposits of suspended bamcs in 1931 were proportionately even greater — about 9 times the yearly average for the 9-ye^r period. ~ 49 No single bank failure in 1931 approximated the size of the Bank of the United States, New York City, which suspended in 1930, but quite a number of the banks that suspended in 1931 were of substantial size; 20 of the sus-* pended banks had deposits of $10,000,000 or more, aggregating $380,000,000. The largest bank failure during the year was the Bank of Pittsburgh, N.A., with deposits of about $44,000,000. In an effort to stem the increasing tide of suspensions lue National Credit Corporation was formed in October 1931 by the banks at the suggestion of the President. This corporation sought to relieve the situation by making loans to banks on sound but not readily marketable assets. The benefits, if any, of this new corporation were short lived, for while the number of suspensions decreased in November to 175 from 522 in October, December witnessed an increase to 358. 1932 By January 1932 the banking situation was generally recognized as extremely critical. Depositors were becoming increasingly alarmed. Overnight mergers were reported in many sections of the country. The placing of restrictions on deposit withdrawals, a practice that had been used in 1931 in the East North Central states, particularly in Wisconsin and Michigan, became more prevalent in 3.932 as a measure to cope with the steady withdrawal of funds. These restrictions on deposit with- drawals were usually imposed through "depositors1 agreements" deferring withdrawal of varying percentages of deposits over periods of time ranging from one to five years, certain percentages of deposits to be released at the end of the first year . n additional percentages at the end of the succeeding years. ad ~ 50 - New business was conducted on an unrestricted basis. Unfortunately, com- prehensive figures are not available to show the number of banks that obtained deposit deferment agreements^jor the amount of deposits involved in such deferment agreements, but from what information is available it appears that the practice was widely followed. Another type of bank moratoria that became common during this period, particularly in the E5ast North Central states, was the reorganization of banks through the waiving or surrender of a portion of deposits by the depositors. This was accomplished in some cases through outright contributions by certain of the depositors, but usually there was a segregation of assets for the benefit of waiving depositors under a trust agreement, with a right in the bank to substitute assets during a period of time running generally from two to five years. Figures are not available at present showing the losses sustained by depositors through this type of reorganization of distressed banks. Many banks in a number of states closed temporarily under special "banking holidays" declared by civil authorities. The first of a series of state-wide banking holidays was declared in November by the Governor of Nevada. In spite of these efforts, suspensions and the accompanying epidemic of fear were spreading. The Reconstruction Finance Corporation was organized in January 1932 and began almost immediately to make loans to banks. Member banks were granted additional assistance through the provisions of the GlassSteagall Act adopted in February. The Act gave the Federal Reserve Board power to permit the use of United States Government securities as collateral against Federal Reserve notes. This made it possible for the Federal Reserve banks to increase their purchases of United States Government securities, thereby providing member banks with funds to meet additional demands for currency and gold and at the sane tine to reduce their indebtedness at the Reserve banks. The Glass-S teagall Act also contained provisions under which nenber banKS that were without adequate anounts of eligible and acceptable assets coulti under certain conditions receive assistance on the basis of other security satisfactory to the Reserve banks. During the spring, summer, and autumn of 1932 the number of bank suspensions declined to less than 100 per month, with the exception of the months of June when 151 banks suspended and July when 132 banks suspended. In those two months difficulties centered in Chicago and elsewhere in Illinois and in Iowa. Near the end of the year suspensions again increased in number, mainly in the Mid-Western and Far Western states. A total of 1,4-53 hanks suspended during the year, involving deposits aggregating more than -700,000,000. Fewer large banks suspended in 1932 than in either 1930 or 1931, but among these were the Peoples State Bank of Charleston, South Carolina, a large branch bank with deposits of £23,000,000, and the City Bank and Trust Company of Hartford, Connecticut, with deposits of about the same amount. 1933 Early in 1933 banking difficulties, which had been grovdng steadily worse since the beginning of the depression in 1929, became greatly intensified. During the: first two months of 1933, 386 banks with deposits of about y200,000,000 suspended. These figures, however, do not measur- the extent of the banking difficulties* that had developed during this period to catastrophic proportions. Banks which without actually closing obtained ~ 52 - agreements from their depositors for the waiver or deferment of their claims, as previously stated, are not included in suspension figures. In addition, in January and February of 1933 local bank holidays were declared by city authorities in order to permit banks to obtain deposit deferment or waiver agreements, and to afford banks an opportunity to raise funds and made adjustments necessary to enable them to continue to meet their obligations. These holidays in many cases were extended from time to time, and in a few instances they lasted for more than two months1 time, culminating with the national banking holiday in March. These local types of bank moratoria could not cope with the problem. More drastic action became necessary, and banking authorities in the different States were obliged to adopt emergency measures. In a number of States new laws were passed to provide for safeguarding of bank deposits or for readjusting the liabilities of bamcs without establishing receiverships. With a view to enabling the broking situation in any particular State to be better handled as a whole a joint resolution was adopted on February 25 by Congress authorizing the Comptroller of the Currency to exercise with respect to national banks such powers as State officials might have for State banks. On February 4 a one-day holiday was declared in Louisiana because of difficulties in New Orleans. On February 14 » four-day banking holiday was declared in Michigan because of difficulties centering in Detroit. Satisfactory settlement of the difficulties in Michigan was not reached, howev,r, and the holiday was extended. While the Michigan holiday arrested withdrawals of deposits from banks in that State, outside Michigan there was an increase in the movement of funds from weaker to stronger banks and in currency withdrawals. Funds were withdrawn from banks in other States to send to Michigan or to meat payments that otherwise would have been met from deposits in Michigan banks. Developments of this nature wore partly responsible for the rapid spread of the banking holiday movement among other States. On February 25 the Governor of Maryland declared a banking holiday, chiefly on account of conditions in Baltimore, and at about the same time restrictions were authorized on withdrawals of bank deposits in Indiana, Arkansas and Ohio. On March 1 bank holidays v/ere declared in Alabama, Kentucky, Tennessee and Nevada and similar action was taken in six other States on March 2 and in seven others on March 3. On the morning of March A, the Governor of the State of Hew York issued a proclamation declaring htat day, which was a Saturday, and the following Monday to be bank holidays. Similar action was taken in Illinois, Massachusetts, Hew Jersey, Pennsylvania and elsewhere. These declarations of State holidays in the various States had by March A closed or placed restrictions on practically all b inks in the country. Federal Reserve banks also observed State holi- days and closed on Liarch A. All leading exchanges ceased operations and business in general was practically at a standstill. The following compila- tion by the Associated Press published in the March 5, 1933, issue of the Hew York Times shows the limitations on banking in effect at this time, State by State: Alabama - Closed until further notice Arizona - Closed until March 13 Arkansas - Closed until March 7 California - Almost all closed until March 9 -54Colorado - Closed until March 8 Connecticut - Closed until March 7 Delaware - Closed indefinitely District of Columbia - Three banks limited to 5%; nine savings banks invoke sixty-days1 notice Florida - Withdrawals restricted to 5% plus $10 until March 8 Georgia - Mostly closed until March 7, closing optional Idaho - Some closed until March 18, closing optional Illinois - Closed until March 8, then to be opened on 5% restriction basis for seven days Indiana - About half restricted to 5% indefinitely Iowa - Closed "temporarily" Kansas - Restricted to 5% withdrawals indefinitely Kentucky - Mostly restricted to % withdrawals until March 11 Louisiana - Closing mandatory until March 7 Maine - Closed until March 7 Maryland - Closed until March 6 Massachusetts - Closed until March 7 Michigan - Mostly closed, others restricted to 5% indefinitely? Upper Peninsula banks open Minnesota - Closed "temporarily" Mississippi - Restricted to % indefinitely Missouri - Closed until March 7 Montana - Closed until further notice Nebraska - Closed until March 8 Nevada - Closed until March 8, also schools New Hampshire - Closed subject to further proclamation New Jersey - Closed until March 7 New Mexico - Mostly closed until March 8 New York - Closed until March 7 North Carolina - Some banks restricted to 5% withdrawals North Dakota - Closed temporarily Ohio - Mostly restricted to 5% withdrawals indefinitely Oklahoma - All closed until March 8 Oregon - All closed until March 7 Pennsylvania - Mostly closed until March 7, Pittsburgh ban.cs open Rhode Island - Closed yesterday South Carolina - Some closed, some restricted, all on own initiative South Dakota - Closed indefinitely ~ 55 - Tennessee - A few closed, others restricted, until March 9 Texas - Mostly closed, others restricted to withdrawals on $15 daily until March 8 Utah - Mostly closed until March 8 Vermont - Closed until March 7 Virginia - All closed until March 8 Washington - Some closed until March 7 West Virginia ~ Restricted to 5$ monthly withdrawals indefinitely Wisconsin - Closed until March 17 Wyoming - Withdrawals restricted to 5% indefinitely On March 6 the President issued a proclamation declaring a nationwide bank holiday to continue through the four days ending Thursday, March 9• An important purpose of this action was to attack the problem of bank failures comprehensively by reviewing at one time the condition of all banks and reopening only such banks as co - l be determined to be in sound financial .d condition. This procedure was intended to insure more equitable treatment as between the depositors who were making withdrawals and those who were not and to restore confidence in the banking structure as a whole. The proclamation declared that there had been heavy and unwarranted withdrawals of gold and currency and extensive speculative activity in foreign exchanges, which had created a national emergency, and the bank holiday was ordered to prevent a continuation of such hoarding and speculation . n to permit ad the application of appropriate measures for protecting the interests of all bank depositors and other persons dependent on banks. During the holiday, banks were not to pay out any coin, bullion or currency or to transact any other banking business whatever except as might be permitted by the Secretary of the Treasury. The Secretary of the Treasury was authorized to permit banks to perform any or all banking functions, to require or permit the issuance of clearing house certificates, and to authorize special trust accounts for receipt of new deposits. ~ 56 On March 9 the Emergency Banking Act was passed by Congress and signed by the President. On this day also the President issued a proclamation indefinitely extending the bank holiday, . n on March 10, by Executive ad Order he conferred power on the Secretary of the Treasury to license member banks of the Federal Reserve System found to be in satisfactory condition to