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DEPOSIT 'GUARANTY IN EI3HT STATES
During the Period 1906-ly30
By Clark V.'arburtorx
Introduction
Oklahoma
Kansas
Texas
Nebraska
March 6, 1959
MEMORANDUM
TO:
Dr. Cramer
FROM:
Clark Warburton
Herewith is the manuscript of Deposit Insurance in Bight
States during the Period 1908-1930«
For convenience, the various chapters have been placed in
separate binders, except that the introductory and concluding chapters
are in the same binder.
^
/>/j
^_
I have not read the various chapters since their typing,
and there may possibly be a few errors which will be disclosed
when I do so. Also, I have notes about a few desirable revisions
in most of the chapters, particularly Mississippi, which was com
pleted prior to my field trips.
DEPOSIT INSURANCE IN EIGHT STATES
During the Period 1908-1930
by
dark Warburton
Federal Deposit Insurance Corporation
1959
FOREWORD
When proposals for Federal deposit insurance were under consider
ation by committees of Congress, and after its adoption in 1933# it was
widely and bitterly opposed by most bankers and by numerous other persons
familiar with the history and operations of banks in the United States.
A considerable part of this opposition was the result of the experience
of several States with deposit insurance during the preceding quarter of
a century.
Officials of the Federal Deposit Insurance Corporation, soon
after its organization, felt that a survey of the character of these State
systems, and of the reasons for their difficulties and abandonment would
be helpful in developing the policies of the Corporation. The Board of
Directors of the Corporation is glad to be able to make the results of
these studies available to the general public as a companion volume to
the study of Insurance of Bank Obligations in Six States during the Period
1829- 1866.
, Chairman
Federal Deposit Insurance Corporation
PREFACE
This study of insurance of deposits in eight States is a part
of a larger project on the history of insurance of hank obligations and
of proposals for such insurance prior to establishment of the Federal
Deposit Insurance Corporation. For a brief description of the larger
project, see the Preface to the companion volume, Insurance of Bank
Obligations in Six States.
This book has been written by Mr. Clark Warburton, Chief of
the Banking and Business Section of the Corporation's Division of Research
and Statistics. His work on the study was begun in 193S hut has been
intermittent because of absorption of his time by other responsibilities
and projects. Most of the work was done during a six month's period in
193^ 35, a two-year period from 19^1 to early 19^3* and a four-year period
from the autumn of 195^ to the end of 1958* During the first of these
periods he was assisted by Miss Florence Helm and Mrs. Ethel Bastedo;
during the second by Miss Carol Colver and Miss Wilhelmina Sharpe; and
during the third by Miss Helen Thompson and Miss Jeanette Karp. Typing
and clerical service bave also been given by Miss Ida Mullins and in lesser
degree by several other persons.
Edison H. Cramer, Chief
Division of Research and Statistics
CONTENTS
Chapter
1. Introduction
2. Deposit Guaranty in Oklahoma
3. Deposit Guaranty in Kansas
h. Deposit Guaranty in Texas
5. Deposit Guaranty in Nebraska
6. Deposit Guaranty in Mississippi
7. Deposit Guaranty in South Dakota
8. Deposit Guaranty in Washington
9. Deposit Guaranty in North Dakota
10. Problems of Deposit Insurance
CHAPTER ONE
INTRODUCTION l/
Failure of a bank has results of far-reaching significance.
The amount of the means of payment, or circulating medium, of the com
munity is suddenly and sharply curtailed. Such curtailment creates im
mediate confusion throughout the community:
general inability to meet
the terms of contracts, paralysis of commerce, interruptions in the flow
of goods and services, and consequent disturbances to the lives of large
numbers of people. The reserves of purchasing power of many people not
associated with business and unprepared to take the risks of investors
beecane unusable and subject to serious loss.
Under these circumstances it is to be expected that the public
would exert strong pressure upon governments to find ways and means of
preventing bank failures, and of reducing the disturbances and losses
resulting from such failures. This has been, in fact, the case. Through
out the entire period of American history as a nation there have been re
peated, almost continuous efforts to provide unequivocal assurance to the
holders of bank obligations that their claims are secure. Almost all
banking codes and banking reforms have been directed, in part at least,
to this purpose.
Deposit insurance is one of the major devices adopted
with this specific purpose.
Prior to establishment of theFederal Deposit Insurance Corporation
by the Federal Government, fourteen States had made use of the insurance
principle to provide protection for bank depositors or note-holders^
1/ In large part, this chapter is an adaptation of Part Three of
the Annual Reports of the Federal Deposit Insurance Corporation for 1952,
pp. 66-72, and 1956, pp. Vf-73* Some of the data have been revised.
or both. Six of the systems were established prior to passage of the
N ational Bank A ct and none of these continued after the levy of a
prohibitive tax on State banknotes in 1865. It was anticipated that the
most important part of the nation’s m oney supply, or circulating medium,
would thereafter be guaranteed bv the Federal Government, as the
notes of national banks, wmcKn*STsuch a guaranty, would take the place
of the notes previously issued b y State banks.^
f
It was apparently not foreseen ewwiy in the 1860’s that deposits, rather
than circulating notes, would com e to constitute b y far the largest portion
of the nation’s circulating medium. In 1860 the tw o items were about
y j/ £
equal in amount. B y 1870 deposits were about twice, and b y the end of
i
the century seven times, circulating n o t e s w a s against this setting
I
that efforts were renewed to guard against the disastrous effects o f the
destruction of circulating medium through bank failures and to provide______ j __ -frtT /fZ o
a greater degree of protection for bank creditors.
^ ~ variou s
I
proposals were made to provide insurance or guaranty of deposits, both
in the Federal Congress and in State legislatures.1^
^
a * / ¿From 1907 to 1917
eight States established deposit insurance systems that operated for
varying lengths of time, some of them until 1930.
T he adoption of State deposit insurance programs between 1907 and
1917 was also a consequence of difficulties m any of the States were meeting
in attem pting to provide for stable banking systems. frmwH be iiulitd 'Ilf- "
J jf c t b a t & v e n ofr th ^ e ig h t States involved were located west o f
the Mississippi R ivei^ ^ ro6lem s similar to those of N ow - Y opIc, V cim on ^7
a half century earlier were current./
i
ffy ji-
*
I
I
^¿■r^
dom inantly agricultural areas. Six were in the Great Plains region east
of the R o ck y M ountains: N orth D akota, South Dakota, Nebraska,
Kansas, Oklahoma, and Texas. T he other tw o were in Mississippi and
Washington.
, <I
I
Character and extent o f insurance. T he bank-obligation insurance
systems of the 1908-1930 period pertained to deposits only. T h ey were
known as “ deposit guaranty” systems, but in all cases the guaranty was
that of a fund derived from assessments on the banks; in no case did
the State guarantee the deposits, though in one the remaining obligations
of the system after its closing were assumed b y the State through a
bond issue. The limitation of the insurance to deposits reflects, o f course,
the fact that State-chartered banks did not issue circulating notes, as
they had done when the systems of the 1829-1866 period were in operation.
JtL
OU
¿¿¿¿Z a
1 Proposals for Federal legislation for deposit insurance, beginning in 1886, are described in the
Annual Report of the Federal Deposit Insurance Corporation for 1950, pp. 68-101.
___________________
O
72*. ¿¿Lj Zikl
r
*
m
*
/
Z*. W.
C
&
yp
*
/
f
1
1
___
# " •/
— '■
T a b le
su te
À . P r in c ip a l P r o v is io n s op D e p o s it In s u r a n c e
P l a n s A d o p t e d b y E i g h t S t a t e s , 1907-1917
T a b le ak. P r i n c i p a l P r o v is io n s o f D e p o s it I n s u r a n c e
P la n s A d o p t e d b y E i g h t S t a t e s , 1907-1917— Continued
Deposit» insured
Banka participating1
Assessment on insured deposits*
Payment of depositors
Oklahoma
A ct of 1908*
as amended or
modified 1909,
1911,1913
All deposits not otherwise secured and on
which rate of interest was within limits
specified by law
Compulsory for all State banka
and trust companies
Annually 1/5 of 1% until fund equaled 2 % 'of
base. If fund reduced, special assessments:at
same rate annually4
In cash by Bank Commissioners immediately
upon taking possession of bank. If fund in
sufficient, in 6 percent certificates of indebted
ness to be paia in order of issue. After 1913
certificates sold at not less than par for purpose
of securing cash for depositors
Kansas
A ct of 1909
as amended or
modified 1911,
1921, 1923
All deposits not otherwise secured and on
which rate of interest was within limits
specified by law
Voluntary for all incorporated
State banka. Trust com
panies and private banks
excluded. Banks organized
after passage of Act eligible
to apply after operating one
year
Annually 1/20 of 1% of base less capital and
surplus until fund equaled $1 million. If fund
reduced below $500,000 special assessment for
amount necessary
In interest-bearing certificates of indebtedness,
reduced as proceeds of liquidation become
available. Deficiency, if any, paid from fund
Nebraska
A ct of 1909
as amended or
modified 1911
All deposits except money deposited on a
collateral agreement or condition other
than an agreement for length of time to
maturity and rate of interest
Compulsory for all incorpo
rated State banks
In cash from fund Immediately after determina
tion by the court of amount due depositors less
cash immediately available to the receiver for
such payments
Texas
A ct of 1909
aa amended
or modified
1921, 1923
Non-interest-bearing deposits not otherwise
secured. Excluded public deposits, secured
deposits, certificates of deposit, deposits
made for the purpose of converting a loan
into a deposit covered by the fund, certifi
cates of deposit converted to non-interestbearing deposits within 90 days of failure
Semi-annually 1/20 of 1% until fund equaled
1-1/2% of base. If fund reduced below 1%
assessment renewed and special assessments if
necessary not to exceed 1% of base in any
one year
All State chartered banks re
quired to choose between
guaranty fund system or
bond security system
Annually 1/4 of 1% of base until fund equaled
$5 million. If fund reduced below $2 million,
or below level of preceding January 1, special
assessments not to exceed 2%
In cash immediately, out of cash in failed banks
and fund
Mississippi
A ct of 1914
All deposits not otherwise secured nor
bearing interest exceeding 4% per annum
Voluntary until May 15, 1915.
Thereafter compulaory for
all banka operating under
State law including trust
companies and savings banks
Annually 1/20 of 1% of "average guaranteed
deposits” , less capital and surplus until fund
approximated $500,000 over and above initial
contribution. If fund depleted, special assess
ments at same rate not to exceed five in any
one year
In interest bearing certificates of indebtedness,
reduced as proceeds of liquidation become
available. Deficiency, if any, paid from fund
South Dakota
A ct of 1915
aa amended or
modified 1921
All deposits not otherwise secured. Deposits
could not pay Interest in excess of 5%
unless authorized by depositors guaranty
fund commission and in no case, more
than 5 -1/2 % per annum
Compulsory for all State and
private banks
Annually 1/4 of 1% until fund equaled 1-1/2%
of base. Resumed whenever fund reduced to
1 % of base
In cash immediately from fund. If fund de
ficient, Commissioner to issue certificates of
indebtedness at 5% and not to exceed 7% if
sold to secure cash for depositors
North Dakota
A ct of 1917
as amended
or modified 1923
All deposits not otherwise secured and on
which interest was within limits specified
by law
Compulsory for every corpora
tion in business of receiving
deposits or buying and sell
ing exchange except national
banka
Annually 1/20 of 1% until fund equaled 2 % of
base. If fund reduced to 1-1/2% of base,
assessments resumed. Special assessments at
same rate at option of Bank Commissioners,
not to exceed four per year
In cash from fund after certification of net
amounts due depositors. If fund deficient, in
certificates of indebtedness
Washington
A ct of 1917
as amended or
modified 1921
Deposits subiect to check or other forms of
withdrawal and not otherwise secured.
Payment of interest at rates higher than
authorized by guaranty fund board sub
jected bank to loss of insurance
Voluntary for all State banks
including trust companies
but excluding mutual sav
ings banka
Annually 1/10 of 1% until fund equaled 3% of
base. If fund reduced, special assessments not
to exceed 1/2 of 1% in any one year
In warrants on fund issued on proof of claim; if
fund deficient warrants to bear 5% interest
until paid
* The banking laws of Oklahoma were codified, revised and re-enacted May 25, 1908, with little
i National banks were prohibited from participating in State insurance plans by ruling In July 1908
change In guaranty law.
of Attorney General of the United States.
*
In terms of percentage of average daily insured deposits for preceding calendar year, unless other
* Special assessments in addition to regular annual assessment authorized 1914-1916.
wise noted. Excludes initial payments or contributions where applicable.
M em bership. In tw o States, Kansas and W ashington, anemberehipy* v*CyM/7 t
in the guaranty plan was voluntary, in the remaining six States com pulsory. In Mississippi, however, the plan was voluntary during the
first year; and in Texas the banks had the option of joining the guaranty
{q
' |
0 .1 7
I
fund or of depositing bonds or other securities with the Commissioner
of Insurance and Banking.
Banks were generally required to undergo special examinations prior
to admission, presumably with the intention, except in the tw o States
with voluntary membership, of forcing weak banks to liquidate or to
im prove their financial condition. F or the m ost part, however, these
examinations appear to have been perfunctory. E xcept in Mississippi,
inadequate time was allowed for making examinations; and supervisory
officials doubtless were reluctant to close banks which they had pre
viously permitted to remain in operation.
_____________
T he period of operation of each of the systems and a sum
mary of participation in them are given in
T a b le
P a r t i c i p a t io n o r O p e r a t in g B a n k s in S t a t e
D e p o s it I n s u r a n c e S ystem s, D e c e m b e r 31, 1908-1930
State
Period of
operation1
Oklahoma............
1908-1923
Kansas................... 1909-1929
Texas...................... 1910-1927
Nebraska............... 1911-1930
Mississippi............. 1914-1930
_ \South Dakota
1916-1927
" ^ ’TJorth Dakota . .
*49l7>1929
1917-1921
Number of partici
pating banks*
Percent of
eligible banks*
Minimum
Maximum
Minimum
Maximum
463
39
34
647
258
322
337
46
695
714
990
1,009
306
566
723
116
100.0%
4.7
4.3
100.0
100.0
100.0
100.0
16.1
100.0%
65.6
96.6
100.0
100.0
100.0
100.0
37.9
Percent of all
banks in State4
Minimum
Maximum
50.9%
8.6
2.2
73.0
88.1
76.3
»»»7 1 ;
12.6
76.8%
51.»
57.7
84.7
9 11
i
81. 1
9 0 .3
28.9
1 In each State the system operated for only a part of the initial year or of the terminal year, or both.
’ For data by years, see Table 36-. 10.
* In five States all incorporated State banks which accepted deposits (except trust companies in
Oklahoma after 1911, and mutual savings banks in Washington) were required to participate. In the
other three States participation was voluntary. For data by years, see Table'S®. 12 1
4 Banks ineligible for participation were predominantly national banks, but included trust com
panies in Oklahoma after 1911, trust companies and private banks in Kansas, and the State-owned
Bank of North Dakota in that State. For data by years, see Table 3*» 10.
■'
I i n f j t J p Oklahoma the number
of insured banks reached a peak iiM lw imi'l"
AYn~ T u — n j~rnrn
Cessation of the rapid rate o f growth in number of banks in the early
1920’s coupled with an increasing number of bank failures and, in several
States, withdrawals from the insurance system or conversions to national
banks resulted in a decline in the number of insured banks beginning
about 1921.
N one of the eight State deposit {¿u * »m ^ 'sy ste m s included national
banks, though in five States the law authorized their participation.
H ow ever, such provisions were inoperative as a consequence of a ruling
b y the Com ptroller of the Currency in 1908 forbidding such action b y
national banks.
A t the time of maximum participation, insured banks constituted
m ore than half the banks in each of seven States and in five of these
States were more than three-fourths of all banks. How ever, insured
banks, on the average, were smaller than noninsured banks. This is
.
J
„
/ y
*
)
reflected
the fact that in none of the States was the per
centage of deposits held b y insured banks as high as the proportion of
banks participating in insurance.
im. i'W ’i
s*r\ TJ-l.
Ostd.
JJ
TabI¿P X
D e p o s it s in B a n k s I n s u r e d u n d e r S t a t e
D e p o s i t I n s u r a n c e S y s t e m s , D e c e m b e r 3 1 , 1 9 0 8 -1 9 3 0
Amount (in thousands)1
State
Minimum
S r 1 ............s ; * * «
Nebraska........................
Mississippi. . . . . . « « »
_ h £ o u t h Dakota it ?.. K ” 0
^ N o r t h D akota...............
$31,617
3,340
73,890
45,493
59,773
39,823
Maximum
Percent of total
deposits in eligible
banks1
Percent of total
deposits in all banks
in State1
Minimum
Maximum
Minimum
$190,900
1 00 .0*
204,669
321,008 7 M ■‘e itr
281,547
100.0
187,850
100.0
100.0
184,098
130,837
100.0
79,814
26.8
100.0%
19.1%
95.9
100.0
100.0
100.0
100.0
41.1
¿ .4
38.2
66.8
55.1
12.4
Maximum
51.8%
43.8
30.9
59.0
79.2
67.3
S M r g ff.O
18.9
1 For data b y years, see Table 9 i- 1 1 •
1 For data b y years, see Table 9A.
.
None of the eight States, except Kansas for a brief period, placed a
limit on the size of account, or amount of deposits owned b y a depositor,
protected by the insurance; but all the States excluded some types of
deposits or those to which specified conditions were attached. In Texas
the insurance was limited to non-interest bearing deposits payable on
demand. In Kansas, for the first tw o years, insurance on savings deposits
was limited to $100 per person and to accounts bearing not over 3 per
cent interest per year; and on other interest-bearing accounts to those
with the same interest limitation and with a six-month to one year
m aturity date. In the other States, and in Kansas after 1911, the in
surance applied to both demand and time deposits. In these States a
maximum rate of interest payable on deposits was prescribed b y law
or required to be set by the bank supervisory authority, and except in
Nebraska paym ent of a higher rate of interest made a deposit ineligible
for insurance. All the States except Nebraska excluded deposits otherwise
secured. In Kansas, Mississippi, South Dakota, N orth Dakota, and
W ashington the insurance did not cover deposits that represented
rediscounts or m oney borrowed by the banks. In Nebraska, deposits
with a collateral agreement or condition other than length of time to
m aturity and rate of interest were excluded. In Texas public deposits,
certificates of deposit, deposits made for the purpose of converting a loan
to the bank into a deposit, and after 1923 certificates converted to non
interest bearing deposits within 90 days of a bank’s failure were not
eligible for insurance. In Mississippi after 1916 cashiers’ checks, certified
checks, and sight exchange were excluded. ^
( I n W ashington the guaranty law applied to all deposits in com
mercial banks, but did not apply to mutual savings banks. A t the time
there was one such bank, holding about one-sixth of the savings deposits
o f all banks organized under the State laws.
1
I
In most of the States the
statutory provisions regarding coverage were supplemented b y court
decisions resulting from litigation. Such litigation arose both as to
whether certain obligations were deposits, and if deposits whether they
were protected. Thus in Texas special deposits, trust funds, and cashiers’
__checks not arising from deposit accounts were excluded; and in several
States paym ent of a bonus for making or renewing a deposit was con
strued to be interest.
Banks in financial difficulties. The number of participant banks
which suspended operations because of financial difficulties during the
periods the funds were in operation ranged from 1 in W ashington to 37^'
in N orth Dakota. In several of the States some of the suspended banks
were reorganized or taken over with no contribution from or obligation
falling on the insurance fund. Table 40' shows the total number of sus
pended banks in each State, and the number entailing obligations on
the respective insurance funds, together with the
gj ' n-rm i
deposits involved in the latter cases. D ata b y years for those resulting
in obligations on the funds are shown in Tables 3ft and 40, pages
and
13
l«f
33
T a b l e sti. F a i l e d B a n k s am ong P a r t ic ip a n t s in
S t a t e D e p o s i t I n s u r a n c e S ystem s, 1 9 0 8 -1 9 3 0
Entailing obligations on the insurance funds’
State
Oklahoma................
Kansas......................
Texas........................
Nebraska..................
Mississippi...............
South Dakota.........
North D akota.........
**«—.^W ashington.............
Total
number of
suspended
banks
Reopened
without
obligations
on the
insurance
funds1
140
141
311
1
22
16
64
324
3 1
1
82
32-
Insured deposits
Number*
139
119
138
317
64
242
340
1
Total
deposits (in
thousands)*
Amount (in
thousands)4
$29,486
25,265
37,627 *
61,489
14,550
56,58%, ?
10,443
$25,068
21,151
'25,460
61,790
14,833
48,37% b
24,274
8,452
Percent of
total
deposits
8 5 .0 %
83.7
SM - no, i
100.5
101.9
85.5
62.1* a
80.9
1 Includes some banks taken over by other banks.
> Includes a few cases with no eventual loss to the insurance funds because proceeds of liquidation,
including assessment on stockholders, were sufficient to repay all deposit liabilities.
* For data by years, see Table S®. 13 .
* For data by years, see Table 9**- I«/,
In some of the States, because of the deposits excluded from insurance,
there was a substantial difference between the deposits of a failed bank,
as reported at the time of failure, and the deposits finally adjudged to
be covered by the insurance. This was particularly true in Texas where
interest-bearing deposits were excluded, and in N orth D akota where
many depositors’ claims for insurance were rejected b y the D epositors’
G uaranty Commission on the ground that they bore a higher rate of
interest than that permitted, or were discounts representing an exchange
of credit that was not a deposit of cash or its equivalent, or were cashiers’
checks representing merely a transfer of funds and not a deposit in the
bank. In Mississippi and Nebraska, on the other hand, the deposit
obligations finally paid from the insurance funds, or judged to be covered
b y the insurance, exceeded the deposits of the banks as reported at
time o f failure.
r * '0
- 7 -
T a b l e d shows average annual failure rates among the participants
in these deposit insurance systems, with the banks grouped b y size.
The proportion of all participating banks that failed ranged from about
one in 300 per year for Washington to Irve per 100 per year in North
Dakota. There wras also a wide range in the average annual amount of
deposits in failed banks relative to the deposits in operating banks, but
the rates differ substantially from those pertaining to number of banks
because of differences in the size of the banks involved.
T a b l e VC. B a n k F a i l u r e R a t e s am ong P a r t ic ip a n t s in
S t a t e D e p o s i t I n s u r a n c e S ystem s, 1 9 0 8 -1 9 3 0 1
Banks with deposits of—
All par
ticipant
banks
$ 100,000
or
less
$ 100,000
$250,000
to
to
$250,000
$500,000
$500,000 $1,000,000
More
to
to
than
$1,000,000 $2 ,000,000 $2 ,000,000
A v e ra g e a n n u a l
n u m b e r p e r 100
o p e r a t in g b a n k s
Oklahoma..........
Kansas................ l . S
Texas.................. 1 . 0
Nebraska............
Mississippi.........
South Dakota... y . ' t
"^N orth D akota. .
W ashington....... ¿ . 1
1.6
M2.0
1.4
4.8
.3
1.2
-hS
.8
2.1
IM
1.7
f
c«1.2
2.1
a .o
it.k
3.7
1.6
■9Æ
6,0 4-.+
4 b 4.0
i.i
».«
2.9
.8
1.4
1.2
L.Ù fhJ
art +*
l.t>
3.3
1.7
1.6
2.0
-4-A
.6
.3
1.5
a3 fc
*
.6
3 .3
10.0
1.8
1.5
4.5
8.8
A v e ra g e a n n u a l
d e p o s it s In fa ile d
h a n k s p e r $100 o f
d e p o s it s in o p e r
a t in g b a n k s
Oklahoma.......... 7JSÏ
1.13
Kansas................
Texas..................
Nebraska............ 1.9* » g
Mississippi
s'.?* * m
North D akota. 4.0Ï 3.58
Washington.
If'ltf 4,18
$1.31
/,<?3
•** 2r.79
m
$1.70
.82
3 .0 » I » «
1.49
S', to
% .1 3 * * *
$3.17
I, 11 .77
.77
4~4»
1.17
3.59
.*7<* j
.6«?
$3.84
WÎ-ST 1.W
1.75
2 ^..616«
4 .* /< ? * »
$1.92
.50
2.14
.72
$8.51
2.34
1.00
.25
1.45
3.34
1 Covers failed banks entailing obligations on the insurance funds (see Table'S#*»
11.47
8.13
*57
T he distribution of failure rates by size of bank indicates that in
Mississippi^ and North Dakota there were relatively more
failures among the smaller banks than among the larger banks; but in
Oklahoma the failure rate was highest in the larger banks, and in W ash
ington the only failure wras the largest bank in the system. In fact, in
both o f the latter States, and also in Kansas and South D akota the
largest bank participating in the insurance system was among the failures.
M ethods used in paying depositors o f banks in financial diffi
culty. In six of the eight systems— Oklahoma, Nebraska, Texas, South
Dakota, North Dakota, and W ashington— the deposit insurance law
provided that depositors of a failed bank were to be paid b y the fund
in cash immediately, either in full or to whatever extent could not be
paid from the readily available assets of the bank. In Kansas the de-
|
\
—^
positors were given interest-bearing certificates of indebtedness which
were reduced as the proceeds of liquidation became available, with the
final deficiency paid from the fund. However, it was expected that
depositors would be able to obtain their deposits prom ptly because the
certificates were negotiable and it was assumed that operating banks
would acquire them from the depositors of a closed bank. The same
procedure was used in Mississippi for several years, and then modified
to provide for payment from the insurance fund whenever it appeared
to the officer in charge of liquidation of a failed bank that the amount
to be collected was likely to be insufficient to pay the depositors.
In m ost of the States in which the depositors were to be paid in cash,
provision was also made for the issue of certificates o f indebtedness in
the event that there was insufficient money in the fund, with such certifi
cates to be paid from future receipts. In these cases also it was expected
that the operating banks would regard the certificates as suitable assets
and would, therefore, acquire them from depositors who needed their
funds immediately.
In Oklahoma, the first of the systems to be established, the procedure
of paying the depositors of a failed bank in cash was followed in only a
small number of cases. In the m ajority of cases, the Bank Commissioner,
under his powers with respect to the handling of closed banks, approved
a reorganization of a failed bank or the assumption of its deposits b y
another bank, with a payment from the fund, in cash or in certificates
of indebtedness payable from future receipts, or with a guaranty that
the fund would provide the difference between the deposits assumed
and the proceeds of liquidation. This procedure was also follow ed to
some extent in Texas, and in a very small number of cases in some other
States.
Assessm ents on participating banks. In all o f the States the in
surance funds relied upon assessments on participating banks as a means
of obtaining the m oney necessary to pay depositors in failed banks. The
assessments were based on total deposits, or on deposits other than those
excluded from insurance. In six of the States— Oklahoma, Kansas,
Nebraska, Mississippi, South Dakota, and North D akota— such assess
ments were levied annually at specified rates, with a larger initial rate
in three of the States, and except for South D akota with provision for
an additional assessment if necessary. In the cases where additional
assessments were authorized, a maximum rate in any one year was
established, either at the beginning of the system or after it had been
in operation for a few years. In Texas an annual assessment was levied
for the purpose of accumulating a revolving fund usable for the immedi
ate paym ent of depositors of a closed bank. The amounts withdrawn
were restored by a special assessment upon the participating banks for
each failure, with a maximum for such assessments of 2 percent per year.
