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Material prepared for the information of the
Federal Reserve System by the
Federal Reserve Committee on
Branch, Group, and Chain Banking

Members of the Committee

E. A. Goldenweiser, Director, Division of Research and Statistics,
Federal Reserve Board, Chairman
Ira Clerk, Deputy Governor, Federal Reserve Bank of San Francisco
M. J. Fleming, Deputy Governor, Federal Reserve Bank of Cleveland
L. R. Rounds, Deputy Governor, Federal Reserve Bank of New York
E. L. Smead, Chief, Division of Bank Operations, Federal Reserve

J. H. Riddle, Executive Secretary and Director of Research

The Committee was appointed February 2&, 1930* *>y the
Federal Reserve Board


« . . to assemble and digest information on
branch banking as practiced in the United States,
group and chain "banking systems as developed in
the United States and elsewhere, the unit banking
system of the country, and the effect of ownership
of bank stocks by investment trusts and holding

To the Federal Reserve Board:
The Committee on Branch, Group, and Chain Banking transmits
herewith a history and analysis of "branch "banking developments in

The statistical series in this volume in most instances

end with the year 1931.


E. A, Goldenweiser


Chapter .1


Chapter II

The Historical Background
Hard Money and Private Bankers
Incorporated Banks
Foreign Banks and Branches
National Banks
Branch Banking

Chanter III California's Banking Laws
Provisions for Branch Banking
Methods of Acquiring Branches
The Bank Act—General Provisions
Special Aspects of the Departmental System


Chapter IV

Growth of the Modern State System
State-wide Expansion
The Methods of Expansion
Out-of-town Branches
Early Attitude of the Superintendent of Banks
The De Novo Rule
The Development of Controversy
Confirmation of the Power of the Superintendent of Banks 50
Abandonment of the De Novo Rule

Chapter V

Complications of Federal Reserve Membership
The Elements of the Problem in California
The Case of the Large National Banks
The Small National Banks
Opposition of Independent Bankers
Federal Reserve Regulations Prior to 1927
The McFadden Act
Further Growth of Branch Banking in California


Chapter VI

Mergers and Consolidations
Procedure of Mr. Giannini and His Associates
Liberty Bank of America
Bank of America of California
Bank of America
Evolution of the Holding Companies
Security-First National Bank
American Trust Company
California Bank
The Financial Methods


CONTENTS (Cont'd)

Chapter VII

Organization and Administration
The Present Methods in California
The Local Management and Advisory Boards
External Supervision

Chapter VIII

Branch Banking Safety and Service
Favorable Failure Record in California
Influence of Economic Conditions
Effects of State Laws and Supervision
Influence of Branch Banking
Branch Banking Service
Availability of Credit
Large Individual Loans
Loans in Relation to Deposits
Interest Hates to Borrowers
The Monopoly Question

Chapter IX

The Cost of Branch Banking in California
Large Intercommunity Branch Operating Banks
Other National Banks
Country Branches and Country Banks

Chapter X




California is the only State in the Union in which modern intercommunity "branch "banking has had a considerable development,

k law was

passed there in 1909 which pennitted the creation under State charter of
a state-wide "branch "banking system.

By the end of 1931 nearly 60 per cent

of the total hanking resources of the State were in the hands of institutions with hanking offices in more than one town or city, and the branches
in operation comprised over two-thirds of all the hanking offices in the

The same tendency towards larger and fewer hanks, which has been

observed in Canada and other countries where branch banking has been the
predominant system, has also been evident in California, where a few
large branch organizations have grown up and are now transacting over
half of the banking business of the State,
The percentage distribution of resources between the single
office banks and the banks operating branches in the State on December 31,
19311 is illustrated in Chart 1.

Table 1 shows the number of banks and

branches in operation, together with their aggregate resources, according
to the same classification.


- 2 -


DECEMBER 31,1931

- 3-

Table 1 - Banks and Branches in California, December 31, 1931s1)
Number of ifumber of
Unit banks (including one holding
company "group" of 18 banks with
combined resources of about


Banks with branches only in metropolitan area of home office


Banks with branches in and outside
of metropolitan area of home












Total resources


(l) Data from records of Federal Reserve Bank of San Francisco, for all incorporated banks in California,
Includes 3 offices of Bank of California N. A., located in Seattle and
Tacoma, Washington, and Portland, Oregon, with resources in those three cities
of $32>1S7>°00; hut does not include one foreign branch of Bank of America
HT. T. & S. A. located in London.
Of the S05 branches in operation at the end of the year 1931*
those outside the metropolitan area of the home office amounted to 5^3,
representing about 67 per cent of the total*

Five banks were operating

USS of these out-of-town offices, or about 90 per cent of the total. The
resources of these five institutions amounted to about Sh per cent of the
total of all the banks operating out-of-town branches, and to nearly 50
per cent of the resources of all the banks in California*
Of the remaining 29 institutions operating out-of-town branches,
none had more than 5 offices outside its home city and 15 had only one branch
each. For the most part these 29 banks are located in small towns throughout the State, and operate branches in neighboring towns.

In general they

represent a type of branch banking which has been practiced in California

- H-

for over fifty years, and in other parts of the United States since long
before the Civil War*

They could hardly "be described as branch organizat-

ions in the modern sense of the term, although a few of them have in the
past several years embarked upon programs of moderate expansion which may
eventually result in the more widespread aggregations of offices usually
associated with the branch banking system.

At all events, the development

thus far has been accomplished, through mergers and the direct establishment of new offices, mainly by the five largest branch organizations named
in Table 2.

Table 2 - Principal Branch Organizations in California
December 31, 1931

Name of bank


branches tranches



3ank of America U. T. & S. A,

San Francisco



lank of .America
(Under same ownership and
control as Bank of America
N. T. & S. A.)

San Francisco




3ecurity~First national

Los Angeles





\merican Trust Company

San Francisco





California Bank

Los Angeles



ill other branch operating
Total branch operating
Jnit banks





j5 ^







Total all banks
........, ,.,,.,
Includes 3 offices of Bank of California N. A. f located in Seattle and Tacoma,
Washington, and Portland, Oregon, with resources in those three cities of
$32,187,000; but does not include one foreign branch of Bank of America N. T. &
S. A. located in London.

- 5-

Of necessity, the foregoing description represents a mere sketch
of the hanking structure of California. Underlying the present situation
and containing large hut uncertain potentialities for the future, are a
number of complex economic and political forces and tendencies*


arise out of the fact that the hanking system of the State during the past
fifteen to twenty years has "been, and prohahly still is, in a state of

It did not develop originally as a "branch hanking system, as

in Canada, hut as an independent unit system, as in other sections of the
United States, The present intercommunity

"branch organizations, more-

over, were for the most part "built up, not hy the establishment of new
offices, hut hy the conversion of existing independent unit banks into
Another source of complication in the present situation is the
fact that California, like all the other States, has three separate categories of hanking institutions. There are first, those hanks which are
operating tinder national charter and are compelled hy law to he members
of the Federal reserve system; second, those operating under State charter
which have voluntarily become members of the Federal reserve system; and
third, those operating "under State charter which have not become members
of the Federal reserve system. All three categories are represented among
the great branch operating banks of California, and no little confusion
has resulted from the sometimes conflicting legal and administrative regulations under which they perform their functions. To add to the difficulty
of a clear understanding of the situation and a dispassionate appraisal of
branch banking on its merits, the whole subject has been further confused
by controversy, much of which has had to do not with branch banking as such

- 6-

"but with the methods employed to build up certain "branch organizations*
Branch "banking in California, however, has attained to far more
than local significance; it has assumed first-class national importance.
The most immediate reason for this is the situation which involves the
national hanking organization and the Federal reserve system*

Of equal

or greater importance, however, is the fact that in California the development of modern intercommunity branch "banking has taken place under American

The growth of the system in that State constitutes therefore

an important fund of experience, especially with respect to the problems
involved in effecting a transition from one type of banking structure to

This is true, primarily, for the reason suggested above, that

modern branch banking began to develop in California after the existence
in the State for over half a century of the same predominant type of independent unit banking common in the rest of the country.
The experience of California may not be expected always to furnish desirable criteria for legislation and banking practice for the country
as a whole; it has doubtless provided certain object lessons in what to

It is important, therefore, as far as possible to disentangle and

make comprehensible the confused elements underlying the existing banking
structure of the State. The discussion which follows is an attempt to
accomplish this purpose*
In order to do so it will be necessary first to set forth something of the history and the economic background of banking in California.
If possible, it should be made clear whether there was any special reason
why branch operation should attain its fullest development in California
rather than in some other State.

To complete the background, it will be

- 7-

of advantage to present a summary and analysis of the principal provisions
of the Bank Act of 1909 and the subsequent revisions and amendments thereof.

The second part of the discussion will deal with the administration

of the law and the rapid development of "branch hanking; the sometimes confused relationship of California hanking to the national hanking system
and the Federal reserve system; and with certain of the spectacular financial operations associated with the growth of the existing "branch organizations*

The third and last part of the discussion will "be an attempt to

appraise the system of branch banking as developed this far in California
from the point of view of its safety and of its service to the economic


California sprang into existence as a full fledged political
entity almost overnight, following the gold rush of 1849. Thrown together
from all over the two American continents and from Europe and Asia, its
people "brought with them nearly every kind of social and economic custom
and doctrine known in the world. At the same time, their contact with the
great Eastern centers of population of the United States was subject to
two or three weeks1 delay "by the fastest means of communication then in

Thus isolated from the rest of the country, they were obliged

to set to work with the human and material resources at hand to fashion their

The predominant element of the population was American, and

the political traditions were thus largely the same as in the East, hut to
an extent that has not always been fully realized elsewhere, California
repeated the experiences of the Colonists of two hundred years before and
became almost a new nation, with characteristics along many lines, economic,
social, and cultural, which have continued well into the twentieth century.
Gold was the first great source of prosperity, but it did not
turn out in the long run to be the most important. With the passage of time
discovery was made of the extraordinary extent and variety of the potential
agricultural wealth of the new State.

Its soil, in different regions, was

adapted to the profitable growth of nearly every food product of the North
American Continent, from the grain of the northern latitudes to the subtropical and tropical fibres and fruits of the south. Other minerals, to prove

- g -

- 9-

ultimately of greater value than the gold deposits, were found from time to
time, notably the immense quantities of oil. Prom almost every point of view,
the early Californians, perhaps without fully realizing it, were "beginning the
development of one of the richest areas on the face of the earth.

Hard Money and Private Bankers
California's early banking history differs essentially from that of
most other sections of the United States.

Whereas in the East and Middle-

west the chief incentive to the starting of banks was the possibility of issuing paper currency, this motive was never allowed to exist in California.


State came into the Union in 1850, after the sudden growth of population in
1848 and 1849, without passing through the preliminary stage of an organized
territorial government/2) and its constitution forbade the issue of bank
notes for circulating purposes.'3'

Che reason for this prohibition was no

(1' Most of the material for the following sketch of the rise of banking
in California has been taken from History of Banking in California,
by Ira B. Cross, and from Banking in California 1849-1910, by Benjamin
C. Wright.
^ 2 ' The area was under the jurisdiction of a military governor from the time
of its acquisition in August, 1846, until organized under a State constitution on November 13, 1849. California was admitted to the Union on
September 9, 1850.
(3) Sections 34 and 35 of Article IV of the original constitution were as
"Sec. 34 The Legislature shall have no power to pass any
act granting any charter for banking purposes;
but associations may be formed under general laws
for the deposit of gold and silver. But no such
association shall make, issue, or put in circulation, any bill, check, ticket, certificate, promissory note, or other paper, or the paper of any bank,
to circulate as money.
"Sec. 35 The Legislature of this state shall prohibit, by law
any person or persons, association, company, or corporation, from exercising the privileges of banking, or
creating paper to circulate as money."
Apparently the term "banking" was meant to refer only to the business of
issuing currency, since this was generally looked upon at the time as the
characteristic activity of banking.

- 10 -

doubt the prevalence of wildcat "banking in other States and the resulting
wide circulation of all kinds of paper currency, much of it of doubtful value
or entirely worthless.

California could dispense with the convenience of

paper money because her principal industry at that time was the mining of
gold, much of which entered into immediate circulation as currency. At first
it circulated in the form of bullion or dust at around $16 per ounce, and
privately manufactured $50 slugs. In 1854 a branch of the United States mint
was established at San Francisco, and for more than sixty years thereafter
gold coin remained the principal circulating medium in the hands of the people
of the State,
For the most part the banking business of the eighteen-fifties was
confined to San Francisco, which was the principal commercial center of the
Pacific Coast. A number of private bankers were operating in Sacramento, however, and in some of the larger mining camps. One of these, later to play a
prominent part in the financial development of California, was D. 0. Mills, a
merchant of Sacramento, who opened a private bank there in 1850.
The earliest banks generally were little more than privately owned
places for the safe-keeping of gold.

Since a fairly good iron safe was about

the only material requirement, and the more prominent merchants and some of
the express companies already had these, they became bankers for the convenience of their customers. Very soon, however, a number of genuine, though
primitive and rudimentary, private banking institutions commenced operations.
They accepted deposits and made loans, usually at very high rates of interest,
bought and sold foreign exchange, and performed other elementary banking func-

- 11


Several of these were express companies, notably Adams & Co., Palmer,

Cook & Co., Page, Bacon & Co., and Wells, Fargo & Co., the latter now still
existing as one of the great "banks of San Francisco. ( i )
Many of the early institutions called themselves savings "banks,
or indicated in some manner that their primary purpose was the safeguarding
of the money entrusted to them.

!Ehus at the beginning was emphasized another

feature of hanking in California which has been one of its distinguishing
characteristics ever since, the predominance of savings banking alongside of
and often in conjunction with commercial banking.
Because of the legal prohibition of the issue of paper currency,
many of the worst features of wildcat banking were entirely avoided. But
the early banks nevertheless soon encountered the difficulties which might
have been expected from their mushroom growth and their often inexperienced

In 1855 most of the express company banks closed their doors,

some of them only temporarily.

They were followed in short order by practi-

cally all the private banks in San Francisco, Of the express conipany banks
only the Wells Fargo institution appears to have survived the difficulties of
this and the following year. Several of the suspended private banks subsequently reopened and continued as before, but the heyday of uncontrolled and
sometimes irresponsible private banking was coming to the end of its brief

Soon after the epidemic of failures in 1855 began the development

in California of what might properly be described in growing degree as a

^ ' Chartered as Wells Fargo & Co., Banking and Express, in 1852 under laws of
New York; nationalized in 1905 by merger with Nevada National Bank; converted to State charter (California) in 1924 when merged with Union Trust

- 12 -

genuine banking system.
Incorporated Banks
The early laws of California provided for the chartering of corporations similar to those existing in other States; "but the few elementary
provisions they contained with respect to banks were of a negative char*
acter.'1' Additions were made from time to time to the general corporation
laws for the regulation and supervision of the banking business, but there
was no comprehensive body of special legislation on the subject until the
passage of the Bank Act in 1909. Meanwhile, as early as 1857 banks began to
incorporate, and from that time forward banking became more and more a business
to be engaged in only by corporations.

The first institution to be incorpo-

rated was the Savings and Loan Society of San Francisco, which was followed
two years later, in 1859, by the Hibernia Savings and Loan Socie

in the

same city. A few years later the movement began to spread to the other towns
of the State, corporate charters being granted in 1867 to banks in Sacramento,
Oakland, and Stockton.

Thereafter the growth of incorporated banking under

the State law, both in San Francisco and in the interior, continued apace with
the development of industry and commerce, although with the setbacks and difficulties to be expected from the ups and downs of business.
Following the failures incident to the depression of 1873 a law
was passed in 1876 compelling "every corporation and all persons and every
person hereafter doing a banking business in this State" (3)
to publish
( i ) See footnote 3, -p. 9.
(2) The Hibernia Savings and Loan Society was originally incorporated as a
stock company, but was changed to a mutual basis in 1864 under a law
which had been passed by the legislature in 1862. It is still in
operation as one of the important banks of San Francisco and is the
only mutual savings bank in California^
Statutes of California.

- 13 -

semiannual statements of condition.

Two years later a "board of "bank com-

missioners was set up, to supervise all incorporated institutions, and in
1887 private banks were required to submit to the board their statements
of condition at the same time as the incorporated banks. In 1905 the private
banks were brought fully under the supervision of the commissioners, after
which some of the remaining ones applied for charters and became incorporated
institutions, while the others played a gradually diminishing role in the
banking system of the State. Finally, under the Bank Act of 1909, they were
required to incorporate or retire from business.
Prior to 1863 all the incorporations were of savings banks, the
commercial banking needs of the community being met mainly by private bankers•
In that year, however, permission was granted savings banks to transact commercial business*

Then began the development, in numbers which were to in-

crease steadily for fifty years, of institutions classified as commercial
banks. Wells, Fargo & Company, incorporated under the laws of New York, had
been carrying on a commercial business in San Francisco since 1852, but the
first California corporation chartered for this class of business was the
Pacific Accumulation Loan Company^1) of San Francisco in 1863, which was
followed in 1864 by the Bank of California.

The latter, still in existence

under the name of Bank of California N. A., had as its first president D. 0.
Mills, previously mentioned in connection with the first bank started in
Sacramento. Of the many other institutions which were incorporated in sub-

( i ) Name changed to Pacific Bank in 1866, According to the Mercantile Trust
Heview of the pacific for June 15, 1924, the Pacific Accumulation Loan
Company was chartered in 1863 as a savings institution, later changing its
operations to those of a commercial bank. f,But the Bank of California,
organized in July 1864," the Review declares, "was the first concern to
be incorporated as a purely commercial bank under the general laws of the
State governing business corporations.M

- 14 ~

sequent years as commercial "banks, a considerable number advertised and
carried on a savings "business as well.

In 1900, and again in the year pre-

ceding the Bank Act of 1909, the distribution of "banks and banking resources
of the State was reported as follows:
Table 3 - Distribution of Banking Resources of California^)

Tyoe of institution

State savings "banks
State commercial "banks
Private "banks
Foreign "banks
National "banks


of total "banks

Per cent
of total













(1) Prom a tabulation in the Eighteenth Annual Report of the Superintendent of
Banks, 1927, p. xiv.
From 1909 until 1913 both the number and the resources of State
incorporated banks increased steadily, the number reaching 548 in the latter
year and the resources $705,871,000. Afterwards the number began to decline,
but the resources continued to increase steadily and rapidly until 1926, when
a maximum was reached of $2,662,558,000.(2) Meanwhile, the Bank Act had been
passed, and the modern State system was taking form.

Foreign Banks and Branches
Another feature of some importance in connection with the present
' 2 ' All figures in this paragraph from a tabulation in the Eighteenth Annual
Report of the Superintendent o£ Banks, 1927, p. xx.

- 15 -

discussion of "banking in California was the early existence of foreign Thanks,
or "branches of foreign institutions, all doing business in accordance with
the State law.

This resulted, no doubt, partly from the cosmopolitan char-

acter of the growing city of San Francisco and its accessibility by sea to
the great centers of wealth and population of the old world, partly from the
influx of foreigners with wider commercial banking experience than was usually
possessed by the American inhabitants during the pioneer period, and partly
from a certain lack of clarity in the early California laws with respect to
the chartering of banks. During the years 1863-1865 as many as five financial institutions operating under British charter opened branches or agencies
in San Francisco.'•*•' Two of these were withdrawn or liquidated in 1866. Two
others were in effect branches of Canadian banks, although chartered in England.

The latter have since been consolidated with other Canadian banks

which have continued to operate them without interruption.

They are now

branches of the Canadian Bank of Commerce and the Bank of Montreal, respectively.

Their business has been reduced to that of agencies dealing in ex-

change, letters of credit, etc., although each of the Canadian banks referred
to owns a separate bank in San Francisco, operating under State charter. The
fifth British institution to establish an agency in California during the
Civil War period was the London and San Francisco Bank, which continued in
operation until 1905, when its banking business on the Pacific Coast was purchased by the Bank of California.

It was through this transaction that the

latter, while a State bank, acquired three branches in Portland, Oregon, and
in Seattle and Tacoma, Washington, which were retained when the bank entered
the national system in 1910.
'*' Ira B. Cross, History of Banking in California, pp. 256-258.

~ IS -

Several other foreign "banks or "branches were subsequently established, notably the Anglo-Californian Bankr Limited, the London, Paris and
American Bank, Limited, the San Francisco "branches of the Hongkong and
Shanghai Bank, and the Yokohama Specie Bank.