conduct a usual banking business with exceptions as to paying out of gold and the furnishing of currency for hoarding purposes. Similar powers were granted authorities of the various States with respect to banks not members of the Federal Reserve System. On Saturday, March 11, the Reserve banks were authorized by the Secretary of the Treasury to reopen on the following Monday. On the same date it was announced that on March 13 banks in the 12 Federal Reserve bank cities would be reopened, on March l4 banks in approximately 250 other cities having recognized clearing houses, and on March 15 banks in other places. On March 15, 4,507 national banks and 571 State bank members of the Federal Reserve System with deposits of #16,200,000,000 and s?9,350,000,000, respectively, were licensed to reopen; 1,400 national banks and 221 State bank members, with deposits of ^1,900,000,000 and §925,000,000, respectively, were not granted licenses to reopen. Corresponding figures with respect to banks not members of the Federal. Reserve System were not available prior to April 12, 1933, by which date 7,394 nonmember banks with deposits of *c>4,950,000,000 had been authorized to reopen and 2,938 banks with deposits of ^1,300,000,000 had not been granted authority to reopen. On December 30, 1933, there were 512 member banks vdth deposits of ^528,000,000 and 1,257 nonmember banks with deposits of ^497,000,000 that ~ 57 had not been granted licenses to reopen or had not been placed in liquidation or receivership. By December 31, 1934, all but 9 of the member banks and 147 of the nonmember banks not licensed following the banking holiday had either been granted licenses to reopen or had been placed in liquidation or receivership* Table 25 shows the number and deposits of banks licensed and not licensed on a series of dates following the national banking holiday. ~ 58 - Table 25 - NUMBER AND DEPOSITS OF BANKS LICENSED AND NOT LICENSED ON A SERIES OF DATES Classes of banks and dates All banks March 15, 1933 April 12, 1933 June 30, 1933 December 30, 1933 June 30, 1934 & December 31, 1934 Banks not licensed Banks licensed 1 Deposits 1/ Deposits 1/ Number of Number of (in thousands) (in thousands) banks banks (Not available) 30,932,272 12,819 13,794 31,635,391 14,344 32,229,882 36,325,932 15,135 15,370 39,909,817 (Not available) 4,194 3,977,530 3,078 2,329,999 1,024,942 1,769 346,228 622 158 38,332 National banks March 15, 1933 April 12, 1933 June 30, 1933 December 30, 1933 June 30, 1934 December 31, 1934 4,507 4,789 4,897 5,154 5,417 5,462 16,195,145 1^,494,549 16,741,289 17,555,?39 19,895,897 21,637,150 1,400 1,108 985 452 95 5 1,942,574 1,818,541 1,028,347 434,978 97,999 6,510 State bank members March 15, 1933 April 12, 1933 June 30, 1933 December 30, 1933 June 30, 1934 December 31, 1934 571 636 709 857 958 980 9,359,142 9,491,634 9,822,638 9,611,735 11,116,470 12,211,255 221 148 110 60 18 4 924,177 841,382 237,668 92,876 12,995 1,795 Nonmember banks-2/ March 15, 1933 April 12, 1933 June 30, 1933 December 30, 1933 June 27, 1934 December 31, 1934 (Not available) 4,946,089 7,394 5,071,664 8,188 5,062,908 8,333 8,760 5,313,565 8,928 6,061,412 (Not available) 2,938 1,317,607 1,063,984 1,983 497,088 1,257 234,234 519 149 80,027 1/ Deposits of national banks and State bank members are as of the nearest prior call dates; deposits of nonmember banks for April 12 and June 30, 1933, are as of December 30, 1932, or the nearest available call date prior thereto; deposits of nonmember banks for December 30, 1933 and June 27, 1934, are as of December 30, 1933, or the nearest available call date prior thereto; and deposits of nonmember banks for December 31, 1934, are as of that date, or nearest available call date prior thereto. 2/ June 27, 1934, in the case of nonmember banks. 3/ Exclusive of mutual savings banks. ~ 59 Effect of bank moratoria, holidays, etc., 011 bank suspension statistics. Because of restrictions on deposit withdrawals and the reorganization of banks through deposit waivers, accomplished during local and State bank holidays without the "suspension" of the banks, and because the chan -es in status of all banks incident to the national banking holiday, statistics of bank suspensions for 1933 are not wholly comparable with those for previous years. The figures for 1933 as used in the present report are, however, thought to be /airly in line with statistics of suspensions in former years. The figures for 1933 comprise, as shown by table 26, (l) banks suspended from January 1 to March 15, 1933; (2) 179 banks that were licensed after the banking holiday but which later closed (between March 16 and December 31 1933) because of financial difficulties; a r (3) 2,111 b : n s which were not ni ->k which licensed following the banking holiday and/Wre subsequently (between 1933 March l(yand December 31, 1935) placed in liquidation or receivership. - Table 2o ~ 60 - BANK SUSPENSIONS DURING 1933 Total, All banks Nonmember banks Member banks National State State Private Number of baak suspensions: January 1 to March 1 5 March 1 6 to December 31 Banks not licensed following banking holiday, placod in liquidation or receivership between March 16,1933 and Dec. 31,1935^ 336 22 10 1,103 63 179 66 9 2,111 866 2,737 9U1 103 1,593 100 73.183 January 1 to March 15 213^97 March 1 6 to December 3 1 17.322 1U5.710 Banks not licensed following ban! ing holiday, placed in liquidation or receivership between March 1 6 , 1 9 3 3 «nd Dec. 31.19351/ 2,523,505 1,363,393 Total 2,SS2,712 1,1(53*893 21,7^2 3.527 llkyZkl 123,95S 3,725 903 672,260 Uso.127 697,529 71^,932 7,725 12,353 Total 23 6 Deposits of suspended banks?/ (In thousands of dollars) l/ By the end of 1935 a ll 27 (all nonmembcrs) of the banks not licensed immediately following the banking holiday had either been licensed or had been placed in liquidation or receivership. These 27 banks had deposits of $19,361,000. 2/ Deposits of member banks suspended are as of dates of suspension; deposits of non-licensed national banks placed in liquidation or receivership are as of dates of conservatorship; deposits of non-licensed state member banks placed in liquidation or receivership are as of the nearest call dates prior to liquidation or receivership; and deposits of nonmember banks are based on the latest data available at the time of the reported closing of the banks* The above figures exclude banks which, without actually closing, reorganized prior to the banking holiday through deposit waiver or deferment agreements. The figures also oxclude banks that were not licensed immediately following the banking holiday but which were subsequently licensed under existing charters, whether or not the banks underwent any reorganization ~ 61 - incident to their reopening. If the figures of bank suspensions during 1933 are deficient, therefore, it is because they understate rather than exaggerate the banking difficulties in 1933* In view of the amount of work involved in the examining . n certifyad ing of banks for licensing during the banking holiday, it is fair to assume that many institutions failed to open on the first three days of licensing, March 13-15, through no fault of their own but simply because of procedural difficulties resulting from the magnitude of the burden placed on supervisory authorities. This is evidenced by the comparatively large number of member banks which opened between March 15 and April 12, 1933 — 279 national banks with deposits of $316,000,000 and 48 State bank members with deposits of ^67,000,000. If it is assumed that all banks that could qualify for reopen- ing without considerable reorganization and loss to depositors had opened by April 12, 1933, and that any banks not reopened by that date failed to do so because of financial difficulties which would result in loss to depositors, bank suspension figures for 1933 will be increased by more than 2,200 banks with deposits of #1,180,000,000, representing banks licensed subsequent to April 12, 1933. The addition of these banks would bring suspensions in 1933 up to a total of 4,965 banks with deposits of ^,062,000,000, instead of 2,737 banks with deposits of $2,883,000,000 as used throughout this study. Table 27 shows, by classes of banks, the number and deposits of banks suspended during 1933 and the number and deposits of banks granted licenses between April 12, 1933 and December 31, 1935. ~ 62 - Table 27 — BANKS SUSPENDED I I 1933 AND NON-LICENSED BANKS I GRANTED LICENSES 7 Derx>sits(ln thousands of dollars) lumber of banks Banks Banks | Banks Banks grant ed^/ Total Total suspended granted suspended licenses-' licenses-^ National b inks / State member banks=y Nonmember banks State Private Total 1,192 195 941 103 251 92 1,730,033 834,083 1,453,898 697,529 276,135 136,554 3,461 117 1,593 100 1,868 17 1,483,915 14,090 718,932 12,353 764,983 1,737 4,965 2,737 2,228 4,062,121 2,882,712 1,179,409 1/ Includes non-licensed state member banks that withdrew from membership in the Federal Reserve System prior to date of liquidation or receivership or date of licensing. 2/ Includes banks licensed to reopen between April 12, 1933 and December 31, 1935 under existing charters, whether or not the banks required reorganization and rehabilitation, capital correction, etc., prior to licensing. While the addition of the 2,228 banks (granted licenses after April 12, 1933) to suspension figures would serve to emphasize the banking difficulties in 1933, analysis of the figures for these 2,228 banks by states, geographic divisions, and size of banks shows a distribution very similar to that of the 2,737 banics included as suspensions in 1933 in the present analyses. V>ry little data are available with respect to losses sustained by depositors in the process of reorganization or reopening of banks which were licensed after April 12, 1933 under their own charters. It is safe to assume, however, that what- ever the losses were they were not as great as losses sustained by depositors in bonks which never obtained permission to reopen and were ultimately liqui- ~ 63 - dated through receivership or by sale to a now or existing bank!/. De- tailed figures covering banks granted licenses between April 12, 1933 and December 31, 1935 according to states, geographic divisions, deposits, loans and investments, capital stock, and population of cities are given in the appendix. 1/ By October 31, 1935, 90.59 percent of the total deposits had been released in 531 national b u i s licensed following the banking holiday ic under existing charters, compared with 58.1 percent of total deposits in 554 national hanks placed in liquidation or receivership following reorganization. The percentage covering 332 banks placed in receivership Trri.thout prior reorganization was not given. (See 1935 Annual Report of the Comptroller of the Currency, page 45). - 64 Preliminary draft Confidential - BANK SUSPENSIONS, 1892-1935 CHAPTER IV FEDERAL AID TO BANKS Loans to open banks In the autumn of 1931 the National Credit Corporation, a private organization, was formed at the suggestion of the President to bolster the financial structure of the weaker banks through the aid of the stronger institutions. This corporation made loans amounting to about ^155,000,000 by the end of January 19321/. With the vast tide of suspensions during the latter part of 1931, however, (l,6ll banks suspended during the last half of 1931 with deposits aggregating more than 01,270,000,000) it was evident that the Government itself must take immediate steps if a complete collapse of the banking structure was to be avoided. The Reconstruction Finance Corporation was, therefore, organized in January 1932 and within a very short time thereafter this organization began to make loans to banks; by the middle of 1932 loans aggregating ^611,000,000 to about 3,600 banks had been authorized. Table 28 shows, by quarters, cumulative figures of the amount of loans to banks authorized and disbursed by the Reconstruction Finance Corporation from January 1932 to December 1935: l/!fClosed and Distressed Banks,n Upham and Lamke, Page 7. For statements of purpose of the corporation and for general plan of organization and operation, see Federal Reserve Bulletin for October 1931, pages 551-557. ~ 65 Table 28 — LOANS BY THE RECONSTRUCTION FINANCE CORPORATION TO OPEN BANKS, BY QUARTERS, FROM JANUARY 1932 THROUGH DECEMBER 1935 (Cumulative figures, in thousands of dollars) Amount authorized Amount disbursed 1932 First quarter Second " Third » Fourth " 156,009 615,391 809,313 893,745 124,107 487,062 675,254 810,110 117,886 419,965 525,537 576,178 1933 First quarter Second " Third » Fourth " 1,172,520 1,234,058 1,268,023 1,290,700 987,445 1,038,930 