In W ashington an initial assessment was levied with no provision (until
1921) for an annual assessment thereafter but with a provision for
special assessments as needed, with a specified maximum in any year.
In certain of the States which had an initial assessment of 1 percent
of deposits, a similar rate was assessed on the increase in deposits each
year, usually with a rebate if deposits declined. In most cases the assess
ments collected in any one year were levied on average deposits for the
preceding y ea r; and in cases where certain classes of deposits (particularly
interest-bearing or secured deposits in Texas) were not insured, such
deposits were omitted from the assessment base. In all the States special
provisions were made for assessments on new banks, usually a specified
rate on the bank’s capital to be adjusted later on the basis of deposits.
In Kansas, operating banks joining the system after it was established
were required to contribute their proportionate share to the fund, equiva
lent to what they would have paid had they joined at the beginning of
the system. Because of these various provisions the average rate of
assessment, as com puted by comparing the amount of assessments
collected in a calendar year with the reported deposits for some date
in that year, sometimes varied considerably from the com bined rate
for regular and special assessments. Table 32 shows the principal statutory
provisions in each State, and also the range in assessments levied and
in the com puted rate of assessments paid.
T a b le
3 i.
fiS to
r> f
¡q S
A s s e s s m e n t R a t e s i n S t a t e D e p o s i t I n s u r a n c e S y s t e m s , 1 9 0 8 -1 9 3 0
I«
Range of
annual
assessment
rates levied
(regular
and
special)1
Statutory rates (percent of deposits)1
Initial
Sp&rial
(maximum
per year)
Regular
annual
.05 to .20
1.00
Oklahoma5 . .
.05
Kansas.........
1.00
.25
Texas*...........
1.00
.10
Nebraska7. . .
.05
Mississippi. South
.25
Dakota - . .
orth
.05
—D akota8 . .
Washington9. .50 to 1.00! none to .10
2.00 to none
.20
2.00
1.00 to .50
.20
.20 to 1.20
.05 to .25
.20
.50
Minimum
and
maximum1
.09
l.lfc
.15-to lv4#
.04 to .21
(•)
O none to irfH
.05 to .ifS
.13 to .91
.05 to .25
.03 to .25
.25
O
.05 to .3&
none to 1.10
Deposits
of cash or
securities
to secure
payment
of assess
Average ments (per
per
cent of
year
deposits)4
Computed yearly
rate of assess
ments collected*
1.00
$
.50
.17
.50
#¿•44
.22 to
.30 LaS
.05 to
.07 to
.aa-jU -is
.41
L
1 Percent of total deposits, or of deposits covered by insurance, on basis of preceding year’ s daily
average or specified date. In some States provisions were made for omission of assessments if the fund
reached a specified size, but this did not occur except with the annual assessment for the revolving
fund in Texas where after omitting the assessment for one year the specified size was raised. For rates
levied by years, see Table 4ft. I *1,
* Computed from assessments collected and the total deposits of banks in system at the beginning
of the year. Because of assessments on new banks and of various adjustments and refunds, and the
differences between total deposits at beginning of year and the deposits used as the assessment base,
the computed rates, either maximum or minimum, may be larger or smaller than the rates levied.
* Excluding years in which assessments covered only part of a year because of repeal of the law, or
the computed rate was substantially distorted because of withdrawals from the system. See also note 6.
* With a minimum of $500 in each of the four States. In Washington the required deposit was
dropped in 1921.
s Annual assessments 1/20 of 1 percent from 1909 to 1913 and 1/5 of 1 percent from 1913 to 1923;
maximum special assessments per year 2 percent from 1909 to 1913, 1/5 of 1 percent from 1913 to 1915,
and none thereafter.
' The proceeds of the initial and regular annual assessments were used as a revolving fund, with
the withdrawals to pay depositors of failed banks replaced by the proceeds of special assessments. The
range of rates levied is omitted because data are not available for the special assessments. The comput
rate of assessment collected, both maximum and minimum and average per year,
'
assessments.
the entire amount of the revolving fund accumulated from the initial:
and annual assessments was returned to the participating banks.
7 The assessment tabulated here as “ initial” consisted of four semi-annual assessments of 1 /4 of
1 percent each, after payment of which the regular semi-annual assessments of 1/20 of 1 percent applied.
The maximum special assessment was 1 percent per year to 1923, but not more than sufficient to main
tain the fund at 1 percent of deposits, and 1 /2 of 1 percent subsequent to 1923.
rang» at — tea tewis J
-i------i------ „pp— ,•—
W —mn -4" t" imw>-w>il>>U
• r ;" 1 imtm
3 f / ,‘
J tn w t m
thn fu n rt tn t rrrnnnt nf flrp n irtrXa m s
» The maximum rate levied exceeded in ooe calendar yea? the maximum permitted because the
latter related to years ended June 3 0, and a change was made in the dates on which special assessments
were payable.
*
The original law provided for an initial assessment of 1 /2 of 1 percent and annual assessments
to maintain this percentage. An amendment of 1921 raised the initial assessment to 1 percent of de
posits, thus requiring the banks to pay 1/2 of 1 percent in the early part of that year, and also for future
annual assessments of 1/1 0 of 1 percent. Late in 1921 after the failure of the Scandinavian-American
Bank the maximum special assessment of 1 2 of 1 percent was levied.
jfjjL .
.t
Hr} ¿W
*'/ c" 'jJr
ÿh' J
arwj W
ùbdi */
In four of the States— Oklahoma, Kansas, Mississippi, and W ash
ington— participating banks were required to deposit with the Bank
Commissioner securities or cash, in an amount equal to 1 percent or
one-half of 1 percent of their deposits, as security for the payment of
future assessments. These, and the accumulated revolving fund in
Texas, were regarded as the property of the individual banks, to be
refunded, after allowance for any assessments due or necessary to meet
existing obligations of the fund, if a bank went into liquidation or ceased
to be a member of the system._______________________
'to
■/*->
f t
'■^Two general methods of custody of funds were used: ijfr Retention
by the respective banks in the form of deposits subject to withdrawal b y
order of the administrative agency of the fund; and
collection b y the
administrative agency of the fund or the State treasurer, with funds not
needed immediately to be invested along with other State funds or in
accordance with special provisions. Details of carrying out these tw o
general methods varied from State to State.
In Oklahoma the fund was at first collected b y the Bank Commissioner,
and in 1909 it was provided that 75 percent was to be invested in State
warrants or other securities specified for State funds, the remaining
25 percent to be kept in cash (that is, deposited in banks along with other
State funds). T w o years later, after a large part of the fund had been
tied up b y the failure of the bank in which it was deposited, it was pro
vided that the assessments were to be immediately re-deposited in the
respective banks, with the banks issuing certificates of deposit to the
Bank Commissioner bearing four percent interest. In 1913, the law was
changed so that assessments were to be paid b y cashier’s check to be
held b y the Banking Board until it was necessary to collect them. T hey
were to bear n o interest.
In Nebraska, South D akota, and N orth D akota, the assessments
levied were left with the bank, subject to call of the guaranty commission
on demand. In Texas 75 percent of the payments were to be held as
demand deposits credited to the State Banking Board and subject to
its check; the remaining 25 percent to be paid to the State Banking Board
and deposited with the State treasurer.
In Kansas and Mississippi the assessments were to be paid to the
State treasurer and placed in depository banks, subject, respectively,
to the call of the Bank Commissioner and of the bank examiners. In
W ashington the board in charge of the fund was given broad powers in
designating guaranteed banks as depositories of the fund.
In s o lv e n c y o f th e in s u r a n c e fu n d s . In all the States except Texas
the bank failures associated with the depression of 1921 or with the
continued unfavorable condition of agriculture throughout the 1920’s
resulted in obligations upon the funds greatly in excess of the receipts
from assessments. In Texas, all obligations of the fund for insured de
posits were eventually met, but the fund became insolvent after most
of the participating banks withdrew, with conflicting claims on the
fund. There was considerable variation in the length of time the funds
were able to meet their obligations as they became due. B y M arch 1930,
all of the funds had ceased to operate, though in tw o cases— Nebraska
and Mississippi— amendments to the law provided for continuance of
■
\ q i - y
f.m
the assessments on participating banks, with the insurance inapplicable
in Nebraska to future failures and in Mississippi to future failures until
the obligations of the fund for past failures had been met.
1'he first fund to cease operations was that of Washington, the last
to be established. After four years with no failure the largest bank,
holding about one-fifth of the deposits of all the banks in the system,
failed on June 30, 1921. The maximum assessment for that year was
levied but was insufficient to meet the obligations of the fund for insured
deposits after allowing for liquidation of the assets of the bank. Faced
with the prospect of another relatively large assessment the next year
all the participants in the system withdrew as they were permitted to
d o under the law in that State.
The next system to be discontinued was the first one established.
T he Oklahoma system ran into serious difficulties early in its history,
but the procedures used in handling failed banks, together with special
assessments as high as 1 percent per year, enabled the fund to survive
them. However, some indebtedness of the fund remained outstanding
after 1915, when because of a change in the law no further special assess
ments could be levied, and was not fully retired until June 1919. When
a wave of failures occurred in late 1920 and throughout 1921, the fund
could not meet its obligations, though the procedure used in handling
most of the closed banks— that of arranging for reopening or assumption
of the deposits by another institution with a guaranty b y the fund—
resulted in smaller outlays than would have been required had all the
deposits in each case been paid immediately from the fund. It was soon
necessary for the fund to resort again to issuance of warrants, or certifi
cates of indebtedness, and to attem pt to sell these to participating banks.
Before long the banks became reluctant to acquire the warrants, and
the State Banking Board then requested participant banks to permit
their use as the security for payment of future assessments, enabling
the Board to sell the United States Governm ent bonds and other market
able securities previously deposited and to use the cash thus obtained
to meet the obligations of the fund with respect to current failures. B y the
latter part of 1921 almost all of the previously deposited marketable
securities had been used, and it became obvious that the fund could no
longer meet its obligations. A t a meeting of the State Banking Board
in N ovem ber 1921 the issuance of warrants on the fund was discontinued,
which meant in practice the end o f any protection to depositors b y the
fund. B y that date the depositors of 82 failed banks had been protected
by the fund. Assessments continued until the legislature early in 1923
repealed the law, though they were not fully collected, and during that
period 57 more banks failed. A fter repeal of the law the State Banking
Board proposed the issue of warrants to the depositors of these banks,
with the remaining assets of the fund to be used to pay a small dividend
to them and to the holders of the other outstanding warrants. This
procedure was approved by a District Court in 1932, with claims that
had not been presented to the court barred from participation; and
early in 1933 a 7 percent dividend was paid to the warrant holders and
to a few' depositors of failed banks who had presented their claims, with
the fund retaining a portion of the balance on hand because some holders
of the earliest-issued warrants refused to accept the D istrict C ourt’s
award and appealed to the State Supreme Court. In 1934 the State
Supreme C ourt ordered the remnant of the fund paid to the appealing
warrant-holders.
- /
;>
-
T he next State to repeal its guaranty law was Texas, in 1927. This
was the most successful of all the systems. The combination of provisions
for a sizable revolving fund and for special assessments to reimburse the
fund for payments to depositors enabled the fund to meet prom ptly
all of its obligations until the middle 1920’s. B y that time, however, the
special assessments were running close to the permitted maximum of 2
percent a year, which the participating banks felt to be an intolerable
burden. Under the pressure of the bankers, the Legislature considered
repeal of the law in 1925, but this was rejected in favor of an amendment
permitting the participant banks to withdraw, and to be refunded their
respective shares of the revolving fund, by joining the alternative “ bond
security system ” that had been established at the same time as the
guaranty system. Also, the provisions for posting of security b y the
individual banks under the bond security system were relaxed, so that
each bank could, in effect, merely segregate some of its investments to
be held b y the Bank Commissioner instead of in its own vault. W ith
this change in the law most of the banks participating in the deposit
insurance system withdrew. In the latter part of 1926 one of the banks
remaining in the system failed, with an amount o f insured deposits
substantially larger than the remaining revolving fund after allowance
for sums refunded or due to be refunded to the banks that had withdrawn,
and eight more failures occurred before the law was repealed in February
1927. Eventually, the insured deposits of these banks were paid in full
either from the proceeds of liquidation of the banks’ assets, or from
remaining assets of the fund upon its final settlement. In addition, the
entire revolving fund was returned to the participating banks, and a
considerable part of the receipts from special assessments was also
repaid from the proceeds of liquidation of the assets of the failed banks.
I
f > ,y j
I
i
South Dakota also repealed its deposit insurance law in 1927. The
fund had run into difficulties early in 1923. Depositors in 16 failed banks
had been paid in full, but in the next case, the fund was able to pay only
half of the deposits. From that time until repeal of the law no payments
were made to depositors of failed banks, but they were given certificates
o f indebtedness of the fund for the amounts of the deposits approved as
insured, and the regular annual assessments continued to be collected.
In 1932, in accordance with a decision of the State Supreme Court, the
remaining assets of the fund were used to pay a dividend o f 3 /4 of 1
percent on the balances of the certificates remaining unpaid after divi
dends from liquidation, and a final dividend of 2 3/100 of 1 percent was
paid in 1939. These dividends went to depositors of 225 banks.
In Kansas, where participation in the deposit insurance system was
voluntary and withdrawal permitted at any time, the system operated
successfully until failure of the American State Bank, W ichita, in 1923.
This had been the largest bank in the system and it was apparent that
I
W
i
the fund would be unable to meet the resulting claims, though under
the Kansas law the fund was not called upon until com pletion of liquida
tion of a failed bank. T o reduce if possible the loss which eventually
would have to be met a successor bank was organized to assume most
of the deposits of the failed bank, with banks participating in the insurance
system subscribing to its stock and absorbing the loss on the assumed
deposits. The im pact of this failure on the participating banks influenced
them to begin withdrawing from the insurance system ; and m ost of
them did so after a court decision in 1926 which held that they could
forfeit the securities they had deposited as a guaranty of paym ent of
future assessments without liability for such assessments as might
be needed to meet the losses in the failures that had already occurred.
W ith these withdrawals the insolvency of the fund was apparent, and
the deposit insurance law was repealed in M arch 1929. The order of
com pletion of liquidation o f the failed banks was followed in making
payments by the fund; and because of variation in the time required to
com plete liquidation, the order in which the guaranty fund redeemed
its certificates of indebtedness differed, from the order in which the
banks failed. T he fund eventually paid the remaining unpaid insured
deposit claims in 29 banks, and more than nine-tenths of the claims in 2
additional banks; and made no payment in the case o f the remaining 88
banks that failed while participating in the insurance system.
In North D akota the deposit insurance law was also repealed in 1929.
The fund had run into difficulties in the latter part o f 1920. Up to that
time, tw o banks in the system had failed, and in both cases the insured
deposits were paid in full from the fund. But with numerous failures
during the last few weeks of 1920, the fund was unable to meet its obliga
tions and payments were discontinued. In addition, receivership pro
cedures were found inadequate and difficulties encountered in determining
the deposit claims that were insured. Consequently, no payments to
depositors were made until near the end of 1924. A t that time the De
positors Guaranty Fund Commission adopted the procedure of paying
a 10 percent dividend on the insured deposits of each failed bank, in
the order of failure, with the expectation that more might be paid later,
as rapidly as funds became available from assessment receipts. This
procedure continued until repeal of the law. B y that time the 10 percent
dividend on insured deposits had been paid to depositors o f 201 banks,
and nothing in the case of 137 other failed banks. Settlement o f the
affairs o f the fund was made in 1932, with a payment of 1 percent dividend
insured deposits of the 137 banks._____ ___________________ ____________
sf.
a Bankers Conservation Fund, supported b y an annual
assessment not exceeding one-fourth of 1 percent of deposits on partici
pating banks, which could be used b y the Guaranty Fund Commission to
operate banks in a failing condition, with the hope that they could be
rejuvenated and thus reduce the losses falling on the insurance fund.
However, the insurance fund itself was weakened b y reducing from 1
percent to one-half of 1 percent of deposits the maximum special assess
ment per year on the participating banks wThich could be levied to pay
depositors of banks placed in receivership.
B y 1926, though all depositors in banks placed in receivership were
being paid, it appeared that the Nebraska insurance fund might be
headed toward insolvency because of the large losses in the banks that
were operated b y the Guaranty Fund Commission. _________________ ^
< -T h e next year, when the Commission began to place in receivership
the banks it had been operating, depositors could not be paid from the
insurance fund. An investigation and audit of the fund was ordered by the
Legislature, and in M arch 1930, after a report to the Governor, the law
was repealed. A plan was adopted for a final settlement fund to be made
up of a small assessment on participating banks for the next ten years,
collection of assessments already levied which many of the banks had
not paid, and a State b ond issue large enough to permit payment of all
deposits of the failed banks to the date of repeal. However, the bond
issue was rejected b y the voters at a referendum, and the State Supreme
Court, in a decision that the Supreme Court of the United States declined
to review, declared the plan for continued assessments and the regular
and special assessments for the insurance fund during its last tw o years
were unconstitutional because under the changed conditions the law
served no public purpose and the assessments were confiscatory. A final
settlement of the affairs of the fund, made in 1934, resulted in payment
of depositors in tw o banks, and a partial payment in another, in which
no previous payments had been made b y the insurance fund. In all,
depositors of 129 banks that failed from the beginning o f the system to
the early months of 1927 were paid in full, those o f 24 banks that failed
during the next three years received partial payments from the fund or
the final settlement fund before that was declared unconstitutional, and
depositors of 164 banks failing from 1927 to the time of repeal received
nothing from the insurance fund.
I
I
( C1
I
]
I
In Mississippi, where the insurance system also appeared to be success
ful during its early years, difficulties in the cotton areas in the middle
1920’s brought about bank failures with obligations on the fund that
could not be met. T he original law in Mississippi, as in Kansas, provided
for the issue of negotiable interest-bearing certificates to the depositors
o f a failed bank, with dividends paid from proceeds of liquidation and
the final deficiency by the insurance fund. In 1924, an amendment
provided for immediate payment from the fund, with a proviso that
if the fund were insufficient, the depositors would be issued interestbearing certificates payable from future receipts of the insurance fund.
F or several years, operating banks purchased the certificates, thus giving
prom pt recovery to depositors who wanted immediate payment. H ow
ever, the amount o f such obligations outstanding became so great that
operating banks were no longer willing to purchase them. In M arch
1930 the legislature approved an amendment to the deposit insurance
law providing that the guaranty would not be applicable to future
failures until existing obligations had been met, though the amount
outstanding was so large that the projected collections from assessments
would be absorbed for nearly twenty years. T w o months later, the
legislature approved a bond issue to provide funds for retirement of
the outstanding certificates, with the bonds to be retired from the assess
ments on operating banks. W hen the bonds were ready for issue, they
could not be sold under the terms set b y the legislature, but an arrange
ment was worked out through which the bonds wrere exchanged for the
outstanding certificates o f indebtedness of the fund and therefore wrere
eventually paid wrhen the bonds became due. The assessments on insured
banks continued until 1934, when the entire deposit insurance lawr of
the State was repealed.______________________________________________________
^
/
"
Disbursem ents to depositors and unpaid obligations o f the
funds. Table ^3# summarizes the experience of the eight States with
respect to the extent to which the obligations falling upon the respective
insurance funds were met by the funds or were never paid. The table
shows how insured deposits were paid, and the extent to which they
remained unpaid. Recoveries from liquidation of assets, directly or
through the insurance funds, ranged from 17 percent in North Dakota
to 75 percent in Washington. Recoveries from the insurance funds, in
addition to those made possible bv liquidation of assets, ranged from
6 percent in South Dakota to ^ p e r c e n t in Texas. The insured deposits
which were never paid from anv source ranged from none in Texas and
Mississippi to ^ W percent in J^&th Dakota. Recoveries and losses in
the banks that failed each year in each o f the States are given in Tables
4+ and 4?, pages 71 and 7&.
if
Ik
T a b l e WS.
&
75
I n s u r e d D e p o s its a n d O b lig a t io n s t o
D e p o s it o r s o f F a ile d
B a n k s , S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1 9 0 8 -1 9 3 0
Recovered through
insurance funds
Insured
deposits'
A m ou n ts (in
thousands) :
Oklahoma7...............
Kansas-----._.
T exa s.. . 4 ^ , 3 * #
Nebraska..................
Mississippi. . . 'A . . .
iSouth Dakota.........
North D akota.........
^W ashington..............
r
"
Percentage o f In
sured deposits
Oklahoma..............
Kansas....................
Texas......................
Nebraska................
Mississippi.............
j-jSouth Dakota.......
y jjo r th Dakota. . . .
Washington...........
$25,068
21,151
61,790
14,833
48,371V
24,274
8,452
Recovered
directly
from
liquidation
of assets1
<tJ
.
Paid by
fund and
recovered
from
liquidation
of assets*
Paid by
fund and
not re
covered
from assets
(loss to
fund)4
$11,175
11,241
$2,913
w2,435
19,420
7,080
6,333
2,456
640
4,154
6,361
11,646
16,608
2,834
3,023
Paid
from
other
sources*
$1,424
Not
paid*
$6,225
6,051
23,306
4,279
33,721«?
18,282
1,240
851
i i
100.0%
100.0
100.0
100.0
100.0
100.0
100.0
100.0
44.6%
53.1
31.4
47.7
17.1
11.6 %
PM.
4.0
4.3
«ÉT”.■— <75
19.0%
11.5
26.9
19.1
6.2
7.5
10.1
6.7%
24.8%
28.6
37.7
28.8
69.7
75.3
14.7
Insured deposit claims arising from bank failures. Excludes interest on certificates of indebtedm
issuedby the funds. J ’q i r i a u by years, je e Table -*»» » 1. A
^
n
» Includes
_________________________
________,
by other banks in excess of payments from the funds. J o r data by years, see Table 4Î , * ST*
'
* Recoveries by the funds on subrogated deposit cfatTTTS’ WKcK the fund« had paid. In Mississippi,
includes recoveries on deposit claims paid from proceeds of bond issue.
* Payments on insured deposits by the fund adjusted for recoveries received by the funds from
liquidation of assets of the failed banks; i.e., loss to the funds. For data by years, see Table 41. l o
* In Kansas, loss to banks participating in the insurance system in the reorganization of the American
State Bank, Wichita. In Mississippi, paid from the proceeds of a State bond issue, adjusted for sub
sequent recoveries on the claims paid.
* Low to depositors, or holders of certificates of indebtedness of the funds. For data by years, see
Table 1 ft See also note 7.
7 In addition to the unpaid deposits, approximately $1,113,000 of warrants, or certificates of in
debtedness of the fund, mostly held by the banks participating in the system, were never paid.
Note: Because of rounding, data may not add precisely to the indicated totals.
A summary of the income and expenditures of each of the insurance
funds is given in T a b le d # . M ost of the income was derived from assess
ments on the participating banks. For tw o States Oklahoma and
Kansas— the amounts shown in the table as assessments collected include
the value of securities which had been deposited b y participating banks
to assure paym ent of future assessments, but had been diverted to the
use o f the fund through the substitution of warrants that were ne\ er
paid or through forfeiture to the fund upon the banks’ withdrawal from
~ /6
-
the system. In six States there were small amounts received from interest
or other sources. The bulk of the expenditures consisted o f payments
on insured deposits or to banks that assumed such deposits. In three
States— Oklahoma, Kansas and Mississippi— interest payments were
made on guaranty fund certificates outstanding before they were retired,
and in three States portions of the funds collected were lost in the failures
of banks in which they had been deposited. Provisions for operating
expenses were varied, being met in whole or in part, in some of the
States, from funds appropriated or collected through examination fees
for support o f the State banking department. In five of the States a
portion or all of the operating expenses of the deposit insurance systems
were met from the deposit insurance funds.
%
T a b l e 3aii
In com e a n d E x p e n d itu r e s o f
S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1 9 0 8 -1 9 3 0
(in thousands)
It»,9 3 3 - Income*
State
Total*
Oklahoma.................
Wj 3-K
Nebraska. t
Mississippi*..............
South Dakota..........
North D akota.........
Washington.............
$5,303
2,821
■VhfftS
3,656
3,647
2,054
937
Assess
ments3
$5,279
2,678
4«Ì4w!
3,604
3,585
2,002
921
Expenditures
Other4
$24
143
Total*
$5,310
2,797
11,646
16,608
3,614
3,646
937
Payments
on insured
deposits5
Interest
and
losses6
$4,754
2,435
11,646
16,608
2,834
3,023
g51
$304
361
681
545
I,SI*
g
Operating
expenses7
$252
99
78
i« » i f 3
60
1 Excludes receipts by the funds from proceeds of liquidation of failed banks, which are not com
parable because of differing provisions of law regarding the procedures for payment of depositors.
* Except for Texas (see note 8), differences between total receipts and total expenditures represent
balances remaining at latest available statements for the insurance funds, or transferred to the general
fund of the State, or unexplained differences in data derived from various sources where complete in
formation is not available.
iSI
* In Oklahoma, includes $1,539,090 of guaranty fund warrants or other securities deposited as
security for payment of future assessnr^ents which were never paid or were sold for the benefit of the
íaranty fund (see note 6 to Table -4ft; p. 13}. In Kansas, includes securities deposited as security for
lyment of future assessments that were forfeited when most of the participating banks withdrew, but
loes not include the loss of $1,424,000 taken by participating banks in the reorganization of the failed
/American State Bank, Wichita. In Texas, relates to the special assessments for paying depositors of
failed banks, not to the annual assessments to accumulate a revolving fund. In all States excludes assess‘funded because of adjustments or other reasons, except the refunds in Texas from the proceeds
liquidation of failed banks.
4 Chiefly interest received, but includes some income from other sources in South Dakota and
from fees in North Dakota.
* Net after allowance for recoveries by the insurance funds from proceeds of liquidation of the
banks. Includes payments to operating banks which assumed the insured deposits of failed banks (in
Oklahoma and Texas and a few cases in other States). /&££.
í-5 1
C ,
* In Oklahoma, estimated amount of interest paid on guaranty fund warranfS» In Kansas, represents
interest paid on principal of insured deposits in the 29 banks for which such deposits were paid in full;
and in Mississippi, interest on the guaranty certificates (representing insured deposits) that were paid
by the insurance fund, on bills payable, and on the State bond issue for one year. In South Dakota
mostly and in Washington entirely, loss on portions of the insurance funds deposited in banks that
failed. In North Dakota juncollectible accounts,
7 In Oklahoma, Mississippi, and North Dakota, a portion of the operating expenses and in Kansas
all of such expenses were met from proceeds of examination fees, special assessments on operating banks,
or appropriations from the State. In Nebraska, operating expenses were met largely from assessments
on tne banks in receivership, thus becoming part of the liquidation expenses of failed banks, but in
art from assessments on operating banks and legislative appropriations. For operating expenses in
'exas, see note 8.
* Income and expenditures shown here pertain only to the special assessments, including assessment
adjustments at time of final settlement of the fund, to pay depositors in failed banks. The excess of
assessments over the net payments on insured deposits was returned to the participating banks. In
addition, assessments for the revolving fund, which amounted to more than $5 million over the course
o f the years the fund operated, were also returned to the participating banks, partly at time of liquidation
o r withdrawal from the fund (prior to 1926) but mostly at time of final settlement of the affairs of the
fund. Some interest receipts were also available for return to the banks, but expenses incurred in settling
the affairs of the fund were deducted— which may have been more or less than the interest receipts;
and part of the operating expenses appear to have been included with those of the Banking Department.