The two first named were incor-

porated in England in 1873 and 1884, respectively*

Both continued in "business

separately until 1909, when they were merged to form the Anglo and London
Paris National Bank, thus "becoming legally, as well as in fact, an American

The two last named are still in operation as "branches. Some

of the institutions chartered abroad operated and still operate chiefly in
the field of foreign exchange. Others, however, carried on a general commercial banking "business. Up to the end of the nineteenth century,, in fact, a
considerable proportion of the total commercial banking business of San Francisco was carried on by institutions operating under foreign charters.

National Banks
No national banks were established in California until after 1870.
Even then, because of the disinclination of the public to accept the paper
currency of the United States or of the national banks (which at that time
was not redeemable in specie), a special act of Congress had to be passed,
authorizing the issue of gold notes repayable in gold coin by the issuing
bank on demand, before any banker in California could be induced to take out
a national charter.

The first one to be opened for business was the First

National Gold Bank of San Francisco, in 1871, which was later to become the
important First National of that city.

This was followed in 1872 by the

National Gold Bank of D. 0. Mills & Co., in Sacramento, an institution

- 17 -

finally merged in 1925 with the California National Bank in Sacramento tinder
the title of the latter. By 1880 ten of these national gold "banks were operating in the State. Following the resumption of specie payments in 1879 "by
the United States Treasury, these institutions dropped the word "gold" from
their names and became ordinary national "banks like those existing in other

By 1900, as shown in Table 3 above, the number in operation had

reached 37, and their resources were about 17 per cent of the banking re*
sources of the State.

Ten years later the number had increased to 187, and

they accounted for about 42 per cent of the State's banking resources*


1920 the number had reached a maximum of 305. It was not, however, until
after the passage of the McFadden Act by the Congress of the United States in
1927, that as a result of conversions the resources of the national banks in
California overtook and surpassed those of the banks operating under the State
Many of the national banks, from the beginning, were formed by the
conversion of State or private institutions.

This was particularly true dur-

ing the ten years following 1900, when the National Bank Act was changed to
permit the chartering of institutions with $25,000 of capital stock*


on, there were several conversions back and forth from State to national and
from national to State charter, as one or the other system appeared to offer
greater advantages.

It was, in fact, this shifting from one jurisdiction to

another, together with the rise of problems in connection with branch operation and other developments, which contributed largely to the tangled story
of banking in California to be dealt with in later chapters of this discussion*

IS -

Branch Banking;
Previous to the passage of the Bank Act of 1909 "branch "banking was
practiced in several other States on a much larger scale than in California,
notably in Virginia, North Carolina, Maryland, and South Carolina.'1' As
pointed out above, however, two Canadian "banks (operating under English charters) had branches in San Francisco as early as the period of the Civil War,
and their existence appears to have "been taken as a matter of course. Likewise, some twenty years later in the interior of the State, the private hanking firm of Hideout and Smith, located at Marysville, was operating banks in
five other towns, Gridley, Oroville, Willows, Chico, and Sacramento,^2'


were all connected by private telephoned) ancL administered either as a "branch
system, or possibly more after the manner of a modern group. At all events,
the development does not seem to have occasioned any comment on the subject of
branch banking.

In 1890 the firm was incorporated as the Hideout Bank, and

apparently some of the branches were afterwards discontinued or otherwise disposed of, since in 1905 the bank was operating only one "agency," at Gridley,
.Apart from numerous agencies of express companies in mining camps
for twenty years or so after the gold rush, the Hideout and Smith firm appears
to have been about the only bank to operate branches in California until after
the end of the century,(4) Doubt as to the legality of the "agency" principle

^ ' See Committee on Branch, Group, and Chain Banking, Branch Banking in the
United States,

' S. D, Southworth, Branch Banking in the United States, 1928, p. 30,


^ ' The Bank of California, while it had no branches in California, was
operating several in Nevada at the close of the century. These were
later discontinued, although in 1905 the Bank of California acquired
three branches in Oregon and Washington, which are still in operation.

- i5 -

has been suggested as the reason why the first example of this kind of banking was not more quickly followed,^ ' Doubt was removed, however, by two
opinions handed down by the Attorney general, in 1903 and 1905, to the effect
that corporations, including banks, could establish agencies for all practical purposes wherever they liked within the State. Afterwards there was
moderate progress in the opening of branches until the passage of the Bank Act
in 1909, when 19 "agencies" were in operation throughout the State.(2) rjjhe
majority of these were owned by country banks, operating one branch apiece in
neighboring villages or towns.
Meanwhile a certain sporadic development of city branch banking had
occurred in San Francisco, following the earthquake and fire of 1906*


of the bank buildings had been destroyed, and after the debris was cleared
away and the vaults were cool enough to be opened, temporary quarters had to
be found in the less damaged residential sections of the town. Several offices were thus established, and some of them appear to have been retained
after business was resumed at the main office*

According to the annual re-

port of the board of bank commissioners for 1908, there were then 8 branches
in San Francisco altogether, and 11 in the remainder of the State. On the
other hand, Wright, in referring to the establishment of branches after the
calamity of 1906, declares that ". . . . before the close of 1909 practically
all of these branches were abolished and the business centered once more at
the main office.
At all events the facts do not appear to warrant the
'*' Nineteenth Annual Re-port of the Superintendent of Banks. 1928, p. 30.
(2) Ibid.
Benjamin C. Wright, Banking in California, p. 142.

~ 20 -

commonly repeated assertion that the catastrophe of 1906 was the principal
cause of the rise of branch hanking in California.


A spectacular bank failure in the autumn of 1907 appears to have
been the event chiefly responsible for California's Bank Act of 1909*


was the collapse of the California Safe Deposit & Trust Company, of San
Francisco, the largest of some 32 State incorporated institutions and 11
private banks which were suspended during the panic and depression of 1907
and 190S. Just before its suspension the bank had established several
branches in the city, in an effort to obtain additional deposits and thus
stave off failure, The circumstances surrounding the closing of this large
and apparently sound institution, involving the loss of all but $2,500,000
of its $12,600,000 of resources,'1) were such as to arouse widespread indignation and to precipitate a growing realization that the laws of the
State were seriously deficient in the matter of banking regulation and supervision. A committee was appointed by the legislature, with instructions to
make a study of sound banking in other States and countries, and to recommend
remedial measures,
The legislative committee, in collaboration with a committee of
the California Bankers Association, appears to have made a very thorough
examination of the banking laws, not only of the United States and the various
individual States, but of Canada and other countries as well#

As a result

* ' Eighteenth Annual Report of the Superintendent of Banks, 1927> P» xvt

- 21 -

- 22 -

of its deliberations a law was drafted, incorporating many of what were
considered the most desirable provisions of existing statutes elsewhere
and certain additional features deemed necessary to meet the specia,! requirements of California, The law was passed in the spring of 1909 and "became
effective on July the first of the same year.

It will not he necessary to

present here a detailed summary of this legislation, since the text of the
law itself is readily available, but only to outline its provisions for
branch banking and to examine certain aspects of the remainder of the act.

Provisions for Branch Banking
An interesting feature of the provisions for branch banking under
the California law is that they appear to restrict a privilege already in
existence before the passage of the Bank Act of 1909* Up to that time, as
pointed out in the preceding chapter, there was nothing in the corporation
law to prevent banks from operating offices or "agencies'1 wherever they
liked within the State; although the board of bank commissioners could in
fact regulate the establishment of branches, through their power to grant
or withhold a license to conduct a banking business in a given locality*
Section 9 of the Bank Act, on the other hand, with revisions up to the end
of 1931t reads as follows:

"No bank in this state, or any officer or director thereof,
shall hereafter open or keep an office other than its principal
place of business, without first having obtained the written approval of the superintendent of banks to the opening of such
branch office, which written approval may be given or withheld
in his discretion, and shall not be given by him until he has
ascertained to his satisfaction that the public convenience and
advantage will be promoted by the opening of such branch office;
provided» that no bank or any officer or director thereof, shall
open or maintain any such branch office unless the capital of
such bank, actually paid in, in cash, shall exceed the amount
required by this act by the sum of fifty thousand dollars for

- 23 -

each "branch office opened and maintained in the place where
its principal "business is transacted; and provided, that for
each "branch office opened or maintained "by any "bank, other
than a hank transacting only the "business described in section 6 of this act (trust companies), in any place in this
state other than the place where the principal business of
such hank is transacted, the capital of such hank, actually
paid in, in cash, shall exceed the amount required by this
act in the sum required by this act for every bank hereafter
organized in the place where each branch office is to be opened
or maintained, exclusive of the capital required for a trust department; and provided, also, that for each branch office opened
or maintained by any corporation which has power to transact
only such business as is described in section 6 of this act or
in section U53x of the Civil Code (trust companies), in any
place in this state other than the place where the principal
business of such corporation is transacted, the capital of
such corporation, actually paid in, in cash, shall exceed the
amount required by this act in the sum of fifty thousand dollars; and provided, further, that no branch office may be discontinued without the previous written approval of the superintendent of banks*.
"Every bank, before it opens a branch office, shall obtain the certificate of authority of the superintendent of
banks for the opening of each of said branch offices. The
applicant shall pay for such certificate a fee of fifty dollars; provided, however, that, in order to encourage saving
among the children of the schools of this state, a bank may,
with the written consent of and under regulations approved by
the superintendent of banks and, in the case of public schools,
by the board of education or board of school trustees of the
city or district in which the school is situated, arrange for
the collection of savings from the school children by the
principal or teachers of such schools or by collectors. The
principal, teacher or person authorized by the bank to make
collections from the school children shall be deemed to be the
agent of the bank and the bank shall be liable to the pupil
for all deposits made with such principal, teacher or other
person, the same as if the deposits were made by the pupil
directly with the bank.
"Every bank and every such officer or director violating
the provisions of this section shall forfeit to the people of
the state the sum of one hundred dollars for every day during
which any branch office hereafter opened shall be maintained
without such written approval."
At first glance the language of Section 9» which down to the first
"provided" is the same as the original law of 1909> would seem to indicate

- 24-

an intention to curb the future growth of branch banking in California,
But the very brief discussion of the subject by the legislature at the time
the act was passed affords no reason to believe that the far-reaching changes
which were to occur in the banking structure of the State were anticipated
or even suspected.

During the several years preceding enactment of the act

of 1909> three State banks conducted by people of Japanese origin, having
branches in some of the larger cities, had failed.

Moreover, the rapid ex-

pansion of the California Safe Deposit & Trust Company, through the opening
of city branches, had caused a scandal. The original provision appears to
have been incorporated in the law, without debate, to take account of the
situation then existing and to add certain safeguards against the abuse of
the privilege of operating branches on the small scale already common in
various regions of the State.

It is possible that some members of the

legislature, familiar with the practice of branch banking in Canada, may
have foreseen and considered desirable something of the development which
has since taken place, but no positive evidence to this effect has been
discovered. Whatever the exact intentions of the legislature, however, the
Bank Act of 1909 did in fact specifically provide that branch banking as
previously practiced might continue to be extended, under definite supervision and control, to operation on a state-wide scale.
It will be observed that the superintendent of banks is vested
with power to give or withhold approval for the establishment or maintenance
of a branch, in his discretion. There is no qualification of this power,
except that he shall not give his approval "until he has ascertained to his
satisfaction that the public convenience and advantage will be promoted by
the opening of such branch."

Moreover, by a decision which will be discussed

- 25 -

more f u l l y in the next chapter, (1) the Supreme Court of California has
declared that t h i s section of the law means exactly what i t says.
The additional c a p i t a l requirement for the opening of each new
"branch, apart from the minimum of $50,000, i s based on Sections 19 and 23
of the act as amended up to the end of 193^»

r Cie


former lays down the

minimum paid-up c a p i t a l and surplus for commercial and savings "banks, or
departments, in percentages of deposit l i a b i l i t i e s , exclusive of lawfully
secured public moneys*

For commercial banks (or departments) the require-

ments are 10 per cent of any amount up to and including $1,000,000, and
5 per cent of any amount exceeding $1,000,000.
partments) the minimum i s as follows:

For savings banks (or de-

10 per cent of any amount up to and

including $1,000,000; 5 per cent of any amount exceeding $1,000,000, up to
and including $3,000,000; 3 per cent of any amount exceeding $3,000,000, up
to and including $25,000,000; and 1 per cent of any amount exceeding

Section 23, in conjunction with Sections DO and 82, prescribes

a minimum c a p i t a l i z a t i o n of $50,000, plus a "surplus and contingent fund
equivalent to 25 per cent of such c a p i t a l stock, 11 for any bank, whether
commercial, savings, or combined commercial and savings, "excepting that
any savings bank organized without c a p i t a l stock must have a reserve fund
of a t l e a s t $1,000,000, M ' 2 '

This minimum of $50,000 applies in towns and

c i t i e s of up to 25,000 i n h a b i t a n t s .

I t i s increased to $100,000 for c i t i e s

v 1 ) See discussion of the de novo r u l e , pp. 45-^9 &nd 53-56.
\2) This exception appears to have been made only for the purpose of
legalizing the p o s i t i o n of mutual savings banks already in existence
and having a t l e a s t $1,000,000 of reserves; since i t would be hardly
possible for a new bank without c a p i t a l stock to commence business
with such an amount of reserves,

- 2b ~

of population ranging from 25,000 to 100,000; to $200,000 for those of from
100,000 to 200,000; and to $300,000 for c i t i e s of over 200,000.

If a t r u s t

department i s included, the paid-up c a p i t a l and surplus must "be increased
by $100,000 in a l l towns and c i t i e s of up to 100,000 i n h a b i t a n t s , and "by
$200,000 in c i t i e s of 100,000 and over.
The additional c a p i t a l requirement for new branches based on a
percentage of deposit l i a b i l i t i e s , unless they should include t r u s t departments, does not represent any burden for a bank large enough to operate a
large scale branch system.

Although the t o t a l requirement must be calcu-

l a t e d on the b a s i s of a separate t o t a l of deposit l i a b i l i t i e s for each c i t y
or town, no c a p i t a l need be assigned to any p a r t i c u l a r branch.

In e f f e c t ,

t h e r e f o r e , under t h i s provision a bank with deposit l i a b i l i t i e s of over
$1,000,000 i s required merely to maintain paid-up c a p i t a l and surplus of
only 5 per cent (or l e s s , in the case of savings banks or departments with
deposits of over $3,000,000) of combined deposit l i a b i l i t i e s of a l l i t s
branches or offices in excess of $1,000,000.
On the other hand, the additional c a p i t a l requirement based on
the size of the c i t y or town might act as a deterrent to a bank in the opening of new branches in a large c i t y other than that of i t s p r i n c i p a l place
of business.

A bank in San Francisco, for example, desiring to e s t a b l i s h

a large number of branches in Los Angeles, would have to increase i t s r e quired minimum of c a p i t a l funds by $300,000 for each such branch; and unless
the offices were f a i r l y large, say with deposits of over $3,000,000 apiece,
the r a t i o of required c a p i t a l funds to deposit l i a b i l i t i e s of the parent
i n s t i t u t i o n might become high enough to c a l l a h a l t to the program.

- 27 -

The foregoing provisions of the California law, as already noted,
are those in effect at the end of 1931. Several changes, of varying importance, were made in the intervening period after 1909. One of the most important was an increase in the minimum capita.1 requirement for all "banks and
tranches from $25,000 to $50,000. Another was the stipulation described
above, of additional capital for new out-of-town tranches equivalent to the
amount required,for unit hanks in the towns or cities concerned.

The re-

mainder were for the most part concerned with matters other than branch banking, referring to such subjects as the allocation of the expenses of maintaining the State banking department, examination procedure, and the like*

In all

essentials the provisions for branch banking have remained much the same as
originally enacted in 1909.

Methods of Acquiring Branches
As emphasized in preceding chapters, California had in 1909 a
fully developed unit bank service, with only a few scattered banks throughout
the State operating one or two branches each in near-by villages or towns.
It was therefore possible that any institution wishing to develop an extensive branch organization might encounter difficulty in convincing the superintendent of "tanks that the "public convenience and advantage" would "be
promoted" by the opening of new branches to augment existing banking facilities.

Clearly under such conditions the simplest method of procedure was

to buy up existing independent banks and operate them as branches.
While the California law prohibits the purchase or ownership of
the stock of one bank by another,C1) a bank may nevertheless sell its

(1) Bank Act, Section 37* a s amended 1931. Exceptions are provided "to
prevent loss to the bank on an obligation owned or on a debt previously
contracted in good faith"; and for the purchase under certain conditions
of tne capital stock of joint stock land banks.

~ 2S ~

assets to anothert' ' consolidate with another,^) or merge with another.w)
In each instance the consent of the holders of two-thirds of the outstanding
capital stock mast be obtained "before the transaction can be completed, and
provision is made to indemnify any dissenting minority stockholders by means
of an impartial appraisal of the value of their interests, vJhen the assets
are sold, the purchasing bank assumes also the liabilities (except to the
stockholders) of the selling institution. The shell of the latter can then
be liquidated and application made to the superintendent of banks for permission to operate a branch. In the case of consolidation under the California law, two or more institutions simultaneously relinquish their charters, form another corporation embracing the assets and liabilities of all,
and apply for permission to continue the business of all but one of them as
branches of the new bank. A merger involves procedure essentially similar
to that of a consolidation, but technically one bank is simply swallowed up
by another, the first relinquishing its charter and losing its identity,
the second continuing without change of charter.
Various combinations of the methods outlined above, as well as
certain new devices, have been employed from time to time for the legal acquisition of branches through the conversion of independent banks. These,
however, are properly a part of the developments reserved for discussion in
later chapters. It will be sufficient here to remark that all three of the
sections of the act of 1909 permitting the acquisition of banks appear to
have been designed for purposes other than the spread of branch banking.
(!) Ibid., Section 31.
Ibid., Section 31a«
(3) Ibid., Section Jib.

- 29 -

The Bank Act—General Provisions
Two features of a general nature distinguished the Bank Act of

The first was its comprehensive severity, coupled with arrangements

for such changes as might later prove to "be desirable; the second was its
provision for the complete segregation of the commercial, savings, and trust
departments of such banks as carried on those classes of business.
The severity of the act was deliberate, designed to provide against
every sort of abuse of the privilege of conducting a banking business which
had ever occurred in California or elsewhere. At the same time, however,
in order to permit the modification of such parts of the law as might prove
unnecessarily restrictive, and above all with the view to ensuring its
adaptability to the future economic development of the State, provision was
made whereby changes in the act might be recommended and considered by the
legislature every two years.
A State banking department was established, to supersede the former
board of commissioners, and a superintendent of banks was vested with the
requisite power and responsibility for the enforcement of the law. This official, who since 1911 has been appointed by and holds office at the pleasure
of the governor of tne State/ ' is also required to submit recommendations,
with his annual reports, for the biennial revision and amendment of the act.
On the part of the banks of the State, tne California Bankers Association
soon after tne passage of the law of 1909 set up a legislative committee of
its own, to consult and advise with the superintendent of banks in the matter
of recommending changes in banking legislation. Thus, theoretically at least,
( i ) The original Bank Act of 1909 provided a definite term of 4 years for
the superintendent of banks and required tnat he should be a man of
tested banking experience. An amendment of 1911 left both the term of
office of the superintendent and his qualifications to the discretion
of the governor of trie State.

- 30 -

adequate..provision was made at the outset for the maximum of safety for the
Stated "banking system and for steady progress, under expert guidance, towards perfection for its "banking laws.
Departmentalized banking was made one of the fundamentals of the
act, primarily in order to provide protection for savings deposits. This
measure was emphasized, no doubt, "because of the traditional importance of
the savings business in California banking.

The law, which, in this respect

has remained essentially unchanged, requires that any commercial bank accepting savings deposits shall maintain, as a part of the same corporation,
what is in effect a separate hank.

Section 27 stipulates that "All money

and assets belonging to each department, whether on hand or with other hanks,
and the investments made, shall be held solely for the repayment of the depositors and other claimants of each such department, as herein provided,
until all depositors and other claimants of each such department shall nave
been paid, and the overplus then remaining shall be applied to any other
liabilities of such bank."
The most detailed, as well as the most restrictive provisions of
the law, apply to savings "banks, and equally to the savings departments of
departmental banks. Among other things, their funds, whether obtained from
depositors or shareholders, may be invested in bonds or other securities,
but only of certain specified classes. Only those securities may be purchased which have been certified by the superintendent of banks as meeting
the requirements of txie law.