1,077,094 1,091,785 677,611 614,467 532,953 462,950 1934 First quarter Second " Third » Fourth " 1,309,442 1,322,062 1,326,733 1,329,2.39 1,103,080 1,122,110 1,130,377 1,133,063 353,066 290,110 259,949 229,184 1935 First quarter Second " Third " Fourth " 1,334,436 1,337,310 1,339,386 1,339,835 1,135,083 1,141,923 1,142,290 1,142,590 204,785 194,741 180,611 167,003 Quarter Amount outstanding; In the light of later developments, including the closing of all banks incident to the banking holiday, it is an open question whether Reconstruction Finance Corporation loans to open ban-is in its effort to support the collapsing banking structure were beneficial or detrimental to the interest of depositors• [During 1932 and the early part of 1933» however, when the bull: of these loans was made, it appeared most obvious that wholesale suspensions could only be averted by such a course of action on the part of this new Government agency. In many cases, such loans doubtless did furnish the assistance necessary to enable the banks ~ 66 - to £0 through the crisis without suspension, but in other cases the banks which obtained Reconstruction finance Corporation aid eventually suspended. Figures showing the number and deposits of banks that did not suspend after being aided by the Reconstruction Finance Corporation, compared with those that did suspend after such assistance, aro not available. Where banks failed in spite of Reconstruction Finance Corporation loans their depositors probably wore in a loss favorable position, at least temporarily, than if their bank3 had not borrowed, as the banks1 good assets had been pledged to the Reconstruction Finance Corporation and interest had to be borne by the depositors1 funds. It would not be practicable, however, to determine whether higher or lower losses would have been sustained by depositors if Reconstruction Finance Corporation aid had not boon extended, in view of the many factors that have affected the value of bank assets since the banking holiday. In individual cases large depositors with knowledge of the banks1 borrowings may have boon able to withdraw the bulk of their deposits, after the banks had been aided by the Reconstruction Finance Corporation, leaving the smaller uninformed depositors in a loss favorable position than if the loans had not been made. This, however, is not susceptible of statistical analysis. In 1932 bank suspensions declined from their high 1931 level to S5 in August and to 67 in September, totaling 1,^33 for the year compared with 2,293 i^1 1931* Temporarily there appeared to have been a restoration of confidence in the banking structure. The Reconstruction Finance Corpora- tion during 1932 authorized loans to banks in an amount greater than the ~ 67 - total amount of deposits involved in bank suspensions. The heavy with- drawals of deposits during the latter part of 1932 and early 1933, however, in spite of the restrictions placed on deposit withdrawals by many banks throughout the country and the declaration of local bank holidays, were more than could be met by Reconstruction Finance Corporation loans, and the national banking holiday in March 1933 resulted. Nothing short of complete guarantee of bank deposits by the Government, which may have required the absorption of heavy losses by the Treasury,could have averted the closing of all b^nks. Loans to closed banks Deposits remaining tied up in banks that suspended in 1930 - 1932, °9° together with the approximately $4,500,000,/of deposits in banks that were not granted licenses immediately following the banking holiday, constituted a serious deflationary factor retarding recovery. Agitation arose for the Federal Government to take over the liquidation of closed banks and to make depositors1 funds immediately available, and the task of assisting in the liquidation of closed banks was turned over to the Reconstruction Finance Corporation. The Liquidation Division of the Reconstruction Finance Corporation was established and machinery was set up to handle loans to closed banks. Banks that closed after January 1, 1933, were given first attention; later loans were made to banks that closed prior to January 1933. By June 1934 loans amounting to ^>802,000,000 had been authorized by the Reconstruction Finance Corporation to closed banks, of which amount $544,000 ,000 had been disbursed. By this time the work of appraising assets and making loans to closed banks was practically finished. Table 29 gives ~ 68 cumulative figures of the amount of loans to closed banks authorized and disbursed by the Reconstruction Finance Corporation, by quarters, from January 1933 through December 1935. Table 29 — LOANS BY THE RECONSTRUCTION FINANCE CORPORATION TO CLOSED BANKS, BY QUARTERS, FROM JANUARY 1933 THROUGH DECEMBER 1935 1/ (Cumulative figures, in thousands of dollars) Quarter Amount authorized Amount disbursed Amount outstanding 1933 First quarter Second " Third » Fourth " 97,535 193,112 321,260 572,230 78,251 150,663 249,258 383,377 48,292 99,918 181,397 291,604 1934 First quarter Second " Third " Fourth » 713,037 802,713 961,429 1,035,733 477,836 544,060 622,138 761,704 349,059 361,296 367,114 443,343 1935 First quarter Second » Third « Fourth » 1,069,976 1,117,928 1,140,972 1,170,157 795,632 822,557 850,551 876,125 372,065 320,135 287,399 245,725 l/ Includes loans to receivers, conservators, and liquidating agents, loans through mortgage loan companies to aid closed banks, and loans on assets of closed banks under Sec. 5e of the Reconstruction Finance Corporation Act. Loans to closed banks by the Reconstruction Finance Corporation provided immediate cash which, in the ordinary liquidation process, would not have been available for distribution to depositors for a considerable length of time. Loans on the assets of closed banks provided the means for the prompt opening of successor banks, at which a substantial part of the funds of the closed banks became immediately available. Such loans also avoided ~ 69 of the necessity of the dumping/large blocks of securities and mortgages by the receivers of closed banks on an abnormally low market in an effort to make depositors1 claims available. It is quite probable, therefore, that in spite of interest charges on loans by the Reconstruction Finance Corporation, depositors of banks realized a higher percentage of their claims than would have been realized through the immediate liquidation of the banks without such loans. Strengthening of the capital structure of banks following the banking holiday- Many of the banks that did not reopen immediately following the banking holiday needed additional capital. Existing stockholders and the public in general could not, however, provide very much of the additional capital funds necessary and the Government, through the Reconstruction Finance Corporation, made extensive purchases of stock in such banks. Banks that had been licensed immediately following the banking holiday without reorganization were invited to join in the program for strengthening the capital structure of banks, and as a result many of the larger metropolitan banks also sold capital stock to the Reconstruction Finance Corporation. A large number of hanks were required to obtain additional capital funds before admission to Federal deposit insurance. By the end of June 1934 the program of capital rehibilitation was well under way, the Reconstruction Finance Corporation having outstanding on that date #814,707,000 investment in capital of banks. At the end of June 1.935 , which marked the approximate peak, the Reconstruction Finance Corporation investment in preferred stock, capital notes and debentures ~ 70 of 5,752 banks amounted to #904,3^1,000. amounted to $899,486,000. On December 31, 1935, it These figures are shown by quarters, from January 1933 through December 1935, in table 30. Table 30 — PURCHASES BY THE RECONSTRUCTION FINANCE CORPORATION OF PREFERRED STOCK AND CAPITAL NOTES OR DEBENTURES OF BANKS, AND LOANS ON PREFERRED STOCK OF BANKS, BY QUARTERS, FROM JANUARY 1933 THROUGH DECEMBER 1935 (Cumulative figures, in thousands of dollars) Amount authorized Amount disbursed Amount outstanding 1933 First quarter Second " Third « Fourth » 14,933 47,419 70,073 496,366 12,750 43,468 63,107 264,346 12,750 43,463 63,095 264,188 1934 First quarter Second " Third « Fourth « 932,623 1,047,659 1,104,772 1,156,904 493,577 817,303 890,775 938,004 593,039 814,707 827,660 865,083 1935 First quarter Second " Third » Fourth " 1,176,942 1,188,462 1,232,068 1,252,018 989,756 1,006,895 1,026,070 1,040,973 902,846 905,262 904,341 899,486 Quarter A number of other Government agencies assisted in the liquidation of bank assets, thereby strengthening the position of open banks and assisting in the liquidation of closed banks. Most of this aid consisted of the replacement of "frozen" mortgages held in bank portfolios by marketable bonds guaranteed by the Government. In this refinancing program, preferred consideration was given to cases threatened with foreclosure, -or where the ~ 71 - loans represented frozen assets ox closed banks. For discussion of related operations of Farm Credit Administration, Home Owners1 Loan Corporation, etc., as well as for discussion of general activities of the Reconstruction Finance Corporation, see Study No. 15, "Effect of Governmental Lending Agencies and Postal Savings System upon Banks." Preliminary draft Confidential BANK SUSPENSIONS, 1892-1935 CHAPTER V LOSSES TO DEPOSITORS OF SUSPENDED BANKS Depositors of banks suspended in this country have sustained losses running into billions of dollars. According to estimates prepared by the Federal Deposit Insurance Corporation, depositors' losses in the banks that 000, suspended during 1931-1934 amounted to more than §2,300,000,/in banks suspended during 1921-1930 to about $815,000,000, and in banks suspended during 1865-1920 to about #265,000,000. Estimated losses in the 70-year period 1865-1934 thus amounted to nearly ^3,500,000,000. The figures are summarized in Table 31• Table 31 ~ Period ESTIMATED LOSSES SUSTAINED BY UNSECURED DEPOSITORS IN SUSPENDED BANKS, 1865-1934 2/ Estimated losses to depositors (in thousands of dollars) Total National State and all banks banks private. banks Total, 1865-1934 3,411,029 1,129,719 2,281,310 1931-1934 1921-1930 1865-1920 2,333,121 815,309 262,599 879,711 196,100 53,908 1,453,410 619,209 208,691 1/ Estimate prepared by the Federal Deposit Insurance Corporation. (See Table 33 of the 1934 Annual Report of the Federal Deposit Insurance Corporation.) - 73 ~ Available data with respect to losses resulting from closed banks are rather sparce. Many of the banks that closed in recent years are still in process of liquidation and it is impossible to determine the ultimate losses in these banks. Even in the case of banks completely liquidated, reopened, or taken over by other banks, complete information is not available. It is believed, however, that a fairly accurate measure of the losses involved in closed banks can be obtained from such information as is available. The following analysis is designed to show the rate of loss sustained in (1) suspended banks reopened and taken over, and (2) completely liquidated. suspended banks The material is presented by geographic divisions, size of suspended banks, and population of cities in which the banks were located. The sources of the available data and the limitations thereof are outlined below. Source and scope of data for 1921-1930. The information covering the period 1921-1930, contained in this chapter, has been taken from data prepared by the Federal Reserve System Committee on Branch, Group, and Chain and covers both national and State banks. Estimates of losses 1/ An individual schedule was obtained by the Committee for each bank that suspended during the period, on the basis of which schedules the Committee^ compilations were prepared. The information presented reflects the status of the liquidation of the banks at the time the schedules were px^epared (during the latter half of 1930 and the first half of 1931). The time required for preparation of the schedules was several weeks or even months in some of the states, and the date of the completion of the schedules varied considerably from state to state. Many complicating factors arose in the attempt to arrive at comparable results representing losses to depositors in different states. The detailed instructions prepared by the Committee when the original requests for data on suspensions were submitted to the Comptroller of the Currency and the several State banking departments called for information on deposit claims only, divided into three classes: secured, preferred,.and