Full information is not available for receipts and expenditures of the revolving fund subsequent to
August 31, 1922.
» Excludes $5 million receipts from bond issue, from which the deficit on insured deposits of
$4,279,000 and interest on guaranty certificates of about $524,000 were paid.
^
r i '
In Table ¿‘ G the assessments collected, as given in the preceding table,
are compared with the amounts that would have been necessary to
meet the losses on insured deposits. In this comparison no allowance is
made for income from other sources, nor for interest payments on de
positors’ claims, operating costs, and other expenses. Further, no allow
ance is made for the funds needed to make immediate payment to de
positors of that portion of their insured claims eventually recovered
from the liquidation of the assets of the banks. Though some of the
States attempted, by providing an initial fund of 1 percent of deposits,
to establish such a reserve, these provisions were inadequate except in
the case of the revolving fund of Texas, and that became insufficient
when the great m ajority of the banks participating in the system
withdrew.
t :p
S b
f
', 6 /
i
T a b le iff. A sse ss m e n ts R e l a t i v e t o L o s s e s ,
S t a t e D e p o s i t I n s u r a n c e S ystem s, 1 9 0 8 -1 9 3 0
S é
(Amounts in thousands)
State
Number of
years fund
operated1
Assessments
collected*
Assessments
necessary to
meet losses
on insured
deposits*
«0
Oklahoma
Kansas..........
Texas4.............
Nebraska.......
Mississippi. . .
»S outh Dakota.
'^ N o r t h Dakota.
^W ashington...
15.0
19.7
17.1
18.7
16.0
11.5
$5,279
2,678
WM
16,489
tv«*3« 3,604
3,585
12.0
2,002
»21
4.5
$10,97«
9 ,9 1 *
11,646
39,914
7,118
36,75V
20,102
2,091
Equivalent average annual rate
of assessment on participating
banks (percent of total deposits)
Necessary to
meet losses on
insured deposits
Paid
,41 0.12
.W%
.¿ v
,5 0
.4»
.17
.25
.18
.87
.S f a
l,0(t
0.9H%
44
1^4
.34
2.52
1.84
.84
1 In Mississippi, to date of amendment making the insurance inapplicable to future failures; in
Washington, to withdrawal of all banks in system; m other States, to repeal of the law.
* See Table 9 4 . *7
* Insured deposits of failed banks in excess of recoveries from the proceeds of liquidation of the
banks’ assets.
4 In Texas, the excess of assessments collected over the net payments by the insurance fund was
returned to participating banks upon completion of the liquidation of failed banks or the final settlement
of the affairs of the fund.
T he assessments collected ranged from an amount equivalent to
an average annual rate on the deposits of participating banks of about
one-eighth of 1 percent in Kansas to about two-thirds of 1 percent in
Texas. The amounts that would have been necessary to meet losses on
insured deposits ranged from the equivalent of one-third o f 1 percent
per year of deposits of participating banks in Mississippi to about 2.5
percent in South Dakota. The total assessments collected varied from
less than one-tenth o f the amount needed to cover all losses on insured
deposits in South Dakota, to full coverage of such losses in Texas.
Inadequacies and factors responsible for failure o f the State
deposit insurance system s.
fr B e - experience with insurance of bank obligations during the 19081930 period was on the whole less successful than that during the period
1829-1866. In four of the six earlier systems all claims arising from
insured obligations of banks in financial difficulties were paid; this was
accomplished in only tw o of the eight later systems, and in one of these
a part o f the obligations was met from proceeds of a State bond issue.
A ll eight systems of the 1908-1930 period becam e insolvent, whereas
four of the six earlier systems continued to operate until expiration of
the charters o f the participating banks or their conversion to national
banks.
/ ¿L
z t*-
/fjri
p b i
Various explanations have been given
for the failure of these State experiments with deposit insurance. The
most prevalent is an assumption that deposit insurance provided a great
tem ptation toward ill-considered expansion and reckless loan manage
ment policies. This assumption is supported by the observation that in
most of the States with a deposit insurance system a relatively rapid
expansion occurred during the early years of the systems. Such expansion
took tw o principal form s: in some States a large increase in the number
of banks relative to population and wealth, and in most of the States an
expansion of bank loans and deposits by individual banks with inade
quate attention to the quality o f assets acquired. The latter appears to
have occurred in the larger banks to as great an extent as in the smaller
banks: certainly it was a specific factor in the failure of some of the
relatively large banks in the systems. Inadequate regulation of banks,
with respect both to statutory requirements and to the quality o f super
vision provided by banking departments, is also frequently cited as an
im portant factor in the failure of these insurance systems. Deficiencies
in legislative standards are in fact suggested b y the extent and nature
o f amendments to the banking codes after the funds had been operating
a few years, or after they had ceased to function; and inadequacy of
supervision appears obvious in some of the States, where there were
frequent turnovers in the personnel of the bank supervisory agency,
and provision for only a few examiners with salaries inadequate to retain
well-qualified men.
H owever, it is easy to place more stress than is warranted on the
presumption that deposit insurance itself led to ill-considered expansion
and reckless management, and that this together with inadequate
supervision was the dominant element in the failure of the systems.
This is clear from the fact that in six of the systems the failure rates
were lower than among State-chartered banks in several contiguous
States during the same periods, and in tw o of the systems lower than in
all State banks in the nation. T he more fundamental underlying factors
in the failures of the systems were the im pact of the deflationary m onetary
policy after the close of W orld W ar I and the accom panying business
depression, and the continued adverse econom ic circumstances through
out the 1920’s in the agricultural areas of the nation.
In a sense all the funds failed from inadequate assessments and in
sufficient accumulated reserves. B ut it would be unrealistic to assume
that the rates could have been made, as a practical matter, high enough
to have covered the cost. If the insurance had been required for all
banks this might have been possible, because the costs would have fallen
upon all establishments providing banking service and hence could
have been passed on to bank customers. B ut with the alternative open
to the banks o f withdrawing from the system— under the provisions of
State law or b y liquidation and conversion to national banks— the rates
which would have been necessary to
been maintained.
ties and sources
data regarding the number of banks,
and the degree to which they were paid, and the assessments collected.
V *-
T he information from which these tables have been prepared was
obtained for the most part from the respective State banking depart
ments, partly from official reports published in State documents, partly
from records remaining in the offices of the State departments wrhich
have been made available through the courtesy o f the respective bank
supervisory officials, and partly from data published or available else
where but largely derived from the records of the State banking depart
ments. In some respects the published material, together with the avail
able records in the offices of the banking departments, do not provide
all the information needed for accurate tabulations, and in most of the
States it has been necessary to supplement the data actually collected
by estimates derived from partial data.
r~
>laj> J l< ^ ti+ y
^ K.
/<i>
Table 36* N u m b e r o f B a n k s , a n d N u m b e r P a r t i c i p a t i n g in S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1908-19301
Oklahoma
Year
end*
Kansas
Texas
Eligible
Partic Total«
ipating4
Mississippi
South Dakota
North Dakota
Eligible
Not
Partic
partic ipating
ipating
Total»
Eligible
Not
Partic
partic ipating
ipating
Total*
Partic Total* Partic Total* Partic Total* Partic Total*
ipating4
ipating*
ipating*
ipating*
834
887
924
646
668
695
1,038
1,077
421
459
404
401
1,203
1,308
43
45
472
582
1911......................
1912......................
1918......................
1914......................
1915......................
914
923
913
918
903
631
615
582
563
557
1,107
1,113
1,141
1,153
1,196
446
432
439
420
427
442
462
481
508
526
1,370
1,442
1,536
1,551
1,532
45
55
61
59
54
643
704
788
790
777
916
935
965
983
1,007
669
694
728
765
803
308
293
273
258
-64«-
68#
1916......................
1917......................
1918......................
1919......................
1920......................
885
901
936
944
977
547
566
681
599
622
1,220
1,250
1,291
1,838
1,374
437
430
426
427
409
546
577
613
649
683
1,530
1,572
1,579
1,641
1,717
47
46
43
41
41
789
828
841
907
990
1,031
1,110
1,133
1,188
1,196
839
920
942
999
1,009
293
297
299
316
337
258
263
266
284
306
628
639
647
673
702
503
514
521
543
566
tm
877
89
87 5
1921......................
1922......................
1928......................
1924......................
1926......................
938
910
556
463
1,875
1,349
1,323
1,297
1,269
377
369
857
371
381
714
698
681
651
611
1,681
1,647
1,645
1,618
1,582
34
34
34
37
497
970
936
916
896
337
1,170
1,137
1,118
1,101
1,072
986
955
938
928
903
336
331
338
335
338
306
300
306
299
301
702
692
662
552
495
566
561
535
438
385
84
84
74:
67
64
1,223
399
78
39
748
34
1,043
1,012
882
804
883
855
726
647
325
325
321
306
289
288
285
271
422
322
1,102
547
794
794
1,524
| u cs\
55 L
51:
47 1
Not
Partic
partic ipating
ipating
DEPU51T
1908......................
1909......................
1910......................
706
709
723
694
364
364
381
401
239
197
191
190
46
85
104
116
661
4
S D 665
569
H
513
482
i
409
371
337
1 For periods of operation of the deposit insurance systems.
* December 81 or nearest available date.
* Total number includes all banks and trust companies operating in the State. Of these, national banks were ineligible for participation in State deposit insurance systems under
a ruling of the Comptroller of the Currency, and in some States certain types of banking institutions were ineligible under State law (Oklahoma, trust companies after 1911; Kansas,
trust companies and private banks; Texas, private banks; Washington, mutual savings banks).
4 Required to participate. Figure for Mississippi for 1914 includes all State banks, part of which may not have been participating banks on that date: participation was voluntary
to M ay 15, 1916.
I ^ U R I N L'E UUKFUKAT1UN
1926......................
1927
1928......................
1929......................
Washington
FEDERAL
Total*
Nebraska
Ur* V dUty - ^ %
Ki
% AA
I
T a b l e OTT
T o t a l D e p o s i t s o f A l l B a n k s , a n d o f B a n k s P a r t i c i p a t i n g i n S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1 9 0 8 -1 9 3 0 1
(In millions of dollars)
Kansas
Oklahoma
Year
end*
Texas
Eligible
Total
Partic
ipating
190 8
190 9
191 0
75
106
121
82
55
61
191 1
191 2
1918..............
1914..............
1916..............
107
128
135
129
158
44
46
46
45
48
191
191
191
191
192
6
7
8
9
0
265
382
339
513
434
192
192
192
192
192
1
2
3
4
5
360
393
192
192
192
192
6
7
8
9
Nebraska
Partic
ipating
57
89
85
64
93
194
205
214
217
241
12
12
15
14
149
204
179
321
266
10
11
17
21
227
252
289
302
Total
189
171
46
47
274
299
4
6
47
55
55
63
75
86
300
395
358
305
390
7
10
10
9
8
118
152
170
205
191
606
763
643
1,132
862
11
211
66
233
P
85
137
121
191
161
330
400
428
487
447
ta
»
(7 «►
113
75
411
427
411
484
457
««•
SH «S
s i *+
Jtfc
r **» -
180
180
168
195
168
756
913
1,075
1,159
1,257
tooiÄW
79
7
3
1,066
451
443
457
•13
North Dakota
Washington
Eligible
Total
Not
Partic
partic ipating
ipating
¥4 4*
14o 4a
South Dakota
Eligible
Total
183
194
191
Mississippi
Not
Partic
partic ipating
ipating
IH i *
22^ < ,
K fc
It,\
Total
Partic
ipating
74
83
93
101
114
63
75
45
55
343
419
478
513
432
166
223
260
279
255
103
141
159
237
160
79
107
388
434
430
485
487
216
239
240
272
282
470
474
462
407
276
275
252
192
Total
Partic
ipating
Total
Total
Not
Partic
partic ipating
ipating
V)
H*
188
123
141
195
239
281
219
84
123
151
184
145
154
187
200
211
246
117
139
148
146
167
202
226
199
179
162
135
150 ft 178
151 IWÄ
122 m
182
106
227
255
250
240
151
172
168
161
120
Partic
ipating
222
143
m
210
m
79
168
* I™
123
131
104
322
36a451
396
109
40
123
107
80
75
11*3
>\0
85
95
80
88
86
70
65
60
1 For periods of operation of the deposit insurance systems.
1 December 31 or nearest available date.
~w^»fUhla ban
nf Unfa mt
th e id e n tity
tU «
«rith d rf
>0 banks that remained in the system h id deposits, ul $29,667,000
1 ,1 9 2 6 ,
CrfUBMW
I
£
i>
Tabic 3ft7 P a r t i c i p a t i o n i n S t a t e D e p o s i t I n s u r a n c e S y s t e m s , 1908-1930
Percentage of banks participating
Percentage of deposits in participating banks
JSo
Year end
wQ
J* o
OC
4
55Q
wQ
Of
Of Of eli Of Of eli Of
Of
Of
Of
Of Of eli Of
Of Of eli Of Of eli Of
Of
Of
all
all
gible
all
gible
all
all
all
all
all
gible
all
all
gible
all
gible
all
all
all
banka banks banks banks banks banks banks banks banks banks banks banks banks banks banks banks banks banks banks
65.5
75.3
75.2
«m
38.9
37.2
46Ì6
39.2
44.5
91.7
92.8
63.7
61.7
61.7
39.9
41.5
42.2
44.1
44.0
49.8
51.7
52.3
54.7
55.2
46.9
48.8
51.3
50.9
60.7
93.5
92.8
92.8
93.1
93.5
73.0
74.2
75.4
77.8
79.7
88.6
88.1
61.8
62.8
62.1
63.6
63.7
44.8
46.2
47.5
48.5
49.7
55.5
57.3
59.0
60.3
62.5
51.6
52.7
53.3
55.3
57.7
94.4
94.7
95.1
95.7
96.0
81.4
82.9
83.1
84.1
84.4
90.0
89.9
90.8
80.1
80.4
80.5
80.7
80.6
80.8
80. V
79 . V
59.3
50.9
51.9
51.7
51.5
50.2
48.1
65.4
65.4
65.6
63.7
61.6
57.7
56.8
55.7
65.4
21.3
96.6
96.5
96.4
96.0
40.4
84.3
91.1
90.6
90.5
89.3
89.1
80.6
81.1
80.8
79.3
77.8
78. V
78
76 A
75.X
75 .V I?
,3 2 .6
42.2
8.9
4.7
2.2
4.3
84.7
84.5
82.3
80.5
88.9
76.3
7 3 .1 1,
72.V ,
7 1 .V ?
69.0
66.6
b. ? W
3.5
• See note 3, Table 5?« 11.
83.9
84.3
84.2
M .o
88.1
88.6
88.6
88.8
88.6
12.6
23.4
27.3
28.9
16.1
30.1
35.3
37.9
42.0
51.8
50.7
24.0
27.4
£
17.3
18.4
92.2
90.4
41.2
37.4
34.1
34.6
30.6
29.9
32.6
34.7
35.3
36.9
64.6
69.8
61.7
62.8
18.9
22.6
23.9
21.0
23.8
89.5
90.3
89.1
87.4
91.7
38.2
40.3
43.4
46.5
47.5
72.3
73.4
31.9
35.9
35.6
37.2
36.9
35.8
38.1
89.6
42.0
42.8
70Ì8
24.6
26.7
27.8
28.4
30.9
93.1
94.5
93.7
95.7
95.0
48.3
53.3
54.4
54.3
59.0
76.2
75.8
75.4
79.2
76.8
59.4
62.7
63.1
65.5
66.4
31.3
19.1
43.8
42.1
40.8
40.3
36.8
30.1
27.6
26.9
26.0
95.7
95.9
94.4
93.6
55.8
55.0
55.8
75.6
74.3
74.2
69.2
67.9
66.6
74.4
7Q
Q
ra.O
72.3
66.8
55.1
17.£
1.6
.7
6Ü.Ö
67!7
Ssuf
u&-
£
r
1
M*
57.8
58.6
57.9
54.7
47.1
v
V
1
67.3
67.3
67.1
56.0
67.3
66.8
61.4
59.3
B a n k s P a r t i c i p a t i n g in S t a t e D e p o s i t I n s u r a n c e S y s t e m s , 1 9 0 8 -1 9 3 0
Kansas
Texas
Nebraska
Mississippi
South
Dakota
North
Dakota
South
Dakota
1
Oklahoma
Washington
Deposits (in thousands of dollars)1
'S
a
Nebraska*
Texas
Kansas
Year of
failure
Oklahoma
Number of failed banks1
29,486
25,265
37,627
61,489
14,55«
56,58V
s
T o t a l..................................
139
1908....................................
1909....................................
1910.....................................
1
3
3
1911....................................
1912....................................
1918.....................................
1914....................................
1915.....................................
8
4
16
6
6
1916....................................
1917....................................
1918....................................
1919....................................
1920..........
1921.....................................
1922....................................
1923.....................................
1924.....................................
1926....................................
1927.....................................
1928....................................
1929....................................
1930....................................
119
138
317
64
340
1
3 * ^ 1 1
3.9,094
2,873
661
1
2
1
1
4
3
1
1
3
1
1
1
2
9
5
2
8
15
19
10
15
30
19
10
15
21
25
22
15
13
20
10
2
3
5
27
17
3
16
2
22
22
46
116
9
6
6
5
10
6
1
1
Ì.55
1,144
656
1,993
501
360
4
1
4
1
1
1
18
1
9
39
94
38
27
7
77
61
25
47
11
43
33
30
18
40
85
1,203
1,183
2,375
1
1
6,509
8,404
1,460
230
35
125
207
513
3,343
\
U»
122
110
648
219
133
24
1,255
1,026
2,110
3,357
7,235
2,593
2,237
12,002
5,815
2,889
4,246
4,826
3,600
2,806
223
82
1,833
151
623
64
32
J O S '
................ 1 .
................
481
141
527
w
3,478
6,041
4,758
2,418
1,546
5,154
1,469
1,169
171
571
1,596
316
1,991
10,173
27,751
6,401
4,062
1,071
9,136
6,745
2,395
5,847
5,629
7,725
19,835
1,278
1,454
2,294
1,554
2,172
932
7,889
1,364
4,383
3,691
2,160
1,772
¿
' f - j
1 Exclusive of suspended banks not placed in receivership that reopened or were taken over without payments from, or due from, the deposit insurance funds.
* As of date of failure or, where this is not available, last available report prior to failure. Due to rounding, data may not add precisely to the indicated totals.
• For the later years, many of the banks had become insolvent at earlier dates, and had been operated by the Guarantee Fund Commission.
10,443
37
2
3
6
8
28
33
11
242
Washington
N u m b e r a n d D e p o s its o f F a ile d
North
Dakota
13
Table WT.
10,443
C>
Ci>
0)
Table i f f .
I n s u r e d D e p o s i t s a n d t h e i r R a t i o t o T o t a l D e p o s i t s in B a n k s t h a t F a i l e d
S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1 9 0 8 -1 9 3 0
W h ile
P a r t i c i p a t i n g in
\
O T T S -y
Vi
1 The major part ol the differences between insured deposits, as given here, and total deposits at date of failure, shown in T a b le d , is due to deposits excluded from insurance
coverage (see text.^pages 50-5I n However, some differences are due to deposit claims allowed that were not on the books or not included in those tabulated as of date of failure, or
to deposiUi on the Botrtnr fo r which claims were not filed or which were disallowed on the ground that they were not deposit labilities.
• Estimated for a large proportion of the banks as the amount of deposits at date of failure, excluding those of banks and government and cashier’s checks. For failed banks that
were liouidated without being taken over or reorganized, such deposits exceeded by 1H percent the claims of the guaranty fund against the receivers. For the majority of the failed
banka the actual amount of insured deposits is unavailable, because the claims of the guaranty fund represented payments to an absorbing or successor bank that assumed the deposits
of a failed bank without a definite determination of the deposits covered by insurance.
1 Guaranty fund certificates issued (estimated for a few banks for which the amount of certificates issued is not available). The figure for 1923 includes the esimated amount of
insured deposits of the American State Bank, Wichita, which were assumed by the successor bank and represented on the liquidation accounts of the American State Bank by re
ceivers’ certificates instead of guaranty fund certificates.
4 Claims paid or payable by the guaranty fund (estimated for some banks, chiefly those absorbed by another bank with a payment by the fund).
• Claims payable by the guaranty fund (estimated for a few of the banks).
• All deposits eventually paid from assets, the guaranty fund, and proceeds of a State bond issue (estimated for one bank).
1 Amount paid by guaranty fund for 16 banks for which all guaranteed claims were paid, and amount of guaranty fund certificates issued for the remaining failed banks.
For additional notes, tee p.
5 .^
T a b le
4 f.
R e c o v e r i e s o n I n s u r e d D e p o s i t s i n B a n k s t h a t F a i l e d W h i l e P a r t i c i p a t i n g i n S t a t e D e p o s i t I n s u r a n c e S y s t e m s , 1 9 0 8 -1 9 3 0
(In thousands of dollars)
Total........................
1908........................................
1910......................................
14,088
11,241
37
1,125
347
18
a
South
Dakota
Mississippi
Nebraska
Texas
Kansas
Oklahoma
Washington
South
Dakota
7,720
f
«o C*
SO
1914........................................
1916........................................
1916........................................
1917........................................
1918........................................
1919........................................
1920........................................
38
84
1,043
823
997
1,919
192 1......................................
1922........................................
192 8........................................
1924..................................
192 5........................................
2,588
3,792
582
94
93
1,485
1,061
2,459
1,410
1,216
105
19
499
1,236 1
1,298
fa À 13
1,613 V3£
1,589
60
166
67
389
32
t i
1 (3
I
43
12
26
3
277
44
35
83
1,012
235
32
402
96
462
649
3Ò3
75
372
329
1,041
366
178
4,868
1,464
611
1,562
1,411
2,983
3,221
2,068
1,121
2,828
982
589
61
189
356
125
1,573
604
177
42
827
93
2,937
567
154
17
87
45
9
3Ì8
177
53
123
7
232
3,320
1,695
580
349
2,177
484
560
105
382
1,806
85
270
1,074
7,031
1,168
367
20
589
1,165
279
3,026
1,067
1,482
7,045
645
698
67H
677
1,582
649
1,455
338
416
566
252
279
6,361
1,285
14
851
29
540
150
529
161
87
103
67
>
■|O
AOA
1
ZV
11,624
616
241
109
16
97
158
367
1926........................................
1927........................................
1928........................................
192 9........................................
198 0........................................
21,876
Net payments to depositors from insurance fund1
w
526
885
1,187
290
245
1911........................................
1912........................................
Mississippi
3
o
Nebraska
I
■
a|
Texas
Year of
faiture
Kansas
Recoveries from liquidation of assets'
19
11
80
286
244851
68
550
438
99
22
23
12
9
1 Includes dividends paid directly to depositors, and those paid to the insurance funds on depositors’ claims, and estimated amount of insured deposits assumed by absorbing or
successor banks with payments from the insurance funds.
* Payments to depositors by the insurance funds, or to absorbing or successor I
Note: Because of rounding, data may not add precisely to indicated totals.l _
iT
,r
..
r
Notes to Table 40— continued
' Claims approved by Guaranty Fund Commission, estimated as follows: for 2 banks paid in full by the fund, the amount of deposits paid; for banks on which a 10 percent divi
dend was paid, ten times the amount of such dividend allowed; for banks on which a 1 percent dividend was paid, one hundred times the amount of those dividends; total deposits
in a few cases paid in full by receivers.
' Warrants issued for the guaranteed deposits.
Nott: Because of rounding, data may not add precisely to the indicated totals.
f
lb
Table
L osses on
D e p o s i t s a n d O t h e r L i a b i l i t i e s in B a n k s t h a t F a i l e d
S t a t e D e p o s i t I n s u r a n c e S y s te m s , 1 9 0 8 -1 9 3 0
(In thousands of dollars)
On insured deposits1
W h i l e P a r t i c i p a t i n g in
On noninsured deposits and other liabilities
Year of
failure
uo a
Total.
6,225
7,475
23,306
4,279
T
33 ,72\
18,282
1,240
1 9 0 8 ..
1 9 0 9 ..
1 9 1 0 ..
1,958
52
1911.
1912.
1918.
1914.
1916.
. . v
.fX
tl \
1916.
1917.
1918.
1919.
1920.
1921.
1922.
1928.
1924.
1926.
1926.
1927.
1928.
1929.
1930.
1,704
122
21
1,582
1,542
4,227
456
97
545
2,999
644
864
1,617
655
42
12
314
4,306
6,237
12,245
517
646
1,498
937
688
296
2,008
513
6,81 V I 4,530
17,509
3,118
1,241
4,199
4,359
845
1,838
1,737
1,070
646
1,240
188
256
827
215
1Bta
121
97
182
192
498
227
142
208
9
22
3
Vj
0^
278
60
91
134
31
74
48
142
780
65
1 Insured deposits never repaid to depositors, either from the insurance fund or liquidation of assets, except for a portion of the loss in Kansas (see note 2) and the loss in Mississippi
which was assumed by the State (see note 3).
* Of this loss, $1,424,000 was assumed by the participating banks in the reorganization of the American State Bank, Wichita, which failed in 1923.
» Paid from proceeds of a State bond issue.
iXhrtsM
‘ Less than
¿Less
ths $500.
Note: Because of rounding data may not add precisely to indicated totals.
t v ç - j
.
A s s e s s m e n t R a t e s a n d C o l l e c t i o n s b y S t a t e D e p o s it I n s u r a n c e S y stem s, 1 9 0 8 -1 9 3 4
Net collections from assessments (in thousands of dollars)1
3
North
Dakota
a
a
South
Dakota
Nebraska4
Assessment rates (percent)1
1-8
S M I
.25
.50
.30
,10 . »
.10 **>■
.05
.05
.*>•«>
.05
.10
.15
.20
.10
.25
.25
.25
.25
.25
.05
.05
.34
.90
,SC> .*6.
.40
.60
.25
.25
.25
.25
.25
.25
.25
.25
.25
.25 .3 6
.25
.25
.25
.a*
*•
.60
.60
.»a
.05
.25
.25
.25
.25
.25
.25
.25
.25
.25
.25
.10
.10 .16
,1 0
17,
2,678
if ,« »
199
327
285
17
18
601
511
202
148
162
23
23
28
32
90
133
209
232
302
37
48
71
84
97
200
62
247
82
107
157
78
344
343
1
1,549
o rt
550
3,585
2,002
7
3,604
177
407
272
141
145
30
129
25 f3
9
MÛ
»21
5
14
I*a W8
639
15
44
98
153
118
139
186
255
330
427
3,991
4,179
1,245
2,416
3,772
2,318
1,972
2,046
1,005
1,616
238
199
228
253
251
442
285
335
249
350 I* _ _ 205
330 t??. 066
a«e
274
#84
1,672
1,653
885
289
299
309
296
292
264 tSi »«fr
253
'
148
44
220
318
H > 4m
|as
/ô3 -««-
139
74
75
62
I
502
975
1 Includes initial, regular annual, and special assessments (excluding regular annual assessment in Texas of 0.25 percent per year for revolving fund). The assessment base to which
rates were applied was a daily or call-date average of deposits for the preceding year, excluding uninsured deposits in most of the States.