Loans may be made only "on adequate security

of real or personal property, and no such loan shall be made for a period
longer than ten years."^ ^ Bankers1 bills or acceptances, as well as com-

(1) Bank Act, Section 67* All quotations from the act are from the text
as amended, 19 3^•

- 31 -

mercial paper, may "be purchased or discounted, tut only on conditions similar
in effect to those applying to such operations "by the Federal reserve hanks.
Commercial hanks, or commercial departments, are permitted to perform the usual functions authorized for such institutions by the laws of
other States and "by the National Bank Act. An interesting additional authorization, in view of the definite segregation of the savings function, is the
provision that up to 35 per cent of the total assets of a California commercial hank or commercial department may he loaned against the security of
real estate, for periods up to ten years, (i)
Trust companies, or trust departments, are required to confine
tneir activities to tne operations strictly germane to such institutions*
Since they are not, properly speaking, banks, the provisions of the law concerning them need not he discussed here.
Special Aspects of the Departmental System
As already emphasized, departmentalized hanking as such would appear to permit merely the establishment in California of two kinds of banks
operating under a single corporate cnarter. They are separate and distinct
with respect to capital funds and all assets and liabilities, but their
functions nevertheless and in considerable measure overlap.


banks or departments, as distinguished from savings bajiks or departments,
are permitted to lend a large part of tneir deposits for purposes which are
unquestionably capital investment. They are specifically authorized to engage on a large scale in a class of business usually considered proper only
for savings banks, or at most for the investment of a part of the time deposits of non-departmentalized banks. Canadian banks for example, although
approximately two-thirds of their individual deposits are classified as
U ) Ibid. , Section


- 32 -

"payable after notice," are forbidden to mate any real estate loans.
Under the departmental system of California, the safeguards for
savings deposits would appear to "be as adequate as those applying to the
mutual savings banks of the East, This is true, however, only so long as
it is definitely and generally understood by savings depositors that their
money is not withdrawable on demand.

In the case of purely savings insti-

tutions, such as the mutual savings banks of the East, such an understanding
usually, although not invariably, prevails* Almost everywhere, however,
banks doing a commercial business, whether departmentalized or not, are
accustomed to pay "savings" or time deposits on demand; and txieir customers
are allowed to expect this privilege, irrespective of the legal rignts of the
bank. To the general public a bank is a place to deposit money which may be
withdrawn at will by check, although a purely savings bank is usually thought
of as something substantially different.
Now an important fact in connection with the California State
banking system is that about two-thirds of all deposits in departmental
banks are "savings." The total of these might under the law be invested
in real estate loans of ten years' maturity.

Since 35 per cent of the

total assets of the commercial department may be invested in the same kind
of loans, it becomes clear that a typical departmental bank might be operating, in full compliance with the law, with from 75 to SO per cent of all
its deposit liabilities tied up in long-term loans.
It would be only fair to add, that since the passage of the Bank
Act of 1909 the departmental banks of California have not encountered the
difficulties in connection with real estate loans which have wrecked so
many State and national banks in the great agricultural regions of the
Middlewest, Northwest, and South, One of the principal reasons for this,
no doubt, is that California has enjoyed during the past twenty years an

77 _

economic development of extraordinary diversity and rapidity. Farm real
estate values in the aggregate increased rapidly -until 1920, as in other
States, but afterwards decreased only slightly, as compared with the precipitous decline elsewhere. (1)

Under such conditions almost any amount of

real estate loans could "be made by commercial "banks without apparent danger,
as was strikingly demonstrated in other sections of the country in the years
preceding 1920. But with the decline in real estate values which after a
period of rapid increase must always be looked upon as a possible contingency,
the advisability of permitting commercial banks, or even departmental banks,
to invest such large proportions of their deposits in long-term real estate
loans is being seriously questioned by many authorities on banking, especially
in vie?/ of the tendency noted above, of savings depositors to assume that they
are privileged to withdraw their accounts at will.

v 1 ) On the basis of 100 for the years 1912-191U, the index of farm real
estate values for California was 167 in 1920 and 160 in I929. The
corresponding indexes for the United States as a whole were: 170
in 1920, and llo in 1929.



Eor over ten years after the passage of the Bank Act of 1909»
branch "banking, in the unimportant degree to which it was practiced in
California, remained predominantly an activity of comparatively small country "banks.

In the Bank of Italy, of San Trancisco, there was one exception

which was later to have far-reaching effects upon the entire "banking structure of the State; "but generally speaking the period up to 1920 marked the
continuation of a gradual development which had been going on for many years.
After 1920, branch banking began in increasing measure to be predominantly
an activity of large metropolitan institutions, both in the home office
cities and in other towns and villages throughout the State. A few country
banks continued to operate one or two, or occasionally even three or four,
branches apiece, but the volume of their business, as well as the number
of banking offices involved, steadily declined in relation to the total
banking business of the State. Meanwhile the total number of branches in
the State increased rapidly, and the number of banks began to decline.
Table k shows the number of banks from year to year and the growth in the
number of home city and out-of-town branches.


35 -

Table 4 - Growth of Branch Banking; in California'1)
June 30( 2 )

ITumber of branches
Number of
banks (State Within home Outside home _otal
and national) office city office city


19 24
Dec. 31, 1931











r r '000



(1) Figures compiled "by federal Reserve Committee on Branch,
Group, and Chain Banking, from annual reports of the
Comptroller of the Currency and of the California
State Banking Department.
( ) Data for the years "before 1920 cxse not always as of
June 30, but only of the nearest date thereto for
which information is available.

State-wide Expansion
The spread of branch banking in California has to'a large extent
resulted from the activities of one man and the bank with which he has been
identified—A* P. Griannini and the Bank of Italy (non the Bank of America
National Trust and Savings Association).

The elementary facts of the rise

of this institution, apart from the operations of Mr. (Jiannini beyond the
borders of California, may be summarized as follows:
The Bank of Italy was incorporated under the State law in 190^,
its stockholders and customers being assembled mainly from the Italian

- 36-

speaking population of San Francisco.

Its original capital was $150,000,

but by the end of 1905 its capital and surplus had increased to $310,000
and its total resources to $1,021,290. The progress of the institution was
phenomenal, its resources increasing over a thousandfold in the ensuing
twenty-five years, to $1,055,113,373 at the end of 1929. Its first out-oftown "branch was established at San Jose in 1909. Afterwards, slowly at
first and then with increasing rapidity, the bank began to build up a statewide system of branches. By the end of 1919 it had 25 offices, only a few
of which were in the head office city of San Francisco. By the end of 1929
the number had increased to 292, of which UO were in San Francisco and the
remaining 252 were out-of-town branches, scattered literally all over the
State of California. Meanwhile the institution had become a national bank,
but was also allied by common ownership with another branch operating bank
under State charter,^) comprising 39 offices in Los Angeles and 122 in
other towns and cities of the State, Altogether the two banks which had
been built up in California by the end of 1929 comprised *+53 banking offices
and aggregate resources of over $1,1+00,000,000, to say nothing of their nonbanking affiliates engaged in other kinds of business.
Two principal reasons have been put forward to explain the extensive development of branch operations by the Bank of Italy. The first, as
expressed by a representative of Mr. Giannini himself,(2) was the desire
(1) Bank of America of California, of which the head office was at that
time in Los Angeles, although later moved to San Francisco. See
discussion in Chapter VI.
(2) Hearings on Branch, group, and Chain Banking, Committee on Banking
and Currency, House of Representatives, 1930, p. I3U0.

- 37 -

on the part of the "bank's management to extend the services of a large
metropolitan institution to country districts, through the building up of
a state-wide "branch organization.

The second reason, usually assigned "by

other California "bankers, was that the Bank of Italy developed a branch
organization in lieu of the system of correspondent relationships existing
"between the other great metropolitan institutions and the country hanks
throughout the State. After 1920, so the explanation runs, the Bank of
Italy "began a struggle to establish its position as one of the big banks
of California.

In order to do so it needed a large number of country corre-

spondents. Most of the existing country banks, however, were already being
served by correspondent relationships of long standing with other metropolitan banks. As a newcomer in the field of large scale banking, the Bank of
Italy was faced with the prospect of being able to obtain country correspondents only very slowly. This did not suit the plans of its management,
so the alternative was adopted of buying up country banks and transforming
them into branches.
It is not necessary to reject either of these explanations. The
special form of the bank's development was probably a result of both a
deliberate plan and the peculiar circumstances existing, and both have
worked together to the same end. Moreover, there must be added a third
reason, perhaps the most important of all: large scale branch operation
was believed to be profitable.

The consequences, however, of the process

of buying up country banks and turning them into branches, have been farreaching. Among other things the Bank of Italy immediately began to take
over the services previously performed for the purchased banks by their
erstwhile city correspondents.

When the large banks of San Francisco and


Los Angeles began to lose increasing portions of their correspondent "business, some of them began to build up branch organizations of their own.
Thus to the successful example of the Bank of Italy was added another reason
for the accelerated growth of wide scale branch operation on the part of
other metropolitan banks, which embarked upon programs of branch expansion
as a means of defending their position.
The Methods of Expansion* - Under the California law, as pointed
out in the preceding chapter, branch banking can be expanded by two principal methods, the original establishment of branches as such, and the acquisition of existing banks and their transformation into branches. Both
methods have in practice been employed, but the second has been almost universal in the establishment of out-of-town offices, because of the fact
already emphasized that a system of unit banks was in well established operation when branch expansion began. An account of the actual procedure followed by the Bank of Italy was given by Mr. James A. Bacigalupi, at that
time general counsel of the bank, in his testimony before the House Banking
and Currency Committee in 1930*

"Briefly told, the method used by the Bank of Italy in
acquiring the stock of a bank prior to the early part of 1917
was as follows: California law forbade and still forbids a
bank to purchase the stock of another bank. Section 31 of
the bank act provides only for the purchase of the assets of
another bank, ndiile section 31a provides for consolidation.
The Bank of Italy's practice was to follow section 31, as it
never made it a rule to compel the exchange of stock. The
selling stockholders were always left free to take all cash
or part Bank of Italy stock and part cash in exchange. As a
practical thing, therefore, it was never practicable to
negotiate for the purchase of the assets of a bank and arrange
for the conversion of that bank!s business into a branch of
the Bank of Italy until after a satisfactory sale of the stock


_ 39 ~

had "been consummated. The selling stockholder naturallywanted his cash or Bank of Italy stock in hand "before he
consented to a transfer of the assets to another "bank. As
a consequence, one or several of the principal officers of
the Bank of Italy gave his or their personal notes, secured
by the shares of the "bank "being acquired, to the CrockBr
National Bank; paid the selling stockholders; perfected the
procedure under section 31 of the "bank act and, after consolidation, liquidated the shell of the selling "banking corporation, in which was always left in cash and such assets as
could not lawfully he taken over "by the purchasing bank an
amount equal to the capital, surplus, and profits of the
selling bank plus such bonus as had been paid, if any, which
was just sufficient to pay off the Crocker National Bank.
In other words, a few men pledged their personal credit and
the stock thus acquired for the benefit of all of the stockholders of the Bank of Italy without charging them anything
for whatever personal risk might have been involved in the
transaction* In the beginning this procedure, when the number of banks purchased was small, was not burdensome or inconvenient, but later the hardship became heavy and irksome.
"This fact, in addition to several other inconveniences
encountered in operation, because of the restriction of the
bank act—such as being forced to write off any and all real
estate which had been carried on the bank!s books for a period
of five years, irrespective of its real value, and thereafter
likely to become nobody *s business in a profit-and-loss account,
and so forth, it was decided to incorporate a general corporation under California laws, the beneficial interest in the stock
of which corporation would be entirely owned by the Bank of Italy
stockholders in exactly the same proportion as their Bank of
Italy holdings* In this way this auxiliary could do many legitimate things which the bank could not do, and \?hatever profit or
loss ensued would be enjoyed or borne by the identical stockholders in the exact proportion of their holdings. This auxiliary
company was also intended to keep the bank cleaner. Whenever an
asset of the bank became doubtful or an apparent loss it could
be transferred for a nominal consideration to this auxiliary,
where it would become some one's special duty to look after it,
and thus the probability of its collection or realization be
materially improved- . . . This company, first known as Stockholders Auxiliary Corporation, was incorporated under the laws of
the State of California, June 20, 1917, with an original capital
of $500,000. Subsequent to said date Stockholders Auxiliary Corporation became the purchaser of the banks intended to be converted
into the Bank of Italy system. . . .
"The name of Stockholders Auxiliary Corporation was changed
to National Bankitaly Co. early in 1927."

- 140 -

Mr* Bacigalupi's statement applies primarily to the procedure of
a single bank in building up its group of branches one by one. Later on,
as will presently appear, the size of individual branch organizations, both
in resources and geographic expansion, was also greatly enlarged by what
might be described as the method of wholesale mergers and consolidations of
existing branch systems.

Out-of-town Branches
The operation of branches, or "agencies," in towns or villages
other than the principal place of business of the bank was the common
method of early branch banking in California, as in other States. A bank,
large or small, merely established a branch where it already had customers
or saw good prospects of obtaining new business.

Sometimes this was in

the same city or town, usually in suburban centers, but frequently also
in near-by separate towns or villages.
Some time between 1910 and 1920, however, a distinction began to
be made between home city and out-of-town or intercity branch banking. The
operation of home city branches appears to have been generally considered
a simple and natural activity of metropolitan banks, especially after traffic congestion began to make access to the main financial districts increasingly inconvenient for the residents of suburban centers. But when the Bank
of Italy began to operate an increasing number of offices in places outside
the corporate limits of San Francisco, this development soon came to be
looked upon as a fundamentally different kind of banking.

The distinction,

in view of modern facilities for communication, is somewhat arbitrary and
not always logical.

In the present discussion, however, to avoid misunder-

- 4l -

standing, it must "be kept clearly in mind; for in California almost the
whole of the question of "branch "banking, as a matter of public concern, has
had to do with intercitjr or intercommunity operations.
Early Attitude of the Superintendent of Banks* - As noted in the
preceding chapter, the superintendent of hanks is authorized to give or
withhold his approval of the opening of a branch office, in his discretion,
although he may not give it "until he has ascertained to his satisfaction
that the public convenience and advantage will he promoted "by the opening
of such "branch office." There is nothing in this section of the law to compel him to authorize the opening of a "branch anywhere, under any conditions.
It appears to have heen taken for granted, however, that the intent of the
law was to permit some extension of "branch banking under adequate supervision
and control. Such has in fact been the policy of the successive superintendents since the passage of the Bank Act of 1909, although important differences of interpretation have arisen in the matter of control.
The first superintendent of banks, Mr. Alden Anderson, held office
for less than two years and was occupied principally with matters of organization in his newly established department.

In his one annual report, pub-

lished near the end of the year 1910, branch banking is mentioned only incidentally.

The next incumbent, Mr. W. R. Williams, occupied the office for

over seven years, from February 20, 1911, to November 30, 191S. He seems to
have considered it necessary to formulate a general policy with respect to
a movement which, mainly through the activities of the Bank of Italy, was
beginning to assume new and wider aspects. His first important public
statement on branch banking appears in his annual report for the fiscal year
ending June 30, 19l6, which was in part as followst^1'

'*' Seventh Annual Report of the Superintendent of Banks, 1916, pp. vii, viii.


- 42-

"One of the important economic facts of the fiscal year
as it relates to the affairs of state "banks was the licensing
of fifteen new branch offices.

. . . Ordinarily such "branch offices are located within the
political subdivision in #xich the main "bank has its principal place of business, and they may be viewed simply as additional tellers1 windows provided for convenience of the public. They are justified because of changing centers of busi~.
ness or residential population within the cities and because
of the tendency of some municipalities to absorb suburban communities into metropolitan areas* Without the expedient of
licensing branch offices some of the more remote and isolated
of these districts would be deprived of banking accommodation
because of the capital required by the classification of the
larger cities.
Economic Advantages of Branch Offices.
"Some of the branch offices have been opened in places
far removed from the principal place of business of the parent
bank. These branch offices represent an endeavor of the banks
to expand the field of their operations beyond the territory
which in a strictly local sense is naturally or financially
tributary to them. These branch offices offer to the communities in which they are licensed greater assistance, larger loans
and more extended credit than local institutions can afford.
The justification of their existence rests in this fact and it
is noteworthy that in every instance the parent bank entrusts
very largely its loaning functions to the discretion of local
advisory committees. These, briefly outlined, are the considerations which have directed favorable action in granting to
banks the privilege of opening branch offices. Still another
cause has often influenced my course in granting the desired
license. Occasionally it happens that the general banking tone
of a community will measurably be improved by the licensing of
a branch office of a well established, safely conducted institution. Involved in the wish of such a corporation to enter the
field is its plan to absorb by purchase a stagnant bank and thus
to strengthen the credit situation. "
Again in 1918 Mr. Williams further reported in part as follows:
"One of the most seriously considered and important activities of the state banking department during this period has been
the elaboration of its theory of the essential character and
value of branch offices in the state banking system. For many
years such offices were licensed simply to serve the convenience

Uinth Annual Report of the Superintendent of Banks, 191S, pp. 10, 11.

~ ltf -

of the public in the political subdivision in which was located
the main office of the hank. Each branch office possessed no
further utility than that of an additional teller's window. The
broader economic service of the branch office was unthought of
until branch offices, under distinct authority of the statute,
were licensed in territory remote from the principal place of
business of the bank and in districts in no geographical sense
contributory either financially or economically to the main bank.
"The establishment of these branches immediately accomplished
a public good. Small communities, with rich tributary territory,
found themselves the benetficiaries of larger loans and more substantial credit facilities. Interest rates were reduced and
stabilized. Local situations were strengthened by the absorption
of banks either stagnant or stationary.n
Mr. Williams was succeeded on December 1, 1918, by Mr. Charles P #
Stern, who in his annual reports does not mention any modification of the
branch banking policy outlined by his predecessor in office. Mr. Stern
resigned on June 20, 1921, and was succeeded by Mr. Jonathan S. Dodge, who
promulgated the so-called de. novo rule.
The De. Novo Rule
While the main lines of the procedure outlined above for the
building up of intercommunity branch organizations were those commonly followed in California, not only by the Bank of Italy but in later years also
by other metropolitan institutions, most of the offices in the head office
cities of the banks were originally established as branches. These came to
be referred to presently as de novo branches, and in the course of time the
question arose as to whether this method of expansion should be permitted
for intercommunity operations. Only one instance is on record of the actual
establishment of an out-of-town de_ novo branch by a large metropolitan institution/1^ but other applications to do so were made, and a long and

A de novo "branch of the Bank of Italy was established in Sacramento in
July, 1921.

- Ill* -

"bitter controversy ensued, over the fundamental principle involved.
So long as the Bank of Italy, or other metropolitan banks, made
it a practice to extend branch operations to new territory only by the
acquisition of existing banks, it soon became evident that difficulty might
sometimes be encountered in purchasing the particular institution required*
The obvious alternative was to establish a d£ novo branch.

It was to be

expected that the mere declaration of intention to do this would be sufficient
to cause the directors and stockholders of a local bank to change their minds
about selling the institution, or, what was perhaps more probable, to accept
the price offered.

Inevitably, under such conditions, it became a matter of

very great importance to many of the banks of California, whether or not the
banks of other cities should be allowed to establish d£ novo branches in
their vicinity*
Since the law vested the superintendent of banks with wide discretion to give or withhold his consent, this official was placed in a position of peculiar authority and responsibility.

On the one hand, he could

preserve and promote the interests of independent bankers throughout the
State by withholding his permission for the opening of de, novo branches,
thus either protecting them from the direct competition of banks with head
offices in other cities or making it possible for them to obtain the prices
demanded for their institutions. By the exercise of a consistent policy of
this kind he might materially retard the spread of branch banking, especially
after it became generally known that certain metropolitan institutions had
embarked upon programs of rapid and wide scale expansion.

On the other hand,

he might greatly facilitate the extension of branch operations by the opposite policy of liberality in granting applications for the establishment


of d£ novo tranches.
The situation which necessitated a decision on the question of
principle arose in 1921, not in connection with "branch expansion into country districts hut as the result of a hank in San Francisco beginning an
aggressive extension of its operations into los Angeles.

Certain banters

in the latter city, who were themselves building up city-wide branch organizations, complained that their territory was being invaded and their rights
infringed, since they were in a position to supply all the local banking
service needed.

The San Francisco institution had been operating so far in

Los Angeles only through offices acquired by the purchase of existing banks,
but was believed to be contemplating the establishment of de^ novo branches.
Faced with the probability of being called upon to grant or refuse applications for such branches, Mr. Jonathan S. Dodge, at that time superintendent
of banks, undertook in November, 1921, to formulate the policy of the State
banking department by the promulgation of the so-called de^ novo rule. This
was as follows:
"No branch of any bank shall be created in any locality
other than the city or locality in which is located the principal place of business of such bank except by purchase of,
or consolidation or merger with an existing bank in such city
or locality in which it is desired to create or establish such
branch bank unless the superintendent of banks in his discretion shall find that the public convenience and advantage require it."
This ruling, in effect, appears to have defined the conditions
under which the superintendent of banks would thereafter approve the opening
of out-of-town de novo branches, although even here his discretionary authority was reserved.