unsecured. It was particularly stressed that any departures - 74 were made only with respect to claims of unsecured depositors, it having been assumed that, unless the percentage of dividends paid to unsecured depositors was abnormally low, preferred and secured depositors were paid in full. In those cases where the dividend payments (to unsecured depositors) were unusually low it is possible that the value of the collateral held by secured depositors also may have been low, and that the secured claimants in such cases suffered some loss. Under the prevailing practice, secured creditors receive the same dividend payments as unsecured creditors, until their claius are met in full either from dividends or from the liquidation of collateral held or both. from this practice should be fully explained. Notwithstanding these precautions, the returns from certain states showed that the data were not always in the form requested, either because of inadvertence or because they were not available in that form. In some states, for instance, deposit claims were not segregated from other types of claims. Moreover, the same types of liabilities were classified differently on the suspension schedules from one state to another, sometimes apparently because of a difference in statutory priority, and sometimes simply because of a difference in the judgment of those who prepared the schedules at the source. An effort was made by the Committee, through further correspondence, to determine in each statei (l) the statutory priority of lien of the various types of deposits; (2) the precise character of deposits reported on the suspension schedules as (a) secured, (b) preferred, and (c) unsecured; and (3) the precise character of other claims included in the suspension schedules with depositors1 claims. The replies to this inquiry were so diverse in character as to make impracticable any attempt to show comparable results for the different states with respect to the claims of preferred or secured creditors and the payments thereon in suspended state banks. With respect to national bank suspensions for the period 1921-1930, it was found that the work of segregating the claims of secured, preferred and unsecured creditors was prohibitive; hence, for banks completely liquidated or in process of liquidation, only the amount of claims of unsecured depositors and the percentage payments thereon were obtained. From the amount of claims of unsecured depositors . n the percentage of ad payments thereon, estimates have been made of the amounts paid to unsecured depositors. For banks reopened or takexi over, no losses of secured or preferred claimants were recorded on suspension schedules. ~ 75 - Source and scope of data for 1931-1935• In connection with suspended banks liquidated during the 5-year period 1931-1935, it was deemed impracticable, because of the magnitude of such an undertaking and the lack of sufficient time, to forward requests to the Comptroller of the Currency and to the various State banking authorities for sufficient data to permit the compilation of statistics comparable to those used for the period 192.1-1930 by the Committee on Branch, Group and Chain Banking. Consequently, the data presented herein for banks liquidated during 1931-1935 were compiled principally from annual reports of the Comptroller of the Currency in connection with national banks. ing departments contain Only a few of the annual reoorts of State bank. information on the subject, and a number of such reports omit all reference to insolvent banks. In the State reports which contain such data, widely diverse methods of presentation are used by the various supervisory authorities, and in most instances the information presented was found to be of little value for the purposes desired. For the period 1931-1935 the estimates in the case of national banks represent losses sustained by all unsecured creditors, whereas in the o/irlier period the estimates represent losses by unsecured depositors only. The reason for this variation is that the Comptroller!s annual reports do not show the portion of unsecured claims which is represented by unsecured deposits. It is believed, however, that in the majority of cases unsecured claims consist almost entirely of deposits, since other claims against national banks,such as those represented by bills payable or similar liabilities, were usually on a secured basis. The Comptroller's reports do not show the dollar amounts of creditors' unsecured claims, but the total amounts of dividends paid are shown together with the percentage ratio of ~ 76 such dividends to unsecured claims, and, by applying the percentage ratio to total dividend payments, an estimate of the original unsecured claims was made. Losses in suspended banks reopened or taken over. 1921-1930» Unsecured depositors of banks which suspended and were reopened or taken over during the 10-year period 1921-1930 suffered relatively small losses, as a rule, compared with those incurred by depositors in banks which were liquidated. In Table 32 the suspended national and State banks which were reopened or taken over during that period are classified according to the percentage of claims realized by unsecured depositors. Table 32 — NUMBER OF BANKS SUSPENDED AND REOPENED OR TAKEN-OVER DURING 1921-1930, CLASSIFIED ACCORDING TO PERCENT OF CLAIiiS REALIZED BY UNSECURED DEPOSITORS, BY CLASSES OF BANKS U Percent of unsecured claims realized (exclusive of offsets) 0% - 19% 20 40 60 80 100 - 39 59 79 99 Total Number of banks Total-National National and state banks banks State banks 6 31 94 114 48 904 1 7 17 9 119 6 30 87 97 39 785 1,197 153 1,044 — 1/ Banks suspended during 1921-1930 which had been reopened or taken over by other institutions at the time the suspension schedules were prepared for the Committee on Branch, Group and Chain Banking. Figures for 1 national bank and 139 State banks reopened or taken over during the period are not available. ~ 77 - It will be noted that, of the 1,197 banks included in the tal>le9 90-4 or slightly more than 75 percent paid unsecured depositors in full, • n that only 131 banks or roughly 11 percent of the total number ad secured depositors less than sixty cents on the dollar. paid un- There are in-* stances, however, in which 'unsecured depositors received only 10 or 15 percent of their claims. In Florida the deposits in most reopened banks were frozen by waiver agreements for periods ranging from a few months to as many as four or five years. Under such circumstances it is evident that the Florida percentages constitute nothing more than tentative estimates which may or may not be actually realized. Taken as a group, the West North Central states made the poorest showing, nearly a fourth of all reopened and taken-over banks in that area having paid depositors less than 60 percent of their claims, as may be seen from table 33, which presents these figures geographic divisions. Table 33 -- NUMBER OF BANKS SUSPENDED AND REOPENED OR TAKEN OVER DURING 1921-1930, CLASSIFIED ACCORDING TO PERCENT OF CLAIMS REALIZED BY UNSECURED DEPOSITORS, BY GEOGRAPHIC DIVISIONS V Geographic division Total Number of banks which paid unsecured depositors the following percentages of their claims (exclusive of offsets) 0%-99%\l00% 1 056-] . 9 $ 20%-39$ 140^-59%:-60^-79^ i 8 — New England Middle Atlantic East North Central 2 15 184 — West North Central South Atlantic East South Central 431 216 58 — West South Central Mountain Pacific 203 64 24 Total 1,197 — — — — 2 14 156 2 5 1 14 27 65 10 1 55 15 2 1 6 4 3 17 6 4 6 5 1 173 49 16 31 9-4 114 48 904 — — 6 — 1 — — — — — — — 6 — 7 21 8 — 257 183 54 1/ Banks suspended during 1921-1930 which had been reopened or taken over by other institutions at the time the suspension schedules were prepared for the Committee on Branch, Group and Chain Banking. Figures for 1 national http://fraser.stlouisfed.org/ bank and 139 State banks reopened or taken over during the period are not available. Federal Reserve Bank of St. Louis ~ 78 The dollar anounts of losses to unsecured depositors in reopened and taken-over banks were not always reported.. They were computed in each case, however, by multiplying total deposits by the reported percentage loss. If it is assumed that about the same average proportionate loss occurred .among the 140 banks for which no information as to losses was reported, as among other reopened and taken-over banks in the same areas, the total losses sustained by unsecured depositors in the 1,337 banks which suspended or were taken-over during 1921-1930 aggregated approximately #54,000,000. deposits of these 1,337 banks aggregated $487,000,000-/ and, therefore, the unsecured depositors suffered an average loss of about 11 percent.. For the 154 national banks the estimated loss was about 8 percent of total unsecured deposits, and for the 1,183 State banks it was nearly 12 percent. Estimated losses of national and State banks reopened or taken over during 1921-1930 are given, by geographic divisions, in table 34. 2 J Condition figures reported on the suspension schedules for national banks are as of the last examiner!s or call report prior to suspension, rather than at time of closing. Since deposits ordinarily decline somewhat as suspension approaches, some overstatement of estimated losses results from the computation of losses by multiplying the percentage of loss in each bank by deposits as shown on the suspension schedules. ~ 79 Table 34 — TOTAL ESTIMATED LOSSES TO UNSECURED DEPOSITORS OF 1,337 BANKS WHICH SUSPENDED AND WERE REOPENED OR TAKEN OVER DURING 1921-1930 ±J (In thousands of dollars) National and State banks Geographic division — New England Middle Atlantic East North Central . 257 6,607 State banks National banks — — •257 2.15 — -.6,392. West North Central South Atlantic East South Central 32,109 7,542 566 1,046 232 53 31,063 7,310 513 West South Central Mountain Pacific 2,432 2,517 2,051 925 1,377 1,633 1,507 l,l4o 418 54,081 5,738 48,343 Total 1/ Banks suspended during 1921-1930 which had been reopened or taken over by other institutions at the time the suspension schedules were prepared for the Committee on Branch, Group and Chain Banking. Figures for 1 national t>*ak < r d A39 State banks reopened or taken over during ai the period are not availa&Le. 1931-1935. Information in connection with losses to unsecured creditors of suspended banks reopened or taken-over during the period 19311935 is not available. However, available data in connection with national banks which were not given licenses immediately after the banking holiday but which were licensed later on indicate that unsecured depositors of such banks sustained relatively small losses, as compared with losses sustained by depositors of unlicensed national banks placed in receivership^. Data with respect to the losses sustained by depositors in banks that were, not licensed immediately following the banking holiday in March 1933 are available only for national banks. Between 4,500 and 5,000 national 1/ See 1935 Annual Report of the Comptroller of the Currency, page 45 . ~ 80 - and State banks were not granted licenses at the end of the banking holiday, and their deposits aggregated about $4,$00,000,000. More than 2,700 of these banks with deposits of approximately $1,700,000,000 were reorganized and eventually reopened under their own charters. From rather sparce data available with respect to national banks it appears that the rate of loss was comparatively low at such banks (about the same as experienced by suspended banks reopened and taken over during 1921-1930). Figures for unlicensed national banks placed in receivership and completely liquidated by 1935 are included in the figures presented in the next section, which relates to suspended national banks completely liquidated during 1931-1935. Depositors of unlicensed national banks which were placed in voluntary liquidation, rather than in receivership, had received approximately 69 cents on the dollar by October 31, 1935 y . Since that time, additional amounts have been released to depositors in these banks which will increase the return somewhat. Losses in suspended banks which have been completely liquidated. National bariKS. Of the 2,558 national banks which suspended operations during the 15 years 1921-1935, 267 had been completely liquidated at the time the data for the period 1921-1930 were compiled by the Federal Reserve Committee on Branch, Group, and Chain Banking, and U2-0 additional national banks had been completely liquidated by October 31, 1935. During the 10-year period 1921-1930, receivers for 267 national banks allowed claims to unsecured depositors, as distinugished from claims 1/ See 1935 Annual Report of the Comptroller of the Currency, page- 45. 