1 Collections from assessments described in note 1, and from banks entering the system, with allowance for refunds and other adjustments.
_ _
-
m n n iJ - o n l M - ^ - f r - l ........ .. f
—n
ir - T T « r m n n l°
--J
J . p . - t . . t j . . i . . n . . i p , . i i n g h ^ n lm nt t h o h n [ jin n in fr n f th n y n ii r
Mn j|ij ........ iit i n n
w n c t a ii t c n t r u u i bu iu i u i tu t: u e i i e i i i o i m e g u u r u i n y i u i i u , i > i , i i o , u u u o i W H rraniB o u t s t a n d i n g a n u a u i p a i u u p u ii u n u i w i u c u i o u t u i m e a i i a u o
in n m i i l n h l n r r m r r i i n i r
i u . m , ujw» «
#
u
------- *
deposited by participating banks as security for payment of future assessments; and $10,000 unpaid assessments collected at time of final settlement as a condition for the return of
securities deposited as security for payment of future assessments. In Kansas, amount is difference between total receipts of the fund (except interest) and assessments collected in the
respective years, and consists mostly or wholly of proceeds from sale of securities deposited for payment of future assessments that were forfeited by withdrawing banks. In Texas, con
sists of adjustments at time of final settlement of the affairs of the fund to cover insured deposits in failed banks for which assessments had not been levied. In Mississippi, consists
of assessments at the 0.25 percent annual rate from the end of 1930 after deposit insurance had ceased to apply to current failures, to early 1934, when the guaranty law was repealed.
r.
i
DEPOSIT GUARANTY IN OKLAHOMA
Prepared by
Clark Warburton, chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit insurance Corporation
March 1958
TABLE OF CONTENTS
DEPOSIT GUARANTY IN OKLAHOMA
Page
Character of the guaranty legislation
Admission of barEs
Deposits guaranteed
Assessments
Administration and custody of the fund
Indebtedness of guaranty fund
Method of paying depositors and of liquidating failed banks
Expenses of administration
1
2
3
5
7
8
9
10
Constitutionality of the deposit guaranty lav
Decisions of the State courts
Decision of the United States Supreme Court
11
12
13
Supervision and regulation of guaranteed banks
Supervisory authority
Examination of banks for admission to guaranty
Supervisory powers of the Bank Commissioner
Supervisory experience
Statutory limitations on bank operations
l6
l6
17
18
21
26
Insufficiency and closing of the guaranty fund
Inadequacy of the guaranty fund
Suspension of payments from the fund
Repeal of the deposit guaranty law
30
30
31
33
Number, deposits, and failures of participating banks
Number and' deposits' of participating “banks
Concentration of bank deposits
Number and deposits of failed banks
Comparison with failures in other States
Causes of bank failures
Procedures used in handling failed banks
3^
3^
3^
Financial history of the guaranty fund
Sources and adequacy of information
Income, expenses, and indebtedness of the guaranty fund
Insured deposits and losses in failed banks, by years
Comparison of assessment receipts and losses in failed banks
Settlement of the affairs of the guaranty fund
Appraisal of the Oklahoma deposit guaranty system
The burden of assessments
High failure rate
Inadequate supervision
38
42
Mt
k6
4-9
52
5^
6l
65
67
67
69
70
LIST OF TABLES
Page
1.
2.
3«
Supervisory powers of bank commissioner, and of state banking
board, in Oklahoma
Statutory limitations on bank operations in Oklahoma
15^0
27-29
Number of operating banks in Oklahoma participating and not
participating in the deposit guaranty system, 1908-1922, by years
35
Deposits of operating banks in Oklahoma participating and not
participating in the deposit guaranty system, 1908-1922, by years
36
5.
Number and deposits of state banks in Oklahoma, November 10, 1910,
and December 29, 1920
37
6.
Number and deposits of state banks in Oklahoma closed because of
financial difficulties, February l4, 1908, to March 31> 1923# by years
39
7.
Size distribution of failed banks in Oklahoma compared with average
size distribution of operating state banks: period of operation
of deposit guaranty system
kl
8.
Annual bank failure rates in Oklahoma, 1908-1922, compared with rates
in contiguous states and in the United States
*6
9.
Receipts, expenditures and unpaid obligations of the Oklahoma
depositors guaranty fund
53
10.
Rates and amounts of assessment, cash balance, and warrants out
standing, Oklahoma depositors guaranty fund, by years
55
11.
Insured deposits, and obligations to depositors of failed banks paid
and unpaid, Oklahoma depositors guaranty fund, by years, 1908-1923
57
12.
Percentage of deposits insured, and percentage of insured deposits
paid by guaranty fund and recovered from liquidation of assets,
bank failures under the Oklahoma deposit insurance system, by
years
60
13.
Annual assessment receipts, liability for deposits in failed banks,
and cumulative deficiency, Oklahoma depositors guaranty fund
62
14.
Comparison of annual rates of assessment with rates required to meet
deposit obligations in failed banks, Oklahoma depositors guaranty
fund, by years, 1908-1923
64
DEPOSIT GUARANTY IN OKLAHOMA
The Oklahoma law for the guaranty of deposits was approved
December 17, 1907> at the first session of the Legislature after ad
mission of Oklahoma into the Federal Union as a State.
The law became
effective February l4, 1908, and continued in full operation for 13
years.
In November 1921; when the liabilities of the fund exceeded its
receipts and further borrowing on warrants became impracticable, the
law became inoperative with respect to protection of depositors in closed
banks, but the legal liability of the fund for such protection and the
liability of the banks for payment of assessments continued until the
repeal of the law in 1923» The affairs of the fund were not fully
settled until 1934.
Of the eight States which established deposit guaranty funds
during the period, 1907-1917; Oklahoma was the first, and was regarded
as a pioneer in the movement to provide safety for bank deposits through
application of the insurance principle. When the Oklahoma law was
enacted, forty years had elapsed since the State bank-obligation insurance
systems of the nineteenth century had been in operation, and very little
was known about their character or the success of their operations.
CHARACTER OF THE GUARANTY LEGISLATION
When Oklahoma became a State in November 1907; incorporated
banks operating in the former Oklahoma Territory, other than national
banks, had been subject to examination and supervisión by a Bank Com
missioner, and private banks had been prohibited for a decade. Banks
in the former Indian Territory, ccarprising the western part of the State,
-2operated as private banks or with charters obtained under the general
incorporation law of Arkansas, which had been extended to the Indian
Territory by Act of Congress. However, neither the private nor the
incorporated banks were examined or supervised.
In May 1908, about
three months after the deposit guaranty legislation became effective,
the banking lavs of the State were codified, revised, and reenacted.
A few minor changes in the deposit guaranty provisions were made at
that time. More important revisions occurred in 1909; 19H; and 1913*
Admission of banks. Participation in the deposit guaranty
plan was made compulsory for all banks operating under a State charter.
At the time the deposit guaranty law was enacted 484 banks, excluding
national banks, were operating in Oklahoma. Of these, 294 were located
in the former Oklahoma Territory, and 190 in the former Indiem Territory.
Under a ruling of the attorney general the guaranty became effective
immediately upon the levy of the first assessment, which was required
to be made within 60 days after passage of the law.
The guaranty law in Oklahoma also provided that any national
bank in the State might voluntarily come under the protection of the
depositors' guaranty fund with the approval of the Bank Commissioner.
The Attorney-General of the United States in July 1908 ruled that na
tional banks could not legally participate in a State system of deposit
guaranty.
l/ First Annual Report oif the Bank Commissioner, 1908, p. v,
and Linwood 0. Neal, The History and Development of State Bank Super
vision in Oklahoma (thesis in Rutgers University library).
1/
-3Under the revised banking code of 1908 the deposit guaranty
law was extended to trust companies. In 19U trust companies thereafter
organized were prohibited from doing a banking business, and the deposit
guaranty law was amended to exclude from its provisions, after September 1
of that year, corporations doing a trust business.
The latter change
excluded only two institutions, holding about one percent of the
aggregate deposits previously covered by the guaranty.
One of these
relinquished its trust company charter and became a State bank, thus
coming back under the guaranty system, about eighteen months later;
the other consolidated with a national bank in 1914.
In 1919 trust
companies were authorized to establish savings departments, with a segre
gation of capital and with the deposit guaranty law applying to the
savings department.
Deposits guaranteed. Deposit guaranty in Oklahoma originally
covered all deposits, the law providing that the State Banking Board
should draw from the depositors' guaranty fund whatever amount, in addi
tion to the cash which could be made immediately available in a failed
bank, was necessary to meet the deposits of the bank. Under decisions
of the State Banking Board, cashier's checks, certified checks, and drafts
outstanding were not recognized as deposits. Application of the guaranty
to secured deposits was excluded by decisions of the State Supreme Court
referring to moneys belonging to counties and to school funds deposited
in banks which became insolvent.
In cases where the assets of a failed
bank were insufficient to pay the general depositors, the court ruled
that deposits of public funds were not entitled to protection by the
depositors' guaranty fund, since the statute provided a specific system
-4for the protection of such deposits. The court also ruled that neither
the owners of such deposits nor a surety company which had paid such a
deposit was entitled to share in the assets of the institution until the
guaranty fund had been repaid in full, because the law gave the State
1/
priority in such distribution on behalf of the guaranty fund.
In 1913 "the law was amended to exclude from protection by the fund
deposits otherwise secured, and deposits on which a greater rate of interest
was paid than was authorized by the Bank Commissioner. Two years later,
another amendment provided that surety companies paying a deposit of public
funds for which they were liable in a failed bank were entitled to a pro
rata share with the depositors' guaranty fund in the proceeds of the assets
of such failed banks. This amendment, however, was declared void by the
2/
State Supreme Court. These decisions did not reduce the protection afforded
school or other public funds, but prevented surety companies from recouping,
out of the guaranty fund or the assets of a closed bank, any part of their
losses in Oklahoma banks so long as the guaranty fund afforded protection
to unsecured depositors but was not fully repaid from the proceeds of liq.uida3/
tion of the assets of the banks.
1/ Columbia Bank &”Trust Co. v. United States Fidelity and Guaranty
Co. (1912,"“33 Okl. 535» 126 Pac. 556; Lovett et al., v. Lankford et al. (1914),
47 Okl. 12, 145 Pac. 7o7J and United States Fidelity & Guaranty Co. v. State
et al. (1917), 67 Okl. 14, 168 Pac. 234.
2/ State ex rel. Short, Atty. Gen. v. Johnson et al. (1923) 90 Okl.
21, 215 Pac. 945. The ground on which this decision was made was a technicality,
namely, that the preference right of the depositors' guaranty fund against
the assets of a failed bank had been impaired, and that this was not expressed
in the title of the amendatory act.
3/
After the guaranty fund, in November 1 9 3 1 * ceased to pay depositors,
a Federal court decided that a surety company that had paid secured deposits in
an Oklahoma bank that failed was entitled to share in the distribution of assets
of the bank ratably with unsecured depositors, on the ground that with no pay
ment from the guaranty fund, nor issuance of warrants on the fund, to the de
positors the State had no preferred claim against the failed bank. Strain et al.
v. United States Fidelity & Guaranty Co. Circuit Court of Appeals, Eighth Circuit
(1923), 292 F. 694, affirmed by the United States Supreme Court, 264 U.S. 570,
08 L. Ed. 854. However, . the State Supreme Court, in a later case, ruled that
the unsecured depositors in a failed bank retained, until repeal of the law, a
g*raf^iiioS
of “ " * ■ 01
*“ '*• 8t*u
-5Assessments. The original deposit guaranty law in Oklahoma
provided for an initial assessment of 1 percent of average daily deposits,
excluding State funds properly secured, during the preceding year. In
the 1908 revision of the law, deposits of the United States were also
excluded. Annual assessments at the same rate were to he made on the
1/
growth of deposits. If the fund became depleted, it became the duty of
the State Banking Board to levy a special assessment sufficient to re
store the fund to 1 percent of average daily deposits.
In 1909, about a year after the initial assessment was levied,
the assessment provisions were revised. The new law provided for the
accumulation of a fund amounting to 5 percent of average daily deposits
by an initial payment of 1 percent of average daily deposits, with a
credit for the assessment previously paid, and subsequent annual payments
of one-twentieth of 1 percent of average daily deposits. Each bank was
also required, once a year, to make such additional payment as was
necessary to adjust its total payments into the fund in proportion to
any growth in its deposits.
Special assessments for restoration of the
fund when reduced by payments to depositors of closed banks were limited
to 2 percent in any calendar year. All assessments were computed on the
basis of average daily deposits during a period of a year, the deduction
for United States and State funds being eliminated.
Further changes in assessments were made in 1913; following two
years in which the total assessments averaged over 1 percent of deposits
per year.
The regular annual assessment was raised to one-fifth of 1 per
cent of average dally deposits, excluding secured deposits, and the maxi
mum fund to be accumulated was reduced to 2 percent of deposits. Assess
ments for restoration of the fund, when reduced below 2 percent of average
decreased.
17 No provision was made for refund if the deposits of a bank
-6 -
daily deposits, were limited to one-fifth of 1 percent in any year. Also,
special assessments not exceeding one-fifth of 1 percent each year were
expressly authorized during the following three years and forbidden
thereafter. These provisions remained in force during the subsequent
duration of the fund.
The 1913 amendment to the guaranty law also provided for the
posting with the State Banking Board, by each bank, of State or local
government obligations approved by the Board in an amount not less than
1 percent of average daily deposits, with a minimum of $500, as security
for the payment of its liabilities to the fund.
A problem of collecting the assessment arose from the conver
sion of State banks to national banks. Under a State Supreme Court de
cision in 1915 a bank subject to the law of 1909 which had become a
national bank was liable for the full 5 percent assessment, payable in
accordance with the instalment payments imposed by that law.
The court
held that the State bank, though it had ceased to exist as a State
corporation, did not thereby escape liabilities incurred by it during
its continuance as a State bank, and that the effect of surrendering
its charter and organizing as a national bank was neither to mature nor
y
discharge the deferred payments of the assessment.
However, this de
cision was reversed four years later, when the Court decided that the
bank was liable only for such payments as matured or were payable while
£/
it was doing business as a State bank.
17 State ex rel. West, Atty. Sen. v. Farmers' National Bank of
Cushing (1^15) 47 Okl. 667, 150 Pac. 212.
2/ Citizens National Bank of Broken Arrow v. State ex rel. Freeling,
Atty. Gen.‘*“(1919) 76 Okl. 9k, iBk pac. 63.
-7Banks organized subsequent to the enactment of the deposit
guaranty law, excluding those formed by reorganization or consolidation
of banks subject to the law, were required to pay into the fund at the
time of opening for business 3 percent of the amount of their capital
stock. Until 1913 this payment was a credit fund, subject to adjustment
at the end of one year to the rate on average daily deposits levied on
other banks.
Administration and custody of the fund. Supervision and manage
ment of the depositors' guaranty fund in Oklahoma were placed in the
State Banking Board, composed of the Governor, Lieutenant Governor, the
President of the Board of Agriculture, State Treasurer, and State Auditor.
This Board was empowered to adopt all suitable rules and regulations not
inconsistent with law for the management and administration of the fund.
In 1911 the composition of the State Banking Board was altered to con
sist of the Governor and two other members appointed by the Governor, with
the approval of the Senate, to be remunerated on a per diem plus expenses
basis.
The Bank Commissioner was made ex officio secretary of the State
Banking Board.
Two years later the composition of the State Banking Board was
again changed. After that date the Board was composed of the Bank Com
missioner as ex officio chairman and three members appointed by the
Governor with the approval of the Senate. The Commissioner was selected
by the Governor from a panel of three persons, and the other members from
a panel of nine persons, recommended by the executive council of the
State Bankers Association, an association consisting of a representative
selected by the board of directors of each bank. After two years' ex
perience with this method of appointment, the recommendation of persons
for Ccomissianer by the State Bankers Association was dropped, and the
-8Commissioner was appointed "by the Governor.
The original law contained no provision regarding investment
of the guaranty fund, but in 1909 provision was made for the investment
of 75 percent of the guaranty fund in State warrants or such other
securities as were specified for State funds. Two years later, after
a large part of the fund kept in cash had been tied up by the failure
of the bank in which it was deposited, the law was amended to provide
for the redeposit of the entire fund in the respective banks, according
to the amounts of their assessments, the banks issuing to the Bank Com
missioner certificates of deposit bearing k percent interest. In 1913
the law was again amended to provide for the payment of the assessment
in the form of cashier's checks to be held by the State Banking Board
until it was necessary to collect them.
bear no interest.
Such cashiers' checks were to
The requirement of deposit of securities as surety
for the payment of assessments, adopted at this time, has been mentioned
above.
Indebtedness of guaranty fund. The original law contained no
provision against the contingency that the assessments collected might
be inadequate to pay all of the deposits in closed banks, other than
the provision for such additional assessments as might be needed.
In
1909, when a maximum was placed upon the special assessments which could
be levied in any one year, the State Banklng Board was authorized, in
the event that the assessments were insufficient to meet the claims of
depositors in failed banks, to issue certificates of indebtedness bearing
6 percent interest to the depositors. Such certificates were to be con
secutively numbered and to be paid by the State Banking Board as soon as
possible in the order in which they had been issued.
-9The foregoing provisions were in effect until 1913, when they
were replaced by a method of borrowing designed to provide immediate
cash with which the guaranty fund could pay the depositors of failed
banks. The State Banking Board was authorized to issue "Depositors'
Guaranty Fund Warrants" of the State of Oklahoma, bearing 6 percent
interest, which could be disposed of, at not less than par value, in
such manner as the Board saw fit to facilitate the liquidation of failed
banks. These warrants were given a first lien upon future receipts of
the guaranty fund from assessments or from the proceeds of liquidation
of failed banks, and were to be retired in order of issue. The warrants
were made nontaxablej and were authorized as investments of trust funds
and of sinking funds of the State and local governments, and as collateral
required to be deposited for the security of public funds. Any trust
company, building and loan association, or insurance company was authorized
to purchase the warrants to the extent of its capital and surplus.
In
1915 the investment of a bank in such warrants was limited to its surplus
and 10 percent of its capital stock. When sale of the warrants became
difficult, the practice was followed of exchanging them, with the per
mission of the individual banks, for other collateral posted by the banks
as security for the payment of assessments.
The collateral was then sold
and the proceeds used by the guaranty fund in meeting its obligations.
Method of paying depositors and of liquidating failed banks.
Depositors in a failed bank were to be paid by the State Banking Board
in cash when the Bank Commissioner took possession of the bank. From 1909
to 1913, as has been indicated, the Board issued certificates of indebted
ness to the depositors if the amount in the fund was insufficient. After
1913, the Board was authorized to sell warrants and use the proceeds
therefrom to make immediate payment to the depositors.
-10
The State -was given a first lien, for the 'benefit of the
depositors’ guaranty fund, upon the assets of any failed bank, in
cluding the personal liabilities of stockholders, officers, directors
or other persons to the bank.
In 1909 an amendment to the law provided
that the funds realized by the Bank Commissioner from the assets of a
failed bank should first be applied to the expenses of liquidation,
then to payment to the depositors' guaranty fund of all money paid by
that fund to depositors of the bank concerned, then to the refunding of
any emergency assessments levied upon the guaranteed banks.
The liquidation of failed banks was placed in the hands of the
Bank Commissioner. In practice, with the approval of the State Banking
Board, most of the failed banks were liquidated through sale of their
assets to another bank or to a newly organized successor.
In such cases
a payment was made from the guaranty fund sufficient to enable assumption
of the deposits, or the total liabilities, of the closed bank.
In many
cases, the guaranty fund assumed an additional contingent liability if
the assets taken over should yield upon collection less than their
estimated value.
Expenses of administration. Under the original law expenses
incurred by the State Banking Board in administering the depositors'
guaranty fund were paid from the deposit guaranty fund. In the 1908
revision of the law these expenses, and the Bank Commissioner's salary
and other expenses of his office were paid frcm the proceeds of fees
levied upon the banks for each examination made. However, in 1909 the
salaries of the Commissioner and of his assistants, and in 1913 the
expenses of the State Banking Board the members of which served without
compensation, were made payable from the general revenue fund of the State.
-11.
In 1917 all expenses of the Banking Department became payable from the
general revenue fund, with all fees and other charges collected by the
Commissioner to be paid into the general revenue fund*
CONSTITUTIONALITY OF THE DEPOSIT GUARANTY LAW
Bankers objected to the deposit guaranty law in Oklahoma, and
a test of the constitutionality of the law was made by the Noble State
Bank. This bank asked the district court of Logan County for an injunc
tion restraining the levy of the first assessment by the State Banking
Board.
The Noble State Bank contended that the guaranty law was in
conflict with several sections of the Constitution of the State of
1/
Oklahoma, for the following reasons:
1. That the law deprived the bank of the enjoyment of the
gains of its own industry for the benefit of depositors of
other banks in which the plaintiff had no interest.
2. That the law deprived the bank of its property without
due process of law.
3. That the law violated the contract between the bank
and the State of Oklahoma, evidenced by its charter, patent,
and certificate of authority.
k. That the property of the bank was taken for private use
without compensation and against the consent of the bank.
5. That, if it be held that the property was taken for
public use, then it was taken without compensation and not in
accordance with the form prescribed.
6. That the law embraced more than one subject.
~TJ It was
State constitution:
state
Con8tltution:
(k) Sec.
23, Art. 2;
(
8
)
Sec.
9, Art. 10;
claimed that the law violated the following sections of the
(1,
(i)
l4,Af e . % (^ ) s|Sc.75TiI& t ? J5 i % ^ 5®,JiJi6.!6i
(5(
(9, Sec. 14, Art. 10; and (10) Sec, 1, Art. Ih.
-127» That, If the law be construed as levying a tax, this tax
was assessed upon an arbitrary basis without regard to the
fair cash value of the property assessed.
8. That, if the law be construed as levying a tax, this
tax exceeded the maximum permitted.
9* That, if the law be construed as levying a tax, this
tax was levied for private purposes rather than public use.
10. That the deposit guaranty law did not provide for the
protection of individual stockholders in the bank.
The Noble State Bank also contended that the depositors'
guaranty fund law violated the Constitution of the United States:
(1)
by impairing the obligation of the contract between the bank and the
State of Oklahoma as evidenced by its articles of incorporation, patent,
and certificate of authority; and (2) by depriving the bank of its
property without due process of the law, denying to it equal protection
1/
of the law.
Decisions of the State courts. The district court of Logan
County refused to grant the injunction requested by the Noble State
Bank.
The bank appealed the case to the Oklahoma Supreme Court, which
upheld the decision of the lower court.
The State Supreme Court, in a lengthy opinion, maintained the
£ /
point of view illustrated by the following quotation:
V It was claimed that the law violated the following sections
of the Constitution of the United States: (l) Sec. 10, Art. 1; (2) Four
teenth Amendment.
2/ Supreme Court of Oklahoma, Noble State Bank v. Haskell et al.,
September H , 1908, 22 Okl. 48, 97 Pac. 590.
-13Banks are chartered by the state, not with the paramount
view of enabling the stockholders to make investments and derive
profits therefrom, but to meet a public necessity. The stock
holders, having made investments therein, should be protected,
but private interest must always be subordinated by the state,
in the reasonable exercise of its police power, to the public
welfare or good. With the view that the depositor, as well as
the stockholder, and the general public with an incidental interest
therein, may be protected, banking is regulated, and limitations,
restraints, and requirements are imposed. The imposition of double
liability upon the stockholders; the requirement of reserve funds;
stipulations as to what capital stock cannot be invested in; pre
scribed qualifications of the directors— all these having been
tried, in the judgment of the Legislature the further restriction
that active officers should not borrow from the bank without
incurring pains and penalties was deemed salutary. In addition
to further and more completely protect the depositors, the de
positors.' guaranty fund is created, the Legislature acting
pursuant to the mandatory declaration of the Constitution ...
Decision of the United States Supreme Court. The Noble State
Bank was dissatisfied with the decision of the Oklahoma Supreme Court
and appealed to the United States Supreme Court. While the case was
pending, similar cases came before the United States Supreme Court re
garding deposit guaranty laws in Nebraska and Kansas, on appeals from
decisions of the Circuit Courts of the United States for the Districts
of Nebraska and Kansas, respectively.
The United States Supreme Court heard the arguments regarding
the three cases at its fall term in 1910. On January 3; 1911, the Court
rendered its decision on the Oklahoma case, which m s also applied to
1/
the Nebraska and Kansas cases.
The principal point in the cases considered by the United States
Supreme Court was the contention that the deposit guaranty laws took the
private property of one bank for the private use of another bank without
compensation. The opinion of the court, by Justice Holmes, admitted
1/ Noble'State Bant v. Haskell, (1911) 219 U.S. 104, 55 L. Ed. 112.
that this might be the case, but pointed out that such transfers of
property are constitutional if there is sufficient purpose and necessity.
In the first place it is established by a series of cases that an
ulterior public advantage may justify a comparatively insignificant
taking of private property for what, in its immediate purpose, is
a private use... And in the next, it would seem that there may be
other cases beside the everyday one of taxation, in which the
share of each party in the benefit of a scheme of mutual protec
tion is sufficient compensation for the correlative burden that
it is compelled to assume... At least, if we have a case within
the reasonable exercise of the police power as above explained, no
more need be said. 1 /
The opinion then discussed the application of police power to
the guaranty of bank deposits as follows:
It may be said in a general way that the police power extends
to all the great public needs. It may be put forth in aid of
what is sanctioned by usage, or held by the prevailing morality
or strong and preponderant opinion to be greatly and immediately
necessary to the public welfare. Among matters of that sort
probably few would doubt that both usage and preponderant opinion
give their sanction to enforcing the primary conditions of suc
cessful commerce. One of those conditions at the present time is
the possibility of payment by checks drawn against bank deposits,
to such an extent do checks replace currency in daily business.
If then the legislature of the State thinks that the public welfare
requires the measure under consideration, analogy and principle are
in favor of the power to enact it. Even the primary object of the
required assessment is not a private benefit as it was in the cases
above cited of a ditch for irrigation or a railway to a mine, but
it is to make the currency of checks secure, and by the same
stroke to make safe the almost compulsory resort of depositors
to banks as the only available means for keeping money on hand.
The priority of claim given to depositors is incidental to the
same object, and is justified In the same way. ... The power to
compel, beforehand, co-operation, and thus, it is believed, to
make a failure unlikely and a general panic almost impossible,
must be recognized, if government is to do its proper work, unless
we can say that the means have no reasonable relation to the end...
So far is that from being the case that the device is a familiar
one. It was adopted by some states the better part of a century
ago, and seems never to have been questioned until now.2/
-15The conclusion of the court was stated in the summary of
its opinion as follows:
The levy and collection, tinder a State statute, from every
bank existing under the State laws, of an assessment based upon
average daily deposits, for the purpose of creating a depositors'
guaranty fund to secure the full repayment of deposits in case
any such bank becomes insolvent, is a valid exercise of the
police power, and cannot be regarded as depriving a solvent bank
of its liberty or property without due process of law... The
police power of a State extends to the regulation of the banking
business, and even to its prohibition, except on such conditions
as the State may prescribe, l/
This decision is notable not only because it affirmed the con
stitutionality of the deposit guaranty legislation, but also because
of the grounds on which that affirmation was made. The decision is
based on the ground that safety of payments made by check is one of
the primary conditions of successful commerce, that the police power
covers any regulations necessary to make the currency of checks secure,
and to make safe the money kept on hand by depositors in the form of
bank deposits. The decision thus rests on the idea that the purpose of
the legislation is the protection of circulating medium.