By implication at least, he seemed to say that the pre-

t 1 ' Statement of de novo rule as quoted in Petition for Writ of Mandate»
S. F. 11,65^, California Supreme Court.

- U6 -

vious existence of a purchased or consolidated or merged bank in
any given out-of-town community would be acceptable evidence that
"the public convenience and advantage" would be promoted hy the
continued operation of the institution as a branch office, in accordance with the permissive terms of Section 9 of the Bank Act.
But before giving his approval for the opening of a de novo
branch, he announced that he would have to "find that the public
convenience and advantage require it,"

Mr, Dodge in the annual

report of his department published shortly before his resignation
on January 31, 1923, does not refer to the de novo rule directly,
but makes the following statement on the subject of branch banking in general and the control of its expansion.'1'
"Branch banking under certain conditions and limitations has been so long permitted and practiced under the
laws of this state as well as in other countries and
states, that it can no longer be considered an experiment.
There is no doubt but that under proper restrictions it
has its advantages and enables strong institutions to afford banking facilities in localities which would otherwise
be without them. The location of a branch office or
the establishment of a new banking institution in a locality where there is a real need for banking facilities not

* 1 ' Thirteenth Annual Re-port of the Superintendent of 3anks, 1922,
pp. 12-rl3» -

- H7~

only "benefits the residents of the section or locality "but it
is of importance to the business and commerce of the state and
of the country as well. It not only prevents hoarding with
its attendant risk of loss through fire or robberyt but brin-. the
funds which would have been hoarded into general circulation ard
public use.H
Mr. Dodge was succeeded on February 1, 1923 > "by Mr. John Franklin
Johnson, who not only accepted the de novo rule as an expression of policy
for the State banking department, but further elaborated its provisions to
make them more restrictive.
The Development of Controversy
Meanwhile, wide scale branch operation after 1920 was becoming the
subject of increasingly bitter controversy among the bankers of California.
The rapid expansion of the Bank of Italy appears to have caused not only
the development of competitive branch organizations noted above, but a considerable feeling of apprehension on the part of other independent local
bankers for the future prospects of their institutions. As a result there
began presently an increasing amount of discussion over the fundamental
principles involved in wide scale branch banking on the one hand and comparatively small scale independent local banking on the other, as predominant types of banking structure in the State.

Such discussion, however,

appears to have been confined, for several years at least, to the bankers.
The general public seems to have been indifferent.
The first organized attempt to check the spread of branch banking
was the formation in 1922 of the California League of Independent Bankers.
For the most part this was composed of officers of the smaller banks of the
State, including a good many national banks. A number of banks operating
local or near-by branches were included, however, although these were

- ks -

generally small institutions representing the type of branch banking which
had "been practiced in California before the passage of the Bank Act. in 1909.
The officers of the league were also members of the legislative committee
of the California Bankers Association, although the two organizations were
in no way officially connected.
It is not easy to define exactly the position taken by the League
of Independent Bankers, Branch banking as such was apparently not opposed,
but only intercommunity branch banking on a large scale. At the same time
there appears to have been only a limited amount of opposition to out-oftown branches as such, since these also were frequently operated by small
banks, although in fact the whole controversy centered around out-of-town

The real issue seems to have been a straggle on the part of the

smaller banks, whether operating branches or not, for a favorable position
from which to meet the danger of being engulfed by large branch operating
metropolitan banks. Naturally the simplest way to get tangible results was
through the State banking department•
As already noted, the de novo rule was promulgated in 1921, before
the League of Independent Banters was organized.

To what extent the in-

fluence of the smaller independent bankers individually had been responsible
for the ruling, it is not possible to say; but when the league was formed


5J£flovorule was heartily endorsed.

It was not considered adequate,

however, to curb the spread of large scale branch banking.

Efforts were

made to have the State legislature change the provisions of the Bank Act
itself. When these tentatives proved unsuccessful, a still more restrictive
ruling was requested of the superintendent of banks, to prevent the chartering of ostensibly independent institutions organized for the purpose of sale

->eto or merger with large branch operating metropolitan banks, and to strengthen the existing de novo rale*

The result was a conference in 1923 between

the superintendent of banks on the one hand and the League of Independent
Bankers and the legislative committee of the California Banters Association
on the other. Out of this conference came first a compromise regulation
known as the three-year rule. The requirement was laid down that before
any bank could sell its assets to or consolidate or merge with another bank,
it must have been in continuous operation for three years. A second ruling
announced that thereafter no more than one out-of-town de novo branch could
be established by any bank, while a third declared that none could be established "unless the Superintendent of Banks in his discretion shall find that
the public convenience and advantage require it." The second and third of
these rulings , it will be observed, had the effect of both reaffirming the
de novo rule and extending it.
The League of Independent Bankers did not limit its activities to
attempts to have branch banking curbed by the State banking department. An
aggressive campaign was organized to oppose the spread of branch banking,
not only in California but elsewhere in the United States. One of the first
moves of the league was to form an affiliation with a national association
organized about the same time in Chicago known as the "United States Association Opposed to Branch Banking.*

Shortly afterwards, in 1923, the Cali-

fornia league cooperated with other organizations in opposing branch banking
in Missouri, in connection with the so-called St. Louis case, which was a
court proceeding to test the right of national banks to establish branches.'*'

(1) See Committee on Branch, Group, and Chain Banking, Branch Banking in the
United States.


Another move was the founding on February 1, 192H, of a monthly [publication
known as "The Independent Banker," for the purpose of influencing public
opinion against the spread of branch banking and in favor of independent unit

This publication was continued until 1927 and consisted largely of

a monthly compilation of quotations, articles, and news items calculated to
arouse the opposition of the people of California and elsewhere to banking
monopolies, money trusts, absentee ownership of banks, and the lite.
Still another activity of the league was the sending of delegations to Washington.

Two of these made the journey, the first in 1923 to

present the case of the independent banks before the Federal Reserve Board,
the second in 192^ to appear before the House Committee on Banking and Currency in connection with the McFadden bill. Both these subjects will be
discussed more fully in the next chapter. They are mentioned here only to
show the extent of the campaign waged against branch banking.
The accomplishments of the league in stirring up public opinion
in California do not appear to have been great.

With the State banking de-

partment, on the other hand, a considerable degree of success was obtained
for the time being, although, as will presently appear, a new superintendent
of banks in 1927 swept such accomplishments aside with a single pronouncement of policy.

Moreover, some of the most energetic leaders of the league

later became themselves officers of large branch operating banks. Before
this occurred, however, they were to engage in a successful battle in defense of the de novo rule.

Confirmation of the Power of the Superintendent of Banks
As pointed out above, the controversy over the de, novo rule arose
in connection with the establishment of out-of-town branches, not in country

- 51 -

districts, but in another large city*

Likewise the dispute was finally

brought to a head as a result of the same situation. The Bank of Italy as
sucht apart from the operations of its affiliated or associated institutions,
did not make any considerable expansion of its facilities in Los Angeles for
several years after 1921, but declared later that it had been prevented from
opening new branches there because of the known attitude of the superintend
dent of banks in his application of the de novo rule.' ' The first important
result from the point of view of public policy occurred in 1925*

I* was an

attempt on the part of the Bank of America of Los Angeles, which was known
to be closely associated with the Bank of Italy, and later by the Bank of
Italy itself, to have the State legislature change the terms of the Bank
Act so as to limit the power of the superintendent of banks to withhold his
approval for the opening of branch offices. Since the legislative proposals
to this effect failed of enactment, they need not be discussed here, but
the second action of the Bank of Italy, which also occurred in 1925* was to
have important consequences.
It was an appeal to the Supreme Court of California for a writ
of mandate directing the superintendent of banks to give his approval for
the opening of two de novo branches in the city of Los Angeles, after an
application for such approval had already been denied*

The brief accompany-

ing the petition of the Bank of Italy also attacked the de novo rule directly,
arguing that it was invalid,'2'
"• . . (a) because contrary to the plain implications of section
9 of the Bank Act; (b) because there is no statutory provision
authorizing the promulgation by the superintendent of banks of
rrr See terms of Petition for Writ of Mandate. S. F. 11,65^, California
Supreme Court.
(2) Ibid.


such a regulation; and (c) if there had been, the statute would
have been invalid as involving unconstitutional delegation of
legislative power*"
Thus the California Supreme Court was called upon to decide, in
effect, whether the Superintendent of "banks was empowered by the law and
the Constitution to lay down such regulations as the de novo rule as expressions of policy.
The League of Independent Bankers promptly engaged counsel and
joined forces with the superintendent of banks. A voluminous answer was
filed to the brief of the Bank of Italy's representatives.

It defended both

the de novo rule and the right of the superintendent to refuse his approval
of the two branches in Los Angeles. The case was heard by the Supreme
Court in April, 1926, and in the oral arguments a new issue was injected
into the controversy by counsel for the superintendent of banks. He declared in effect that restrictions had to be placed on the opening of de
novo branches by the Bank of Italy in order to prevent independent banking
in California from being wiped out. Argument with opposing counsel led to
the filing of an "addendum to brief for respondent," the last paragraph of
which was as follows:' '

"The Bank of Italy, the Liberty Bank, or any other one
of the branch banks belonging to this chain, in and of themselves are legitimate, and by themselves, without being externally controlled and dominated from one brain and one organization, could be completely and satisfactorily regulated
in the interests of the depositing public and of the state by
the Banking Department of the State of California, but the
chain banking system of the Bancitaly Corporation cannot be
reached for these purposes. The only recourse left open to
that Department, if it is to do its duty and serve the public,
in so far as yet remains possible, is to halt the growth of
the various members of that system, each legitimate in itself,
but whose operation as parts of a chain banking system is opposed to public policy and public convenience and advantage

- 53 -

and in its very nature a menace to the people of the State of
California, Not only is this huge system monopolistic in its
tendency, but the desperation with which it has sought to
"break down the power of the State Banking Department, as evidenced by this proceeding itself, its mushroom growth, the
extraordinary prices it is willing to pay for "banks to add to
its chain, and the great lengths to which it will go by indirect methods to acquire new "banks, all demonstrate that its
tendencies for monopoly have not been neglected, hut have been
and are being used with effectiveness, and we desire here and
now to point out to this Court that the attempt in this proceeding to attack the power of the Superintendent of Banks under
section 9 of the Bank Act is the opening gun of the final attempt upon the part of this huge octopus to irrevocably fix for
all time its monopolistic tentacles upon the banking resources
of the State of California,"
The Supreme Court of California handed down its decision on
December 15, 1926, upholding the superintendent of banks on both his specific and his more general contentions.

The court refused to grant the

writ of mandate petitioned by the Bank of Italy and held that the de novo
rule was a\^)
", . • lawful exercise of the powers of the superintendent of
banks as a policy to be followed by him and as an indication
to applicants for branch bank permits of the showing necessary
to be made to entitle them to obtain affirmative action on
their applications, but in no sense as restricting, modifying,
or controlling his statutory discretion,"
More important, perhaps, than the confirmation of the power of
the superintendent of banks to promulgate rules for the opening of branches,
were the comments of the court upon the discretionary power of this official
in general, (2)
"(8) Furthermore, the Legislature has not attempted to
indicate whether, in the use of the word fpublic! in the phrase
public convenience and advantage,1 reference was thereby made
to the people of the state at large, or to the people of the
particular portion of the public affected or to be served by
the particular branch bank sought to be established. We incline to the view that the interest of the public immediately

(1) The Pacific Reporter. Vol. 251f p. 798.
<2> Ibid,. pp. 789» 790.

- 54-

contiguous to the proposed "branch hank, or of the public
reasonahly subject to service "by the proposed branch, should
first he considered by the superintendent of banks, but we
are not prepared to hold that the superintendent of banks may
not, in the administration of the duties imposed upon him, take
into consideration the question whether the convenience and
advantage of the people of the entire state would be promoted
or retarded by the unlimited establishment of state-wide branch
banks. He is a state-wide officer and, as such, is not limited
by the statute to purely local considerations in passing upon
any application for his written authority* Such being the fact,
we do not feel justified in laying down a rule that would remove
from his consideration all questions of state-wide policy in the
administration of his office."
It is at least clearly implied in these comments that the superintendent of banks has the power and responsibility of exercising a very
wide control over the banking structure of the State. The court appears
to have taken full account of the considerations outlined in the addendum
to the superintendent's brief and to have indicated in a general way that
he ought in fact to base his decisions upon his view of the convenience and
advantage of the whole State as well as of a particular community. After
this decision there remained little room for doubt of the effective power
of the banking department either to facilitate the growth of branch banking
under State charter, or considerably to curb it. And since the superintendent of banks is appointed by and holds office at the pleasure of the governor, who is elected by the people of the State, branch banking in California in 1926 became more than ever a political issue.

Abandonment of the De Novo Rule
In January, 1927f a new governor assumed office in California and
appointed as superintendent of banks Mr, Will C. Wood. Promptly Mr. Wood
abolished the de novo rule. He appears to have adopted, in fact, a policy

if 55 -

with respect to "branch "banking very similar to that of Mr. W. R. Williams
in the period 1911 to 191S. Thus essentially all the accomplishments of
the League of Independent Bankers in shaping the policy of the State banking department were summarily destroyed.



No State bank in California joined the Federal reserve system until

Four small institutions applied for and obtained membership in that

year, but their combined resources were less than 1 per cent of the aggregate
resources of the eligible banks operating under State charter.

It was not

until the latter half of 1919 that an important movement into the system began, the membership at the end of the year representing over ko per cent of
the aggregate resources of the eligible State banks. Obstacles to membership existed or seemed to exist in both the Federal Reserve Act and the
California Bank Act.

In the first instance, the State bankers appear to have

been doubtful whether they could become members and retain their rights and
privileges under the State law, including the right to establish and operate

In the second place, the State banks were required by the Cali-

fornia Bank Act among other things to keep a considerable part of their legal
reserves in cash. Membership in the Federal reserve system would have resulted in their being obliged to add their reserve deposits with the Federal
reserve bank to their other non-earning assets.
The first obstacle was removed when Section 9 of the Federal Reserve
Act, laying down the conditions of State bank membership, was amended in 1917
to read in part as follows:
"• . . Subject to the provisions of this act and to the regulations of the board made pursuant thereto, any bank becoming a
member of the Federal Reserve System shall retain its full

~ 56 -

- 57 -

charter and statutory rights as a State "bank or trust company, and may continue to exercise all corporate powers
granted it by the State in which it was created, and shall
he entitled to all privileges of member hanks: . . . "
The California law was amended in 1919 to permit State institutions, whether member banks or not, to count as reserves their deposits in
the Federal Reserve Bank of San Francisco. Apparently this action removed
the principal remaining difficulty in the way of State banks joining the

During the first six months following the amendment, which became

effective on July 1, 1919• about 20 of them applied for membership*


were for the most part the larger institutions, as had already been the case
with the movement of State banks into the system in the rest of the country.
By tioe end of 1920 the total number of State members and applicants for membership had increased to H2. These institutions represented only about 12
per cent of the number eligible for membership, but their combined resources
made up over 50 per cent of the aggregate resources of eligible State banks,
and over ko per cent of the resources of all State banks* Thus the movement
of State banks into tiie Federal reserve system in California, although somewhat retarded, nad by the end of 1920 overtaken the movement in most other
States and surpassed it in many of them.

The Elements of the Problem in California
Generally by the end of 1920 the largest banks operating under
State charter had begun to build up branch organizations.

In most instances

their branches were as yet confined either to the limits of their home office cities—usually San Francisco, Oakland, and Los Angeles—or to the
immediately surrounding territory.

The Bank of Italy, however, as noted

in the preceding chapter, had already embarked upon a program of state-

- 58 -

wide expansion.

Several other institutions, moreover, as shown by subse-

quent events, were getting ready at this time to extend their branch operations over wider areas.
The Bank of Italy had become a member of the Federal reserve system in 19191 along with a number of other large institutions. By the end
of 1920 several other important branch operating State banks of San Francisco
and Los Angeles had joined the system, as well as a few smaller branch operating banks located in country towns throughout tto- State. All national banks
were of course members, as a matter of Federal law.
The total membership of California banks at the end of 1920 consisted of 3^9 institutions, of which 307 were national banks and 42 were
operating under State charter. (1)

Their combined aggregate resources were

$1,653>000,000, or about two-thirds of the total banking resources of the
State. Of these 3^9 member banks, the 20 largest had resources of
$1,112,000,000, or over two-thirds of the total for all member banks.
Average resources of the remaining 329 were only $1,643,000 apiece, and the
largest of the entire group had less than $15,000,000. Of the 20 largest
member institutions 12 were national banks and S were State banks. The
Bank of California N. A. was operating 3 branches, 1 at Seattle and 1 at
Tacoma, Washington, and 1 at Portland, O r e g o n , ^ but no other national bank
in California had any branches at all. Of the 8 larger State member banks,
7 were operating branches, and U of these were either already engaged in
expanding their branch organizations or were about to embark upon sucn a
program, the Bank of Italy, of couise, being the leader in the movement.
(1) Three of these State banks were actually in the position of applicants,
and were not admitted to membership until after the end of the year 1920.
(2) These branches are and have been operated virtually as independent' banks,
in contrast with other cases of branch banking cited.

- 59 -.

Although, as already noted, several of the smaller State members were also
operating a few branches in country towns throughout the State, branch banking in the modern sense was being practiced or embarked upon mainly by the
larger State member institutions and one or two nonmembers.
Such in general terms was the state of affairs in California at
the end of 1920 with respect to branch operating membership in the Federal
reserve system.

In the circumstances it was perhaps inevitable that certain

conflicting forces or tendencies should arise which were to give cause for
serious consideration of their effects upon the system.
The Case of the Large National Banks. - In the first place, the
large national banks, wxiich were not permitted to extend their operations
through branches, considered themselves handicapped in their ability to
compete, even within the limits of their own cities, with the large State
banks, particularly when the latter began the rapid expansion of their
branch organizations. This disadvantage was accentuated by the loss of
country correspondent business, as more and more country banks, botn State
and national, were bought up by the large State branch operating institutions.

Such a situation created a strong incentive for large national banks

to consider giving up their charters and becoming State institutions*


the 20 largest banks referred to above only one actually left the national
system during the years 1921-1926 inclusive, by direct conversion to State
charter, but several national banks of considerable size entered the State
system by merger or consolidation with State banks. The most important
were the Wells Fargo Nevada National Bank in 1924 (which was converted for

- 60 -

reasons having nothing to do with branch hanking)/ 1 '' the First National
Bank of Oakland in 192*4,- the Merchants National Bank of San Francisco in
1923, and the First National Bank of Bakersfield in 1922. These four institutions alone transferred $127>220,000 of resources from the national
to the State hanking system, although under their new status their resources
remained within the Federal reserve system. They were nevertheless now in
a position of purely optional membership, as were large numbers of smaller
national banks which had been bought up by large branch operating State
The Small National Banks, - The second principal cause for concern within the Federal reserve system arose out of the movement of small
national banks into the State system. Many of them were indeed bought by
branch operating State members, but frequently they left the Federal reserve
system also, by merger with nonmember banks or by converting to State charter and then not applying for membersnip. During the six years 1921 to 1926,
altogether 112 national banks were converted or merged into the State system,
transferring aggregate resources of $^55,362,000.

The effect of this was

partly offset by the movement of 13 State banks, with aggregate resources
of $90,6S'U,000, into the national system, but the net loss to the latter
during the period was still 99 banks and $364,678,000 of resources. On account of the mergers of smaller banks with, or their purchase by, member
(1) The Wells Fargo Nevada National Bank was merged on January 2, 192U,
with the Union Trust Company, to become the Wells Fargo Bank and Union
Trust Company, under the State charter of the latter. The institution
has never embarked upon a program of branch banking, merely operating
the former Union Trust Company in a separate building a few blocks
away in San Francisco since the merger, for reasons of convenience
and housing facilities.

- 6l *

i n s t i t u t i o n s , the net loss to the Federal reserve system amounted to only
$123,000,000 of resources, "but the r e s u l t s were s t i l l too important to be
Opposition of Independent Bankers. - A third source of difficulty
was the growing opposition on the part of small member banks, whether
national or State, to the spread of wide scale branch banking.

How this

opposition was manifested within tne State system has already been described
in the preceding chapter. Within the Federal reserve system it appears to
have been expressed at first by complaints to the Federal Reserve Bank of
San Francisco.