2/ Exclusive of 4 banks that had only nominal amounts of assets administered by receivers, the majority of creditors' claims having been assumed by purchasing banks, also of 42 banks that had no unsecured claims when receivers were appointed. ~ 81 - of preferred or secured creditors, in the amount of $68,489,000^/, on which aggregate payments of >34,034,000 were made. Unsecured depositors, there- fore, received about 50 cents on the dollar, exclusive of offsets*!/. During the 5-year period 1931-1935, receivers for 423 national banks allowed claims to unsecured creditors to the extent of £>148,771,000, on which aggregate payments of ^92,205,000 were made. Unsecured creditors, therefore, received approximately 62 cents on the dollar, exclusive of offsets, which represents a considerable improvement over payments during the earlier period. State banks. Corresponding data for completely liquidated State banks for the period 1921-1930 are much less satisfactory than in the case of national banks, and for the period 1931-1935 no such figures whatever are available at this time. As heretofore stated, no attempt has been made to obtain the required data from the various State supervisory authorities for the latter period, and the annual reports of State banking departments contain only fragmentary information on the subject. Of the 1,130 suspended State banks which were liquidated during the earlier period 1921-1930, satisfactory data as to claims and payments were received on only 988. Aggregate unsecured claims in these 988 banks amounted to £1.55,809,000, on which payments of >90,891,000 were made, depositors thus receiving an average of.58.3 cents on the dollar, exclusive of offsets. 1/ This figure includes a negligible amount of claims of secured creditors which it has not been possible to segregate* 2/ A depositor who is also a borrower usually has his deposit applied against his indebtedness to the bank. ~ 82 By geographic divisions and States. Considerable differences are shown by a study of results for individual States and geographic districts. In table 35 the average percentage of claims received by unsecured creditors of completely liquidated banics are shown by geographic divisions. From the table it is evident that, in general, depositors in the areas which have had the most failures have realized the smallest percentage of their claims upon liquidation. Depositors in mid-western States, on the whole, suffered larger losses proportionately than those in the eastern portion of the United States. This is true of banks liquidated during 1921-1930 and of those liquidated in 1931-1935. Table 35 — PERCENTAGE OF CLAIMS REALIZED BY UNSECURED DEPOSITORS AND CREDITORS OF SUSPENDED BANKS, BY GEOGRAPHIC DIVISIONS Geographic division Average percentage of claims realized by unsecured depositors in 1,255 completely liquidated national and State bonks!/ 988 State 267 National banks 3/ banks Average percentage of claims realized by unsecured creditors in 423 , national banks^/ New England Middle Atlantic East North Central 67.0 80.5 59.0 100.0 88.6 68.5 76. A West North Central South Atlantic East South Central 50.6 54.6 94.0 55.5 43.3 74.4 58.9 58.7 75.4 West South Central Mountain Pacific 45.4 42.5 61.9 49.6 58.1 73.7 57.1 56.1 62.4 49.7 58.3 62.0 United States 83.1 65.2 1/ Banks suspending during 1921-1930 which had been completely liquidated at the time the schedules were prepared for the Committee on Branch, Grout) and Chain Banking, with the exception of 142 State banKs for which information as to claim;? and payments was not available. 2/ Banks suspending during 1921-1935 which had been completely liquidated by October 31, 1935. Exclusive of 4 banks that had only nominal amounts of assets administered by receivers, the majority of creditors1 claims having been assumed by purchasing banks, also of 42 national banks that had no unsecured claims when receivers were appointed. http://fraser.stlouisfed.org/ 3/ Guaranty Fund payments included. Federal Reserve Bank of St. Louis ~ 83 Within each geographic division there are appreciable differences arsong the several States in the percentage of deposits lost by unsecured depositors of suspended banks, as is shown by tables included in the appendix. Leaving out of consideration those States in which the number of banks that have been completely liquidated is inadequate to give a fair indication of what more inclusive data might show, the proportion of unsecured claims realized in national banks completely liquidated during the period 1921-1930 ranged from 28 percent in Montana, 35 percent in Oklahoma and 37 percent in Idaho to 65 percent in Iowa, 66 percent in Wyoming and 67 percent in California. For national banks liquidated during the period 1931-1935, realized claims were higher on the average, ranging from 32. percent in Alabama and AA percent in South Dakota to 75 percent in California, 79 percent in New York and 92 percent in Ohio. In the case of suspended State banks completely liquidated during 1921-1930, the proportion of claims realized by unsecured depositors ranged from 28 percent in North Dakota, 32 percent in Arkansas and 35 percent in Montana to 66 percent in Colorado, 73 percent in Washington, 83 percent in Tennessee, 8A percent in Texas and 100 percent in Nebraska. Explanation of differences in rate of loss in national banks compared with State banks. The Nebraska banks which were reported as having been completely liquidated during 1921-1930 all failed during 1921-1923, when the Depositors1 Guaranty Fund was still in operation. For a period of years the depositors in suspended Nebraska State banks were paid in full, the difference between the amount realized from a bank's assets and the liabilities assumed being paid out of the Depositors' Guaranty Fund. In later years, however, as bank failures increased, tne Guaranty Fund was inadequate to pay all deposit claims. By 1930 a deficit of about $20,000,000 is ~ 84 reported to have accumulated, and the Guaranty Fund law was repealed early in that year. The deficit at that time was greater than the total capital stock of all active State banks in the State* In seven other States the operation of State guaranty deposit funds increased during a limited period the returns which depositors in State banks received. The guaranty funds were responsible in part for the fact that, as shown in table 35, depositors in the liquidated State banks received a higher percentage of their claims than those in national banks. The majority of the banks included in that table suspended during the early part of the period under study, when several of the guaranty funds were still in operation. After the guaranty funds became inoperative, however, the depositors of many State banks which had contributed heavily to the maintenance of these funds received no benefits therefrom. Oklahoma passed a guaranty laxv in 1907; Kansas, Nebraska, and Texas in 1909; Mississippi in 1914? South Dakota in 1915; and North Dakota and Washington in 1917. In six of these States, all except Kansas and Wash- ington, membership in the guaranty system was compulsory for all State banks. In all of these States it was the intention that the guaranty funds should be built up and maintained by initial, annual, and special assessments on the banks. Increasing bank failures after 1920, however, disrupted all of the systems, leaving in all cases substantial deficiencies in the guaranty funds. These deficiencies ranged from three or four million dollars to over thirty million dollars, according to a statement of the Comptroller of the Currency to the Subcommittee of the Committee on Banking and Currency of the House In Washington the guaranty fund was inoperative 1/ 72nd Congress, 1st Session, Hearings on H.R. (10241) 11362. ~ 85 - after 1921, and the Oklahoma law, after an experience of 15 years, was repealed in 1923. The laws in the other six States were either repealed or became inoperative in the period 1927-1930. Another important factor in the differences between national and State bank payments, as shown in table 35, is that the data for completely liquidated State banks are not strictly comparable with those for national banks. Claims of preferred and secured creditors and the payments thereon were not segregated from the claims of unsecured depositors in the case of some State banks. This fact would tend to improve the showing of State banks, since a higher percentage is paid on the claims of secured and preferred creditors. In some States, Idaho and Oregon*for example, the de- positors are preferred by law over other creditors. creases the depositors1 share of dividends. This, of course, in- Furthermore, the data for 142 completely liquidated State banks were too fragmentary to be included in the tabulations. While there is no proof that depositors in these banks received a low percentage of claims, many of the 142 omitted cases were in States in which the payments received by depositors were well below the average for all completely liquidated State banks. The figures for national and State bmks for the period 1921-1930, by States, are shown in the appendix. In most of the States and in some of the geographic divisions the number of cases of completely liquidated laanks is so small that comparisons of national and State banks are practically meaningless. In some of the States, however, where suspensions have been heaviest and where significant comparisons can be made, the national banks show a higher percentageof claims realized than do State banks, notably in Iowa, Minnesota, North Dakota, and Wyoming. For the majority of States and for the country as a whole, however, available data indicates that the State ~ 86 banks (partly because of the guaranty funds) showed somewhat better liquidating results for the period 1921-1930. As previously stated, no comparable data whatever are available for State banks for the period since 1930. Losses by Size of Banks. The classification of banks reopened, taken-over, and completely liquidated during the period 1921-1930, according to size, as presented in table 36, shows that depositors in banks with loans and investments of $1,000,000 and over realized a somewhat higher percentage of claims than depositors in smaller banks. Within the group of banks with less than &1,000,000 of loans and investments, however, size appears to have little relation to the percentage of claims paid, for banks with less than $150,000 of loans and investments paid approximately the same percentage ox claims as those with $500,000 to $1,000,000 of loans and investments. ~ 87 Table 36 — DISTRIBUTION OF REOPENED, TAKEN-OVER, AND COMPLETELY LIQUIDATED NATIONAL AND STATE BANKS', ACCORDING TO PERCENT OF CLAIMS REALIZED BY UNSECURED DEPOSITORS AND BY SIZE OF LOANS AND INVESTMENTS 1/ Size group loans and investments Number of banks which paid unsecured depositors the following percentages of their claims (exclusive of offsets): Less than 80-100$ Total 40-79$ m Under §150,000 150,000-500,000 500,000-1,000,000 1,000,000 and over 233 239 47 14 268 320 76 36 539 553 120 78 1,040 1,112 243 128 Total 533 700 1,290 2,523 Percent of b -\nks which paid unsecured depositors the above nercentages of their claims (exclusive of offsets) Under $150,000 150,000-500,000 500,000-1,000,000 1,000,000 and over Total 22.5 21.5 19.5 10.9 25,7 28.8 31.3 28.1 51.8 49.7 49.3 61.0 100.0 100.0 100.0 100.0 21.2 27.7 51.1 100.0 1/ Banks suspending during 1921-1930 which had been reopened, taken-over, or liquidated at the tine the suspension schedules were prepared for the Committee on Branch, Group and Chain Banking during the last half of 1930 and the first half of 1931, excluding 211 banks for which information is not available as to the percentage of claims realized by depositors. Comparable data for national and State banks are not available for the period 1931-1935. The appendix contains, however, a distribution of suspended national banks completely liquidated during the period 1931-1935 according to the percentage of claims realized by unsecured creditors and according to total assets at date of suspension. Such figures indicate that, insofar as the period of liquidation 1931-1935 is concerned, there is relatively little difference, as between large and small banks, in the per centage of claims realized by unsecured creditors. ~ 88 Losses by Size of Towns The average percentage of claims realized by depositors in completely liquidated banks, distributed by the size of towns in which the suspended banks were located, is shown below. Table 37 — Population of town Under 1,000 1,000-5,000 5,000-10,000 10,000-25,000 25,000 and over Total PERCENTAGE OF CLAIMS REALISED BY UNSECURED DEPOSITORS AND CREDITORS IN SUSPENDED BANKS, BY SIZE OF TOWN Average percentage of claims realized by Unsecured depositors in 1,255 Unsecured creditors completely liquidated . in 423 national national and State banksi/ banksfy 49,0 53.6 67.7 67.3 55.8 55.7 68.4 64.3 77.3 55.7 62.0 52.0 1/ Banks suspending during 1921-1930 which had been completely liquidated at the time the schedules were prepared for the Committee on Branch, Group and Chain Banking, with the exception of 142 State banks for which information as to claims and payments was not available. 