The problem of the constitutionality of a deposit guaranty or
insurance plan designed primarily to protect the invested savings of
individuals was not considered by the Supreme Court in this case. The
Court neither asserted nor implied that assessments upon one bank for
the purpose of protecting interest-bearing deposits, or other deposits
not subject to check, are, or are not, constitutional, except as such
protection may be incidental to the protection of deposits which are
part of the circulating medium.
1/ ibid., pp. 112-13
-16SUPERVISION AND REGULATION OF GUARANTEED BANKS
Supervisory authority. Under the original deposit guaranty
law and the revised hanking code of May 1908, the State Banking Board
was given no duties other than administration of the deposit guaranty
law. The Bank Commissioner was charged with the following duties:
certification of compliance with the law by persons organizing new banks
and authorization of such banks to open for business, examination of all
State-chartered banks and trust companies and of national banks if they
should apply for the benefits of deposit guaranty, reporting of viola
tions of law to enforcement authorities, handling of banks closed because
of insolvency or for violations of law, and other duties, such as ob
taining reports of condition, associated with bank supervision.
In 1913,
the State Banking Board was required to approve, in its discretion, the
opening of any new bank, and to see that each operating bank was examined
at least twice each year.
Under the 1908 law the Bank Commissioner was appointed by the
Governor, with the advice and consent of the Senate, for a term of four
years.
The Bank Commissioner must have had, prior to appointment, at
least three years' practical experience as a banker, but at the time of
appointment could not be an officer or employee of any bank or any per
son interested as an owner or stockholder of a bank.
In 1913; when the
Bank Commissioner was made ex officio chairman of the State Banking Board
and the appointment was required to be made from a panel of three persons
named by the State Bankers Association, the practical banking experience
required of the person appointed was raised to five years.
The last of
these provisions was retained when, two years later, the requirement of
selection from a panel was dropped.
-17Examination of banks for admission to guaranty. The first
task of the State Banking Board and the Bank Commissioner after enact
ment of the deposit guaranty law was to examine all banks in the State,
other than national banks, before the deposit guaranty law should become
effective. The Commissioner did not have sufficient examiners to make
these examinations, particularly in view of the fact that the banks in
the former Indian* Territory had not previously been examined. A special
force of 31 examiners selected from among bankers in the State was em
ployed and 513 examinations were made within a period of six weeks.
The Bank Commissioner, in his report for 1908, stated that
those banks whose condition or past record did not justify a continua
tion of business were ordered to discontinue receiving deposits and to
liquidate, and that they did so. According to a report prepared by a
later Commissioner, 24 banks failed to meet the standards required for
continuance in business and admission to guaranty, and were forced to
liquidate during the first year of the fund's operation, and 30 banks
1/
were reorganized under new charters to meet the requirements. However,
the Commissioner also stated:
On account of the unfavorable financial situation at this time
it was extremely difficult in many instances to meet every re
quirement immediately. If the bank was solvent and showed a
disposition to comply with the law as promptly as possible the
department endeavored to be fair and give them an opportunity...
While a large number of banks were technically not in
harmony with every provision of the banking laws their general
condition was such that the department did not feel justified
in closing them and upon their promise to correct the objection
able features of their business they were allowed to continue in
operation. 2/
l/ Linwood 0. Neal, The History and Development of State Bank
Supervision in Oklahoma, (1942),' pp. 64 and 65.
27 First Annual Report of the Bank Commissioner, 1908, pp. viii-ix.
-18The Bank Commissioner in office four years later held a
less optimistic view of the condition of the banks admitted, to the
guaranty system.
The only near fatal mistake made in our Guaranty Law was
that after its passage, the immediate taking in under the
guaranty system of all banks without first the most careful and
rigid examination of banks, men and methods. They should have
been tried out under the most thorough test and the incompetent
and dishonest should have been eliminated from our financial
institutions, and none but the strongest and best men permitted
to engage in banking. 1/
Thomas Bruce Robb, who made a detailed study of the Oklahoma situation
after the guaranty law had been in operation, commented in similar
fashion on the Commissioner's statement in the 1908 report:
But this description of the condition of the banks was
far too roseate. It is now well known that a goodly number
of banks, especially on the Indian Territory side, were
positively insolvent. 2/
Supervisory powers of the Bank Commissioner. The supervisory
powers given the Bank Commissioner related chiefly to examinations, the
capital position of the banks, and conditions under which a bank could
be closed. The Commissioner also had some powers relating to the opening
of new banks and to the quality of bank management. Part of the Com
missioner's powers, particularly with respect to the handling of closed
banks and after 1913 the opening of new banks, were shared with or exer
cised under the control of the State Banking Board.
The powers of the
Commissioner and of the Board are summarized in Table 1.
1/ Tliird Biennial Report of the Bank Commissioner, 1912.
5/ T. Bruce Robb, The Guaranty of Bank Deposits, p. 4l.
-19Table 1. SUPERVISORY POWERS OP BANK COMMISSIONER,
AND OF STATE BANKING BOARD, IN OKLAHOMA
Item
Opening of new banks
Examinations and reports of
condition:
Frequency of examinations
Powers 1/
Commissioner to approve incorporators and to
issue certificate of authority to transact
a banking business after specified require
ments for incorporation have been filed,
capital stock paid-up, and bank examined. 2/
In 1913, amended to give full discretionary
power to Commissioner and Banking Board to
approve issue of certificate to engage in
the banking business.
At least twice a year and whenever deemed
advisable by Commissioner. 3/
Scope of examinations
A full and careful examination.
Reports of condition
Commissioner to prescribe form and set dates,
at least four times a year; and to require
additional reports whenever deemed necessary
to obtain full and complete knowledge of
bank's condition.
Bank management:
Removal of undesirable assets
or discontinuance of undesirable
practices
No specific provision.
Impairment or deficiency of
capital
Commissioner to require impairment of
capital below legal minimum to be made
good within 60 days; in 1909, amended to
30 days, and to require increased capital
and surplus if below minimum ratio to
deposits. 4/
Removal of bank officers,
directors, or employees
Commissioner may order removal by Board of
Directors of any officer found upon exami
nation to be dishonest, reckless, or in
competent.
Taking possession or closing a bank
Commissioner authorized to take possession and
liquidate a bank:
If found insolvent, by court or Commissioner's
examination, with following conditions de
fined as insolvency: when cash market value
of assets insufficient to meet liabilities;
when unable to pay creditors in usual and
customary maimer; when legal reserve not
made good as required by law.
-20Table 1 . SUPERVISORY POWERS OF BANK COMMISSIONER,
AND OF STATE BANKING BOARD, IN OKLAHOMA - continued
Item
Taking possession or closing a bank continued
Handling of closed banks:
Return to owners
Powers
If officers refuse to submit bank to ex
amination or be examined under oath.
If officers or directors violate any
provision of the act.
If affairs placed by bank under control
of Commissioner.
Commissioner may authorize reopening of bank
if solvency restored by stockholders and any
indebtedness to Guaranty Fund repaid.
Liquidation
Unless returned to owners, closed bank to be
liquidated by Commissioner.
Sale of assets or capital stock
Commissioner may sell assets upon order of
District Court or judge thereof.
l/ As of May 26, 1908, with subsequent amendments during the period of operation of
the deposit guaranty system. For the most part the act of May 26, 1908, was a
codification of the previous banking statutes, including the territorial banking
law and the deposit guaranty law enacted December 17, 1907*
2/ The requirement that the incorporators be approved by the Bank Commissioner
was inserted by the Act of May 26, 1908.
3/ In 1921, examinations by Federal Reserve System of State banks members of
the Federal Reserve System to be acceptable, at the discretion of State banking
authorities, in lieu of State examinations.
kj See Table 2 for minimum capital stock, and after 1909 maximum ratio of deposits
to capital and surplus.
-21Supervisory experience. During the early years of the deposit
guaranty system, supervision of State banks in Oklahoma was handicapped by
the small size of the examining staff and frequent changes of personnel.
Each of the first three Bank Commissioners held the office less, or only
a little more, than a year. Lists of examiners in the second and third
biennial reports of the Commissioner show only one or two names appearing
in the preceding report. However, after 1911 there was more stability,
with one person holding the Commissioner's office for eight years. The
improvement in the quality of supervision was described by T. Bruce Robb
as follows:
The reconstruction of the state banking department has produced
most salutory results. It will be recalled that the state banking
board is now appointed by the governor from a list nominated by
the state bankers themselves. This has completely divorced the board
from politics. Mr. J. B. Lankford, who served as bank commissioner
from 1911 to 1919, organized a most efficient bank supervision. This
department is indefatigable in ferreting out incompetent and reckless
banking, l/
The problem of supervision during the early years of the guaranty
system was also made very difficult by an extremely rapid growth in the
number of banks. At a call date two weeks after the law became effective
470 state banks were in operation. During the next two years approximately
two hundred banks commenced operations under State charters, about half of
which had formerly operated under national charters.
During the latter
part of 1910 the Commissioner, who had taken office on June 1, attempted
to use his power to refuse certificates of authorization to open for
business if conditions in the various communities did not justify additional
l/ Robb, The Guaranty of Bank Deposits, p. 105«
-22banks, but found that under the law and a decision of the State Supreme
Court he was required to issue the certificates when the incorporators
had complied with the specific requirements of the law.
He recommended
that the Commissioner and State Banking Board be given power to regulate
the number of tanks organized in any town or city, and that no person
be permitted to engage in the banking business without a license from the
Board granted only after a thorough investigation of the character and
1/
ability of the applicant. In 1913; the law was amended to req,uire the
approval of the Commissioner and of the State Banking Board before
issuance of a charter for the organization of a bank. No specifications
were given in the law for the guidance of the Board in exercising its
discretion in passing on applications, but the Bank Commissioner, in
his report for 1914, laid down the following principles:
Under the present system ... no charter is issued unless
positive proof be furnished that the banking facilities of
the community are not adeq,uate to the public needs. There
must be convincing evidence at hand that the enterprise will be
an assured success. Those applying for a charter must be men
in every way worthy of confidence and the proposed officers
must be of the highest honesty and integrity, having ample
banking experience. 2/
The efforts of the Commissioner, and the change in the law, successfully
checked the high rate of formation of new banks, for the largest number
of State banks reporting at any call date was 695 in January 1911.
17 Second Biennial Report of1 the Bank Commissioner, 1910,
pp. xii-xiTi.
2/ Fourth Biennial Report of the Bank Commissioner, January 1,
1915, P. vii.
-23The Bank Commissioner's powers to close a ‘bank for insolvency or
violation of law were ample. Except under the circumstance of a general
decline in values and business depression, these powers, rigorously used,
were adequate to result in the closing of most banks that were badly
managed or in poor condition before their condition became sufficiently
acute to involve the guaranty fund in serious loss. However, closing of
a bank is a drastic action that may have a severe impact on the community,
and in practice bank supervisory authorities find it difficult to take
such action in the early stages of the deterioration of a bank's condition.
In Oklahoma, action to close insolvent banks was also delayed because of
hesitancy in making large enough assessments to enable payment of de
positors by the guaranty fund. Toward the end of 1912, Bank Commissioner
Lankford reported to the Governor:
Within the first few months of my administration the fact
was disclosed that the department had many insolvent banks on
hand; seme of which it was imperative to take charge of and
liquidate at once; others should have been liquidated soon
thereafter, but as our Guaranty Law provides that all deposi
tors shall be paid at once, in full, there being no funds on
hand, and our banks as a whole being unable to stand additional
excessive and heavy assessments, the Department was prevented
from handling them in the proper manner at the time, l/
The powers of the Bank Commissioner to take action in the case
of incompetent or improper management of a bank, without closing it, also
appear to have been reasonably adequate, particularly after 1913; when
amendments to the law provided penalties for various types of illegal
acts of bank officials and employees.
These penalties, together with the
Commissioner's power to remove from office any bank official whom he found
l/ Third Biennial Report of the Bank Commissioner, Dec. 1912, p. v.
-2 k -
to be dishonest, reckless, or incompetent, made it possible to raise
the standard of bank management throughout the State. At the beginning
of 1915, Commissioner Lankford reported that he had displaced over 125
incompetent and unscrupulous managing officers of banks. However, he
also reported that of 27 prosecutions of bank officers for violation of
the criminal statutes, only seven convictions had been secured, in part
y
because of insufficient legal assistance.
The quality and adequacy of bank examinations appear also to
have been hampered by the limitation of available funds and salaries
permitted. The annual cost of the Bank Commissioner's office, including
expenses of the State Banking Board, during the time the law was in
effect, was approximately $50,OCX) to 0,000, or about $80 to $140 per
2/
participating bank. From 1913 to the repeal of the deposit guaranty
law in 1923 the salary of the Bank Commissioner was fixed by law at
$4,000, and those of his 12 specifically authorized assistants at $2,000
3/
each.
Of these assistants, one was designated by law as Assistant Bank
Commissioner, and one as building and loan auditor.
y
constituted the bank examining force.
The remaining ten
Since the number of operating
y Fourth Biennial Report of the Bank Commissioner, Jan. 1915;
pp. viii-ix.
2/ From 1909 to 1916, when part of the expenses of the Commissioner's
offices was met from the proceeds of examination fees, appropriations for the
Banking Department ranged from $37>000 to $50,000; from 1917 to 1922, when
the examination fees were paid into the general revenue fund, the appropriations
for the Department ranged from $64,000 to $71,000.
¿for examiners
3/ In January 1919, the Commissioner recommended a minimum salary/
of $2,500, with an annual increase of $200 for five years. Sixth Biennial
Report of the Bank Commissioner, p. 4.
4/ The reports of the Bank Commissioner state that in 1912 the
Department had one special and eight regular examiners; in 1914 ten examiners.
In some of the later years the appropriation bill provided for only eight
examiners.
-25State banks was about six hundred, and two examinations per year were
required, each examiner was apparently required to make about 120 bank
examinations per year, too large a number to permit as thorough examina1/
tions as would have been desirable.
Bank Commissioner Lankford unsuccessfully urged that employees
of the Banking Department be given civil service status.
In his last
biennial report lie stated:
Six years ago, and at each successive meeting of the Legis
lature thereafter, this office has in the strongest possible
terms recommended that this Department be placed under civil
service rule, for ... a Banking Department is easily destroyed
and when once under a cloud it is difficult to regain confidence
in the public mind. 2/
The validity of this observation was borne out by subsequent events.
After 1919, the quality of bank supervision in Oklahoma deteriorated.
No further reports of the Bank Commissioner were published, except for
one at the end of 1920 containing statements of the individual banks
but no text. The Bank Commissioner at that time was indicted a year
later for accepting a bribe from a bank in bad condition, and after
it
leaving the State for two years, was convicted.
A few years later the
author of a thesis on the guaranty of bank deposits at the University of
Oklahoma commented as follows on this Commissioner's handling of his
office:
17 The Federal Deposit Insurance Corporation in 1941 had two
examiners and two assistant examiners in Oklahoma to make one examination
per year of approximately 160 banks, or an average of kO examinations per
year per member of the examining force. Comparison of the examining task
in 1941 with that during the period of operation of the guaranty fund does
not appear to be invalidated by differences in the size distribution of the
banks examined. From 1916 to the repeal of the guaranty law, the average
proportion of banks in the size groups above $500,000 of deposits was nearly
the same as the proportion in those groups of banks examined in 1941 by the
Corporation.
2/ Thornton Cooke, "The Collapse of Bank-Deposit Guaranty in
Oklahoma, and Its Position in Other States," Quarterly Journal of Economics,
XXXVIII (November 1923).
-26Mal-administration of the banking department of no state
in the Union has been more odious or harmful than that by Fred
Dennis of Oklahoma, l/
Other appointees to the Bank Commissioner's office, up to the time of
repeal of the deposit guaranty law, occupied the position only a short
time, and were unable to restore the office to its former effectiveness.
One feature of the Oklahoma banking code may be mentioned here be
cause of its potentialities for reducing the risk to and losses falling upon
the deposit guaranty fund, though its use does not appear to have had such
an effect In practice. This was the statutory prohibition, after 1909, on
the receipt of deposits, excluding deposits of other banks, in excess of
ten times paid-up capital and surplus. If the reports of a bank indicated
deposits in excess of this ratio, it became the duty of the Commissioner to
require the bank to increase its capital or surplus or to cease to receive
deposits. This provision of law could have been made a valuable weapon in
maintaining the banks in a sound condition and In preventing unwise bank ex
pansion, had the ratio been computed on the capital and surplus as appraised
by bank examiners instead of being computed on capital and surplus as stated
in the reports of the banks, and had the examining force been sufficiently
large and competent to provide good appraisals.
The law specified that
action was to be taken on the basis of the reports submitted by the banks,
such reports to be in the form required by the Commissioner; but did not
specify that the Commissioner could require the banks, in submitting reports
of assets and liabilities for this purpose, to adjust valuations in accord
ance with examiners' appraisals.
Statutory limitations on bank operations. The principal statutory
limitations on banking operations, under the 1908 lav and the amendments
adopted while deposit guaranty was in force, are summarized in Table 2.
1/ George Marion Crisp, The Guaranty of Bank Deposits, thesis
for H. A. degree at University of Oklahoma, 192b, p. 55.
-27Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN OKLAHOMA
Item
Provisions of law l/
Responsibility of officers, directors,
and stockholders:
Examination of bank
Directors to make thorough examination
twice a year of books, records, funds
and securities, to be recorded in detail
and copy forwarded to bank commissioner
and each stockholder.
Losses resulting from violations
of law
Officers, directors, and any other persons
participating in a violation of law
liable for all damages incurred as a
result of such violation.
Liability of stockholders
Additionally liable for amount of stock
owned.
Bonding of active officers and
employees
Board of Directors to require cashier and
any officers handling funds to give good
and sufficient bond to be held by Banking
Board.
Limitations on loans and investments
Loans to bank examiners
No provision.
Loans to officers and employees
Either direct or indirect loans to active
managing officers forbidden.
Loans to directors
No specific provision.
Loans to stockholders
Total indebtedness of stockholders limited
to 50 percent of paid-up capital.
Maximum to single borrowers (not
to apply to bills of exchange or
discounts collateralled by ware
house receipts under specified
conditions)
Limited to 20 percent of paid-up capital.
Maximum secured by real estate
20 percent of the aggregate loans of the bank,
on real estate secured by first mortgages
running not longer than one year.
Secured by own capital stock
(applicable also to purchase of
own stock)
Prohibited unless necessary to prevent loss
on debt previously contracted and to be
disposed of within six months of acquisi
tion.
-28Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN OKLAHOMA - continued
Item
Limitations on ownership of
real estate and stocks
Maximum in banking house
and equipment
Provisions of law
One-third of paid-up capital.
Time limit on real estate
acquired by collection of debt
Five years and to be disposed of within
thirty days thereafter.
Other real estate
Prohibited.
Bank stocks
Prohibited, except stock in Federal Reserve
bank, unless acquired to prevent loss on
debt.
Other corporate stocks
Prohibited.
Limitations relating to deposits
Maximum aggregate deposits
May be fixed by Commissioner in proportion
to paid-up capital and surplus. In 1909,
amended to ten times paid-up capital and
surplus, excluding deposits of other banks.
Maximum rate of interest payable
on deposits
To be fixed at discretion of Commissioner.
Receipt of deposit when insolvent
or in failing circumstances
Prohibited.
Required reserves
Total required
Until 1915; 20 percent of entire deposits in
areas with population under 2,500, and 25
percent in areas with population over 2,500,
or if bank a reserve depository; in 1915
amended to 15 percent and 20 percent, re
spectively. 2/
In actual cash in bank
One-third.
Character of balance
Balances to be held in solvent banks
selected from time to time by Commissioner.
Limitations on borrowing
Maximum amount
50 percent of paid-up capital for temporary
deficiencies; Commissioner to prohibit
borrowing for relending. 3/
Maximum value of assets
pledgeable as security
Not specified (may pledge assets).
-29Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN OKLAHOMA - continued
Item
Limitation on payment of dividends
Earning6 to be carried to surplus
prior to dividends
Provisions of law
l/lO of net profits until surplus 50 percent
of paid-up capital.
When losses equal or exceed un
divided profits
Forbidden.
When reserve is impaired
Forbidden.
When insolvent or capital
impaired
Forbidden.
Maximum
Amount determined by directors to be
expedient after deducting losses and
bad debts.
Minimum capital stock
New banks 4/
Other banks
Graduated by population of city or town:
20,000 or more population
- $100,000
6,000 to 20,000 population - 50,000
1,500 to 6,000 population
- 25,000
500 to 1,500 population
- 15,000
500 or less population
- 10,000
See limitation on deposits (above).
l/ As of May 26, 1908, with subsequent amendments during the period of operation
of the deposit guaranty system. For the most part the act of May 26, 1908, was
a codification of the previous banking statutes, including the territorial
banking law and the deposit guaranty law enacted December 17, 1907*
2/ Savings banks not transacting general banking business required to keep 10
percent of deposits in cash and 10 percent invested in federal, state, county or
municipal bonds. After 1921, State banks members of Federal Reserve System to
comply with reserve requirements of Federal Reserve.
3/ After 1921, State banks members of Federal Reserve System not subject to
limitations on borrowing.
k/ Until 1909, ranged from $10,000 in places with population of less than 2,500
£0 $25,000 in places with more than 10,000.
-30INSUFFICIENCY AND CLOSING OF THE GUARANTY FUND
Inadequacy of the guaranty fund« In September 1909> less than
twenty months after the deposit guaranty law went into operation, the
largest bank participating in the system failed, with liabilities far
larger than the accumulated fund* The crisis in the fund's affairs re
sulting from this failure was met by using the power to issue certificates
of indebtedness, an emergency assessment on the participating banks, and
1/
unusual methods of handling the affairs of the closed bank.
For nearly a decade the fund was continuously in debt. The
limitation on assessments after 1913» and particularly the prohibition
of special assessments after 1916, drastically curtailed the possibility
of rapid retirement of obligations issued to make payments to depositors
of failed banks. During most of this period of indebtedness, the major
part of the fund's debt was owned by the participating banks, with much
of it deposited with the State Banking Board as security for payment of
2/
future assessments. This procedure had become possible under the pro
visions of the 1913 law regarding issue of "Depositors Guaranty Fund
Warrants," and assured a ready market for the warrants. There were,
however, diverse attitudes towards the warrants.
In January 1916 the
Treasurer of the State Banking Board referred to the warrants as "the
only 6 per cent investment I know of in the state that you can buy at
par that is absolutely good.
3/
But a banker commented on them as follows,
1/ The Banking Board was able to delay or adjust payments to some
depositors with large accounts who were closely associated with the manage
ment of the bank. The closing of this bank and the handling of its affairs
are described in Robb, The Guaranty of Bank Deposits, pp. 43-57*
2/ "With the money collected from the assets of failed banks
being applied on the outstanding secured warrants, and with the state banks
gradually taking up more warrants with cash in lieu of depositing security
with the Ttawirtng Board, it will not be long before all the warrant indebted
ness of the Guaranty Fund will be held by the Ptate banks themselves." Edi
torial In The State Banker, official organ of the Oklahoma State Bankers Asso
ciation, octotter 1915,"pp. lb-17 .
3/ The State Banker, January 1916, p. 22*
-31after asking whether the item of "Securities with the State Banking
Board", carried as an asset, is such or a liability:
X venture the assertion that should an examiner find in my case a
note that had the appearance of being as slow as he knows my
securities with the State Banking Board are bound to be, he would
require me to charge it off though I might be able to prove to him
that it would be paid years before my Guarantee Warrants...Why should
we carry these warrants and pay ourselves interest on them when we
must pay the interest ourselves to ourselves? Is it to fool our
selves or to fool the people? We may fool ourselves but be assured
that we cannot fool the people, l/
This question of the worth of the warrants soon began to appear
theoretical. The increased yield of the regular assessments for the
guaranty fund and the reduced frequency of failures during the inflationary
period of World War I made it possible to retire all outstanding warrants
by the middle of 1919« For a year thereafter the guaranty fund was out
of debt.
Suspension of payments from, the fund. In the latter part of
1920 and in 1921 came the nationwide wave of bank failures accompanying
the deflationary policies of that period. The impact of the deflation on
banks in Oklahoma was doubtless accentuated by the laxity of bank super
vision after 1919# but the major factor in the situation was the collapse
in values, particularly in farm products. Further, the guaranty system,
with assessments limited to one-fifth of 1 percent per year, was much
less capable of meeting an adverse situation than it had been at its be
ginning. But for a year the obligations of the fund to the depositors of
failed banks were met through issuance of warrants, which, as in the earlier
period, were mostly sold to the participating banks and deposited with the
1/ J. L. Pryor, "Guaranty Fund Warrants," The State Banker,
January 19T6, p. 42.
-32Banking Board in lieu of other collateral as security for payment of
future assessments. In this period the impetus to this procedure
appears to have come as much from the State Banking Board as from the
participating banks, and by the latter part of 1921 only about one-tenth
of the participating banks had securities other than guaranty fund
1/
warrants deposited with the State Banking Board. By that time there
was no other cash market for the warrants. They could legally be issued
to the depositors of banks that closed, but the depositors would have
little hope of eventual payment.
This resulted from the fact that the
earliest issued outstanding warrants, with interest at 6 percent per year,
had priority of payment from the guaranty fund, both from the proceeds
of future assessments on participating banks, and from the proceeds of
liquidation of failed banks. Recoveries from the assets of additional
banks that might fail would therefore be used to pay obligations arising
from earlier failures. It was estimated that the interest on outstanding
warrants would absorb a large share of the assessment receipts, and re
tirement of the outstanding warrants from the remainder of the receipts
£/
would take twenty years.
On the first of November 1921, the second largest bank then
participating in the guaranty system failed. Two weeks later, at a
meeting of the State Banking Board, the Board discussed the condition
of the banks and of the guaranty fund, and talked with the State Governor
about them.
l/ Prom evidence presented at the litigation regarding disposition
of the remaining assets of the fund after repeal of the law.
2/ Thornton Cooke, "The Collapse of Bank-Deposit Guaranty in
Oklahoma and Its Position in Other States,"loc. cit.
-33At this informal meeting with the Governor, the further
issuance of warrants to depositors in failed banks was thoroughly
discussed, and each member of the Board was asked what his atti
tude would be toward calling on the State Banks of Oklahoma for
additional securities, said securities being necessary before the
issuing of warrants could be made practical as outlined by the
opinion of Judge Zwick of the Attorney-General's office. Bach
member of the Board expressed himself as being unwilling to call
on the State Banks for additional security at this time, knowing
their strained condition, and knowing that to enforce same would
mean the closing of numerous other banks. 1/
This was followed, at a subsequent meeting of the State Banking Board,
by a resolution "that the moneys and funds on hand shall be used in the
liquidation of contracts now in effect, and that they will not make
any contracts or promises that are contingent on the future collections
of the assets of the Guaranty Fund until said funds are available for
2/
distribution."