On December 13, 1921, Governor Calkins of that "bank wrote

to the Governor of the Federal Reserve Board in part as follows:

ELe situation here is such that country bankers in many
parts of the state have become seriously apprehensive and are
disposed to think that it is hopeless for them to try to continue in business as independent banks and expedient for them
to sell to one of the institutions now actively engaged in
buying banks for conversion into branches, at the first opportunity."
Throughout tne State, the smaller independent bankers appear to
have realized that under the California law branch banking could be curbed
to only a limited degree. The movement by 1921 and 1922 had already reached
such proportions that to stop it would be impossible without the help of
outside forces. In the circumstances the logical resort was an appeal to
the Federal reserve system to prohibit the expansion of branch operations
by its members. Demands to this effect were made with increasing persistence, especially after the formation in 1922 of the California League of
Independent Bankers. Among other measures taken, as noted in the preceding
chapter, a delegation of the league was sent to Washington in 1923 to argue
its case before the Federal Reserve Board.

These efforts were seconded by

- 62 -

the nation-wide association opposed to branch banking, and the question became, chiefly among bankers, a matter of nation-wide controversy. Meanwhile,
in April, 1922, two members of the Federal Reserve Board had gone to California to study the situation on the ground.

Out of their investigations

and the subsequent deliberations of the board came a series of regulations.
federal Reserve Regulations Prior to 1927
The Federal reserve authorities confronted in California a situation in which there were three conflicting elements. These were:

(l) the

large State member institutions which had come into the system as banks already embarked upon programs of branch expansion; (2) the large national
banks that wanted similar branch banking privileges in order to improve their
competitive position; and (3) the small independent member banks, both State
and national, who wished to curb the spread of branch banking.
It must be borne in mind that prior to 1927 the Federal Reserve
Board had no definite legislative authority to regulate branch banking by
State member banks.

Clearly it could not authorize national banks to operate

branches and thus meet the competition of the California State institutions.
The Comptroller of the Currency was indeed authorizing a certain number of
"additional offices" of national banks within the limits of their home cities,
but such concessions were wholly inadequate to establish a satisfactory competitive position for the large national banks in California. With the view
to finding at least a partial solution of this problem, the Federal Reserve
Board as early as 1915 it&d recommended changes in the law which would permit national banks to engage in a limited amount of branch operation. Farther recommendations to the some effect were made from time to time during

~ 63 ~

the following twelve years, but prior to 1927 no branch "banking legislation
for national banks was passed.

The Federal Reserve Board, therefore, was

left to do what it could to cope with the situation through its power to
regulate the establishment of branches by State member banks.
Up to November, 1923, in dealing with applications to establish
additional branches within the system in California, the Federal Eeserve
Board dealt with each case on its merits. Ho application was made to the
board until authorization had been received from the State superintendent
of banks, whereupon the board took into consideration such matters as public
convenience and advantage, the capacity of the parent bank to organize and
coordinate the business of the new office with proper regard to solvency and
liquidity, and other matters of a general or specific nature. As far as possible due consideration was given to all questions relating to the proper conduct of the Federal reserve system in general and the local banking system in
particular. Expansion of member bank branch organizations was permitted under
State supervision and control, in so far as such expansion was considered consistent with sound "banking principles.
The opposition of the independent bankers of California to branch
expansion continued to increase, however, and the board undertook to formulate certain general principles for the future regulation of the movement,
adopting on November 7> ^923> *^e following resolution:
"WHEREAS, under the terms of the Federal Eeserve Act
national banks are required to become members of the Federal
Reserve System and cannot withdraw therefrom, while State
banks may become members by voluntary choice and may withdraw therefrom at will, and,
"WHEREAS, the Federal Reserve Act contemplates a unified
banking system in which State and National banks can participate
on a basis fair to both, and,

~ 6k -

"WHEREAS, State "banks in certain States have "been permitted
"by law or regulation to engage in State-wide "branch "banking,
while national "banks are restricted "by the federal Statutes from
establishing "branches or offices "beyond the limits of the city
in which the parent "bank is located, and,
"WHEREAS, the Board "believes that this results in an inequitable situation which renders it impossible for national and
State banks to exist together in the Federal Reserve System on a
fair competitive basis unless the powers of State and national
member banks to engage in branch banking are reconciled, and,
"WHEREAS, in the interest of the successful administration
of the Federal Reserve System, it appears necessary and desirable to confine the operations of member banks within reasonable
territorial limits, and,
"WHEREAS, the Federal Reserve Board is authorized by the
Federal Reserve Act to prescribe conditions under which applying State banks may become members of the Federal Reserve System,
"HOW, THEREFORE, BE IT RESOLVED, that the Board continue
hereafter as heretofore to require State "banks applying for
admission to the Federal Reserve System to agree as a condition of membership that they will establish no branches except
with the permission of the Federal Reserve Board;
"BE IT FURTHER RESOLVED, that as a general principle,
State banks with branches or additional offices outside of the
corporate limits of the city or town in which the parent banks
are located or territory contiguous thereto ought not be admitted to the Federal Reserve System except upon condition that
they relinquish such branches or additional offices;

3E IT FURTHER RESOLVED, that, as a general principle,
State banks which are members of the Federal Reserve System
ought not be permitted to establish or maintain branches or
additional offices outside the corporate limits of the city
or town in which the parent bank is located or territory
contiguous thereto;
"BE IT FURTHER RESOLVED, that in acting upon individual
applications of State banks for admission to the Federal Reserve System and in acting upon individual applications of
State banks which are members of the Federal Reserve System
for permission to establish branches or additional offices,
the Board, on and after February 1, 192*+1 will be guided
generally by the above principles;

~ 65 -


BE IT FJBTE3R RESOLVED, that the term «territory contiguous thereto* as used above shall mean the territory of a
city or town whose corporate limits at some point coincide
with the corporate limits of the city or town in which the
parent hank is located;

BE IT FUHTHEH RESOLVED, that this resolution is not
intended to affect the status of any branches or additional
offices established prior to February 1, 192U, either those
of banks at the present time members of the Federal Reserve
System or those of banks subsequently applying for membership in said System."
It will be observed that the rulings announced in the resolution
adopted by the board were not to come into force until February 1, 192I+.
Thus a period of nearly three months was allowed for the branch operating
State member banks in California to adapt themselves to the new conditions*
Several of them did not, however, consider this time allowance sufficient,
notably those banks which were actively engaged in building up branch organizations in the areas surrounding San Francisco and Los Angeles. They
protested against the rulings of the board, on the ground that unless they
cancelled their Federal reserve membership they would be placed in a position of serious disadvantage with respect both to their nonmember competitors and to member banks which had already established intercommunity branch

Because of certain developments presently to be described,

the board recognized that there was some justice in this contention. Consequently on January 2U, I92U, a special and temporary definition was promulgated of the term "contiguous territory" as applied to San Francisco and Los

This ruling was to be in effect only until Jkucrust 1, I92U, but it

extended for the time being the area in which branches of State member banks
could be established, sufficiently to allow the "banks in question to complete
at least a part of their programs.

- S6 -

On April 7, I92U, the board announced a revision of its regulation
governing membership of State banks and trust companies. The conditions for
the establishment of branches laid down in this revision were summarized in
the Federal Reserve Bulletin for April, I92U, (page 250) in part as follows:

(l) The establishment of branches will be restricted
to the city of location of the parent bank and the territorial
area within the State contiguous thereto (as defined in the
Board!s resolution of Nov. 7, I923), except where State "banking authorities have certified and the Board finds that public
necessity and advantage renders a departure from the principle
necessary or desirable."
This new ruling, as applied to the original establishment of "branches,
was somewhat similar in its effective meaning to the de novo rule as elaborated
in 1923 "by the California superintendent of banks (see discussion in the preceding chapter). Under it, in effect, the Federal Reserve Board resumed its
former policy of considering each case of an application to establish a branch
on its merits. Considerable possibilities were still left for the extension
of branch banking within the system, until the ruling was superseded by the
McFadden Act of 1927.
The McFadden Act
The purpose of the legislation was in part to improve the competitive position of the large national banks by permitting them to operate local
branches. At the same time the law was designed to halt the out-of-town
expansion of branch operations by all member banks of the Federal reserve
system, national banks in towns and cities of 100,000 inhabitants and over,**'
where State banks were alloived to operate branches, were given the legal right
to establish and maintain as many branches as they liked within the head office
town or city, upon authorization of the Comptroller of the Currency.

On the

(1) National banks were also permitted one branch each in towns of 25,000
to 50,000, and two each in towns of 50,000 to 100,000.

- 67 -

other hand, State member banks were in effect forbidden to establish anyadditional branches beyond the limits of their home office cities after
the date of the approval of the Mcjadden Act (February 25, 1927).
One other provision of this legislation should be noted before
considering its consequences in California. A subsection of the act reads
as follows:
"(b) If a State bank is hereafter converted into or consolidated with a national banking association, or if two or
more national banking associations are consolidated, such converted or consolidated association may, with respect to any of
such banks, retain and operate any of their branches which mayhave been in lawful operation by any bank at the date of the
approval of the Act J1
It will be observed that any office which had been in existence
as a branch of any bank prior to February 25, 1927, could later be continued
as a branch of a national bank, if the latter acquired it through consolidation with its parent bank, although the parent bank itself could not be continued as a branch.
Further Growth of Branch Banking in California
The Bank of Italy, which by 1923 was already the largest branch
operating bank in California, did not join in the protests of other branch
operating banks against the Federal Reserve Board's resolution of November
7. A procedure had been developed by which to continue the expansion of
branch operations and at the same time to retain the advantages of Federal reserve membership. This was accomplished by using closely allied (but not


affiliated") (1) State nonmember banks to expand branch operations.

(1) According to an opinion of counsel for the Bank of Italy, not tested
in the courts because never officially challenged, one corporation
is "affiliated" with another in California only when the stock ownership of both is identical*

- 63 -

A detailed description of the way in which holding companies were utilized
will be given in a later chapter. The principal steps by which the development of the period 1921 to 1930 was accomplished are summarized in the following paragraphs.
By the beginning of 1927 the various holding companies associated
with the Bank of Italy had built up a large branch organization operated by
several nonmember State banks. Then during the interval between January 1,
1927, and the coming into force of the McFadden Act on February 25 of the
same year, a series of mergers was carried out, whereby the Bank of Italy
increased its number of branches from 9& to 276.

Its organization was now

truly state-v/ide, its branches being located in about 150 separate cities,
towns, and villages. A few days later, on March 1, 1927, the institution
was converted into a national bank, under the name of Bank of Italy National
Trust and Savings Association.
•The bank's program of branch expansion did not stop with that
series of transactions, however, but was actively continued by the use of
allied nonmember banks. Through numerous mergers another controlled nonmember institution was built up, until at the end of October, 1930, it was
operating l6l banking offices. On November 3, 1930, this institution was
merged into the Bank of Italy U. T. & S. A* under the new name of Bank of
America National Trust and Savings Association. But only 70 of the newly
acquired out-of-town branches had been in operation as branches prior to
February 25, 1927*

These,, together with 10 others in San Francisco, making

SO altogether, were taken over by the national bank but the remaining 81
had to be otherwise provided for.

Some of them were merged with existing

branches of the former Bank of Italy N. T. & S. A., and the others were
used to form still another new nonmember bank under State charter.

- 69-

The methods of "branch expansion within the Federal reserve system
which have been briefly outlined above have also been employed to some extent
'by institutions other than the Bank of Italy and its present successor, the
Bank of .America N. T. & S. A.

The whole branch banking movement in California

since 1920 has in fact been accomplished largely by means of extensive mergers
and consolidations.


No other feature of the rise of branch "banking in California has
attracted soranchattention throughout the United States as the mergers and
consolidations^1' by which the present structure has been chiefly built up.
In California some measure of regulation and control of the branch banking
movement has been applied, or attempted, by both State and national authorities; and yet, throijgh the device of holding company operations, mergers have
^oeen used to accomplish desired ends in spite of all legal and regulatory
restrictions. The methods employed have been described in a general way in
the preceding chapter, and it will be necessary in the present chapter 'to ex$mine onlj

those aspects of the development in California which relate par-

ticularly to the transition from one system of banking to another.

This can

be most conveniently accomplished "oy giving an account of the more important
mergers involved in building up the principal branch banking organizations
now in operation*

(1) According. • to the law of California, a "merger" of banks may be described as the absorption of one institution ^oj another, the latter
retaining the same charter as before; while a "consolidation" involves the -union of two or more banks under a new charter. The words
are used with these specific meanings in the present discussion, and
it will be observed that practically all the operations referred to
were technically "mergers."

- 70 -

- 71 Procedure of Mr, Giannini and His Associates*1'
Until about 1921 or 1922 the principal method employed by the
Bank of Italy in building up its branch organization was the one described
in Chapter IV above. That is, an affiliated non-banking company of identical share ov/nership bought up individual unit banks and merged them into the
Bank of Italy, whereupon they became branches of the latter•

This method,

rendered relatively slow by the restrictions exercised by the Federal Heserve Board, was in course of tine largely superseded in the program of
expansion carried out by Mr, Giannini and his associates by the method of
using closely allied nonmember State banks to build up supplementary branch
organizations, which were then merged into the Bank of Italy.
Two main operations of this kind have been carried out since 1921 „
The first culminated in the series of mergers which took place during the
first two months of 1927 and centered around the coning into force of the
Mcjadden Act*

The second led up to the merger of November 3, 1930i which

created the present structure of the Bank of America National Trust & Savings Association..
Liberty Bank of jmerica, - This was the final name of the nonmember State bank utilized to carry out the first of the operations above
referred to. The principal mergers by which it was built up are shown on
the left hand side of Chart 2.
It will be observed by referring to this chart that the principal

(1) The names of the numerous holding companies employed from time to
time to build up the present organization of banks and other enterprises associated with Bank of American. T. & S, A. are often so
much alike as to make it difficult to distinguish one from another.
In order to avoid confusion in the following discussion, therefore,
the actual names involved will be used only when necessary to make
clear the more important developments; while the term "Giannini
interests" will suffice to explain in a general way what is meant.





- %?T-

institutions involved in the development were the Liberty Bank, in San
Francisco, and the Bank of America of Los Angeles*

The former was organized

by the Gdannini interests in 1921 • One of its main activities was to "build
up a branch organization in the northern half of the State*

Ehis was accom**-

plished for the most part by the acquisition of existing country banks*
1!he Bank of America of Los Angeles appears to have entered into the
general plan of the Giannini interests in 1923, when they took options upon
blocks of its shares*

Exactly when complete control was obtained is not

definitely known to the public, although by 1925 the institution was acting
in accord with the Bank of Italy in the attempts described in a preceding
chapter to have the State legislature limit the power of the Superintendent
of banks in the matter of disapproving applications to establish de novo

At all events, the Bank of America of Los Angeles began in 1923

a rapid expansion of its branch organization, both within the city limits
and in the southern half of the State generally*

Out-of-town branches were

acquired by the purchase through a holding company of existing banks, while
those in Los Angeles were for the most part established de novo*
Ihe principal holding companies utilized for the purposes outlined
above were the Bancitaly Corporation and its subsidiary, the Americommercial

In order to make dlear the operations of these two holding

companies, it will be necessary to outline something of their origin and the
reasons for their existence*

Banci taly Corporation was organized in New York

by the (Jiannini interests in 1919, for the purpose of acquiring certain banks
there and bringing them under the same general control as the Bank of Italy
in California*

But unlike the Stockholders Auxiliary Corporation, its share

~ &srownership was not identical with that of the Bank of Italy.


Corporation was formed in California in 1923 after the purchase by the Bancitaly Corporation of the Commercial National Bank in Los Angeles and the
options mentioned abovettpon"blocks of shares of the Bank of America of Los
Angeles, to take over the holdings of the Griannini interests in these two

It became in effect the local office of the Bancitaly Cor-

poration, with the same characteristic of not "being directly affiliated with
the Bank of Italy "by identical share owner ship.
The Bank of Italy had agreed with the Federal reserve authorities
on January 23* 1922, that neither the hank nor its affiliate would acquire in
excess of 20 pfctf cent of the stock of any other "banks, unless authorized "by
the Federal Reserve Board to take them over as "branches. But in the opinion
of the Sank of Italy's counsel neither the Bancitaly Corporation nor the
Ameriaommercial Corporation was an affiliate of the Bank of Italy, because
share ownership was not identical.

If this was the case, then "both corpora-

tions could "be used to acquire "banks to "be converted into "branches of their
own nonmember institutions, principally the Liberty Bank and the Bank of
America of Los Angeles.

This was done on a large scale, and on January 27,

1927, the Bank of America of Los Angeles was merged into the Liberty Bank in
San Francisco, which was owned by the Banci taly Corporation, to form the
Liberty Bank of America, as shown in the chart.

The operation was completed

within the next few weeks, by merging first the Commercial National Bank
(which in the meantime had become the Commercial National Trust and Savings
Bank) and other owned institutions, into the Liberty Bank of America, and

- 75 -

then the latter into the Bank of Italy, which on March lf 1927, converted
from the State to the national system and became the Bank of Italy National
Trust & Savings Association.
Bank of America

of California* - This was the final name of the

nonmember State bank used to bring into the main banking institution of the
Giannini interests the second large group of branches. The principal units
which were combined to form the Bank of America of California, as well as the
evolution of names and the successive transfers of the head office of the
bank from one town or city to another, are shown on the right hand side of
Chart 2.
The Giannini interests were definitely known to have entered this
development in April, 1927, when the United Bank and Trust Company of California,^) San Francisco, merged with the French American Bank, San Francisco,
under the name of United Bank and Trust Company (merely dropping the words

of California" from the name of one of the merging banks).

The French Ameri-

can Bank was owned by the Bancitaly Corporation, and soon after the merger
another holding company was utilized for building up a nonmember branch organization.

This was the French American Corporation, and its operations were

not essentially different from those of the Americommercial Corporation described above.

It carried out the purchase of the various banks which were

to be converted into branches of, or merged with, the different institutions
involved from time to time in the development.
It will be observed that the head office of what constituted the
main institution was moved several times in the course of the development.

(1) This bank had been previously built up by merger operations as follows:
In March, 1923* the Sacramento-San Joaquin Bank, Sacramento, took over
the Union National Bank, Fresno, and the Merchants National Bank, San
Francisco; moved its head office from Sacramento to San Francisco;
then changed its name to United Bank and Trust Company of California.
It was known as the Spreckels Bank.


The move from San Francisco to Bakersfield resulted in bringing the word
"Security" into the bankfs title. Both the French American Bank and the
United Bank and Trust Company of California had been members and the membership had been retained for their successor, the United Bank and Trust
Company; then the latter left the system by being merged into the Security
Bank and Trust Company of Bakersfield, (i) which was at that time a nonmember
institution. The next move, back to San Francisco, was made shortly afterwards, and the next, to Los Angeles, was accompanied by restoration of the
name "Bank of America" into that of the nonmember institution then being
used to build up another branch organization, by the following procedure:
The holding company controlling the United Security Bank and Trust Company,
San Francisco, owned a small nonmember bank, the Harbor Commercial Savings
Bank, in San Pedro (within the corporate limits of Los Angeles).


was obtained in 192S to change the name of this institution to Bank of
America (San Pedro).

The United Security Bank and Trust Company then removed

its head office to Los Angeles and merged with the Bank of America (San Pedro)
under the charter of the latter, which changed its name to Bank of America of

Shortly thereafter it absorbed the Merchants National Trust & Sav-

ings Bank, Los Angeles. The final move back to San Francisco made possible,
^ ' This bank, as the Security Trust Company of Bakersf ield, had also been
a member of the Federal reserve system., until October 3, 1927, when it
surrendered its charter and merged with two- nonmember banks of San Jose,
under the charter of one of the latter, and changed its name to Security
Bank and Trust Company of Bakersfield.

under the terms of the McFadden Act, the merger of the Bank of America of
California into the Bank of Italy National Trust & Savings Association, to
form on November 3, 1930, the Bank of America National Trust & Savings
Bank of America. - This is the name of the nonmember State hank
which was organized to take over the branches of the Bank of America of
California which could not, under the terms of the McFadden Act, "be brought
into the Bank of America National Trust & Savings Association by the merger
of November 3, 1930. On December 31, 1931, it was operating 63 branches,
located for the most part in small towns and villages throughout the State.
These appear to be administered almost exactly as if they were branches of
the larger national bank#

The relationship between the two institutions,

in fact, does not appear to differ essentially from that which has been common for many years in California and elsewhere, between a national and an
affiliated State bank under identical ownership and management.
The period since November, 1930, has been everywhere one of contraction rather than expansion of banking activity.

Both the Bank of .America

N. T. & S. A. and the State chartered Bank of America appear to have completed,
for the time being at least, their program of branch expansion.

Some of their

branches have in fact been merged with other offices, or temporarily closed,
although officially still in existence*

They are said to be "consolidating

their position," in the matter of improving internal organization and administration, marking time meanwhile in the matter of further extending their
branch operations. On December 31, 1931, the Bank of America N. T. & S. A.
and the Bank of America had combined resources of $970,058,000 and were oper-


ating through 407 banking offices in 237 cities and towns in California (12

of which were within the corporate limits of other cities).
Evolution of the Holding Companies* - Among the numerous holding
companies utilized successively "by the Giannini interests to accomplish the
results described above, two main sequences are to be distinguished.


are those which have confined their operations essentially to California and
have been technically affiliated (by identical share ownership) with the main
banking institution.