2/ Banks suspending during 1921-1935 which had been completely liquidated by October 31, 1935. Exclusive of 4 banks that had only nominal amounts of assets administered by receivers, the majority of creditors* claims having been assumed by purchasing banks, also of 42 national banks that had no unsecured claims when receivers were appointed. The table shows that, ih the case of 1,255 national and State banks completely liquidated during the 10-year period 1921-1930, unsecured depositors of suspended banks in towns with a population under 1,000 realized an average of 49 percent of their claims, and that the percentage increased as the size of towns increased to an average of 67 percent in the case of suspended banks located in places with a population of 25,000 and over. ~ 89 Similarly, in the case of 423 national banks liquidated during the 5-year period 1931-1935 the percentage of claims realized by unsecured creditors rose from 56 percent in the case of banks located in places with a population under 1,000 to 77 percent at banks located in places with a population of 25,000 and over. Losses by year of suspension The percentage of claims realized by unsecured depositors and creditors of banks suspended in the early 1920's was lower than at tanks suspended later, except in the case of State banks during the early years of operation of the deposit guaranty funds. Only very general comparisons by year of suspension can be made, however, because of the fact that the amount collected by receivers is greatly affected by changes in the values of bank assets after suspension. The recovery of values since the banking holiday, for example, has made it possible in many cases to pay creditors in full. Another factor which makes such comparisons inconclusive is that many of the banks suspended in the later years have not as yet been completely liquidated, particularly those that were most heavily involved, with the result that the indicated experience of banks suspended in recent years and already liquidated is not a true average. Still another factor making for a high rate of return on claims against banks closed in recent years is the granting of loans by the Reconstruction Finance Corporation to receivers of closed banks for the very purpose of expediting dividends to depositors. Nevertheless, there were factors in the early 1920!s which made for low dividends to unsecured depositors, such as the heavy borrowings so common to the post-war period. The table below shows such data by year of ~ 90 - suspension as are avaixabiesubject to the limitations already indicated. It also indicates the relatively large part of collections by national bank receivers used to make payments to secured and preferred creditors in the early years, which, of course, had an adverse effect on payments to unsecured depositors. Table 33 — Year of suspension 19a PERCENTAGE OF CLAIMS REALIZED BY UNSECURED DEPOSITORS AND CREDITORS OF SUSPENDED BANKS, BY YEAR OF SUSPENSION Average percentage of claims realized by unsecured depositors in 1,255 completely liquidated national and state banks 1/ 267 national 988 State, b anks -a banks Average perPercentage of payments centage of from collections claims realized made to secured and by unsecured preferred creditors creditors in 423 national 267 national|423 Natjanal banks*/ banks!/ I banksii/ 1922 1923 1924 35.1 40.6 35.9 51.3 60.3 43.1 49.3 45.3 3/ y 30.0 55.1 3/ 3/ 51.6 44.7 82.5 79.2 59.1 48.8 1925 1926 1927 1928 58.5 71.6 61.0 2/ 50.4 58.8 68.0 3/ 59.7 51.4 60.2 64.4 34.5 24.1 40.9 3/ 39.7 41.3 36.2 42.0 % 3/ 59.6 81.7 80.0 3/ 3/ 3/ 38.7 39.6 28.4 1929 1930 1931 K 3/ l/Banks suspending during 1921-1930 which had been completely liquidated at the time the schedules were prepared for the Committee on Branch, Group and Chain Banking, with the exception of 142 State banks for which information as to claims and payments was not available. 2/ Guaranty Fund payments included. 3/ Percentages omitted because the number of banks is not sufficient to produce a significant av^ri^e. 4/ Banks suspending during 1921-19^5 which had been completely liquidated by October 31, 1935. Exclusive of 4 banks that had only nominal amounts of assets administered by receivers, the majority of creditors1 claims having been assumed by purchasing banks, also of 42 national banks that had no unsecured claims when receivers were appointed. - 91 BANK 'SUSPENSIONS, 1892-1935 Preliminary draft Confidential CHAPTER VI EXPENSES OF LIQUIDATION AND LOSSES TO STOCKHOLDERS OF SUSPENDED BANKS Expenses of liquidation National banks. and costly process. Liquidation of suspended banks is generally a slow In order to throw some light on these costs, the ex- penses of liquidating national banks during 1921-1935 have been compiled from annual reports of the Comptroller of the Currency and computations have been made of the ratios of such expenses to total assets at time of suspension and to collections from these assets. The-ratios are presented by geographic divisions in table 39 for national banks completely liquidated during 1921-1930 and 1931-1935, respectively. A comparison of the two periods shows that the average ratio of expenses to total assets declined slightly, for the United States as a whole, from 5 percent for 267 suspended national banks whose liquidation was completed during the earlier period to 4.7 percent for 465 national banks completely liquidated during 1931-1935. The ratio of expenses to total collections declined in a larger proportion, from 8.5 percent to 6.4 percent. The lov?er average ratios in the period 1931-1935 may be accounted for in part by the fact that, of the 465 banks liquidated in this period, 73 paid unsecured creditors 90-100 percent of their claims and incurred less expenses because the liquidation period generally \Tas shorter. In the latest annual report of the Comptroller of the Currency, however, it is stated that during the past two years . n a entirely new item of expense has been incurred in the liquidation of national - 92 ~ banks, namely, interest paid on money borrowed from the Reconstruction Finance Corporation against assets in closed banks for the purpose of expediting payments to creditors. Table 39 - RATIOS OF EXPENSES OF LIQUIDATION OF NATIONAL BANKS TO TOTAL ASSETS AT TIME OF SUSPENSION AND TO COLLECTIONS FROM SUCH ASSETS, BY GEOGRAPHIC DIVISIONS Geographic division Ratio of expenses to assets at tine of suspension 267 banks 465 banks liquidated in liquidated in 1931-19352/ 1921-1930y Ratio of expenses to collections from assets 465 banks 267 banks liquidated in liquidated in 1921-19301/ 1931-19353/ New England Middle Atlantic East North Central 2J20.0 3.2 3.8 4.5 3.3 4.6 •2/13.7 4.5 5.0 4.9 4.8 5.7 West North Central South Atlantic East North Central 5.5 5.4 4.0 5.4 3.5 2.2 9.3 9.6 6.4 7.6 4.7 3.0 West North Central Mountain Pacific 4.1 5.3 5.9 5.2 4.6 5.6 7.2 9.6 8.1 7.9 6.5 6.6 5.0 4.7 8.5 6.4 United States 1/ Banks which suspended during 1921-1930 and which had been completely liquidated at the time the suspension schedules were prepared. 2/ Banks which suspended during 1921-1935 and which were completely liquidated during the period October 31, 1930 to October 31, 1935. 3/ Not representative — covers only 1 small bank. Considerable variations in the ratio of expenses of liquidation are evident in different sections of the country. Too few banks are included, however, in the figures for some of the geographic divisions to justify very definite conclusions. Nevertheless it is clear that the ratios of expenses - 93 of liquidation to total assets and to total collections were highest at banks in the western states, wher- suspensions were most numerous. Table AO gives a percentage distribution of national banks completely liquidated during 1921-1930 and 1931-1935, by amount of total assets and by ratio of expenses of liquidation to total assets. The table shows that the expenses of liquidation in proportion to total assets have been materially higher at the smaller banks than at the larger banks about 25 percent of the small national banks during both periods were liquidated at a cost of more than 10 cents oer $1 of assets remaining at the time of suspension, whereas the expenses of liquidating the majority of the larger banks was less than U cents per $1 of book assets at time of suspension. ~ 94 Table 40 — PERCENTAGE DISTRIBUTION OF LIQUIDATED NATIONAL BANKS, BY AMOUNT OF TOTAL ASSETS AND BY RATIO OF EXPENSES OF LIQUIDATION TO TOTAL ASSETS Size group — total assets Percentage of liquidated banks with following ratios of expenses of liquidation to total assets 4$ 10$ Total 4-6$ 6-8$ 8-10$ 1 or over or less 267 banks liquidated in 1921-1930^ Under §250,000 250',000-500,000 500,000-1,000,000 1,000,000 and over Total 13.6 9.9 42.9 66.7 11.8 35.8 46.9 18.5 26.4 30.8 8.2 11,1 23.6 12.4 23.2 26.2 22.9 14.2 2.0 24.6 11.1 100.0 100.0 100.0 100.0 13.5 100.0 3.7 465 bamcs liquidated in 1931-1935^ Under ^250,000 250,000-500,000 500,000-1,000,000 1,000,000 and over Total 13.0 10.3 25.9 55.5 20.7 32.6 44.7 38.9 21.3 23.0 25.9 3.7 18.4 20.8 2.3 1.9 26.6 13.3 1.2 100.0 100.0 100.0 100.0 19.9 31.2 20.5 14.0 14.4 100.0 1/ Banks which suspended during 1921-1930 and which had been completely liquidated at the time the suspension schedules were prepared. 2/ Banks which suspended during 1921-1935 and which were completely liquiaated during the period October 31, 1930 to October 31, 1935. State banks. Comparable information in connection with the expense of liquidating State banks is not available, since annual reports of State bank commissioners generally give little or no data on the subject. In the case of three states, however, where the annual reports do contain sufficient information to permit the calculation of the ratios of expenses of liquidation to total collections from assets, the following ratios have been derived; - 95 ~ Period Number of banks completely liquidated Oregon 1921-1934 North Carolina 1927-1934 Michigan!/ 1889-^935 28 79 22 Ratio of expenses of liquidation to total collections (percent) 7.16 8.44 11.10 1/ Court receiverships only. The Oregon ratio is about the same as the average for national banks, while the ratio for North Carolina is somewhat higher and that for Michigan materially higher. The Michigan ratio, however, relates to court receiver- ships only. Losses to stockholders of suspended banks The 5,712 banks that suspended during 1921-1929 had an aggregate capital stock of 0225,000,000 and the 7,924 that suspended during 1930-1935 had an aggregate capital stock of $780,000,000, or a total of $1,000,000,000 for the 15-year period. In view of the heavy losses sustained by bank de- positors, even after collections from assessments made upon stockholders, it is obvious that the stockholders lost practically their entire capital investment, apart from assessments paid under the double liability clausel/. At the time of suspension, of course, any surplus and undivided profits shown by the books of suspended banks was non-existent, since even the capital stock account was impaired in nearly all cases. Even the aggregate amount of capital stock of the suspended banks and of assessments collected does not adequately measure the losses sustained by stockholders, as many of 1/ Recent changes in the National Bank Act . n in the banking laws of many ad States have done away with assessments on stockholders of insolvent b*nks. ~ 96 them purchased the stock considerably above par value and in some cases the stock could have been sola far above par value when times were good and bank earnings were high. Nevertheless, the only satisfactory measure of losses sustained by depositors are the figures of capital stock of suspended banks and such data as are available with respect to assessments collected from the stockholders. A computation made covering 267 suspended national banks which were completely liquidated during the period 1921-1930 indicates that collections on assessments averaged 45 percent of the aggregate capital stock, and a similar computation