Repeal of the deposit guaranty law. With numerous additional
failures in 1922, and a sharp contraction of deposits in participating
banks and therefore in the income from assessments, there was no hope of
restoring the system to solvency without aid from the State. A bill to
issue bonds to meet the deficit in the guaranty fund was debated and
defeated in the State Legislature at its session in early 1923« A bill
which repealed all assessments and the provisions for issuing certifi
cates and warrants, without releasing banks and their officers from
obligations already incurred, was thereupon passed and became effective
on March 31 of that year.
The repeal of the law was followed by liti
gation regarding the distribution of the assets remaining in the Guaranty
Fund, which delayed settlement of the affairs of the fund until 1934.
T 7 Minutes of ‘the State Banking Board, meeting of Nov. 16, 1921.
/ Minutes of the state Banking Board, meeting of Jan. 9, 1922.
-34number ,
DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number and deposits of participating banks. The number of
banks operating in Oklahoma which participated, and the number which
were not eligible to participate, in the deposit guaranty system each
year, are given in Table 3* The participating banks include all State
banks and, during the years 1908-1910, trust companies. The nonpartici
pating banks include national banks and, after September 1911# trust
companies operating under State law.
During the first two years of deposit guaranty the proportion
of banks in the State operating under the guaranty system rose rapidly,
due primarily to the conversion of national banks to State banks. After
the third year the proportion operating under the guaranty system de
clined, primarily as the result of conversions of State to national banks.
The deposits of the participating banks and nonparticipating
banks, for each year, are given in Table 4. During the first two years
of deposit guaranty the proportion of all bank deposits in the State
which were held by the participating banks rose rapidly. After 1910,
however, the proportion held by banks in the guaranty system declined.
The deposits of participating banks given in Table 4 exceed
the amount of deposits covered by guaranty, because certified and
cashier’s checks, public funds, and, after 1913#other secured deposits,
were excluded from guaranty.
Concentration of bank deposits. Table 5 shows the amounts of
deposits held on November 10, 1910, and December 29, 1920, by State banks
in Oklahoma grouped according to their deposits.
In 1910, 11 percent of
the deposits, and in 1920, 15 percent, were concentrated in the ten
largest banks. The largest bank in 1910 held 2.2 percent, while the
largest bank in 1920 held 2.7 percent, of the deposits of all State banks.
-35Table 3» MJMBER OP OPERATING BANKS IN OKLAHOMA PARTICIPATING AND
NOT PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1908-1922, BY YEARS
Date l/
Feb. 190«
All 'banks Participating
operating
in deposit
in Oklahoma
guaranty 2/
782
IffO
Not participaPercentage
ting in deposit participating
guaranty 3/
3l2
553
288
65.5
75.3
End of year
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
834
546
887
924
668
695
631
615
582
229
283
308
563
557
547
346
566
581
355
914
923
913
913
903
885
901
936
944
977
938
910
599
622
556
463
219
331
350
338
335
345
355
382
447
75.2
69.O
66.6
63.7
61.7
6I.7
61.8
62.8
62.1
63.5
63.7
59.3
50.9
l7 End of year data are for call dates' on or nearest to December 31*
The call dates for State and national banks are not identical in several years.
2/ Includes all banks and trust companies operating under State law,
except 2 trust companies in 1911# 2 in 1912, and 1 in 1913* After 1911 trust
companies were excluded from deposit guaranty, but none is reported as engaged
in banking operations after 1913« Figures for 1908-1920 from biennial reports
of the Bank Commissioner; figures for 1921 and 1922 from Federal Reserve
Bulletin, November 1937# P» 1117» Reports of the Bank Commissioner were not
published subsequent to 1920.
3/ Includes national banks operating in Oklahoma, and also 2 trust
companies in 1911, 2 in 1912, and 1 in 1913# operating under State law but
excluded from deposit guaranty.
-36Table 4. DEPOSITS OF OPERATING BANKS IN OKLAHOMA PARTICIPATING
AND NOT PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM,
1908-1922, BY YEARS
(Amounts in thousands)
Date
1/
All banks
operating
in Oklahoma
$63,'2tStf
Feb. 1£6B
End of year
AflnfW Tii» 75,238
1909
105,815
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
121,012
106,698
122,802
135,233
129,301
158,153
265,349
381,935
338,998
513,071
434,364
359,691
392,990
Banks
participating
in deposit
guaranty 2/
Banks not
participating
in deposit
guaranty
$18,720
$44,56«
31,617
54,769
61,309
44,004
45,878
46,131
44,773
48,460
84,799
137,392
43,621
51,046
59,703
62,694
76,924
84,528
109,693
180,550
244,543
112,579
75,027
273,691
247,112
317,963
120,660
190,900
160,673
89,102
218,338
322,171
Percentage of
deposits in all
banks held by
participating
banks
29.6 $
4$.0
51.8
50.7
41.2
37.4
34.1
34.6
30.6
31.9
35.9
35.6
37.2
36.9
31.3
19.1
l/ End of year data are for call dates on or nearest to December 31»
The call dates for State and national banks are not identical in several years.
2/ Deposits of all State banks and trust companies, with deposits
of trust companies deducted as follows: 19H, $600,000 (est.); 1912, $701,000;
1913# $500,000 (est.). Figures for 1908-1920 from annual reports of the Bank
Commissioner; figures for 1921 and 1922 estimated by averaging the deposits
for the preceding and succeeding June 30# as given in the annual reports of
the Comptroller of the Currency. Reports of the Bank Commissioner were not
published subsequent to 1920. The amounts of deposits given here exceed the
amounts of deposits protected by the depositors' guaranty fund, since certified
and cashier's checks, public funds, and after 1913 other secured deposits, were
excluded from guaranty.
3/ Deposits of national banks plus the deposits of trust companies
given in note 2 .
-37Table 5. HUMBER AND DEPOSITS OF STATE BANKS IN OKLAHOMA,
NOVEMBER 10, 1910, AND DECEMBER 29, 1920
Banks grouped by amount of deposits
Amount of
Number deposits
of banks (in thou
sands)
All State banks, November 10,
-- 1910 1/ .... .
Banks with deposits of —
$100,000 or less
$100,000 tp $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1 ,000,000 to $2,000,000
693
$61,612
100.0#
100.0#
520
26,590
19,150
11,178
75.0
43.2
31.1
3,362
1,332
0.7
133
34
5
1
Largest bank
Largest 5 banks
Largest 10 banks
All State banks, December 29,
1920 1/
Banks with deposits of —
$106,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1 ,000,000 to $2,000,000
$2,000,000 to $5,000,000
Percentage Percentage
of number of aggregate
deposits
of banks
19.2
4.9
0.1
18.1
5-5
2.2
2.2
1,332
4,157
6,513
6.7
10.6
621
$158,960
100.0
100.0
174
28.0
119
12,053
43,671
40,437
7.6
27.5
25.4
41
14
5
27,512
19,833
15,454
268
43.2
19.2
6.6
2.3
0.8
17.3
12.5
9.7
of the Bank Commissioner. Totals differ slightly from the figures given in
summary tables for the same dates in the Commissioner's reports, which are as
follows: November 10, 1910, 694 banks with deposits of $61,442,000;
December 29, 1920, 622 banks with deposits of $l60,673,000.
Largest bank
Largest 5 banks
Largest 10 banks
4,222
15,454
24,507
2.7
9.7
15.4
-38The figures for 1910 do not show as great a concentration of
the risk falling upon the guaranty fund as actually existed during the
early years of the guaranty system. The largest hank in the State, with
deposits of $2,7^2,OCX), had failed in September 1909* At the time of
its failure, this bank held approximately 5 percent of the deposits of
all banks covered by the guaranty system.
Number and deposits of failed banks. During the 15 years of
the guaranty system in Oklahoma, 140 participating banks closed, or were
absorbed or reorganized with financial support from the guaranty fund,
because of financial difficulties. The aggregate deposits of these banks
at time of suspension amounted to approximately $30 million.
Several of
the banks that closed were banks which had previously suspended and had
reopened or reorganized.
One of the suspended banks reopened without a
payment, or obligation due, from the guaranty fund.
Failures entailing obligations on the guaranty fund occurred
each year that the system was in operation. The average annual rate of
failure, computed as the number which failed per 100 in operation at the
beginning of the year, was 1.6. The deposits of the suspended banks
averaged $2.34 per year for each $100 of deposits in operating banks.
Data by years are given in Table 6.
The heaviest failure rates, with respect to the number of banks,
were in 1921, 1922, and early 1923» A substantial part of these failures
occurred after the fund was exhausted in the autumn of 1921 and the
officials had ceased to pay off the depositors of closed banks*
In terms
of deposits, failures in 1921, which exhausted the fund, were less serious
relative to the deposits of the participating banks than those in 1909 and
-39Table 6 . NUMBER AND DEPOSITS OP STATE BANKS IN OKLAHOMA CLOSED BECAUSE OF
FINANCIAL DIFFICULTIES, FEBRUARY l4, 1908, TO MARCH 31, 1923, BY YEARS
1/
Banks entailing obligations on the depositors guaranty fund
Period
Total
Sub-totals for
selected periods
1908-1919
Jan. 1920-Oct. 1921
Nov. 1921-March 1923
Year
Num
ber
.9 2/
2.1 2/
7.3
36,745
2,872,514
.2 2/
1910
3
3
1911
8
4
1913
1914
1915
16
6
6
1916
l
1.87
501,216
360,451
40,337
.2
.4
.5
.08
.10
.88
1.3
.98
1.24
1,143,882
655,983
1,993,450
3
1919
6
8
1,202,975
1,183,105
2,375,357
28 4/ 6,509,045 4/
11
.22 2/
1.2
.6
2.6
1.0
1.1
661,308
84,998
1923 5/
it6i
y,
8.46 2/
9.09
2
33
V
1.46 2/
.5
.4
1917
1921
1922
$2.34
10,736,964
5,342,982
13,406,130
1
1920
1.6
59
23
57
1908 3/
1918
Number sus Deposits in
closed banks
pended per
100 parti per $100 of de
posits in parti
cipating
cipating banks
banks
139 $29,486,076
1909
1912
Deposits
(in dol
lars)
8,404,257
1,460,453
1.0
4.5
5.9 ,
9.3 2/
1.21
1.49
4.35
1.09
.81
4.05
7.47
7.63 2/
reopened without any payment, or obligations due, from the fund.
2/ Computed on an annual basis.
3/ After February 14.
%j Of these banks, 15 with deposits of $2, 967,625 closed prior to the
time payments to depositors ceased because of insolvency of the fund.
5/ To March 31.
-to -
in 1913» Id fact, the fund was as insolvent in 1909, after the failure
of the largest bank in the State, with deposits of $2,7^+2,000, as it was
when payments to depositors ceased in 1921. However, the 1909 crisis was
succeeded by a period with failure rates sufficiently low and assessment
rates sufficiently high to permit the fund to be recouped, while the
failures in 1921 and 1922 restilted in obligations so great that, with
the reduced maximum rate of assessment, many years would have been re
quired to meet them.
Nearly one-half of the closed banks were very small, having
less than $100,000 deposits each. These banks held about one-tenth of
the deposits of all of the suspended banks.
Only three of the closed
banks had deposits of more than $1,000,000, but these accounted for
22 percent of the deposits of all of the closed bank6. A distribution
of the closed banks and of their deposits according to the amount of
deposits held is given in Table 7, and compared with an average of the
size distributions of operating banks for dates for which such data are
available.
During the period of the guaranty fund, that is, from February
lb, 1908, to March 31, 1923, failures among State banks were positively
correlated with size of bank. The smallest banks had the lowest, and the
largest banks the highest, failure rate* Failures among banks with less
than $100,000 of deposits, for the entire 15-year period, were about onesixth of the average number of operating banks of this size, while failures
among banks with more than $1,000,000 deposits were four-fifths of the
average number of such banks in operation.
If failure rates are computed
for the period up to October 31, 1921, when payments to depositors in closed
-41Table 7 . SIZE DISTRIBUTION OF FAILED BANKS IN OKLAHOMA COMPARED
WITH AVERAGE SIZE DISTRIBUTION OF OPERATING STATE BANKS:
PERIOD OF OPERATION OF DEPOSIT GUARANTY SYSTEM
AverageNumberPercentage of
number of
of
total number
operating failed Opera- Failed
banks
banks
ting
banks
1/
2/
banks
>tal number of banks
592
Banks with deposits of
$100,000 or less
¡59
$100,000 to $250,000
166
$250,000 to $500,000
48
$500,000 to $1,000,000
$1 ,000,000 to $2,000,000
$2,000,000 or more
14
4
1
Average
deposits
of opera
ting banks
(thousands
of dollars)
1/
Average annual
number of failed
banks per 100
active banks
139
100.0
66
6O.7
42
27.9
3O.2
I5.I
1.7
2.9
2.4
5.0
.7
1.4
3.3
1.7
21
7
1
2
Deposits
of failed
banks
(thousands
of dollars)
2/
100.0
47.5
8.1
.7
.2
Percentage of
total deposits
Opera- Failed
ting
banks
banks
1.6
1.2
10.0
Average annual
amount of de
posits in failed
banks per $100
deposits in opera
ting banks
$78,157
$29,486
100.0
100.0
$2.51
Banks with deposits of —
$100,000 or less
157056
$100,000 to $250,000
25,174
$250,000 to $500,000
15,911
3,556
6,412
7,564
23.1
32.2
20.4
12.1
2I.7
25.7
I.3I
I.70
3 .I7
$500,000 to $1,000,000
9,540
$1,000,000 to $2,000,000 5,7 l6
$2,000,000 or more
3,760
1,656
5,487
12.2
18.6
7.3
4.8
5-6
I6.3
Total deposits
4,807
3.84
1.92
8.51
y Averages of number operating on dates' for which data regarding
individual banks are available in the reports of the Bank Commissioner, as follows:
September 23, 1908; November 10, 1910; November 26, 1912; December 8, 1914;
November 17, 1916; November 17, 1918; and December 29, 1920.
2/ Banks closed because of financial difficulties which entailed pay
ments, or obligations due, from the guaranty fund, during period of operation of
the deposit guaranty system, February 14, 1908, to March 31, 1923*
Note:
Because of rounding, data may not add precisely to the indicated totals.
-1*2banks ceased, the same relationship holds. This relationship of failures
to size of bank was also characteristic of national banks in Oklahoma
during the same period. The failure rate of national banks with more
than $1,000,000 of deposits was five times as high as that for banks with
deposits under $100,000.
Comparison with failures in other States. The number of >»nk
failures during the years, 1908-1922, relative to active banks, was
nearly twice as large in Oklahoma as in the United States as a whole,
or as in the six States contiguous to Oklahoma combined. However, in
one of the contiguous States (New Mexico), the relative number of State
bank suspensions was higher, and in two other contiguous States (Colorado
and Arkansas), the rate was nearly as high as in Oklahoma.
In terns of
deposits the Oklahoma rate for State banks was apparently higher than in
any of the contiguous States, though not far above that in New Mexico.
A comparison of the Oklahoma rates with those for contiguous States and
the United States is given in Table 8.
In two of the contiguous States, Kansas and Texas, deposit
guaranty systems were operative during most of the period embraced by
these figures.
The failure rates for both of these States were far below
those for Oklahoma.
These figures suggest that the existence of deposit guaranty in
Oklahoma was not a significant causative factor in the high rate of bank
suspensions, as has been claimed by opponents of the principle of deposit
insurance.
The high rate of failures in the State appears more probably
due to causes which operated also in New Mexico and Colorado, and to a
lesser extent in Arkansas and Texas, but were of much less consequence in
Kansas and Missouri.
-43Table 8. ANNUAL BANK FAILURE RATES IN OKLAHOMA, 1908-1922, COMPARED
WITH RATES IN CONTIGUOUS STATES AND IN THE UNITED STATES l/
Failures per 100
Deposits in failed banks
operating banks_____ ___ per $100 in operating banks
State and State National
State and State National
national banks banks
national banks
banks
banks
banks
Oklahoma
1.1
h
i
0.3
$1.07
$2.42
$0.29
Six contiguous States
211
0.6
0.2
.31
.56
.09
0.4
0.2
1.1
0.1
•••
.28
0.6
.44
.17
.73
1.85
1.92
.43
.31
0.3
Kansas
Missouri
Arkansas
Texas
New Mexico 2/
Colorado
0.2
1.0
0.5
2.3
0.9
0.8
3.0
1.3
0.3
.61
.62
.80
.22
Entire United States
0.5
0.6
0.2
.20
0.3
0.8
.09
.06
**9
.41
.15
.28
.14
.07
17 Tabulated from data from the following sources: reports and
records of bank commissioners in the various States; Willis, Banking Inquiry of
1925; anniiAi reports of the Comptroller of the Currency; Federal Reserve Bulletin,
September 1937»
2/ For the years 1912-1922.
-44Causes of bank failures. Numerous circumstances contribute
to the financial difficulties which result in bank failures. However,
in most cases the factors responsible for failure are predominantly
associated with one of the following groups:
(a) dishonesty on the part
of officers or employees; (b) excessive loans directly or indirectly to
certain business interests, often to the interests of an influential
official or stockholder; (c) adverse economic conditions in a dominant
industry and collapse of property values associated therewith; and (d)
general managerial incompetence.
For 35 failures which occurred during the years 1909 to 1918,
the Biennial Reports of the Bank Commissioner of Oklahoma contain brief
comments regarding the cause of failure, the character of the bank's
management, or other aspects of the bank's operations.
In about one-half
of these cases sufficient information is given to indicate the major
factor responsible for the failure.
In twelve cases defalcation by
officers or employees is mentioned, and was assigned primary responsibility
for the failure in the majority of these cases. In four cases excessive
loans to certain interests were noted, and in four cases failure was
ascribed to bad or incompetent management.
In only two cases was any
mention made of business depression or of adverse economic circumstances.
The operation of the deposit guaranty law in Oklahoma during
the first 12 years of its history, from 1908 to early 1920, was carefully
y
studied by Thomas Bruce Robb.
number were selected as typical.
Of 57 failures during that period, a
In 18 cases Mr. Robb cites specific
1/ Robb, The Guaranty of Bank Deposits, pp. 42-73»
-45causes of failure, or gives sufficient information to warrant classifica
tion. Of these, six were attributed chiefly to fraud or defalcation on
the part of bank officers, and 12 to speculative and excessive loans to
interests associated with the bank managements.
The Comptroller of the Currency, in his report for 1921, summarized
the experience of States with deposit guaranty plans in operation. His
statement regarding the causes of bank failures in Oklahoma is as follows:
The closing of 42 of the 95 banks was due to a decline in
the value of the assets, poor management, and slow loans, in
ability to realize on loans, injudicious investments, and
shrinkage in deposits. In 34 cases closing was due to criminal
acts on the part of officers, including embezzlement, misappli
cations, or use of the banks' funds in speculation for private
gain. In 19 cases the cause of closing is not on record here. 1/
The failures described in the Bank Commissioner's reports, and
those reviewed by Mr. Robb, took place prior to the collapse in prices
of farm products and the business depression in 1921.
The failures in
1921 and in 1922 were more directly associated with adverse economic cir
cumstances than were those in the preceding years, though such evidence
as is available indicates that incompetent management and speculative
loans also played a part in these failures.
There is no evidence that
the number of failures during this period was affected by the insolvency
of the guaranty fund. High failure rates in 1921 and 1922, in comparison
with those during the previous decade, occurred not only among the State
banks in Oklahoma, but also among national banks in the State, and among
both State and national banks in most of the contiguous States.
l/ Annual Report of tile' Comptroller of the Currency, 1921,
p. 188.
-it6Procedures used in handling failed banks. The affairs of the
first three banks that failed after establishment of the deposit guaranty
system in Oklahoma were liquidated by the Bank Commissioner. Of the 79
other banks that failed before the State Banking Board discontinued pay
ments from the guaranty fund, only seven were liquidated directly by the
Bank Commissioner.
In the other cases, the liabilities of the failed
bank, or most of them, were assumed by another operating bank or by a
newly organized bank, or the affairs of the failed bank were liquidated
by another bank, with an immediate payment or a guarantee, or both, by the
depositors' guaranty fund. The reasons for using these procedures were
given by the Bank Commissioner as follows:
... we can liquidate a bank much more economically through another
bank located in the same town, or by permitting the failed bank
to be reorganized under another name. The notes are paid or
secured more readily, and the Banking Board is only required to
handle such paper as the Bank purchasing the assets is unable to
collect or have renewed to their satisfaction. By this method,
a very small amount of money will take care of the liquidation of
a failed bank, and no financial disturbance whatever is created
in the community where the bank is located, l/
There was considerable variety in the details of the arrangements
made with the successor, absorbing, or liquidation-handling bank. This is
illustrated by the following cases described in the reports of the Bank
Commissioner:
Bank of Ochelata, closed December 31, 1909»
The Commissioner entered into an agreement with Mr. G. D. Davis
of Claremore and his associates, to liquidate the Bank of Ochelata,
through a new institution to be known as the Oklahoma State Bank...
the Commissioner agreeing that the State Banking Board would protect
the said nkiahnm«. state Bank against loss in assuming the obligations
to the depositors of the Bank of Ochelata. On July 25, 1910, the
Oklahoma State Bank submitted a report...showing that there was due
them for notes which they were unable to collect, the sum of $18,968.48.
The Ranking Board issued their warrant for the above amount and took
lip the notes.
Tf Second Biennial Report of tne Bank Commissioner, 1910, p. xii.
-47Oklahoma State Bank, Durant, closed April 28, 1910.
An agreement was entered into with the Guaranteed State Bank,
of that city, to liquidate the Oklahoma State Bank, and the State
Banking Board deposited with the said Guaranteed State Bank, the
sum of $25,000 to protect it against loss.
Creek Bank & Trust Company, Sapulpa, closed November 11, 1910.
Mr. M. Jones of Bristow and his associates offered to re
organize the bank under the name of the Oklahoma State Bank, of
Sapulpa, and pay in the 100 percent assessment, on the condition
that the Bank Commissioner enter into an agreement to place all
cash and accounts on the books in balance, and obtain the guarantee
of the State Banking Board on such notes belonging to the assets of
the Creek Bank & Trust Company, as the Oklahoma State Bank might
desire to have guaranteed after thirty days' investigation. Such
an agreement was entered into and the same was confirmed by the
Banking Board at a meeting on Dec. 1st, 1910. l/
Bank of Commerce, Geary, closed May 5# 1911»
The American State Bank of Geary assumed all of the deposits of
the said bank and took over certain of its assets. The Banking
Board paid it the difference between the deposits which it assumed
and the assets which it took over.
Citizens Bank, Mountain Park, closed April 10, 1911.
A new charter was granted to the Planters State Bank of Mountain
Park and it purchased the good assets of the Citizens Bank, and the
Banking Board made up the difference between the assets purchased
and the liabilities of the failed bank...
Night & Day Bank, Oklahoma City, closed June 7> 1911»
The Night & Day Bank was taken over by the Wilkin-Hale State
Bank, September 18, 1911, the Banking Board taking all doubtful assets
not accepted by the Wilkin-Hale State Bank, and paying them the
difference between the liabilities assumed and assets taken over...
First State Bank, Shattuck, closed October 3# 19H.
This bank was voluntarily liquidated through the Guarantee State
Bank of Shattuck...The Banking Board advanced $20,004.29* in the
liquidation...
Farmers State Bank, Tushka, closed September 28, 1911.
The Banking Board made an agreement with the stockholders that
if they would pay in their double liability and put up an additional
capital stock, that they would be protected. 2/
17 Second Biennial Report of the Bank Commissioner, 1910, pp. ix,
x, and xi-xii.
2/ Third Biennial Report of the Bank Commissioner, 1912.
-48The records of the amounts paid by the fund suggest that the
objectives of reducing the liquidation cost and the disbursement of the
guaranty fund were not always achieved, particularly in some of the
cases in which the fund made an immediate payment to the absorbing bank
and also gave a guaranty against additional loss on the liquidation of
the assets.
In some cases liabilities other than guaranteed deposits
were protected, with direct or indirect losses to the fund, and in some
cases the absorbing or successor banks do not appear to have been diligent
in making collections. A particularly striking case was the Citizens
State Bank of Coalgate, which closed November 19# 1920, with deposits of
$496,000, of which $429,000 are estimated to have been covered by the
guaranty.
The initial payment to the successor bank was $328,000, partly
in cash and partly in warrants of the depositors guaranty fund. During
the next twelve months several additional payments were made, as the
successor bank reported its inability to collect on assets taken over,
bringing the total disbursement of the fund to $498,000. The reported
, y
recovery by the fund was only $26,000.
In several other failures in
the latter part of 1920 or in 1921 the disbursement by the fund, less the
reported recovery, was nearly as large, or larger, than the deposits at
date of failure.
These large losses may have been due to inefficiency,
or corruption, in the administration of the Bank Commissioner's office:
they occurred during the time when Fred Dennis, later convicted for
taking a bribe from a bank in difficulty, was Bank Commissioner.
“
l/ Minutes of the State Banking Board and other records in
the Bank Commissioner's office.
-49A large majority of the banks that failed after cessation of
payments from the guaranty fund, up to the repeal of the law, were
liquidated by the Bank Commissioner. The method of liquidation used
in these cases, and in liquidating such assets as were acquired by the
fund from the failed banks that were succeeded or absorbed, was also
expensive. The procedure was described by a later Bank Commissioner as
follows:
In fairness to the guaranty fund system of Oklahoma, it
should be mentioned that during most of the time it was in
operation the cost of liquidating failed banks was an expensive
process. Liquidations were handled on a fee basis. The con
tracts of liquidating agents usually called for ten per cent of
collections the first year, twenty-five per cent the second year,
and fifty per cent the third year. In addition to this, they
were allowed all traveling and other expenses, and when it was
necessary to place an instrument in the hands of an attorney for
collection, another large fee had to be paid. With such a con
tract it is not unreasonable to suppose that most collections
were made during the second and third years. Anyway the cost
of liquidation in virtually all instances amounted to fifty
per cent or more of a bank's assets..* 1/
FINANCIAL HISTORY OF THE GUARANTY FUND
Sources and adequacy of information. Published information
regarding the operation of the Oklahoma depositors guaranty fund is
inadequate.
No statements of the fund were published in the reports of
the Bank Commissioner except for the last three months of the years, 1914,
1916, and 1918. For several years, from 1911 to 1919, quarterly state
ments were made available to the participant banks and published or sum
marized in local and regional banking journals* A partial statement for
the entire period up to the end of 1922 appears in a report made to the
1/ Linwood 0. Neal, The History and Development of State Bank
Supervision in Oklahoma, p. 71»
-501/
Oklahoma House of Representatives. Some additional information is
available in surveys of deposit guaranty plans made by students and
2/
agencies outside the State.
Information is given in the published reports of the Bank Com
missioner regarding the cost to the guaranty fund of most of the banks
that failed during the period 1908-1919» Additional information re
garding some of these failures is given by Robb in his book published
3/
in 1921. For the failures from January 1, 1920, to the cessation of
payments from the fund in October 1921 no information is given in reports
of the Bank Commissioner regarding bank failures or the operations of the
fund, except the names of banks taken over by the Commissioner during
the year 1920.
Considerable additional information has been obtained from
surviving records of the fund, consisting of minutes of the State Bank
ing Board and various registers and ledgers, in the office of the Bank
Commissioner.