Their evolution has been as follows:


Auxiliary Corporation was founded in 1917; National Bancitaly Company was
founded in 1927 and absorbed Stockholders Auxiliary Corporation; Corporation
of America was founded in 1930 and absorbed National Bancitaly Co.

Hie second

sequence consists of those companies linking the holdings of the Giannini
interests in New York and elsev/here with those in California.
have been

The main units

the Bancitaly Corporation, founded 1919, and the Transamerica Cor-

poration, which was founded in 1928 and absorbed not only the Bancitaly Corporation but also, either directly or through intermediate holding companies,
all the bank and other holdings of the Giannini interests in California and

The Transamerica Corporation, therefore, served to bring together

for the first time the varied and scattered Giannini interests into a single
holding company*

As of March 9, 1931, its component subsidiary corporations

and other holdings were as shown in Chart 3.

Since that date it has sold the

Bank of America N. A. in New York to the National City Bank of New York and
acquired in exchange a substantial minority interest in the latter institution. Other changes have been proposed, and a struggle has occurred for control of Transamerica Corporation, but there has been as yet (end of 1932) no



MARCH 9,1931 *





essential changes in the interrelationships of the units comprising the "banking structure built up "by the Giannini interests in California*

Security-First National Bank
This institution is the second largest "branch operating "bank in

Its branch organization, covering approximately the southern

half of the State, was built up by methods somewhat less indirect than those
of the Giannini interests, althoiogh the final results were accomplished by
means of two great mergers.

The principal differences were that the three

most important institutions eventually brought together had been members of
the Federal reserve system since 1919 and the holding company operations involved were confined essentially to California*
The program of branch expansion was begun in 1921 by an affiliate
of the First National Bank of Los Angeles, the Los Angeles Trust and Savings

This was a combination of the kind previously referred to, of a na-

tional and a State bank under identical ownership and control*

In September,

1922, the name of the State bank was changed to Pacific Southwest Trust and
Savings Bank.

The out-of-town branch expansion was carried on exclusively

by the State institution, since the national bank was not permitted by law to
engage in such operations.

The method of expansion was through the purchase

of existing country banks for conversion into out-of-town branches and the
original establishment of branches in the city in which the head office was

For the expansion through purchase, the holding company employed

was the affiliated First Securities Conpany (organized June 8, 1920).

By September 1, 1927, the Pacific Southwest Trust and Savings Bank

- SI -

had built up an organization of 100 offices.

It was then merged under the

existing national charter, with its affiliated First National Bank, to become the Los Angeles First National Trust and Savings Bank.
The second important merger, which completed the present structure of the institution, occurred on April 1, 1929» with the Security Trust
and Savings Bank.

This was a branch operating State institution which had

been developed independently of the other bank.

Its branches, 5^



were all concentrated in and around Los Angeles. Upon completion of the
merger, again under the existing national charter, the new institution assumed
its present name, the Security-First National Bank.

On December 31 * 1931

the Security-First National Bank had resources of $5^0,1^5,000 and was operating through 125 banking offices in bO cities and towns in California (12
of which were within the corporate limits of other cities).

American Trust Company
This is the third largest of the branch operating banks in California. Most of its branches are concentrated within an area extending not
farther than 50 or 60 miles from San Francisco, although one office is located at Los Banos, about 100 miles away. The actual operations carried out
in building up the organization were not essentially different from those involved in the development of the Security-First National described above,
except that there was involved a change from national to State charter of
one principal institution.

On December 31> 1931» the American Trust Company

was owned by the American Company, which was in turn a subsidiary of the
Goldman Sachs Trading Corporation of New York.

The American Trust

Company had resources of $250,U031000 and was operating through 93 banking

offices in 34 cities and towns in California.

California Bank
The "branch organization of this "bank is so closely concentrated in
and around the city of Los Angeles that its operations could hardly Toe described as intercommunity "branch "banking.

It is nevertheless a large insti-

tution, operating outside of the Federal reserve system with over 50 tranches.
The principal steps "by which the "bank assumed its present structure were as

The Home Savings Bank, originally incorporated in 1904, was rein-

corporated May 26, 1920, after absorbing a number of other banking institutions in and around Los Angeles.
to California Bank.

On November 12, 1920, its name was changed

In 1926 its affiliated holding company, California Group

Corporation, acquired control of the National City Bank, Los Angeles, which
was absorbed by the California Bank on August 17, 1928.

On December 31, 1931,

the California Bank had resources of $100,126,000 and was operating through
54 banking offices in 19 cities and towns in California (11 of which were
within the corporate limits of other cities)*

The Financial Methods
In building up the great branch banking organizations in California
much new capital was required.

How this was raised is a part of the story of

the phenomenal rise of the securities markets which ended in the autumn of

Bank stocks and the shares of bank holding companies during the period

under consideration were particularly subject to speculative activity.


trading profits were realized, or hoped for, and the desire of the general

- S3 -

public to participate in them was stimulated "by the frequent reports
of spectacular mergers and consolidations of "banks. Stock brokers
and bond departments of banks were being constantly provided with material for sales talk that was adapted to influencing the investing
and speculating public*. Under such conditions it was not difficult
for those engaged in the expansion of branch banking organizations
to obtain all the additional funds they required, through the issue
and sales of shares at rising prices.
In common with many of the largest banks everywhere in the
United States, the growing branch operating institutions in California
organized securities affiliates. These were frequently used both to
underwrite and to distribute the stock of the banks themselves or of
the holding companies affiliated with or superimposed upon them.
Through the numerous branches of the banks the affiliated securities
companies were in a particularly advantageous position to dispose of
their share issues among large numbers of their customers.

In this

manner, as well as through the operations of brokers, an exceedingly
wide distribution was obtained for the shares of either the principal
branch banking institutions themselves or the holding companies controlling them.
At the same time that funds were so easily obtainable from
the general public in payment for share issues, several banks were engaged in keen competition to expand their branch organizations. The
result frequently was the payment of very high premiums for the stock

- gu-

of the unit banks taken over, as well as the negotiation of long-term
contracts to engage the services of former officers at high salaries.
Sometimes the purchased banks* assets were "badly frozen, or serious
losses had teen incurred.

Occasionally the holding company carrying

out the operation, instead of paying anything for the stock of the acquired bank, actually obtained a guarantee against loss, although this
was very unusual•• Under the spur of competition, in combination with
the readiness of the public to supply new money, the tendency was to buy
banks freely, trusting to the future expansion of business to make them,
as branches, profitable in the long run. After the collapse of the stock
market boom in the autumn of 1929t many investors in the stock of branch
operating bank holding companies suffered heavy losses.
The facts outlined above are matters of common knowledge. They
require further considerations here only in those particulars which may
be expected to show the distinction between what is essentially a part
of branch banking development and what has resulted from more general
The raising'of additional capital through the sale of securities by associated or affiliated companies, while characteristic of the
branch expansion that has developed ;in California, is to be considered
as but one of the ways in which capital may be obtained for such purposes.
Other methods would include the sale of securities through completely
independent investment banking houses. Branch organizations might be
built up, furthermore, much more slowly, without the use of additional

On the other hand, it is doubtful whether the branch expansion

- 85 -

which has occurred in California could have been carried out so rapidly
without the stimulus which existed in the rising stock market.
The extensive employment of mergers and consolidations has been
another essential element in the rapidity with which the development has
taken place in California-

If the absorption of unit banks had been ac-

complished in California by some other method, such as that of absorbing
one banking office at a time, the transition would certainly have been
greatly prolonged.

It could evidently have been made more deliberate,

moreover, by appropriate regulation of the operations of bank holding


She following discussion will be limited essentially to the large
scale inter community "branch banking which has been in operation in California
for only a few years.

It is engaged in at present by only five banks at the

most; and only three of these, if the State chartered Bank of America be included as an integral part of its larger national affiliate, operate on a
geographic scale even approximately comparable to that of the great branch
operating banks of Canada and other countries• A glance at the accompanying
maps (Charts Uf 5, and 6) will suffice to show the location of the offices
of the five institutions*
As far as the available information will permit, the questions
considered in this and the remaining chapters of the discussion have to do
with the operations of large scale branch systems in California, and not
with the methods by which the existing branch organizations have been built

More specifically, they relate to such matters as the organization and

administration of the branch operating banks, the influence of branch banking upon the safety to depositors of the banks of the State as a whole,
the quality and cost of branch banking service, the danger of a monopoly
of credit through the concentration of banking control, and the earnings
and expenses of intercommunity branch operating banks as compared with
those of other banking institutions.

~ 86 ~






DECEMBER 31,1931


- Tro*r*









- 90 -

It should be remembered, however, that the large inter community
branch operating banks of California are not as yet fully matured branch
organizations. Notwithstanding their wide geographic extension, they still
represent in considerable measure merely the continuation of the activities
of large aggregations of formerly separate banks. These formerly separate
banks have indeed been coordinated into unified organizations, but there
has not been sufficient time to permit them to accumulate a fund of experience and establish a record of operations in which their characteristics
as branch banking systems can be separately appraised from their other characteristics.

In these conditions, any attempt to appraise their performance

as branch banking systems must be necessarily inconclusive.

The Present Methods in California
As already suggested, the methods of organization and administration of branch banking in California,are to a considerable extent still in
a stage of experimentation and development.

This is true both because the

advent of the system is comparatively recent and because of the special
conditions under which the branch organizations are still operating. The
special conditions arise out of the fact already noted, that in a large
number of instances the banks now operating as out-of-town branches were
only a few years ago independent unit institutions.

In turning them into

branches, the usual practice has been to retain either the former president
or the former cashier as branch manager, as well as to continue the employment of most of the remainder of the staff of the institution in former

- 91 -


Even the former directors have generally been retained

to function as local advisory boards. Such arrangements have resulted partly from the fact that no other operating personnel has
been available in sufficient numbers and partly from the policy
of the expanding branch organizations to minimize the more obvious
effects of the change from one system to another.
Of necessity, therefore, the great majority of the
operating personnel of the present branch organizations is made
vcp of officers and employees originally trained in the conduct
of independent unit banks. Gradually these are gaining experience
in branch operation and acquiring the " habits of thought of members of unified institutions composed of multiple banking offices.
As in England and Canada, all the varied activities of the
branches of a particular bank are coordinated, supervised, and to some
extent directed, by the head office of the institution. The
head office itself consists of the usual departments, committees,
and officers subsidiary to the board of directors likely to be
found in any large bank. Except for ordinary customer relationships, which are usually with the branches, the head office deals

- 92 -

directly with all the larger affairs of the bank, such as the mailing of
investments, transactions with other banks, and the formulation of general policies.

Its functions are different from those of the general

management of any large bank only in its coordination and supervision
of the activities of the branches.

The chief executive officer


the head office is the president, and his principal assistants are
usually vice presidents. The Canadian and English designation of these
officials as the general manager and assistant general managers has not
been adopted in California.
Only one institution, Bank of America National Trust and Savings
Association, operates on a geographic scale considered by its management
wide enough to require resident supervisory officers outside the city in
which the head office is located.

The branches of this bank in the spring

of 1932 were divided into seven districts, each under the supervision of
an executive vice president, Pour of these were resident in San Francisco
and three in Los Angeles. The other large intercommunity branch organizations are in each case administered from the head office directly.

It has

been the common practice in some of these institutions thus far, however,
for the manager of the most important branch in a given district to exercise
a sort of informal supervision over smaller neighboring branches, although

~ Jt&? ~

the latter are for all purposes of administration and accounting in direct
communication with the head office.
An important division of the head office organization is the
department of inspections and examinations. All "branches are examined at
irregular intervals and without notice, and a complete record of the condition and progress of each is kept in the head office. Usually the department of inspections and examinations is separately constituted, and
is responsible either to the board of directors or to the most important
governing committee of the bank, made up of directors.
In all the larger institutions the head office organization also
includes a central credit department, responsible for investigating important applications for the granting or renewal of credits, and a cashier1s
department, in general charge of routine operations.

Subordinate to the

latter are the comptrollers!s and accounting departments. The principal
contacts of the branches are with these departments, either directly or
through the executive vice presidents in charge of the various districts.
The activities of each branch are under the immediate direction
of a local manager, whose functions correspond approximately to those of
the president of a local independent bank, although his more important
lending operations must receive the prior approval of the head office. The
branches do not keep accounts with each other, and all interbranch transactions are carried out through the head office by means of a daily entry
clearance system.
Each branch is allowed a certain lending limit, within which
loans may be made without authorization from the head office, depending

partly upon the size of the branch "but more upon the experience and proven
ability of the local management.

An attempt is made to set this limit

high enough to cover the great majority of local loans*

TShere this is not

possible, larger borrowers are encouraged to arrange for lines of credit in
advance of their needs, so that they may obtain immediate accommodation
without referring each transaction to head office.
Accounting practices differ from those likely to prevail in any
large metropolitan bank only in the elaborations necessary to coordinate
the records of branch activities. Each branch is required to submit various
reports to the head office, some daily, some weekly, and others monthly,
depending upon the purpose served.

The details of branch accounting are

more technical than would be suitable for treatment here.

It will be suf-

ficient to remark that the methods used in California, particularly in the
matter of interbranch clearings and ordinary routine reports, appear already
to have become standardized, as far as fundamental principles are concerned,
along the lines common among Canadian^1' and English banks. Profit and
loss accounting for individual branches is a subject presenting peculiar
difficulties, which will be dealt with incidentally in a later chapter on
the earnings and expenses of branch banking in California.
The Local Management and Advisory Boards. - It is in the constitution of the local management of the out-of-town branches that the most
important departures have been made from standard branch banking practice*,

(1) Brief technical descriptions of different phases of accounting practices in Canadian banks will be found in Banking Principles and Practice«
by E. L. Stewart Patterson, pp. 1^7-208 (Textbook of Alexander Hamilton
Institute, New York), A more detailed discussion is contained in
H# M. P. Eckardtfs Manual of Canadian Banking, published by Monetary
Times, Toronto.

- 95 -

Before the advent of the new system the public in California, as in other
States, had always been accustomed to deal with local bankers fully empowered
to act for their institutions upon their own initiative.

Consequently the

branch operating banks of California have taken special pains from the outset
to make the changed ownership and control of purchased banks as little apparent as possible.

It was partly with this end in view, as pointed out above,

that the officers and employees of the purchased banks were usually retained
in approximately their former capacities to operate the branches. Where the
purchased bank was of considerable size or importance, the former chief
executive officer, in addition to being made branch manager, was frequently
given the title of vice president.
Recognizing the traditional importance of personal relationships
in the "banking business of the out-of-town communities entered, the expanding branch organizations have laid particular stress in public announcements and in advertising matter upon the continued aaid enhanced power of
the local bankers to serve their communities. They have emphasized, for
example, the fact that an advisory board has bepn set up for most of
the out-of-town branches, to furnish aid and counsel to the local manager in his more important lending and other operations. -This local advisory board, composed usually of former directors of the purchased bank,
has continued to hold regular meetings as before and probably to perform most of the functions actually performed by the directors of many
independent country banks. Being usually influential men in their communities, the members of the boards have continued to maintain and establish business connections, to obtain credit and other information, and to
furnish advice valuable alike to the local manager and to the bank as a

whole. However, they do not generally exercise any definite power over the
granting of loans in excess of the lending limit of the local manager, although their recommendations are said to carry considerable weighs in determining the decisions of the head office of the hank.
The use of local advisory hoards in the manner outlined above
appears to "be a genuine innovation in wide scale branch banking practice.
As far as it has been possible to ascertain, no such methods are used in
Canada or other countries where the branch system is predominant.


the practice will become permanent in California, it is as yet too early
to predict, For the time being, however, the large branch operating banks
appear to consider their local advisory boards to be of considerable importance. Testifying before the House Committee on Banking and Currency in


representative of the Bank of Italy National Trust and Savings Asso-

ciation (now Bank of America National Trust and Savings Association) declared that !!. • • The important conscientious service rendered by the bank!s
approximately 1,700 advisory board members is regarded as a most valuable
External Supervision
As pointed out above, an important feature of the structure and
administration of large branch operating banks is their own system of internal supervision, involving thoroughgoing inspections and examinations of
branches without prior notice. With offices scattered over wide areas this
appears in fact to be indispensable to the sound conduct of branch banking
(1) Hearings on Branch, Group, and Chain Banking. Committee on Banking and
Currency, House of Representatives, 1930, p. 13^7-

- 97 -


Such supervision, however, is primarily in the interest of

the shareholders as represented by the board of directors; and while the
interests of the shareholders with respect to safety are in the long run
undoubtedly the same as the interests of the general public as represented
principally by depositors, the latter are considered to be entitled to
additional safeguards in the form of supervision of the institution as a
whole by governmental authorities.
In California,, as in other States, there are three separate kinds
of external supervision of banks:

that of the State banking department

for State chartered institutions; that of the Comptroller of the Currency
for national banks; and that of the Federal reserve authorities for all member banks, both national and State. In practice, the examinations made by
the Comptroller of the Currency and the State banking department, where
these are considered efficient, are usually accepted as satisfactory by the
Federal reserve authorities.
Wide scale branch banking in California was for several years
believed to present special difficulties in the matter of external supervision.

The State banking department, in accordance with a requirement of

the Federal Reserve Board, undertook for a while to begin its examination
of all the branches of a member bank simultaneously.

The same procedure

was followed when the Federal Reserve Bank of San Francisco itself undertook the examination of a member bank. Before long, however, the number
of branches of several member banks had grown so large that simultaneous
examinations became virtually impossible. A new method was adopted in
February, I923, when the Federal Eeserve Bank?s examiners entered only

- 98 -

three offices of one of the large "branch operating "banks, taking statements from the other branches. Thereafter the new method became the
standard practice; that is: To enter the head office of the institution
and a few of the largest branches simultaneously, requiring at the same
time a condition statement and a complete schedule of all important assets,
of every other branch as of that date. After the completion of the examination at the center of the institution, so to speak, all the other branches
are examined

by making an examination upon entrance and reconciling impor-

tant items with the statements submitted when the examination of the bank
as a whole was begun.

Since the branches generally carry no accounts with

correspondent banks and keep no investments, examinations are greatly



Up to the time of writing (end of 1932), no bank in California
which could be properly described as a large metropolitan institution, whether
operating as a branch organization or not, had been suspended since 1907^
During the period 1921-1931, furthermore, for which statistics of bank suspensions have been examined in detail, the banks of California taken as a
whole, including banks of all types and all sizes, had a record of suspensions substantially better than that of the banks of the United States as
a whole.

Favorable Failure Record in California
A summary record of suspensions for the eleven years 1921-1931
is shown in Table 5Table 5 - National and State Bank Suspensions in California
and the United States As a TShole, 1921-1931(1)

Number of active banks, June 30» 1920
Number suspended 1921-1931
Percentage suspended


Total loans and investments of active
banks, June 30, 1920
Total loans and investments of banks
suspended I92I-I931

United States
as a whole






Percentage suspended


(l) Calendar years. Data compiled by Committee on Branch, Group, and
Chain Banking, from reports of Comptroller of the Currency, State
banking supervisors, etc. See volume entitled Bank Suspensions! 1S92-19J1-*
Number of banks in California in 1920 here given is 3 less than
the number shown in Table U, because taken from different sources;
but the difference mokes only a very slight change in the percentages shown.

- 99 -

~ 100 -

It is to be noted, however, that these figures throw little
light on the safety of branch banking, as such, in comparison with independent unit banking.
Influence of Economic Conditions« - California has enjoyed in
recent years more favorable economic conditions than many other States, particularly those of the great grain growing regions of the Middlewest and Northwest and the cotton planting areas of the South,

This is true mainly because

of the extent and the diversity of California,1 s natural resources, coupled

the rapid economic development, especially in the southern part of the

State, which has taken place since the World War, The production of petroleum
in and around Los Angeles, and the moving picture industry in the same vicinity, are examples. Considerable wealth has been brought into the southern
part of the State, moreover, by an influx of retired farmers and others,
particularly from the Middlewest and Northwest, who have settled in California
and transferred all or part of the value of their possessions to their new

These and other causes have tended to offset the influences which during

the past ten or twelve years have caused so much difficulty to the smaller independent banks in many other States.
Effects of State Laws and Supervision. - Another factor which appears to account in part for the safety record of California!s banks is
the structure and administration imposed upon those operating under Sta,te
charter, by law.