recently made covering 465 suspended national banks completely liquidated during 1931-1935 gives practically the same ratio. The only corresponding information now available for State banks relates to 529 suspended State banks that were completely liquidated during the period 1921-1930; In the case of these banks collections averaged37 percent of aggregate holdings of capital stock. In many instances, also, a considerable amount of assessments were collected before the suspension of the banks, in fact, in the case of 927 national banks which suspended during the period 1921-1930 it was found that assessments prior to suspension averaged 34 percent of capital stock. Data regarding assessments on shareholders of State banks prior to suspension are much less satisfactory than for national banks, but thestudy made by the Federal Reserve Committee on Branch, Group and Chain Banking indicates that, in a number of States where the information was ~ 97 - reported, assessments before suspension averaged around 30 to 35 percent of capital stock, or about the same as in the case of national banks. On the other hand, many of the States with heavy suspensions reported practically no or very little assessments before suspension. It is known, how*- ever5 that in many instances important directors or stockholders (of national as well as of State banks) either made large outright contributions to capital accounts of banks in efforts to save their institutions, or purchased at book value worthless or questionable assets. Furthermore, in some instances large amounts of such assets have been transferred to affiliated companies organized or used for that purpose. Assessments in the case of suspended banks which were later reopened or taken over were probably not as high as those liquidated, but it is likely that a higher percentage of such assessments was collected. While there are no data to base an estimate of collections from suspended banks reopened or taken over, there is no reason to suppose they would average materially lower than in the case of liquidated banks. In the above circumstances, it would appear that losses sustained by stockholders of national and State banks suspended during 19.2L-1935 amounted to at least §1,400,000,000, made up as followsi - 98 Table 4l — ESTIMATED LOSSES SUSTAINED BY STOCKHOLDERS OF SUSPENDED NATIONAL AND STATE BANKS, 1921-1935 (In thousands of dollars) Total Capital stock of banks suspended in — 1921-1929 1930-1935 219,350 772,753 National banks 47,352 261,846 i State banks 171,998 510,907 Est-ima+.prt flRRPSfiTUPn'hs 252,675 Total 1,383,917 448,337 935,580 1/ 45 percent of capital stock in the case of national banks and 37 percent in the case of State banks. Available statistics by states and classes of banks, pertaining to losses sustained by stockholders of suspended banks, are shown in the appendix. Preliminary draft Confidential ~ 99 - BASK SUSF5IJSI0ITS, 1892-1935 CHAPTER VII CAUSES 07 BAHI SUSPENSIONS The foregoing review of bank suspensions in the United States shows that in "good times" as well as in "bad times" large numbers of banks have suspended, involving depositors' losses running into billions of dollars, and when through successive years of economic depression conditions became steadily worse the banking structure collapsed completely. This cloarly demonstrates that our banking structure has been indefensibly weak* Some measures of reform have been adopted, particu- larly in the last few years, but these corrections have not exhausted all of the channels of improvement. The complete correction or reform of the banking structure can be accomplished only if the causes of weakness and failure are known and understood. "Causes" of bank sus- pensions, however, cannot be enumerated in a straight-forward list, since the underlying factors are by no means coordinate and of equal importance; thoy are likely to occur in a number of combinations and with different degrees of importance in different circumstances, and individual failures often are the result of a combination of causes varying in importance and character. "Immediate" causes of bank failures. In our long, failure-rstudded history of banking most of the institutions which suspended business were subsequently proved to be insolvent. This, however, does not prove that insolvency is the prime cause of failure. banks Indeed the large number of which were found to be insolvent and unworthy of support at the ~ 100 time of the banking holiday is substantive proof that insolvent "banks can, with good luck and without supervisory interferenco, remain open for a long time. The immediate factor which has caused banks to fail has almost always been the lack of cash. In a few instances supervisory authorities have closed banks before cash shortages wore evident and in other instances boards of directors have closed their banks before cash reserves were depleted, but generally this action was in contemplation of an inevitable shortage of cash. Such shortages are almost always due to deposit losses; which, in turn, arise from a number of circumstances. In some cases, the confidence of depositors has been shattered, and the resulting withdrawals of deposits through either the tellers1 windows or the clearing houses have reduced cash reserves* In other instances, as in the case of agricultural communities or other areas where seasonal industries predominate, payments are made to outsiders during the production season in excess of cash income, resulting also in depleted cash reserves* In declining communities the excess of payments to outsiders con- stitutes a regular drain on the cash reserves of the local bank or banks, Fundamental or underlying causes. While the loss of cash reserves is the immediate cause of the majority of suspensions it is not the fundamental or underlying cause. The loss of cash is something that can happen to almost any bank, and by the tenets of sound banking this contingency should be provided for in the loan, investment, and reserve policies. The inability to replenish cash reserves is a condition which arises from holding assets of an inferior quality — assets which cannot be sold with- out loss or used as collateral for borrowing. It is usual among authori- ties to charge this regrettable condition to bad management; it is cer- tainly reasonable to assume that with management of the highest integrity ~ 101 - and intelligence there would have been fewer bank suspensions. The supposition of management of the highest order, however, is rather contrary to the characteristics of our banking structure* In the two decades follow- ing the turn of the century the number of new banks organized was considerable, and with this expansion in the number of banks during a relatively short period the quality of bank personnel declined. Whinesses in the banking structure» Many factors of weakness in the banking structure have previously been demonstrated in the chapter dealing with the distribution of bank suspensions among the various sizes of banksv.communities, etc. The preponderance of failures among the small banks and in small communities, particularly in the States that experienced a considerable expansion in the number of banks during the first two decades of this century, is convincing evidence that there were too many banks. Another weakness of the structure was revealed by tho large number of failures of very large banks in 1930 - 1933» rainy of which had grown rapidly as a result of promotional methods or had been associated with the promotional development of large groups and chains. The failures of such banks as the Bank of the United States, How York City, and of two large banks in both Detroit and Cleveland, demonstrate that size attained in a competitive market of mergers and consolidations may be quite disadvantageous. The advantages of size gained by the bank itself through participation in expanding group banking organizations wore not necessarily beneficial to the general ran of depositors, as the weakness of parts of such organizations spread and affect affiliated banks. In a nunber of cases banks have been forced to close because of the loss of cash funds sustained in the failure of an important city correspondent. For example, a number of banks in Kentucky and southern ~ 102 - Indiana wore forced to close soon after the failure of t i Kational Bank le of Kentucky in Louisville. There is one structural matter which has not been dealt with in this report but which is an important banks — element in the strength of our the gradual drift away from commercial banking l/. Hie growth of time deposits in the member banks of the Federal Reserve System was due, in part, to the lower reserve requirements put on s^ch deposits. Their growth raised the problem of finding employment for those deposits (because the commercial demand was not adequate to absorb them) at a rate which would justify the interest cost which resulted from the competition for such deposits* The testimony of bank examiners and others familiar with the internal matters of such bar2-:s lias uniformly criticized tho results of this general change. It has been claimed that the banks assumed additional liabilities with essentially the same degree of volatility as their demand liabilities but without the compensating advantage of greater liquidity and "shiftability** of commercial assets# General economic factors. The direct responsibility of bark management and the flaws of our banking structure have not been tho only causes of bank suspensions. There are certain elements in economic affairs such as local or general business depressions and land and socurity booms, which cannot but affect the fortunes of oven the stro:i(;est and most prudently managed banks. In addition the vagaries of nature such as flood, drought, hail, etc., may be factors causing bank suspensions. A reasonably prudent bank management in a good banking structure should be 1/ The changing character of bah!: assets and liabilities is discussed in Studay Ho. 3, "Tho Conplexity of the Banking Structure." - 103 able to nullify a part of the effect of these factors, but the fluctuations in asset valines which occurred in the business depressions of 1921 and 1930 * 1933 were greater than could be reasonably anticipated by competent bankers. In the cases where this factor has been combined with heavy losses of dexoosits, many well-managed banks failed. The great increase in bank failures which followed the World War has been generally ascribed to the depression of agriculture during this period. The expanded farming facilities produced more goods than the post-war markets could absorb, so that the prices of agricultural products and land were seriously depressed. Lax loan and collection policies. Tho measurement of the element of bank management 1/ and its part in causing or averting bank suspensions is a complex problem. One of the few works on internal factors of weakness in banks is a study prepared by the Federal Reserve Coranittee on Branch, Group, and Chain Banking, "225 Bank Suspensions — Case Histories From Examiners1 Reports". This chapter has drawn heavily on the findings of the Committee^ report and the material has been used to a large extent without specific reference thereto. The Committee study includes a frequency tabulation of the various types of criticism made by the examiners, classified under the following heads: Loan and collection policies Investment policies Other operating policies Criticism of baiik j>ersonnel Economic, climatic* and competitive factors 1/ For detailed discussion of problems relating to bank management, see the separate report on that subject. That report indicates that incompetent management was the cause of failure in the case of one-third of the 1,780 national banks which suspended during IS65 - 1931 > a n & a "combination of incompetent management and local financial depression from unforeseen disaster" was given as the cause in another one-sixth of the cases. The "Report of Study Commission for Indiana Financial _ Institutions (1932)" indicates that the principal causes of/mSi^^x 01 banks in 1925 - 1931 vrero improper loan policies, inefficient management, declining price levels and earnings of borrowers, psychological attitude of the public, and improper chartering of banks. - 10U Criticisms of loan and collection policies of the 225 banks included in the survey were summarized under the categories listed below* Opposite each heading is shown the frequency of occurrence in the examiners1 reports* Number of times mentioned out of 225 cases Pfrpe of criticism Lax lending methods Slack collection methods Unwise loans to directors and officers