These records provide statements of the fund for certain
periods, and a complete register of the guaranty fund warrants outstand
ing from 1911 to 1923> but no file of the quarterly statements of the
fund. Hie minutes of the State Banking Board include an audit of
guaranty fund transactions for individual failed banks as of February 9,
1922, showing the amounts advanced by the fund in the respective failed
banks, the amounts returned to the fund, and the balance due on that date.
i f House journal, February 21, 1923, pp. 773-75»
5/ These include Robb, The Guaranty of Bank Deposits (Houghton
Mifflin Company, 1921); Thornton Cooke, articles in the Quarterly Journal
of Economics, November 1913 and November 19235 Federal Reserve Board, In
Federal Reserve Bulletin, September 1925; Blocker, The Guaranty of Bank
Deposits (The School of Business, University of Kansas, 192$).
3/ Robb, op. cit., pp. 57-73*
k/ These records were examined by the writer of this report In
December 1955•
-51Another audit, or "inventory," as of October 1930 also provides figures
for the amounts paid out in the case of most of the individual failed
banks, but not for recoveries or the balances due. An undated volume,
apparently prepared at scane intervening date, gives asset and liability
statements as of date of failure for each bank in ■which a payment had
been made from the guaranty fund, with a few exceptions, together with
the amounts paid by and returned to the guaranty fund.
Information regarding the banks that failed between the date
of cessation of payments from the fund and the repeal of the law was not
found in the surviving records in the Commissioner's office. For these
banks the principal source of information is schedules submitted in 1931,
prepared from records in the Commissioner's office at that time, to the
Federal Reserve Committee on Branch, Group, and Chain Banking.
The data for the individual failed banks from the various sources
show some inconsistencies, but for the most part these are relatively
small. No data have been found for the amount of deposits in the re
spective banks subject to the protection of the fund under the provisions
of the guaranty law, nor for the amount of guaranteed deposits assumed
by banks taking over the business or liquidating the affairs of the
failed banks. However, in most of the cases the amount of guaranteed
deposits must have been approximately the same as the amount of deposits
shown in the statements of the banks at time of closing, excluding
cashier's checks, which were not regarded as deposits, and accounts of
governments and of banks, which were mostly secured and therefore ex
cluded from guaranty.
-52-
The court records pertaining to the final disposition of the
fund provide some additional information regarding the fund's opera
tions, particularly as to assessments levied that were not collected,
the assets and liabilities of the fund in 1929 when the court pro
ceedings were initiated, the claims approved by the District Court and
by the State Supreme Court, and the remaining assets applied to those
1/
claims under the decisions of the courts.
Income, expenses, and indebtedness of the guaranty fund. An
estimate of the receipts and expenditures of the Oklahoma depositors'
guaranty fund during its entire existence is given in Table 9» The
figures take into account receipts and disbursements subsequent to
repeal of the law, including the final disposition of the fund in 1934.
The estimates in this table exclude borrowings of the fund which were
eventually repaid, and also payments to depositors of failed banks made
directly from the cash or liquidated assets of those banks.
The total receipts of the fund throughout its entire period of
operation, including borrowings from participant banks that were never
repaid, amounted to more than $8 million. Nearly half of the receipts
were from assessments on the participating banks, about one-fifth from
diversion to the fund of assets pledged by the participant banks as a
guaranty of payment of future assessments, and about two-fifths from
the liquidation of assets of failed banks acquired by the fund. The
fund paid out about $7*7 billion to depositors or to banks that assumed
the deposits of failed banks, and spent approximately $0.6 million in
interest and administrative expenses.
I/ District Court records, case no. 6 0 8 3 8 , at the Oklahoma City
Court House, and Supreme Court records, case no. 24-551, at the State
Capitol* These records were examined in December 1955*
-53Table 9. RECEIPTS, EXPENDITURES AND UNPAID OBLIGATIONS OF
THE OKLAHOMA DEPOSITORS GUARANTY FUND l/
Receipts
Assessments collected to 1925 2/
$3,729,937
Additional assessments, and securities pledged
for payment of future assessments diverted
to the fund 3/
1 549,402
Total collections from participating banks,
including warrants of the fund sold to
those banks that were never paid
5,279,339
Recoveries from assets of failed banks 4/
2,913,174
Interest on daily balances 5/
Total receipts 6/
,
23,729
$8,216,242
Expenditures
Payments to depositors of failed banks or to
banks for assuming insured deposits 4/
7 ,667,311
Interest on warrants J?/
304,016
Operating expenses jJ
252,261
Total expenditures 6/
8,223,588
Unpaid obligations
To depositors of failed banks 8/
6,225,437
1/ All items are partly estimated.
2/ As given in Federal Reserve Bulletin, September 1925, p* 631.
See Table 10.
3/ For method of estimate and component items, see note 6 to Table 10.
%/ Tabulated from data for the individual banks. See Table 11.
5/ Amounts reported in periods for which income and expense data
are available, plus estimated amounts for other periods.
6/ Difference between expenditures and receipts is attributable to
errors of estimate for the various items.
7/ W&rrants issued to January 31, 1923, for salaries, expense of
examiners, office supplies, bank robbers and miscellaneous. House Journal,
February 21, 1923»
8/ Losses to depositors in banks that failed from cessation of
payments by the fund to repeal of the lav. See Table 11.
-5 4 -
Annual data regarding assessments and the cash balance and
Indebtedness of the fund are shown in Table 10. The information avail
able does not permit a tabulation by years of the disbursements of the
1/
fund, nor of the receipts from assets of failed banks.
The annual range of assessments ranged from a high of one and
one-fifth percent in 1911# when a special assessment of 1 percent was
levied, and a low of one-fifth of 1 percent in 1916 and subsequent years#
when additional assessments were not permitted.
The amounts collected
ranged from a maximum of about $600,000 in 1911 to a low of about $90,000
in 1916.
The maximum amount of outstanding warrants, or indebtedness,
of the fund prior to the World War I period was $844,000 in June 1914.
This was all retired by 1919» The warrant indebtedness arising from the
failures of 1920 and 1921# up to the time of cessation of payments from
the fund in October 1921# was $2,404,000 at its maximum.
This was reduced
to about $1 ,300,000, and remained close to that figure until the final
settlement of the affairs of the fund. Unfulfilled obligations to de
positors of banks that failed from October 1921 to the repeal of the law
in March 1923# as shown in the preceding table, amounted to more than
$6 million.
Insured deposits and losses in failed banks, by years. Table 11
gives the estimated amount of insured deposits of the banks that failed
each year while participating in deposit guaranty, and the estimated
l/ Only about one-half of the quarterly statements, for the period
for which they were made available, have been located in banking journals,
and some of these are incomplete. Only part of the earlier and later years
are covered by statements found In the surviving records of the guaranty fund.
-55Table 10. RATES AND AMOUNTS OP ASSESSMENT, CASH BALANCE, AND
WARRANTS OUTSTANDING, OKLAHOMA DEPOSITORS GUARANTY FUND, BY YEARS
Year
Rate o
f
C
a
s
h
assessment
Amount of
balance
(percent of
assessment (end of
deposits)
2/
year)
1/
Total
1908
Warrants”
outstanding (end
of year)
3/
V
$5,279,339
1909
1.00
•95
198,837
327,388
5/
5/
5/
1/
1910
1911
1912
1913
1914
.20
1.20
.95
.40
.4o
285,433
600,538
511,054
201,825
148,084
5/
$61,120
5/
$318,847
44,714
146,000
660,889
768,682
1915
1916
1917
1918
1919
.4o
.20
.20
.20
.20
161,817
89,964
77,703
153,738
35,560
45,691
371,536
666,379
389,936
136,961
none
1920
.20
.20
.20
.20
301,658
1921
1922
1923
Additional 6/
133,356
208,800
231,962
72,510
15,131
680,009
588,534
5/
Äi/ ../ 103,697 2,222,118
246,771)
1,413,246
5/
1,303,916
82,451
1/
1,549,402
1/ Includes regular and special assessments. These rates were
applied to-average daily deposits during the preceding year, except in the
case of the initial assessment which was applied to deposits as of
December 11, 1907. Rates for 1908-1920 from Robb, The Guaranty of Bank De
posits, p. 73; for 1921-1923, according to provisions of law.
2/ For 1908-1920 amount of assessments levied, Federal Reserve
Bulletin, September 1925, P* 631, originally derived from Robb, op. cit.,
p. 73« Assessments collected for these years probably did not differ
greatly from the amount levied though there were some refunds and adjust
ments. For 1921-1922, estimated as the difference between net collections
(i.e., total collections less refunds and adjustments) to the end of 1922
frcm House Journal, February 21, 1923, amounting to $3,647,486, less the
total levied for the years 1908-1920, amounting to $3,400,715» For 1923,
difference between total assessments collected to 1925 as given in the
Federal Reserve Bulletin, op. cit., amounting to $3,729,937, and the net
collections to the end of 1922. Most of the assessment levied in 1923 remained
unpaid. Assessments due at the time of repeal of the law, as given in court
records pertaining to the disposition of the fund, amounted to $109,928. For
the amount Indicated In this table as "ttlditianal" see note 6.
-56Notes to Table 10.
3/ From quarterly statements of the fund published in banking
and in the Bank Commissioner's reports, and statements for the
certain periods in the surviving records in the Bank Commissioner's
The figures indicated for 1919 and 1921 are for May 31, 1920, and
9, 1922, respectively.
4/ From warrant register in the surviving records in the Bank
Commissioner's office. The maximum amount of warrants outstanding in
1914 was $844,342 in June, and the maximum outstanding in 1921 was
$2,403,6l8 in November.
5/ Not available.
H/ Includes: (a) $10,064 of assessments due by banks to which
securities posted as security for payment of future assessments were re
turned under the court decision regarding settlement of the fund and which
were required to be paid as a condition for such return; (b) $395,224
of guaranty fund warrants deposited as security for payment of future
assessments which were cancelled by the State Banking Board because the
banks concerned had nationalized or liquidated; (c) $31,000 of other
securities deposited as security for payment of assessment by banks that
had nationalized which were sold for cash by the State Banking Board; and
(c£)$I*113,ll4 of guaranty fund warrants outstanding at the time of final
settlement of tke affairs of the fund which were never paid. The last
item is Included because almost all these warrants were owned by the
participating banks and deposited as security for payment of future assess
ments with the cash derived from their sale having been used by the guaranty
fund, and thus in effect represented an additional final assessment upon
such banks. By the time of settlement of the affairs of the fund almost
all of the guaranty fund warrants which had been issued to depositors of
failed banks or to successor or absorbing banks had been retired and were
no longer outstanding.
journals
fund for
office.
February
-57Table 11.
INSURED DEPOSITS, AND OBLIGATIONS TO DEPOSITORS OF FAILED BANKS PAID AND UNPAID, OKLAHOMA
DEPOSITORS GUARANTY FUND, BY YEARS, 1908-1923
Year or
period
of
failure
Total
Subtotals
T8BKÏ919
Jan. 1920-Oct. 1921
Nov. I92I-March 1923
1908
1909
1910
1911
1912
1913
1914
Insured
deposits
1/
¡Î7,b67,311
£2,913,174
¡54,754,137
8,573,019
5,537,038
4,120,026
2,264,142
4,790,969
4,452,993
3,172,539
41,779
2,010,163
903,011
2,442,830
2,269,528
41,779
36,745
1,741,078
11,781
61,156
24,964
1,679,922
24,964
1,064,289
587,959
1,065,149
534,837
1,715,525
451,124
313,082
274,877
34,250
230,577
72,778
10,957>828
1920
2,008,581
1917
1918
1921
1922
1923
y
$3ll,Ï75,137
1919
1916
Insured deposit obligations paid and unpaid
Paid by fund
Total
Recovered Not re
Unpaid (loss
from liqui covered
to de
dation of from liquida positors)
assets 3/ tion of
assets (loss
to fund) 4/
$25,067,^85
332,463
40,337
84,217
1,077,546
906,039
1915
Paid directly
from liquida
tion of assets
2/
5,415,002
8,033,344
1,037,939
294,981
312,209
798,443
202,178
198,720
37,837
84,217
1 ,028,628
776,794
686,646
1,994,874
3,791,672
581,919
770,168
222,628
917,082
248,946
—
388,498
88,120
$$,#$,437
M—
100,357
6,125,080
615,633
-----
240,627
539,591
149,850
528,584
- -
160,826
--
-----
-----
46,544
—
87,199
-----
-----
-----
48,918
129,245
14,389
45,754
34,529
83,491
—
1,321,935
1 ,878,083
14,300
309,887
1,012,048
1,284,959
14,300
133,743
2,500
__
593,124
—
2,500
- -----
-----
-----
1,542,045
4,227,372
456,020
-58Notes to Table 11«
l/ Estimated as the deposits at date of failure, excluding
cashier's checks and accounts of governments and banks (tabulated from state
ments for the individual banks in the surviving records of the guaranty fund,
with estimates for a few cases for which such statements are unavailable), or
as the amount paid by the fund if in excess of the foregoing*
2/ For banks with deposits assumed by another bank or paid from the
fund, residual between the estimated insured deposits and the payment by the
fund. For banks with no payment from the guaranty fund, recoveries from liquida
tion as reported to the Federal Reserve Committee on Branch, Group and Chain
Banking in 1931*
3/ From data for the individual banks in the surviving records of the
fund, with an allowance for recoveries subsequent to repeal of the law derived
from data for the status of the fund.
kf Balance of the estimated insured deposits.
-59eventual recoveries and losses on those deposits. Table 12 shows for each
year the percentage of the deposits of the failed banks estimated to
have been insured, and of the insured deposits the percentages paid
by the guaranty fund and recovered from the liquidation of assets.
For the years, 1908-1919, over 70 percent of the insured
deposits in the failed banks were eventually paid directly or indirectly
from liquidation of the assets of the failed banks.
But in subsequent
failures, to the repeal of the law, recoveries from liquidation of assets
amounted only to about one-half of the insured deposits.
The difference
between the 1908-1919 and the 1920-1923 failures is doubtless due in
part to the great decline in prices and property values associated with
the depression of 1921 and the continued adversities of agriculture. In
part, however, the difference between the two periods should be attributed
to the deterioration in the quality of bank supervision and the handling
of the Bank Commissioner's office.
Information is not available regarding the recoveries and losses
on secured deposits and cashier's checks, which were not covered by the
guaranty. However, up to the time of cessation of payments by the guaranty
fund, such losses were negligible, because successor or absorbing banks
usually assumed all the liabilities of the closed bank, or if not, the fund
assumed the remainder.
For the banks closed in 1922 and 1923, and not
taken over by another bank, some losses may have been incurred on secured
deposits, because the pledged collateral may have been disposed of at a
loss, and losses on cashier's checks were presumably at the same per
centages as on insured deposits.
-6 o -
Table 12. PERCENTAGE OF DEPOSITS INSURED, AND PERCENTAGE OF INSURED DEPOSITS PAID BY GUARANTY
FUND AND RECOVERED FROM LIQUIDATION OF ASSETS, BANK FAILURES UNDER THE OKLAHOMA
DEPOSIT INSURANCE SYSTEM, BY YEARS
Year or
period
of
failure
Total
Percentage
of total
deposits
insured
8^.0
Percentage of insured deposits
Paid by guaranty fund
Paid directly
Unpaid (loss
from liquiRecovered
Not recov- to depositors)
dation of
from assets ered; i.e.,
assets
loss to
fund
T*
100.0
44.6
11.6
24.8
19.0
Total
Subtotals
79.8
103.6
81.7
100.0
100.0
100.0
48.1
1909
100.0
60.6
100.0
100.0
32.1
3.5
67.9
61.1
1910
1911
1912
1913
1914
88.9
93.1
81.5
86.1
90.0
100.0
100.0
100.0
100.0
100.0
53.2
27.7
58.4
21.6
46.5
44.8
22.6
19.5
50.7
28.0
30.8
35.7
1915
1916
1917
1918
1919
92.2
100.0
99.1
89.6
76.6
100.0
100.0
100.0
100.0
100.0
59.8
93.8
14.0
26.2
1920
1921
84.6
1900-1919
Jan. 1920-0ct. 1921
Nov. 1921-March 1923
1908
m
83.2
ft-i
100.0
100.0
100.0
100.0
40.9
43.7
100.0
23.4
16.3
—
5.8
13.6
- -
28.5
41.0
.4
55.9
35.4
—
1.8
»mm
40.9
••
—
«to■■
6.2
- -
95.5
85.7
1.3
5.0
3.2
9.2
34.2
36.8
47.2
56.1
15.4
50.4
23.7
1 1 .0
- -
—
.2
—
mm
—
*■m
m
28.5
52.6
43.9
-6 l-
For the entire period during which the guaranty law was on
the statute books, about 56 percent of the insured deposits, and more
than 60 percent of the total deposits of the failed banks were eventually
paid from the proceeds of liquidation of the assets of those banks. The
guaranty fund provided additional recoveries equivalent to 16 percent of
the total deposits of the failed banks.
Comparison of assessment receipts and losses in failed banks.
Table 13 compares the amount of assessments levied or collected each year
with the eventual net loss to the guaranty fund or, after cessation of
payments from the fund, to depositors in the banks that failed in that
year. The figures are also shown cumulatively, with the cumulative excess
or deficiency of assessments.
Such an excess or deficiency, it should be
noted, is a different concept than that of the accumulated surplus or
deficit of the fund. It does not take account of interest paid or accrued
on the fund's indebtedness, nor the amounts used or needed to pay de
positors that were eventually recovered or recoverable from liquidation
of the assets of the failed banks.
What the deficiency figures in this
table show is the additional assessment that would have been necessary
to have paid all insured deposits without incurring interest costs or
other expenses.
For the first twelve years of the fund, except for 1909 and 1910,
there was a cumulative excess of receipts. This was achieved because the
heavy losses of the fund during its early years were met by large special
assessments in 1909, 19H, and 1912. By the end of 1919/ with smaller
special assessments during the years 1913-1915 and none thereafter, the
cumulative excess of assessments over losses amounted to about $650,000.
-62Table 13 . ANNUAL ASSESSMENT RECEIPTS, LIABILITY FOR DEPOSITS IN FAILED
BANKS, AND CUMULATIVE DEFICIENCY, OKLAHOMA DEPOSITORS' GUARANTY FUND
Year
Assessments Net deposit
collected l/ liability of
the fund 2/
Cumulative
Assessment Deposit
Excess of Deficiency
receipts liability receipts (excess
of the
liability)
fund
1908
1909
$198,837
327,388
$198,837
526,225
1910
1911
1912
1913
1914
285,433
600,538
511,054
201,825
148,084
160,826
1915
161,817
87,199
1917
89,964
133,356
1916
$615,633
240,627
539,591
149,850
528,584
2,500
--
1919
208,800
231,962
34,529
83,491
1,012,048
2,827,004
4,241,672
456,020
1918
1920
301,658
1921
246,77l)
1923
82,451
1922
Additional.
1,549,402
„
$615,633
$198,837
—
$89,408
811,658
856,260
1,412,196
1,923,250
2,125,075
2,273,159
1,395,851
1,545,701
2,074,285
2,235,111
16,345
377,549
50,790
...
38,048
--
2,434,976
2,524,940
2,658,296
2,867,096
3,099,058
2,322,310
112,666
2,324,810
2,324,810
2,359,339
2,442,830
333,486
507,757
3,400,716 3,454,878
6,281,882
3/
3,647,487 10,523,554
3,729,938 10,979,574
5,279,340 10,979,574
134,010
200,130
656,228
----
--
-----
54,162
3/
6,8767067
7 ,249,636
5,700,234
TJ Fran Table 10.
2/ Deposits paid from the fund, adjusted for recoveries, plus deposits
unpaid (loss to depositors). From last two columns of Table 11.
3/ Not available.
-
63-
However, a part of this had been used to pay expenses and interest on
warrants, so that the cash balance of the fund in May 1920, when no
warrants were outstanding, was only about $370,000. This was less than
one-fifth of 1 percent of the deposits in the participating banks, whereas
the original law contemplated that the fund would always be restored, by
special assessments, to a figure equal to 1 percent of the deposits of
the participating banks.
The large losses in the failures from the latter part of 1920
to the repeal of the law, together with the limitation of assessments to
the regular rate of one-fifth of 1 percent per year, resulted in a rapidly
mounting cumulative deficiency relative to losses. By the date of repeal of
the law, it had reached more than $7 million.
If the warrants of the fund
and other securities deposited by participating banks as surety for payment
of future assessments that were forfeited to the fund or never repaid are
treated as additional assessments, the final deficiency of the assessments
relative to losses was somewhat less than $6 million.
In Table ih the rate of assessment levied each year, and the
amount collected per $100 of deposits in the participating banks, are com
pared with the rate that would have been necessary to meet the eventual
losses from the failures in that year. During the first five years of
the system the collections, because of the initial levy and the special
assessments, averaged nearly nine-tenths of 1 percent of deposits in the
participating banks. Had this average been maintained until the date of re
peal of the law, it would have been sufficient to meet all the losses in
the failed banks, including the abnormally large losses of the early
-64Table 14. COMPARISON OF ANNUAL RATES OF ASSESSMENT WITH RATES REQUIRED TO
MEET DEPOSIT OBLIGATIONS IN FAILED BANKS, OKLAHOMA DEPOSITORS' GUARANTY FUND,
BY YEARS, 1908-1923
Year
Per $100 of deposits
Assessment
in participating
rate per banks at beginning of year
$100 of
Assess- Losses on
deposits
ments
deposits
colin failed
lected
banks 2/
1/
1908-1923
Per $100 of total capital
accounts in participating
banks at middle of year____
Assessments
Losses on
collected
deposits in
3/
failed banks
3/
$2.52
average
$0.44
$0.4l
1908
1909
' 1.00
.95
1.04
1.95
2.78
5.22
1910
.20
1.20
.95
.40
.40
.52
.98
.44
2.04
4.84
4.26
1.72
4.34
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
Additional
.40
.20
.20
.20
.20
.20
.20
.20
.20
1.06
1.16
.44
.32
$0*86
2.47
.88
.34
1.15
.35
1.80
1.36
.19
1.48
.16
- -
.15
.19
.03
.07
1.10
1.45
1.42
.53
1.50
.36
.19
.16
.09]
.11
2.07 5/
$5.24
.01
1.76
3.77
2.44 4/
.82
.75)
.71
1.25
4.71
1.48
.80
.02
.24
.51
5.04
13.97
33.54
15.67
13.31 5/
'
XT Computed from assessment receipts (Table 13) and deposits in
participating (i.e., State) banks in Table 4.
2/ Computed from deposits paid from the fund, adjusted for recoveries,
plus deposits unpaid (loss to depositors) from Table 13 and deposits in participating
banks (Table 4).
3/ Total capital accounts used in computing these ratios are from the
revised Federal Reserve tabulations.
4/ Annual rates (i.e., four times the rate for failures occurring prior to
March 31, T923).
5/ Relative to deposits and capital accounts as of December 31, 1922, and
June 30, 1923» respectively.
-651920's. Had the guaranty law remained in its original form or as amended
in 1909, under which the special assessments were limited to 2 percent
per year, hut without the assessment amendments of 1913, it would have
survived the impact of the depression of 1921, though borrowing in 1922
and 1923 would have been necessary.
If, in addition, the quality of
bank supervision and the efficiency of handling the affairs of closed
banks had not deteriorated after 1918, it is probable that the fund would
not have found borrowing necessary except to pay depositors promptly
while proceeding with the liquidation of the affairs of closed banks.
The assessments paid by the banks, including their losses on
warrants and other deposited securities, averaged about 2^ percent per
year on their capital investment, as measured by their reported total
capital accounts.
Had all the losses to depositors been met by assess
ments, the average would have been a little over 5 percent per year on
their total capital accounts.
Settlement of the affairs of the guaranty fund. Settlement of
the affairs of the guaranty fund, after repeal of the law, was delayed
because of pending suits and other problems pertaining to the completion
of liquidation of the affairs of the various closed banks.
In 1929 liti
gation was instituted to determine the method of disposition of the re
maining assets of the fund, including such collections as had by that
time been made from assets of failed banks whose depositors had been
paid by the fund. The Bank Commissioner recommended treatment of the
remaining assets of the guaranty fund as a trust fund to be distributed
pro rata among holders of the outstanding warrants and unpaid depositors
of banks that had failed from the time of cessation of payments from the
fund to the date of repeal of the law*
-6 6 -
The District Court in charge of the litigation set a date by
which all claims should be submitted.
fell into four classes:
The claimants who filed claims
(l) holders of the numerically first outstand
ing and unpaid warrants of the fund, who claimed that under the law they
had priority; (2) holders of other outstanding warrants, who contended
that because of the insolvency of the fund and repeal of the law the
remaining assets should be applied pro rata on all warrants outstanding;
(3) banks seeking recovery of securities, other than warrants of the
fund, pledged with the Banking Board to secure payment of future assess
ments; and (4) holders of other claims, mostly for unpaid deposits in
certain banks that failed between the date of cessation of payments from
the fund and the date of repeal, who claimed they should be paid pro rata
with the warrant holders. The District Court appointed a referee to re
view the claims presented, who conducted numerous hearings over a period
of nearly two years.
In 1932 the final report of the referee was made
and the District Court entered its judgment: (1) that securities, other
than warrants, remaining with the Banking Board and pledged to secure
payment of future assessments should be returned to the respective banks,
provided that those with unpaid assessments prior to repeal of the law
were first required to pay the same; and (2) that the approved claims,
including all unpaid warrants and other allowed claims, were to share pro
rata in the distribution of the assets of the fund. Under this judgment
pledged securities, valued at about $110,000, were returned to 65 banks;
and it was estimated that a dividend of about 15 percent would be paid on
the allowed claims, which included $1 ,197,000 of unpaid warrants and
$375,000 other claims* The small amount of claims other than warrants
indicates that only a few of the depositors of the banks that failed sub
sequent to cessation of payments from the fund presented their claims*
-67Eight banks, holding seme of the earliest-issued outstanding
warrants, did not accept the judgment of the District Court, and appealed
to the State Supreme Court, holding that those warrants, with interest,
should have priority over other claims. The remaining warrant holders
accepted the judgment of the District Court.
Consequently, a stifficient
portion of the remaining assets to meet the claims of the appealing banks
was held pending the decision of the State Supreme Court, and the remainder
of such assets was used for a pro rata dividend of 7 percent on the rest
of the approved claims. This was disbursed in February 1933»
In Septem
ber 1934, the State Supreme Court held that the decision of the District
Court had been in error, and ordered the remnant of the fund paid the
holders of the earliest-issued warrants who had appealed.
The eight
banks received about $130,000 on those claims, of which about one-half
was the principal of the warrants and about one-half the accumulated
1/
interest.
APPRAISAL OF THE OKLAHOMA DEPOSIT GUARANTY SYSTEM
The burden of assessments. To bankers in Oklahoma the assess
ments levied during the first few years of the Depositors' Guaranty
Fund appeared to be heavier than could be borne by the banks. They
pointed to the fact that the assessments amounted to what they deemed
an extremely high percentage of their capital and surplus, averaging
during the first six years of the fund approximately 3 percent per year
of the total capital and surplus of the banks, and thus presumably
absorbing a very large proportion of the profits available for dividends
to stockholders.