Some of the principal provisions of the Bank Act have al-

ready been described in a preceding chapter.
In California the total number of suspensions of State chartered
banks in the eleven years 1921-1931 amounted to 30. This was 7.2 per cent
of the total number of State chartered banks in operation on June 30, 1920*

~ 101 -

The national "banks suspended in the State during the same period numbered
26, which was 8.6 per cent of the total number of national banks in operation on June 30> 1920•

The ratios of loans and investments of suspended

banks to total loans and investments of the two classes of institutions in
operation on June 30, 1920, were: for State banks, $18,527,000 to
$1,091,050,000, or 1.7 per cent; for national banks, $23,987,000 to
$799*950,000, or 3.0 per cent.(x)
Prom these figures it appears that in California the safety record of the State banks was better than that of the national banks.


most other States, on the other hand, the safety record of national banks
was better than that of State banks. For the United States as a whole the
ratios of the number of suspensions during the years 1921-1931 to the total
number of banks in operation on June 30, 1920, were as follows: for State
banks, 37*0 per cent; for national banks, lb.7 per cent.

In terms of total

loans and investments the same ratios were: for State banks, 19»3 P e r cent;
for national banks, 6.5 VeT

cent. (2)

Influence of Branch Banking. - Supplementing the foregoing explanations, it may be noted that branch banking in California, by extending
the methods and practices of large metropolitan banks to small communities
all over the State, may have had influence in the direction of causing local
independent bankers, in competing with the branch operating institutions, to
conduct their own institutions along conservative lines. That this view
was not without standing among banking officials is shown hy the following
(1) Data compiled by Committee on Branch, Group, and Chain Banking.
volume entitled Bank. Suspensions§ 1892-1931.
(2) Ibid.


- 102 -

passage, quoted In Chapter IV above, from the 1916 annual report of the
State superintendent of banks:^'

". • . Still another cause has often

influenced my course in granting the desired license. Occasionally it happens that the general banking tone of a community will be improved measurably by the licensing of a branch office of a well established, safely conducted institution;11
A special factor contributing, during the period examined, to the
safety record of California's banks was the absorption of independent unit
banks into the expanding branch organizations• A considerable number of
independent unit banks are known to have been taken over in order to prevent
their suspension.

In certain cases, as previously noted, consolidation took

place under a contract by which the absorbing bank, instead of having to
mate payment to the stockholders of the institution taken over, received either
an actual payment from the latter or a guarantee of indemnity against loss.
It is of interest to observe in this connection, that some of the
branch operating banks followed the practice, when taking over a unit bank,
of selling its slow or doubtful assets to an affiliated or associated holding company. (2) At the same time the bank holding companies were realizing
large sums from the nation-wide sale of their stock at high, prices. They
were thus in a position for the time being to absorb heavy losses, if necessary,
upon the assets taken over from the unit banks.

In such cases, whatever the

subsequent history of the holding companies, the investing and speculating
public of the United States as a whole made at least temporary contributions
to the safety of California's banks.

(1) Seventh Annual Report of the Superintendent of Banks, 1916, p. viii.
(2) See testimony of a representative of Bank of Italy N. T. & S. A., in
1930, quoted in Chapter IV above.

- 103 -

No satisfactory figures are available concerning either the number
of suspensions which were prevented in California by the taking over of endangered banks by branch organizations or the amount of resources involved.
It is evident, however, that; in the period examined the spread of branch
banking in California through merging independent unit banks made substantial contribution to the safety record of the banks of the State as a whole.
When a bank was in difficulties, and yet not actually insolvent, it was almost
always possible, in the circumstances of the period, to have one of the large
metropolitan institutions take it over and transform it into a branch. The
machinery for carrying out sucb operations was in existence; the procedure,
while cumbersome as far as the law was concerned, had nevertheless been well
established and simplified; and since it was widely known that intercommunity
branch organizations were being built up by the taking over of unit banks,
the obvious measures could usually be taken without danger of impairing the
confidence of a given community in its local bank.

There is, of course,

every reason to believe that the great majority of the unit banks absorbed
by the branch operating banks of California were in sound condition when
taken over. Those in financial difficulty were undoubtedly the exception
rather than the rule.

Branch Banking Service
Most of the controversial discussion of wide scale branch banking,
in California as elsewhere, centers around the adequacy and cost of its service to the borrowing public.

The following paragraphs, therefore, will be

devoted primarily to an examination of California^ experience with large
branch operating banks as lending agencies*

- 10U ~

About the only essential difference in the formalities of negotiating a loan from a well conducted unit bank and from a branch of a branch
operating bank occurs when the amount involved is greater than the discretionary lending limit of the branch manager.

In either case, the prospective

borrower applies for the credit and submits a statement of his financial condition.

This is analyzed and probably discussed by the borrower and the unit

bankers, or by the borrower and the branch manager, as the case may be; then,
in either case, if the amount involved is within the discretionary lending
limit of the branch manager, the credit is granted or refused, perhaps after
consultation with the local advisory board of the branch or the board of
directors of the unit bank, but without other authorization.

If the amount

is above the discretionary lending limit of the branch, the manager may first
consult the local advisory board, but at all events he must forward the application, together with the financial statement and his recommendations, to
the proper officer at the head office (who may be a resident supervisor
nearer at hand than the head office city) and wait for authorization from
the latter before making the loan. The local unit banker, on the other
hand, if the credit applied for is within the legal limit of his bank,
will either make the loan himself or, when the amount is large, refer the
matter to his board of directors*
Delay in granting loans is often avoided, in practice, by both
classes of institutions, through the establishment, once a year or oftener,
of lines of credit for prospective borrowers in advance of their needs.
Once this is done, loans may be made immediately, whether the application
is to a branch or to a unit bank.

Information is not available as to how

~ 105 -

widespread this practice is among unit banks, but an officer of the largest
"branch operating institution in California has testified that "• • . As a.
matter of fact, after a "branch has been in operation for a year or more, experience shows that easily SO per cent of the annual commercial credits extended by the branches are renewals under established lines*"v^/
The adequacy of the service which may properly be demanded from
banks as purveyors of credit depends essentially upon whether, within the
limits of the funds at their disposal, they grant all applications for loans
which are economically justifiable and which will not endanger the safety
of the deposits entrusted to them.

Consequently, the decision to make or

refuse loans is very largely a matter of judgment on the part of the management, and the measure of adequacy of lending service is determined by the
degree of competence of the management.
As pointed out in a preceding' chapter, the managers of the great
majority of the country branches of the large intercommunity branch operating banks of California are themselves former unit bankers. Since they became
branch managers, members of the staff of a metropolitan bank, the quality of
management that they have displayed has reflected both their own earlier experience as unit bankers and the effect of their new staff connection.


particular, their own judgment as lending officers has been conditioned, where
substantial amounts have been involved, by that of the central credit department of the head office, a factor difficult to isolate for separate appraisal.
Their effectiveness as lending officers, however, may well have been increased
by the fact that the head office relieves them of all work and responsibility
in connection with investments and the general financial administration of

(!) United States Congress, 71st, 2nd Session, Hearings under H. Res. lUl
on Branch, Chain and SrouiJ Banking, House Committee on Banking and
Currency, p. 13^S.

the bank.
With the passage of time it is to be expected the branches will
be managed for the most part by men less well trained in the operation of
unit banks and better trained in branch operation. Pending the development
of that condition, the evidence afforded by California experience concerning
the quality of local management under branch banking must be considered inconclusive.^)

British and Canadian experience have been revie?/ed in other

studies of the Committee.
Availability of Credit. - It is stated by advocates of the branch
system that the lending service it provides is not only as good as that of unit
banking but better. Two principal characteristics of branch banking are cited
to prove the point.

The first is that small branches can and often do make

individual loans much larger than could be extended by unit banks in the same

The second is that, through the mobility of funds in a branch or-

ganization, the aggregate of loans extended in a given community is not limited
by the deposits of that community.

To establish both these claims, a large

amount of data was submitted to the Committee on Banking and Currency of the
House of Representatives in I93O by an official of the Bank of Italy H.T.& S.A.
(1) John Philip Wernette, of Harvard University, after traveling widely over
the State of California during the summers of 1930 and 1931 &'&& interviewing persons in small towns, writes as follows with respect to the service to borrowers rendered by branches as compared with unit banks:
"The matter of the wisdom and fairness of the comparative
lending policies is one on which judgment is difficult. Any
would-be borrower, who has been refused a loan, and there are
many of them, will damn the bank as a soulless, unsympathetic
institution. Hie feeling is fairly general in branch towns
that the branch banks are stingy with loans. This question
was the subject of especially careful inquiry and the writer
believes that, on the whole, the branch banks1 lending policies have been wise. They have been, it is true, increasingly
cautious during the past few years and, in some cases, unduly
restrictive. Due to the relatively unprofitable condition of
agriculture during the past few years all banks, both branch
and unit, have been restricting their agricultural credit. In
some cases, where the branch banks have erred on the side of
conservatism, local banks have taken over the rejected business.
In general, however, the branch banks seem to have refused very
few loans which the local banks would have been willing to'make."—
Branch Banking in California, pp. 132-139• (& doctoral thesis on
file in the library of Harvard University, 193 2 ).
(2) See Branch Banking in Canada and Branch Banking in England.


Large Individual Loans. - A tabulation was presented, showing
individual loans made "by "branches which had formerly "been independent countryhanks*

The legal lending limit of the independent hanks, based on their

paid-up capital and surplus, was indicated in each case, to illustrate the
larger credit facilities actually extended to customers after the same institutions had become branches of the Bank of Italy N. T. & S, A.

In order

to avoid the possibility of revealing the names of borrowing customers, both
the location of the branches and the borrowers were designated by numbers
and letters respectively.

The original tabulation contains data for 70

branch offices. To conserve space, the relevant figures are here reproduced only for each fifth branch as shown in Table 6«

Table 6 - Examples of Loans Outstanding in Excess of Legal Lending Limit
to Individual Borrower of Former Independent 3ank(l)
Spring of 1930


legal lending
limit of
unit bank


from branch


No. 1

$ 5.000.00

Mr. A


No. 5


Mr. A
Mr. B

Sheep and farming


No. 10


Mr. A
Mr. B
Mr. C




Mr. D

Mr. 3
Mr. 1


No. 15


Mr. A

Hay and grain

Ho. 20


Mr. A (also
"borrows at






Table 6 - Examples of Loans Outstanding in Excess of Legal Lending Limit
to Individual Borrower of Former Independent Bank(l)
Spring of 1930 (Continued)


legal lending
l i m i t of
u n i t "bank



. . .







Ho. 25


, Mr*



Ho. 30






Mr. A
Mr. B
Mr. C

No. 35

from "branch


! $




Ho. Uo







Ho. 45


Ho. U9C2)










i Mr*
! Mr.
I Mr.


Stoclr. r a i s e r
Hay and g r a i n

j Mr.
! Mr.
! Mr.


Hardware and i c e



|Mr. A
j Mr. B
; Mr. C
jMr. D
\ Mr. E
•Mr. F
JMr. G
IMr. H
jlir. I
;Mr. J
; Mr. 1L
JMr. L
.Mr. M





• Canner
Cannes; and. r a n c h e r
' Canner and r a n c h e r
Dried f r u i t s
• Canner
; Dried f r u i t b r o k e r
1 Dried f r u i t s
j Cattle
i B u i l d i n g and loan



Table 6 - Examples of Loans Outstanding in Excess of Legal Lending Limit
to Individual Borrower of Former Independent Bank(l)
Spring of 1930 (Continued)


No. 55

legal lending
limit of
unit bank








Realtor and insurance


Mr. A


Ho. 65




Mr. J
i&r • xi

Mr. L
Mr. M
Mr. H
Mr. 0
Mr. P
Mr. Q,
No. 70


Mr. A
Mr. 3
Mr. C



^3 > 5 5 3 . ^


Ho. 60


from branch

General Me renan dis e
Orchardist and
Ice and storage
Orchardist and
Sock and gravel
Orchardist and



(1) Compiled from tabulation submitted to Committee on Banking and Currency, House of Representatives, Hearings on Branch, Group,and Chain
Banking, 1930, pp. 1392-1398.
( 2 ) Data for Ho. U9 used "because figuures for Ho. 50 of the o r i g i n a l tabul a t i o n are incomplete.

- -*&


To assume tnat all these borrowers would have failed to obtain
so much credit had the branch banking system not been in operation, would
hardly be justified*

Undoubtedly trie needs of some of them would have

been and previously were met tnrough the intermediary of independent banks
by the city correspondents of the latter. Or, in some instances, the required funds might have been obtained by borrowing from two or more inde*.
pendent country banks. Moreover, certain of these loans were doubtless
extended to local divisions of important firms which could readily have
borrowed from metropolitan banks, but kept their accounts in near-by
branches as a matter of convenience.

Consequently it is not possible to

determine the exact extent to which the borrowers referred to in the tabulation actually received more ample credit accommodation from the branches
than they would have obtained from independent unit banks in the same cou>munities*
Loans in Relation to Deposits. - Another tabulation submitted
by the Bank of Italy 11. T. & S. A. in 1330 was one showing the amounts
of deposits and loans of its branches in the different cities and towns
of California. Prom this tabulation the list shown in Table 7 has been
taken, of branch locations where the average of loans outstanding on
February 28 of the three years 1927-1929 amounted to over 70 per cent
of average deposits.

- K?r

Table 7 - Loans and Deposits of Selected Branches. Average As of
February 26 for 3 Years 1927-1929^^

Name of branch

1 . Balcersfield
2 . Wasco
Fe t a l u a a
5. K o l l i s t e r
6. Hayyard
7. King City
s. Lo'uipoc
9. Los Banos
10. kadera
1 1 . Merced
1 2 . G-ridley
1 3 . Live Oak
l 4 . Marysville
1 5 . Paso Eobles
1 6 . Eapa
17. Eedwood City
I S . Watsonville
1 9 . San J o s e
2 0 . San Mateo
2 1 . Sunnyvale
2 2 . Santa Clara
2 5 . Tracy
26. Vacaville
2 7 . Woodland
28. Ontario
29. Salinas
30. Shafter
3 1 . San Juan
32. Arcadia
Santa Ana
34. San Fenian do
35. F a i r f a x
36. Crescent City
37. T u l a r e
3 8 . Lakeport
Daly C i t y
4 i . Eealdsburg
42. Eoseville
^3. San Bruno






j Deposits
1 (demand and

1 E a t i c of
loans t o
: deposits
(per cent)

j $ 4,986,000 ! $ 6,733,000 |
843,000 j
450,000 |
2,665,000 i
3,069,000 !
1,858,000 |
1,424,000 1
2,874,000 j
2,260,000 |
2,555,000 !
1,007,000 i
498,000 j
857,000 1
799,000 !
1,308,000 )
1,089,000 j
3,718,000 j
1,345,000 1
1,394,000 1
294,000 !
2,836,000 !
! 12,397,000
, 14,491,000
2,799,000 1
1,902,000 ;
13,273,000 !
15,531,000 I
3,3^2,000 !
3,805,000 i
1,015,000 i
1,056,000 I
732,000 1
874,000 1
2,283,000 ]
1,627,000 1
1,578,000 !
i,59S,ooo [
5,084,000 i
4,198,000 J
187,000 !
134,000 j
200,000 I
999,000 i
719,000 1
1,736,000 {
1,625,000 j
799,000 ;•
897,000 1
251,000 !
312,000 1
880,000 1
1,130,000 !
823,000 i
1,161,000 1
357,000 ;
466,000 !
1,238,000 {
667,000 1
1,263,000 i
1,094,000 j
992,000 j
1,053,000 1
1,165,000 j
1,550,000 1
2 6 s , 000 1
285,000 1








10b. 8



Table 7 - Loans and Deposits of Selected Branches, Average As of
February 2S for 3 Years 1927-1929(1) (Continued)


Name of "branch











fall Valley
South San Francisco
San Leandro
Santa Maria
Santa Paula
Yu"ba City
National City
Half Moon Bay
San Rafael
San Anselmo
El Centro
Ojai Valley
Anahe im
Santa Barbara
Walnut Creek

(demand and



Rat:r of
loar.w. to
(per cent)


$ 2,887,000

$ 2,277,000







, 2,539,000











7£. 7






(1) Compiled from tabulation submitted to Committee on Banking and
Currency, House of Representatives, Hearings on Branch, Groupt
and Chain Banking. 1930, pp. 13S5-1383.

This tabulation illustrates several aspects of branch banking practice.

In the first place, it should be recalled that well conducted banks

are generally unable to lend locally as much as 70 per cent of their deposits.
During the three years in question, for example, the Bank of Italy H. T. &
S. A. as a whole had an average of $662,553*000 ki gross deposits.(^/


average total of loans and discounts outstanding, including call loans, coo>mercial paper, and bankers' acceptances (important items of secondary reserve),,
amounted to $4l6,035fOOO, or about 63 per cent of gross deposits.^) Total
loans and discounts of all country member banks of the Federal reserve system
during that same period averaged Sk per cent of gross deposits in California
and 60 per cent in the United States as a whole. Sound banking practice requires that considerable sums "be employed as reserves, in the form of cash
or balances due from other banks, call loans, and investments of one kind or
another. Under ordinary circumstances the only way in which the ratio of local loans to deposits of unit banks can be increased bejond a maximum usually
under 70 per cent is by borrowing, a practice which is not generally regarded
as sound when pursued as a regular policy.

It is fairly certain, therefore,

that the loans of most of the branches listed above were substantially greater
in relation to their deposits than would have been the case had those branches
been independent banks.
In the second place, since the ratio of loans to deposits of the
branches referred to was greater than that of the average of the bank as a
wxiole, it follows that other communities were in effect furnishing the funds
to make up the excess. Other branches of the bank were of necessity lending,
at the time referred to, less than the average amounts in relation to their

This state of affairs doubtless represents to a considerable extent

a seasonal situation. At some other period of the year many of the branches

(1) Ave;:age reported to the Comptroller of the Currency in response to calls
during each of the years 1927, 192S, and 1929.

- HU -

tabulated would probably have had outstanding substantially smaller
amounts of loans, while others, operating in regions then in their
season of greatest economic activity, would in turn have been making
larger aggregates of loans. The tabulation illustrates, therefore, in
effect, the mobility of loanable funds resulting from the operations
of a branch system.
She tabulation also provides evidence that the branch system
furnishing the data had not drawn off funds needed in small communities for use in large commercial and industrial centers. The branches
designated in the tabulation are nearly all located in small towns
all over the State. She period 1927~1929»


which the figures re-

late, was characterized in general by a great demand for funds at
high rates in the call money markets,, not only of Hew York and
Chicago but of San Francisco and Los Angeles as well.

It appears,

therefore, that the bank was obliged, presumably as a matter of long
run business policy, to take care of the customers of its country
branches, irrespective of temporary opportunities for larger immediate
profits from funds lent at call in the cities.
Interest Rates to Borrowers. ~ The Committee has endeavored
to ascertain whether the advent of wide scale branch banking in California has or has not resulted in lowering interest rates to borrowers
in the rural communities. Available statistical evidence, however, has

- 115 -

"been found to be neither comprehensive nor conclusive.

In the first

place, sufficient data are not available to show in fairly representative manner what the effective interest rates to borrowers in rural districts
actually have been at any time. Different "banks, both unit and branch
operating, follow different practices with respect to the amount of balances which borrowers must leave on deposit without interest. Moreover,
it is possible that the customs of "banks generally in this respect may have
changed during the past ten or fifteen years.

Such differences or changes

would affect the real interest charged for loans.

In some banks service

charges axe made for granting small loans; in others, where large credits
are involved, the prevailing rates are sometimes reduced in order to get
the business. Consequently, since it would be a hopeless task to try to
allow for all these and other influences tending to change the cost of bank
credit, it must be borne in mind that the common or "going" rate on loans
is but a rough indication of the real interest charges paid.
With the view to ascertaining what has actually been the movement
of the common or "going" rates to borrowers in the rural districts of California during the past ten or fifteen years, two separate inquiries have
been made. The first was an examination of the records of notes submitted
to the Federal Reserve Bank of San Francisco for rediscount in the spring
of the years 1921 and 1932* from selected towns in various regions of the

- z&-


In 1921 the notes came from independent member banks, while in 1932

they were from the branches of metropolitan member banks which had in the
meantime succeeded to the business of the same independent institutions.
Out of about 3Q-toims investigated in this manner, 11 were found where there
was some evidence that rates had been lowered after the independent bank
was converted into a branch. From one town, in the northern part of the
State, the notes submitted for rediscount all carried the rate of 8 per cent
in 1921 and 7 per cent in 193^»

Prom another, in the southern part of trie

State, the records definitely indicate a change from 10 to S per cent. In
tne case of 9 other towns, a considerable proportion of the notes bore in
1921 a higher rate than in 1932.
The second inquiry was the sending of a questionnaire by the Federal
Reserve Bank of San Francisco in April, 1932> to unit national banks in 30
selected country towns throughout the State. About half the banks questioned
were located in towns wnere there was competition from branches of metropolitan institutions, while the others were not far away from communities served
by branches. These banks were asked to indicate "what was the common interest
rate to borrowers from your institution or in your community,11 in the spring
of each of the years 1915 to 1932. They were further requested, in the event
that any changes had occurred in the period under consideration, to indicate
what in their opinion were the principal reasons therefor.
Twenty-six answers to the questionnaire were received.