lack of credit data Capital loans KPlaced paper" Excessive loans to tenants Loans subject to prior liens Loans to accommodate other banks Loans based on inflated land values Excessive loans on city real estate Evasion of loan limit by splitting lines with other banks Unwise loans to relatives and friends Attempts to capture business by loans Enphasis on profits over safety lion-resident loans Loans collateralled by bank!s own stock Automobile paper Belief in "service to c n f n - i y by loa,ns" ofirit Loans for security speculation Concentration of credit on "one crop" or industry Loans to "straw men" to loermit speculation by officers 152 133 110 S3" H6 27 27 23 22 21 15 it 13 12 10 g 6 b 3 3 2 The most common criticisms of loan policies in the above list are those that relate to the care and skill with which loans are made. The making of loans to the interests of bank officers or directors, their friends and relatives was also iniportant* These malpractices are scrupu- lously avoided by well-trained bankers with professional integrity* The evidence suggests that a more careful training of those that engage in the banking business would be of substantial assistance in eliminating these evils* ~ 105 A number of rather lengthy quotations excerpted from tho examina- tion reports gave further information of interest in this connection. They indicate that improper loan policies were usually matters of long standing, and that the actual suspension of banking operations did not occur in many cases until long after the bank was seriously involved with poor loans. This supports the general proposition that the imme- diate occasions for bank suspensions are usually external circumstances, while the underlying weakness of such banks arises from internal policy. The quotations referred to above also indicate that the loans made to officers, directors, relatives, and friends, though improper, usually were not made v/ith vicious intent, but frequently with the honest conviction, born of optimism, that the loans were good and proper. Mistakes made with the best of intention, however, are not the less damaging and are all the more dangerous since examiners do not have the same moral ground on which to force corrections. Capital loans of suspended banks, according to the comments by examiners, frequently had their origin in short~tern loans which became slow and on which long-term and capital assets were taken as collateral. Insofar as this was true, the criticism of capital loans is, of course, nothing more than further elaboration of the criticism of "Lax lending methods". A balance sheet analysis showed that the ratio of "Other real estate1' to total assets held by the 225 banks that subsequently failed increased in the years prior to failure, whereas the ratio at banks which did not fail, did not increase during the same interval. The usual origin of "Other real estate" is by foreclosure following default on loans. - io6 Poor investment practices. Prior to 1931 the market for the type of investment securities commonly purchased by banks was so stable that the contribution of poor investment practices to the insolvency of banks was probably negligible. There xuidoubtedly were many cases in which banks sus- tained serious losses on securities, but the criticism by examiners of investment policies was infrequent during this period. In the years 1931 1932 the situation was changed considerably, and the market for investment securities became so unsettled that many issues which were deemed to be reasonably conservative in the pre-depression period dropped to but a fraction of their former value. Even with this considerable factor it was found that deprecinfcion of securities was the main cause of failure in only six out of 105 cases of bank failures and was a major contributing cause in only four other cases. In this study of investment policies there were several specific types of malpractice which were uncovered, such as The purchase of bonds with high yields The trading of bonds for turnover profits The purchase of convertible bonds which fluctuate in value with changes in stock prices The purchase of unlisted bonds and so-called "one-house" bonds The purchase of real estate and irrigation bonds The bonds of well-known companies enjoying a high investment repute have typically borne only a modest yield, and high yields are typical only of the bonds of lesser-known enterprises not enjoying a wide market. Such investments obviously do not qualify in any way as secondary reserves. Likewise, the type of securities which give trading profits must fluctuate in price and such movements can produce losses as well as gains. The practice of 107 - ~ "bond trading, therefore, can be carried on only in second rate issues which are likely to cause losses. The purchase of securities United to a narrow market and having only real estate security is most obviously an improper banking practice. In addition to the improper practices described in the case study to which reference has been made, there are several other improper and imprudent practices, some of which are covered by provisions of the Banking Act of 1933% Most important of these practices has been the purchase of securities by banks from their own security affiliates, or from the security affiliates of correspondents which were engaged in the sale or underwriting of securities. Over-ex tension of loans and excessive borrowings by banks. Regardless of tho high quality of loans and investments of a bank, it is easily possible for an institution to get itself in such an over-extended condition that deposit losses necessitate disadvantageous sales of assets or continuous borrowings. This condition is not necessarily unsafe if all the earning assets are of impeccable character but, becauso of the narrow margin of safety, such a bank is less able to withstand natural and unpredictable hazards, such as business depressions, droughts, floods, crop failures, etc. In tho Committee^ case study previously alluded to, it was observed that the proportions of loans and investments to deposits were considerably higher for the banks that suspended than for the banks that survived. This was true for a number of years prior to failure. In addition, the examination reports of these institutions mentioned on ov^r-eattended condition in 106 of the 225 eases and continuous borrowing (the same condition) was mentioned as a criticism in jG cases. The study - 10S brought out that the suspended banks showed a much greater proportion of borrowings than the bariks that survived; that the policy of heavy borrowing existed for a number of years prior to failure; and finally, that the banks that suspended in the years 1921 to 1930 were heavier borrowers than the banks that suspended in the year 1931 • Of t i 225 ^o banks included in the study, those which suspended in 1921 - 1927 had combined borrowings of more than 100 percent of their combined capital and surplus, and in most cases these borrowings dated back to the last half of 1920* The banks that failed in the years 1922 - 1931, on the other hand, did not have such a large proportion of borrowings at the date of suspension, nor did thoy have a history of such excess borrowings, though the amount that they did borrow was in excess of the amounts borrowed by bariks which remained active* As a matter of feet the sample of banks which remained active had no borrowings after 1922. Large investments in banking house. Large investments by banks in banking house and fixtures may be a strong competitive force in attracting and holding depositors, but such e:q>enditures have no doubt contributed a great deal to the difficulties of banks by causing shortages of reserves and the iispairmont of effective capital. The proportion of funds invested in such items was Almost twice as large for the banks that failed as for the banks that survived, as shown by the case study already cited* Both the "marking up" of bank buildings and the failure to depreciate this item were mentioned as criticisms of operating policies* Dividend policiest operating losses, etc* Just as excessive investment of banking funds in non-earning assets such as ban!:: building may im- ~ 109 - pair the capital which protects deposits, the depreciation of capital by the payment of unearned dividends or largo salaries, high rates of interest paid on deposits, and other operating expenses may give rise to operating losses which impair capital. In the co.sc study made by tlie Branch, Group, and Chain Banking Committee, the payment of dividends not currently earned was criticized by the examiners in 29 instances. A survey of the earnings and dividend reports of the banks involved indicated that an even larger number uad been guilty of this practice. The result of inadequate earnings either because of inadequate gross revenues or excessive operating e:q?enses is important not only because of the direct capital impairment created by the loss, but because of the incentive which such a condition gives bankers to take extra hazards and invest in high-yield and unsafe forms of securities. One of the expenses which lias been an important source of operating losses has been the payment of excessive ratos of interest to depostors l/ which resulted from the active competition for deposits* Tko ;payme:it of excessive rates of interest was mentioned as a criticism of operating policies in IS of the 225 cases in the Committee Report. Direct quotations given in this report mention the payment of rates as high as 5 percent to S percent on deposits. Provisions of the Banking Acts of 1933 and 1935 have keen directed against this practice. Lar.^e deposit accounts. Small banks have accepted large deposit accounts from a single source in many cases. Public funds are a com.ion form of such deposits. Where banks holding such deposits have not pursued l/por a detailed discussion of this and related points, see Study ilo. 2, "Banking Profits, I S 9 2 - 1935". ~ 110 - an investment policy which protected them against reduction or withdrawal of such accounts, this factor has contributed to their suspensions. The Branch, Group, and Chain Banking Committee's case study reports that jjublic deioosits were mentioned in IS examination reports. Other quotations indicate that such deposits have been a substantial factor in the failure of a number of banks. Criminal acts. Various criminal acts including defalcation, embezzlement, and larceny have frequently been mentioned as important factors in the failure of some banks. The Comptroller's reports men- tioned criminal acts as a major cause of failure in about percent of the national bank suspensions prior to 1920, but after 1920 this accounted for a much less significant percentage of the national bahk failures. Since January 193^» when Federal deposit insurance became operative, the major cause of suspensions cited is crininal acts of bank officers^/. Many men of prominence, including public officials, bankers, economists, business men and others, have made statements in speeches, writings, hearings, etc., on the causes of bank suspensions. As may be expected, differences of opinion are apparent from a review of these statements, but weaknesses both in the banking structure and in the management of banks are generally included in all of these statements. A number of thy^e statements have been included in the appendix of this report. 1J "In the case of five of the nine insured banks failing in 193^, suspension was the direct result of criminal activities of bank officers." See 193H Annual Heport of the Federal Deposit Insurance Corporation, pages 68 and 69. — Ill -- BANK SUSPENSIONS, 1890 - 1935 APPENDIX Note It is contemplated that the appendix will include approximately 25 statistical tables which will present detailed figures of bank suspensions, by classes of banks, years, geographic-divisions and States, supporting the summary text tables. These tables will cover about 125 pages. In addition to the tables it is contemplated that the appendix will include selected statements by a number of men of prominence, including public officials, bankers, economists, business men and others, relating to causes of bank suspensions. The appendix to the corresponding volume of the report of the Federal Reserve System Committee on Branch, Group and Chain Banking covered 75 pages. The present study covers a longer period of time than that covered by the Committee, and since this report is intended to be a primary source of information with respect to bank suspensions the appendix to the present s u f r will be somewhat more detailed and consetcc quently larger than the appendix to the Committee report.