Of these,

21 reported that there had been no material change in the seventeen year

The other 5 reported reductions, in two cases from 10 to S per cent,

and for 3 banks, from S to 7 per cent. By way of explanation of the change,
one institution in the southern part of the State declared that:

"For many

- ^3T~

years we had no paper in our bank bearing less than 10/5. Following tne entrance of Branch Banking into the valley the rate was gradually reduced until
now the prevailing rate is 2%. At least 95^ of our paper bears &$> inmerest."
A bank in the northern half of the State explained the change as follows:
"From about 1923> there has been a constant decrease from Bjo to 75* <3ue to
the reduction in rate by competitive banks and to general economic conditions.
The results of these attempts to arrive at the facts cannot be said
to be conclusive.

In general they seem to indicate that the prevailing rate

in rural communities for the past four or five years has been about 7 per
cent, except for certain small areas of the State, where the usual charge
has been 8 per cent. Prom ten to fifteen years ago, the rates in the same
areas appear frequently to have been S per cent and 10 per cent respectively.
As previously emphasized, however, the prevailing rates on customers1 loans may not be taken as an accurate measure of the effective rates
paid. Even if a change in effective rates could be shown to have taken
place since the advent of branch banking, it would not necessarily follow
that such change has resulted from branch banking.

Other influences have

been at work during the past ten to fifteen years, both in California and
elsewhere, which might tend to lower interest rates, notably the pronounced
improvement in means of communication.

With the greater ease of transportat-

i o n resulting from good roads, the price of almost everything in rural districts, including bank credit, has probably been affected to some extent by
competition from the cities. Moreover, California has been for many years
gradually passing from the stage of pioneer development into that of an
older, more settled

community; and generally such a "settling down" process

results in lower interest rates on loans.

- 113 -

For these and other reasons, no positive conclusion appears to be possible
concerning the influence of "branch banking in such changes as may have occurred iri effective interest rates to borrowers in California.
The Mono-poly Question* - The facts of banking concentration in
California have already been set forth in sufficient detail to show that
wide scale branch operation there, as in Canada, and other countries, tends
to result, through mergers

and consolidations, in larger and larger and

fewer and fewer banks. Up to the present time, however, it is clear that
the different branch operating systems in California are in active competition with one another. Furthermore, there are still several hundred different banks operating in the State, and. even those towns which are served
only by branches of one institution are usually near enough to independent
banks in near-by places for convenient access to them by existing means of
As bearing on the prospective degree of banking concentration in
California, material presented in preceding chapters may here be recalled.
This showed that the present degree of such concentration was attained with
extraordinary speed in consequence of a combination of circumstances that
prevailed at the time when it was going on. These may bo summarized as:
(l) the banking laws of California; (2) the personality and the

ambition of

individuals; (3) the adaptability of the Statefs economic activity to branch
banking, because of diversification; (h) the extensive use of affiliated or
associated holding companies to buy unit banks, to raise money by the sale
of stock, and to accomplish wholesale mergers and consolidations; and finally
(5) the existence for a considerable period of a rapidly rising stock market,
making possible the sale at high prices of the shares of banks and bank
holding companies.


Experience with branch banking in California up to the present
has not been sufficient to warrant conclusions as to costs of operation*
Comparisons between the earnings and expenses of the large branch operating
banks and those of other banks are not conclusive. The branch banking
movement has progressed so rapidly that the branch banking institutions
have had considerable expenses of a non-recurrent kind in perfecting details of their administrative structure. On tho other hand, deductions
from earnings on account of losses have been decreased in the largest
branch operating banks by the use of affiliated non-banking companies to
take over slow or doubtful assets, ( i )

It is impossible to determine the

extent of either the increase in operating costs attributable to transition
or of the decrease in losses through transfers to affiliates. Consequently
comparisons of costs and profits made between ?/ide scale intercommunity
branch operating banks and other banks are subject to reservations.
Lagge Intercommunity Branch Operating Banks
vs. All Other National Banks
In an attempt to arrive at some comparison, however, earnings and
expenses and loans and investments for the four years I927-I93O have been
aggregated and averaged for the three largest intercommunity branch operating banks in the State, or their predecessors, on the one hand, and for all
other national banks in the State, on the other. The three branch operating
(1) Seo testimony of a representative of Bank of Italy U. T. & S. A.,
Chapter IV above.

~ 119 ~

- 120 -

"banks during the period r e f e r r e d to may be considered as a state-wide "branch
"banking system made up of two national hanks and one State bank.

These are

the Bank of jtaerica N. T. & S. A., the Security-First National Bank, and the
American Trust Company.

All three are members of the Federal reserve system.

The three "branch systems operated thro^ugh twice as many hanking offices as
the "other n a t i o n a l hanks," with nearly twice the amount of loans and i n v e s t ments.

Consequently the average size of the offices of each system i s rough-

ly comparable.

The r e s u l t s of t h i s calculation are shown in Table 8.

Table g - Earnings of Three Large Intercommunity Branch Operating
Banks Compared with Other National Banks i n California,
Average of Four Years 1927-1930V1)











[ Three large
branch operating banks
Annual averages of:
Number of banking offices (banks and branches)



1 $1,280,96^,000p736,265,000

Loans and investments
Capital, surplus, undivided p r o f i t s , and r e serves (except reserves for expenses, e t c . )


Earnings and expenses per $100 of loans and
I n t e r e s t on loans and investments
Other earnings
Total earnings
S a l a r i e s and wages
I n t e r e s t paid on deposits
Other expenses
Net losses


J national
[ banks(2)














Total expenses and net losses



Net p r o f i t s



Net p r o f i t s per $100 of invested c a p i t a l



Ratio of time deposits to t o t a l deposits



(1) For the method by which these schedules were drawn up, see Committee on Branch,
Group, and Chain Banking, Banking P r o f i t s , 1890-1931.
(2) A few small n a t i o n a l "banks were excluded because complete figures could not be
obtained; but since the tabulation has to do only with averages of aggregates,
the omission makes no appreciable difference.

- 121 -

When expressed as percentages of loans and investments, gross
earnings were higher for the branch operating banks than for the other
banks, the difference arising, however, not fron interest charges, but from
other earnings• Operating expenses were likewise higher for the branch systems, with the result that net profits per $100 of loans and investments were
nearly the sane for both groups of banks. Average net profits on invested
capital were higher for the branch operating banks than for the other banks
because they had a smaller invested capital in proportion to loans and investments.
Interest on loans and investments was substantially lower for the
branch systems than for the "other national banks." But since the data do
not show whether the ratio between investments and loans was approximately
the same in each case or the yield on the investments the same, it does not
necessarily follow that the actual interest collected on loans was at a lower
rate in the branch systems than in the "other national banks."
Other earnings of the branch systems were nearly 65 per cent higher
than those of the "other national banks." This is probably accounted for by
the larger number of functions performed by the branch systems. A considerable part of the difference is doubtless represented by commissions on the
purchase and sale of securities for customers. But if earnings from services other than strictly banking business were greater in the branch systems, such services might naturally be expected to result in greater operating expenses. And in fact, operating expenses, as embodied in the two items
of salaries and wages and other expenses, were higher, although the difference in the case of salaries and wages was very snail.

- 122 -

Interest paid on deposits was substantially higher for the "branch
systems, reflecting in part the higher ratio of tine deposits to gross deposits*

Net losses appear to have "been substantially lower for the branch

systems. But this nay be accounted for, in part at least, by the custom
of the branch operating banks already emphasized, of turning over slow and
doubtful assets to affiliated non-banking companies when converting unit
banks into branches.
Altogether the comparison made possible by these tabulations is
inconclusive. It does appear to indicate, however, that there has been very
little difference in cost per unit of business, between the large intercommunity branch operating banks in California and the other national banks of
the State. Economies of operation of the branch systems have not so far been
demonstrated by the statistical information available, although it is possible that expenses incident to the building up of the branch organizations
themselves may have offset any economies otherwise effected.

Country Branches and Country Banks
If there is any considerable saving in the operating costs of
wide scale intercommunity branch banking as compared with unit banking, the
difference should be apparent in the results of country branch and country
unit bank operations. Unfortunately, for reasons which will appear presently, accurate and comprehensive comparisons between the two types of banking
cannot be made. A statistical compilation has nevertheless been attempted,
in the hope of indicating approximately the differences between at least a
few items of earnings and expenses. Statements for each of the five years
1926-1930 of the earnings and expenses and the principal balance sheet items
(averages of the condition statements issued during the year) were obtained

- 123 for 31 country "branches of the three principal intercommunity "branch operating banks of California. These "branches were selected "by the Federal Reserve Bank of Son Francisco with such geographical distribution as to constitute, as far as possible, a representative cross-section of country
branch banking in the State* At the same time, to provide a basis for comparison, corresponding data were assembled for 30 national banks operating
either in the same towns as the branches or in the nearest neighboring
places* (i)
When the statements were received for the 31 branches, it was
found that, while the principal balance sheet items and the ordinary items
of earnings and expenses appeared to have been reported on the same basis
by the three institutions, certain other items obviously had not, These
were (l) interest allowed the branches on balances due from the head office,
(2) interest charged the branches on balances due to the head office, and
(3) the charge against the branches for their share of the expense of maintaining the head office. These items in branch accounting are of necessity
determined arbitrarily, and in fact each of the three branch operating banks
concerned uses an accounting basis differing widely in some particulars from
those of the other two. In .o^der therefore to obtain averages of earnings and
expense data for the 31 branches which would be approximately consistent,
it was necessary to adjust these items to a common basis. This has been
done by combining some of the methods of the three banks and using composite
percentages as follows: (1) interest allowed on balances due from head
office, 5 per cent; (2) interest charged on balances due to head office,
5 per cent; and (3) charge for head office supervision, 0.21 per cent
(1) The schedules referred to in the report on Banking Profits, 1890-19*51
of the Committee on Branch, Group, and Chain Banking were used for
this purpose.

- J&2: -

(approximate1;0 of earning assets.t1'
I7ita these adjustments, Table 9 slior/s average animal figures for
the five year period 1926-193° of the principal earnings and expenses and
balance sheet items for the 31 branches and the 30 national banks.

Table 9 - Earnings end. Expenses and Balance Sheet Items
Average of Five Years 1326-1930
Average for
31 branches
Earnings and Expenses
Interest on loans and investments
Interest on "balances due from head office
Other earnings

$ 33,561



Capital, surplus, and undivided profits
Time deposits
Total deposits
Due to head office









2,237 2)



Total expenses and net losses

Total earning assets



Salaries and wages
Interest paid on deposits
Interest on balances due to head office
Supervision of head office
Other expenses
Net losses

Loans and investments
Due from head office

Average for
30 unit banks


Total earnings

Net additions to profits









1 ,593,607


1 1,593,607




! 763,247
1 ^,735


(2) Items in which adjustments have been made, as described in the text.

In order to determine the average rate of earnings and expenses

(l) This is approximately the percentage actually assessed against the
branches of the largest intercommunity branch operating bank for head
office supervision, on the basis of several years of experience.

- 125 -

of the "branches and the unit "banks, it is necessary, since the branches
have no capital assigned to them, to adopt as the basis of calculation their
earning assets* For the tranches this means in effect their loans plus
their balances due from head office, since they do not generally have any
other investments. If they were unit hanks presumably they would have capital funds to dispose of; but any increase in earning assets which they might
have on this account would probably "be more than offset by the funds immobilized in buildings and fixtures and the reserves of cash and deposits in the
Federal reserve or other banks required by law*

Generally the bank buildings

of the branch operating hanks are owned by an affiliated company, to which
the branches pay rent*
It will be observed that the average amount of earning assets of
the unit banks referred to in the tabulation is approximately twice as large
as that of the branches*

The difference was unavoidable in the process of

selecting national banks located as near as possible to the branches* But
since it has been shown in another part of the Committee's report'1' that
the expenses and losses of unit banks with earning assets of from $1,000,000
to $2,000,000 are generally lower per unit of business transacted than those
of unit banks with from $500,000 to $1,000,000, this fact should be kept
in mind in the comparison*

At the same time, there are so many other pos-

sible sources of error in the compilation that this factor should not be
overemphasi zed*
In the light of the foregoing considerations, it is evident that
earning assets as a basis for determining the rate of earnings and expenses
of the two classes of banking offices are only an approximation*

(1) Banking Profits. 1890-1931. Ch. III.

Even so,

_ jjhfc

however, they are probably accurate enough to provide a fairly reliable
comparison between those items for which no adjustments have been riade,
and to give a rough indication with respect to the others. The relevant
figures for such a comparison are shown in Table 10.

Table 10 - Earnings and Expenses of Branch and Unit Sanies
Average of Five Years 1S26-1930
Average for
31 branches

Average for
30 unit "baaUss

Amount per $100 of earning assets
Interest on loans and investments
1.39(12] $6.17( >
Interest on balances due from head office
Other earnings
Total earnings
Salaries and wages
Interest paid on deposits
Interest on balances due to head office
Supervision of head office
Other expenses
Net losses









0-9lr J


Total expenses and net losses

5.2l(!) 1

flet additions to profits

l.23(1) |




Ratio of time to total deposits
Interest paid per $100 of total deposits





(1) Items in which adjustments have been made, as described in the text.

Total earnings of the branches appear to be considerably smaller
than those of the unit "banks, apparently because of the smaller "other earnings"; but the total for the branches includes (in lieu of yield from investments) the arbitrary interest allowance of 5 P e r cent on balances due
from head office, which may be higher or lower than the average yield of
the investments of the independent banks. Moreover, the item "other earnings" of the unit banks includes, interest received on balances due from

- i^~
correspondent banks, which might be compared with a part of the interest
allowed the branches on balances due from their head offices. The most
that can be said of the comparison is that it gives some reason to believe
that average gross earnings of country branches are somewhat smaller per
unit of business done than those of country unit banks.
Among the several items of expense, salaries and wages for the
branches are shown to have been definitely lower than for the unit banks.
This would still be true even though the entire item of head office supervision were added to it. The difference seems to substantiate one claim of
the advocates of branch banking with respect to operating economies, namely,
that the operating staff of a small branch need consist only of a manager
who is essentially a lending officer (assisted ^oy the central credit department of the head office) and ordinary clerks. The aggregate salaries and
wages of these should be lower per unit of business done than in the case
of a unit bank, because the operating personnel of the latter must be capable of attending to all such matters as the investment of funds and the
general financial administration of the bank.
Interest paid on gross deposits in the two classes of banking
offices appears to be about the same per $100 of earning assets.


as the ratio of time deposits to gross deposits in the unit banks averaged
considerably lower than in the branches (kf

per cent as compared with 6*+

per cent), either the rate paid on time deposits 'by the former must have
been substantially higher or they must have paid substantial interest on
other classes of deposits.
Other expenses of the branches, including adjusted figures for
head office supervision and interest on head office funds used, appear to

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be somewhat greater than those of the -unit banks*

The figures for both

classes of banking offices are supposed to include the cost of occupancy
and maintenance of buildings and fixtures, insurance, stationery, telephone
and telegraph, advertising, and other miscellaneous items; and while presumably the branch operating banks should be able to effect some savings by
centralization of purchases, the extra costs of supervision by the head
office would be likely to offset these*
Not losses appear to be much smaller for the branches than for
the unit banks*

In all probability, however, a part of the difference is

accounted for by the fact noted above, that some of the branch operating
banks have made it a practice, when taking over unit banks and before
turning them into branches, to transfer their slow and doubtful assets
to affiliated non-banking companies*

Such branches have thus started

without any heritage of previous losses to write off*

The experience in

California cannot, therefore, be considered as having provided an answer
to the question whether losses are smaller in branch banking systems than
in unit banks*



California provides an especially favorable environment for wide
scale 'intercommunity branch • banking, of the great diversity of the economic activities of the different regions of the State. It
appears, however, that this circumstance was of less importance as a factor
in the rapidity of the development of the branch system in California than
a combination of other circumstances, made up of the career of A. P# Giannini
as banker and financial organizer, the somewhat guarded provisions of the
State law sanctioning branch operation, and an unusual opportunity for stock
flotation thro-ugh the existence for several years of rising security markets.
The branch banking movement gained headway after 1920 and within a few years
the banking structure of the State was transformed*

Starting with a system

of unit banking of the type predominant in the United States generally, California witnessed the rise of a

small number of branch operating banks,

which before the end of the decade controlled well over half of her total
banking resources*
There are two separate but closely interrelated aspects of the
development. On the one hand is the matter of the transformation itself,
the processes by which a large number of the banks in California gave up
their status as independent institutions and became branches of metropolitan
banks. On the other hand is the actual performance as banks of the large
branch organizations, upon which may be based a tentative appraisal of wide

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scale intercommunity "branch banking as practiced in California to date*
This second aspect of the development has thus far been largely influenced by the first. Moreover, the commonly expressed opinions of the
merits or demerits of branch banking in California have been based more
upon the particular methods by which the existing branch organizations
have been built up than upon their performance as banks. To avoid confusion, the two aspects must be considered separately.

In the long run

the process of building up branch organizations has little or nothing to
do with the merits or demerits of branch banking as such.
The development in California, if not too rapid for compatibility
with the public interest, was so rapid that it escaped effective control
by governmental agencies. During the five or six years following 1920,
the State superintendent of banks, under whose jurisdiction alone intercommunity branch operation was permitted ^oy law, was presented at times
with applications the granting of which would extend the scope of branch
banking far beyond what most bankers believed was in the minds of the
framers of the 1909 act. Unit banks throughout the State were bought up
by holding companies affiliated or associated with branch operating banks,
and then the superintendent was called upon to authorize their transformation into branches. Usually he granted the applications. Otherwise he would
have been unable to exercise effective supervision over these large group
organi zations•
Prom as early as 1919 the most important branch operating State
banks of California were members of the Federal reserve system. But the

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restrictions on "branch tanking prescribed by the Federal Reserve Board were
rendered ineffective 1y the utilisation of affiliated or associated nonmember banks to build up branch organizations, which later were to be absorbed by merger with the member institutions. Restrictions were conditioned
by the complexities of dual banking control, and by the fact that all membership in the Federal reserve system is in effect voluntary, since State members may withdraw from membership and national banks may surrender membership by converting into State banks.
The procedure employed to escape the regulations of the board was
to use the bank holding company, which purchased the stock of the unit banks
concerned and merged them together into the nonneniber branch operating bank*
Such transactions were greatly facilitated by the rising stock market, which
made possible the sale of shares of the holding companies at such prices as
to draw large sums from the public for use in the purchase of banks at high
prices. This was accompanied by speculation and stock promotion, sometimes
throiagh the branches of the affiliated or associated institutions themselves*
Without the holding company device the development of intercommunity branch
banking in Califoniia could not have taken place with such speed.
Consideration of the safety record of branch banking in California
appears to show that branch expansion, as distinguished from branch operation,
has been an important factor in reducing bank failures in the State. While
there has been no suspension of any large scale branch organization in California, the experience there has been too short and limited to too few banks
to be accepted as a test of the safety of branch banking.

In the matter of service to the community, the evidence available

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indicates that many small towns and villages in California have "been supplied with more extensive credit accommodation by branches of metropolitan
banks than could have been provided by local independent "banks. Individual
loans have frequently been made in amounts much larger than would have been
legally permitted for unit banks of a size the community could support. The
aggregates of loans made by branches have frequently been a great deal larger
than the deposits of those branches. This has reflected the transfer of
funds assembled as deposits and not needed in one coranunity at a particular
time to branches in other communities where there was a demand for credit.
No evidence has been found in California that branch banking has
resulted in draining small communities of their funds, when such funds have
been needed locally for loans. On the contrary, a tabulation of the loans
and deposits of country branches of an important branch operating bank in
the State, as of February 28 of the three years 1927-1929> shows that the
average of loans outstanding at seventy-five offices amounted to over 70
per cent of deposits and in a great many cases to over 100 per cent, as
compared with Sk per cent for all country member banks in California and
66 per pent for all country member banks in the United States. This was
during a period of exceedingly brisk demand for call loans at high prices
in the financial centers of the country.
Economies of operation of the branch system, claimed to result
from centralization of all the functions of general financial administration, have not been demonstrated by the statistical information available
as to California* s experience. Expenses incident to the building up of
the branch organizations themselves may have tended to offset any economies otherwise effected.