17 Security Bank and Trust Co., of Miami, Oklahoma, et al., v.
Barnett, eT al., no. 24-551, Supreme court of Oklahoma, Sept. 11, 13534,
36 Pac. 87%.
-68Whether the assessments did in fact absorb a large proportion
of profits which would otherwise have been available for dividends is
unknown.
No figures of profits or dividends of State banks in Oklahoma
during the period are available.
Nor is information available regarding
the extent to which the limitation on the rate of interest paid on de
posits, imposed by the deposit guaranty law, reduced the expenses of
operation of the banks.
The problem of making adequate profits is not so much a problem
of the magnitude of expenditures which have to be borne by all banks as
a part of their cost of business, as it is of the margin between the
charges which they can make for their services and the aggregate expenses
which they must incur.
Since the rate of interest currently charged on
loans by the banks in Oklahoma was very high, judged by average rates in
eastern money centers or by average rates for the United States as s whole,
and the rate of interest paid by the banks on deposits was also comparatively
high, and since the latter rates are determined by competition among the
banks themselves, it should have been possible for the banks participating
in deposit guaranty to have maintained their profit position by reducing
the rate of interest paid to depositors.
However, the presence of another group of banks in the State,
operating under national rather than under State law, provided a competi
tive situation which made it difficult for State banks as a group to make
these adjustments. For two years prior to 1913, when the law was amended
in such a way that adequate assessments could no longer be levied, there
had been a substantial tendency for State banks to convert to national
banks.
The proportion of the total number of banks operating under State
law and therefore participating in the deposit guaranty system had de
clined from 75 percent to 67 percent, and the proportion of aggregate
-69deposits in the participating hanks from 51 percent to 37 percent of
all banks in the State.
There is good reason to believe that the guaranty system could
have been successful had it embraced all banks operating in the State,
and had the original assessment provisions, or those of 1909, been re
tained.
If all banks in the State had been covered, without affecting
the quality of bank supervision or other factors determining the number
of failures, the necessary assessment rate for the entire 15-year period
would have averaged less than four-tenths of 1 percent per year.
High failure rate. The high rate of assessment which would
have been necessary to have prevented insolvency of the Oklahoma depositors'
guaranty fund was much higher than the rate necessary to have operated a
similar fund on a national scale during the same period of time because
of the relatively high frequency rate of bank failures in the State.
This
abnormally high failure rate, as has been noted above, was due in sub
stantial part to deliberate bank mismanagement - sheer dishonesty,
participation in unduly speculative enterprises, and overextension of
loans to enterprises with which bank officials or favored customers were
connected.
It should also be noted that the abnormally high failure record
of the larger banks in the system was an important influence in the rate
of assessment which would have been necessary to have met the burden
falling upon the guaranty fund. Approximately one-fourth of the total
loss in failed banks during the 15-year period was incurred in four banks
in the larger size groups. The failures of large banks were also responsible
for the periods of crisis in the operation of the guaranty fund. The
-7 0 -
Columbia Bank and Trust Company, of Oklahoma City, which failed in
September 1909, when the guaranty law had been in operation less than
two years, had become the largest bank in the system after a mushroom
growth which increased its assets and liabilities by sevenfold. Also,
it was primarily the failure of the Bank of Commerce, Okmulgee, the
second largest bank in the system, at the beginning of November 1921,
which increased the outstanding obligations of the guaranty fund so
much that guaranty fund warrants could no longer be sold and the fund
became inoperative.
Inadequate supervision. The high bank failure rate among
participants of the Oklahoma deposit guaranty system could probably have
been considerably reduced had there been a continuity of reasonably
effective supervision.
The powers of the Bank Commissioner, which have been outlined
above, appear sufficient, had they been adequately used, to have checked
many of the malpractices of Oklahoma banks* The two examinations re
quired to be made each year, if thoroughly conducted, would have dis
closed, long before failure, the conditions described in Robb's account
of the affairs of the chief banks which failed* Use of the legal power
of the Commissioner to close banks for violation of the banking law by
its officers, and more vigorous use of the power to order the removal
from office of bank officials found to be dishonest, reckless or in
competent, would have prevented much of the dissipation of bank assets.
During the early years of the system, as shown by Robb's care
ful study, examinations and supervision were inadequate.
Later, after
several years of more competent supervision under J. D. Lankford, the
-71Bank Commissioner's office was not only inefficient but also corrupt.
However, the severity of the losses to the guaranty fund in that period
should not be attributed solely, or even primarily, to the laxity of
bank supervision and the corruption of the Commissioner's office. With
the best of supervision, the failures resulting from the collapse of
values of the 1921 depression would have been severe.
Nevertheless, one conclusion of vital importance to the success
of other systems of deposit guaranty or insurance can be drawn with
certainty. That is, that dishonesty, favoritism to special interests,
and speculative activities on the part of the largest banks in the
system will lead to disaster, and that the supervisory authorities must
be alert and vigorous in watching the policies of the banks in which
the risk is concentrated.
DEPOSIT GUARANTY IN KANSAS
Prepared by
Clark tfarburton, Chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
January 1958
TABLE OF CONTENTS
DEPOSIT GUARANTY IN KANSAS
Character of the guaranty legislation
Admission of "banks
Withdrawal or exclusion from the guaranty system
Deposits guaranteed
Assessments
Method of paying depositors in failed banks
Indebtedness of guaranty fund
Administration and custody of the fund
Expenses of administration
Page
T~
1
2
3
5
6
7
8
8
8
Constitutionality of the bank depositors' guaranty law
Decisions of the Circuit Court and of the Circuit Court of Appeals
Decision of the United States Supreme Court
10
11
Supervision and regulation of participating banks
Chartering and supervisory authority
Participation in the deposit guaranty system
Supervisory powers of the Bank Commissioner
Supervisory experience
Statutory limitations on bank operations
12
12
14
16
16
21
Insufficiency and closing of the guaranty fund
Inadequacy of the guaranty fund
Withdrawals from the system
Insolvency and disposition of the fund
Repeal of the law
26
26
27
28
30
Number, deposits, and failures of participating banks
Number of participating banks
Deposits of participating and nonparticipating banks
Concentration of bank deposits
Failures of participating and nonparticipating banks
Failures by size of bank
Comparison with failures in other states
Causes of bank failures
Procedures in the handling of failed banks
30
30
32
343436
40
43
48
Financial history of the guaranty fund
Sources and adequacy of information
Income, expenses, and deficit of the guaranty fund
Insured deposits and losses in failed banks, by years
Comparison of assessment receipts and losses in failed banks
Settlement of the affairs of the fund
50
50
51
57
Appraisal of the Kansas deposit guaranty system
The burden of assessments
Losses in mismanaged banks
Defects of the Kansas system
65
65
68
60
64
$9
LIST 0F TABLES
Table
Page
1.
Supervisory powers of Bank Commissioner in Kansas
17-18
2
Statutory requirements for bank operations in Kansas
22-25
.
3.
4.
5.
6
.
7.
Number of operating banks in Kansas participating and not
participating in the deposit guaranty system, 1909-1928, by years
31
Deposits cf operating banks in Kansas participating and not partici
pating in the deposit guaranty system, 1909-1928, by years
33
Number and deposits of banks participating in the Kansas guaranty
system, September 12, 1914, and September 15, 1922
35
Number and deposits of state banks in Kansas closed because of
financial difficulties, June 30, 1909, to March l4, 1929, by years
37
Number and deposits of failed banks entailing obligations on the
deposit guaranty fund in Kansas, June 30, 1909, to March 14, 1929,
by years
38
8. Size distribution of failed participating and nonparticipating banks
9.
10
.
u.
12
.
13.
14.
15.
16.
in Kansas compared with average size distribution of operating
state banks: period of operation of deposit guaranty system
39
Annual bank failure rates in Kansas, 1910-1928, compared with rates
in contiguous states and in the United States
4l
Causes of bank failures in Kansas reported by the Bank Commissioner,
period of operation of the guaranty system
45
Causes of bank failures in K&nsas, 1921-1930, reported by the Federal
Reserve Committee on Branch, Group and Chain Banking
47
Receipts, expenditures, and deficit of the Kansas depositors’ guaranty
fund
52
Rates and amounts of assessment, and other contributions by partici
pating banks, Kansas depositors* guaranty fund, by years, 1909-1929
54
Receipts, disbursements, and balance, Kansas depositors' guaranty
fund, by years, 1910-1950
55-56
Obligations to creditors paid and unpaid, failed banks involving
obligations on the Kansas depositors' guaranty fund, by year of
failure
58
Percentage of deposits insured, and percentage of insured deposits
recovered from liquidation of assets and paid by guaranty fund or
participating banks, bank failures under the Kansas deposit
guaranty system, by years
59
17.
6l
LIST OF TABLES - continued
Page
Table
18.
19-
Comparison of annual rates of assessment with rates required to
meet deposit obligations in failed banks, Kansas depositors'
guaranty fund, by years, 1909-1929
63
Selected data from statements of earnings and dividends, and total
capital accounts, all state banks in Kansas, 1909-1928
66
DEPOSIT GUARANTY IN KANSAS
The Kansas law for guaranty of bank deposits was approved on
March 6, 1909, and became effective on June 30 of that year. The Kansas
law differed in many respects from that of Oklahoma. The law remained in
operation until it was repealed on March 14, 1929. However, it became of
relatively slight importance in 1926, when the great majority of the partici
pating banks withdrew from the fund.
CHARACTER OP THE GUARANTY LEGISLATION
Admission of banks. Participation in the Kansas deposit guaranty
plan was voluntary. An incorporated State bank which desired to participate
in the guaranty system was required to be examined by the Bank Commissioner,
and approval was dependent upon his finding that the bank was solvent,
properly managed, and conducting its business in strict accordance with
the banking law. In addition, the bank was required to have a paid-up and
unimpaired surplus fund eq.ual to ten percent of its capital. Trust companies
and private banks were not eligible to participate in the guaranty system,
but were authorized to reorganize as State banks, and thereby become eligible,
by filing an amended charter. Banks organized subsequent to enactment of
the guaranty legislation, if located in cities or towns where all existing
banks had failed to become guaranteed banks within six months after passage
of the act, were eligible for admission to the guaranty system; and, if
located elsewhere, eligible after operating for one year.
In 1921 the
requirement of a year's operation was extended to all newly organized banks*
-2A State 'banking department bad been in operation in Kansas for 18
years prior to the adoption of deposit guaranty, and the banks had been sub
ject to more careful examination than in many other States* How many banks
which applied for admission to the guaranty system were rejected by the
i/
Commissioner is unknown.
B an k
By the close of the year 1909, nearly one-half of
the banks operating under State law had been admitted.
The law also provided that any national bank, at its option and
after an examination by and with the approval of the State Banking Commissioner,
could participate in the deposit guaranty system. However, the ruling of the
Attorney-General of the United States with respect to participation by na
tional banks in the deposit guaranty system in Oklahoma was applicable to
national banks operating in other States.
Consequently no national banks
were able to join the system in Kansas.
Withdrawal or exclusion from the guaranty system» A bank which de
cided to withdraw from the bank depositors' guaranty fund was permitted to do
so by displaying a notice to that effect and by notifying the Bank Commissioner,
effective at the expiration of six months.
The participation of a bank which? on examination was found to be
violating any provision of the deposit guaranty law and failed to comply within
thirty days after notice by the Bank Commissioner, was required to be termina
ted by the Bank Commissioner.
“
l/ The tenth biennial report of the State Bank Commissioner, dated
September X, 1910, p. xvi, states that applications were received from
several hundred banks to participate under the guaranty law, but gives no
information regarding the number approved or disapproved.
-3Deposits guaranteed. Deposit guaranty in Kansas, under the
original law, covered all deposits not bearing interest, time deposits
payable in not more than one year nor in less than six months and bearing
interest not in excess of 3 percent per annum, and savings accounts not ex
ceeding $100 for any one person and bearing interest not in excess of 3 per
cent. At the same time payment of interest by guaranteed banks at a rate
higher than 3 percent per year, except for existing contracts, was prohibited.
In 1911 the limitation on the guaranty of savings deposits to $100
per person was removed, and the guaranty extended to all deposits not other
wise secured* The prohibition of payment of interest on deposits by guar
anteed banks at a rate in excess of 3 percent per annum was modified to
prohibit payment of a rate in excess of that approved from time to time by
the Bank Commissioner« The maximum rate was to apply to both guaranteed and
non-guaranteed banks and to be uniform within each county. County, township,
city and school funds were brought under the protection of the guaranty fund
by a provision that no further security was required for the deposit of such
funds in a guaranteed bank. This provision was repealed in 1927•
The guaranty law, both in its original form and as amended, pro
vided that the guaranty should not apply to deposits which were primarily
rediscounts or money borrowed freon the bank, nor to deposits otherwise
secured.
The law also provided that the guaranty should not apply to a
bank's obligations as endorser upon bills rediscounted, nor to bills payable,
nor to money borrowed temporarily from its correspondents or others. An
amendment to the law in 1923 defined as "borrowed money" and therefore ex
cluded from guaranty any deposit on which a greater rate of interest was
paid, directly or indirectly, than that approved by the Bank Commissioner;
and also excluded from guaranty any deposits or credits obtained by fraud or
-4in violation of law or evidences of debt fraudulently issued.
Various cases arose in connection with, the definition of guar
anteed deposits which were carried to the Supreme Court of the State for
decision. In one case certificates of deposit and a draft issued by a bank's
cashier in connection with a land deal were held to have been issued in
transactions outside the business of the bank and therefore not protected
1/
by the guaranty fund, nor, in fact, an obligation of the bank. In another
case a certified check, which the payee had been unable to collect because
of the insolvency of the bank and had returned to the drawer, was held not
protected by the guaranty fund, though it had b een issued in exchange for a
£/
check on the drawer's account* In other cases, certificates of deposit were
found to have been, under the circumstances of their issue, loans to the bank
3/
and therefore not protected by the guaranty fund.
However, an agreement to
maintain a smaller reciprocal balance was not evidence that a certificate of
deposit represented a loan.
Other cases of litigation reaching the State Supreme Court involved
the question of whether certain certificates of deposit or deposit accounts
were excluded from protection by the fund because they were otherwise secured
or violated the Commissioner's interest rate regulation. A deposit otherwise
secured, according to theCourt decision, remained unprotected by the guaranty
fund even though the security was inadequate, and the personal endorsement of
a certificate by the bank president made it "otherwise secured," and therefore
5/
not protected by the guaranty. A certificate of deposit bearing interest at
1/ Fourth National Bank of Wichita v. Wilson, 204 Pac. 715, H O Kans* 380.
2/ Lloyd v. Butler County State Bank, 253 Pac. 906, 112 Kans. 835«
3/ American State Bank v. Wilson, 204 Pac. 709, 110 Kans. 520;
Mulberry State Bank v. Peterson, 236 Pac. 8l4, 118 Kans* 728.
4/ Farm Mortgage Trust Co. v. Wilson, 205 Pac. 6l0, 110 Kans. 786.
5/ City of Osawatomie v. Bone, 247 Pac. 432, 121 Kans. 545; American
State Bank”v. Wilson, 204 Pac. 709; 110 Kans. 520.
—
-5the maximum annual rate permitted under the Commissioner's regulation, but
compounded quarterly instead of semi-annually as specified in the regulation,
was not protected by the guaranty fund; and payment of a bonus is equivalent
/
1
to contracting for a higher rate.
However, payment of a bonus to a de
positor by a third party was not an indirect payment of interest by the bank
2/
and therefore did not exclude the deposit from protection by the fund. A
certificate of deposit payable in "6 or 12 months,” and a certificate "not
payable in less than 6 months and not extending for more than one year", were
held to have a definite date of maturity, as required by the Commissioner's
interest rate regulation, and therefore were protected by the fund; but a
certificate with interest payable for "all full months if left six months,"
did not have a definite maturity date and was excluded from protection by
3/
the fund.
Assessments. Assessments for meeting the cost of deposit guaranty
were levied upon the banks on the basis of deposits covered by the guaranty,
with a minimum of $20. The law provided for annual assessments of onetwentieth of 1 percent until the fund should reach a maximum of $500,000;
and for special assessments, if the fund should become depleted, at the same
rate, with the number of such assessments limited to five in any calendar
year. This was interpreted to include the regular assessment, so that the
maximum annual assessment was one-fourth of 1 percent.
To secure payment of the assessments, each guaranteed bank was
required to deposit with the State Treasurer selected bonds or cash amounting
T/ Bumaman v. Peterson, 232 Pac. 1047, 117 Kans. 612; American
State Bank v. Wilson, 204 Pac. 709; 110 Kans. 520.
2/ Farm Mortgage Trust Co. v. Wilson, 205 Pac. 6l0, 110 Kan. 786;
Farmers* ¿“Merchants'State Bank of Claflin v. Foster, 210 Pac. 490, 112 Kans. l4l.
3/ Songer v. Peterson, 220 Pac. 1060, 114 Kans. 900; Merchants' Reserve
State Bank v. Peterson, 230 Pac. 1056, 117 Kans. 186; Barrett v. Foster, 223 Pac.
1091, 114 Kans. 8o4, 115 Kans. 557*
-6to one-half of 1 percent of the bank's guaranteed deposits, with a miniwnim
of $500» In case of voluntary liquidation or withdrawal from the fund, the
bonds or cash deposited were to be returned to the bank after the closing of
affairs of all failed banks in liquidation at the effective date of withdrawal
and payment of the assessments levied to meet losses in those banks. In case
of termination of participation because of violation of law the deposited
bonds or cash were to be forfeited, with the bank (after 1923) remaining
responsible for assessments to meet losses in banks that failed prior to the
termination of its participation.
Interest on bonds deposited with the State Treasurer belonged to
the banks depositing them. The original law contained no provision regarding
interest on deposits of cash in lieu of bonds; an amendment in 1917 required
such cash to be deposited by the State Treasurer in a guaranteed bank, with
the interest credited to the bank depositors' guaranty fund.
These provisions remained unchanged until 1921, when the maximum
fund to be accumulated was raised to $1,000,000. Two years later, another
amendment provided that assessments in addition to the regular annual assess
ment should be made whenever the fund was reduced below $500,000, but only in
amounts necessary to cover losses which had matured and becane claims payable
upon demand against the guaranty fund, and limited, as previously to not more
than five assessments per year of one-twentieth of 1 percent each. The added
limitation was of considerable importance because of the method of paying de
positors in failed banks, described below, for it prevented an assessment to
cover losses in a failed bank until the bank had been completely liquidated.
Method of paying depositors in failed banks. In Kansas the de
positors' guaranty fund was not responsible for the immediate payment of the
-7deposits in a failed bank. The fund was responsible for the payment, upon
completion of the liquidation of a failed bank, of guaranteed deposits
which had not been paid from the proceeds of liquidation of the assets of
the bank.
When a bank participating in the guaranty plan was found by the
Bank Commissioner to be insolvent, the Commissioner was required to take
charge of the bank and to wind up its affairs.
The depositors, upon proof
of claim, were given interest-bearing certificates for the amount of their
deposits (at the contract rate on interest-bearing deposits, and at six
percent on deposits with no contract rate), which were paid so far as
possible from the proceeds of sale of assets of the bank and collections of
double liability of stockholders.
When these assets were exhausted, the
balances due on guaranteed deposits were paid from the bank depositors'
guaranty fund.
Interest on certificates issued to depositors of closed banks was
abolished in 1925 by an amendment to the law. This amendment as enacted
applied both to certificates to be issued in the future and to those then
outstanding, but the elimination of interest on outstanding certificates
1/
was declared unconstitutional by the State Supreme Court.
One other State, among those which adopted deposit guaranty plans
during the period 1908-1917, originally provided for payment of guaranteed
deposits upon completion of the liquidation of a failed bank.
The other six
States, and Mississippi after a few years, provided for immediate payment upon
presentation and proof of claim.
Indebtedness of guaranty fund. No provision was made for borrowing
by the depositors' guaranty fund, in the event that assessments collected
should be insufficient to meet the obligations of the fund*
http://fraser.stlouisfed.org/l/ Thompson
Federal Reserve Bank of St. Louis
v. Bone, liank Commfssioner (1926), 122 Kans. 195, 251 Pac.178.
-8 -
The law provided that, if the available money in the guaranty
fund after collection of the maximum assessments should be insufficient
to pay the guaranteed deposits of failed banks, the depositors were to be
paid pro rata to the extent of the money available, with the balance to be
paid from the next assessment.
Administration and custody of the fund. The administration of the
Kansas depositors' guaranty lav was placed in the hands of the Bank Com
missioner.
The Bank Commissioner was appointed by the Governor vith the
advice of the Senate, and must have had three years, (after 1927> five years),
of practical knowledge of banking or have served at least one term as bank
commissioner.
Assessments under the deposit guaranty lav vere paid to the State
Treasurer and placed in depository banks for State funds subject to the call
of the Bank Commissioner.
Expenses of administration. No specific provision was made in
the depositors' guaranty lav for expenses of administration. The cost of
operating the office of the Bank Commissioner was met by appropriations
of State funds. However, fees levied upon the banks for each examination,
vhich were collected by the Bank Commissioner and paid to the State Treasurer,
covered most of the expenses of the Commissioner's office.
CONSTITUTIONALITY OF THE BANK DEPOSITORS' GUARANTY LAW
Bankers in Kansas doubted the leg&lity of the bank depositors'
guaranty lav. A group of State banks, and a group of national banks, and also
a stockholder in a State bank, brought suits in Federal court to restrain the
State officials from carrying out the lav, on the ground that it violated the
-9Constitution of the United States. The complaints were heard by the Circuit
Court of the United States for the District of Kansas in December 1909.
The State banks contended that the guaranty law was in conflict
1/
with the Federal constitution for the following reasons:
1. That the effect of the law would be to drive them out of
business, thus depriving them of their property without due process
of law, unless they contributed to the guaranty fund.
2. That in case they had given credit to a bank which
became insolvent, their rights of recovery would be impaired and
they would be deprived of property without due process of law,
since depositors in an insolvent guaranteed bank would be pre
ferred creditors.
3 . That certain conditions of the guaranty plan were
unreasonable and arbitrary.
4. That taxation was required to meet the expenses of
carrying out the guaranty plan.
The national banks claimed that the guaranty law was in conflict
£/
with the Federal constitution for the following reasons:
l/ This list is based on the summary of the plaintiffs’ arguments
given in the opinion of the United States Supreme Court in reviewing the case
(see note 3/ P« 12). The contentions of the State banks are given in greater
detail in the opinion of the Circuit Court. (Larabee v. Dolley, State Bank
Commissioner, et al.; Assaria State Bank of Assaria, Kara., et al., v. Same;
Abilene National Bank of Abilene, Kansas, et al., v. Same, 175 Fed. 3^5)•
The State banks also claimed that the law violated the Constitution of the
State of Kansas.
2/ These contentions were held to be in violation of the fifth and
fourteenth-amendments to the Constitution of. the United-Stataà.- This statement of the
arguments of the national banks is based on the summary given in the opinion
of the United States Circuit Court of Appeals, Eighth District (Dolley, State
Bank Commissioner of Kansas, et al., v. Abilene National Bank of Abilene,
Kansas, et. al., 179 Fed. 46l). The contentions of the national banks are
given in greater detail In the opinion of the Circuit Court, op. cit., 175 Fed.
365.
-101. That, since they could not avail themselves of the pro
visions of the statute, the law operated to deny them the eq.ual
protection of the law.
2. That the efficiency of the national banks as instrumen
talities of the Federal government would be impaired, since the
effect of the law would be to attract depositors from the national
banks to the guaranteed State banks.
The stockholder of the State bank claimed that the act violated
the Federal Constitution because it impaired the obligation of his contract
as a shareholder in the bank by applying the property of the bank to the
payment of private debts not contracted by the bank or by himself and without
y
his consent and therefore took his property without due process of law.
Decisions of the Circuit Court and of the Circuit Court of Appeals.
The Circuit Court of the United States for the District of Kansas agreed that
the bank depositors' guaranty law was unconstitutional on the grounds claimed
by the national banks and by the stockholder of the State bank, and granted
a temporary injunction restraining the State officials from carrying out the
law. With regard to the complaint of the State banks, the Circuit Court held
that they did not have a case within the jurisdiction of the court, on the
ground that they did not show that their rights were infringed. They could,
the Court pointed out, meet the conditions necessary to obtain the benefit
of the law, and could withdraw any credit outstanding to guaranteed banks,
%1
and thus could avoid loss of property on account of the act.
l/ The stockholder contended-that the law was in violation of article 1
of section-10, and of the fourteenth amendment of the Constitution of the United
States. (Opinion of the Circuit Court, op. cit., 175 Fed. 365).
2/ Qp. cit., 175 Fed. 3^5.
-11The Bank Commissioner and Treasurer of Kansas appealed to the
United States Circuit Court of Appeals, Eighth Circuit, which reversed the
opinion of the Circuit Court and dismissed the injunction. The grounds
for this action were summarized by the Circuit Court of Appeals as follows:
"The national banks owe their existence to the laws of the United
States...Their exclusion from the operation of the statute in question
is not from any design on the part of the state to discriminate against
them, but results from the limitation of governmental powers...
"The fourteenth amendment provides that no state s h a l l 'deny to
any person within its jurisdiction the equal protection of the laws.'
A conclusive answer to the objection to the Kansas statute now being
considered would seem clearly to appear from the face of the amend
ment itself...The amendment does not profess to secure to all persons
in the United States nor all persons in the same State the benefit of
the same laws. ...Jurisdictional limits are an obvious and sufficient
reason for lack of universal uniformity in legislation. The equality
clause of the amendment does not require indiscriminate operation of
state laws, but proceeds upon due consideration of the relations of
persons to the state and to the legislation in question...Such has
been the consistent holding of the Supreme Court...
"The effect of the Kansas statute upon the business of the
national banks will at the most be indirect and incidental...
"We have not considered the merits of the guaranty plan, whether
practically beneficient, experimental, or illusory. Such matters are
for the state Legislature. Our province is confined to the question
whether the exercise of its powers is within constitutional limits so
far as the national banks are concerned. We think the objections they
urge are so clearly without foundation, the temporary injunction was
improvidently granted." l/
Decision of the United States Supreme Court. State bankers in Kansas
were dissatisfied with the dismissal, of their case by the Circuit Court of the
United States for the District of Kansas and appealed to the United States
Supreme Court. The United States Supreme Court heard the arguments of the
Kansas bankers in December 1910, along with cases regarding the constitutionality
of deposit guaranty laws in Oklahoma and Nebraska. The Court rendered its
~
17 Dolley, State Bank Commissioner of Kansas, et al. v. Abilene
National Bank of Abilene, Kansas, et al., 179 Fed» 46l. Decided May 20, 1910.
-12decision on January 3, 1911, that the Oklahoma law was constitutional, and
stated that the opinion was applicable to the Kansas law, except so far as
y
the Kansas law showed certain minor differences from that of Oklahoma*
These minor differences were also dismissed as not affecting the constitu2/
tionality of the Kansas bank depositors1 guaranty law.
The national bankers also appealed to the United States Supreme
Court from the decision of the Circuit Court of Appeals. The Supreme Court
3/
upheld the opinion of the Circuit Court of Appeals.
SUPERVISION AND REGULATION OF PARTICIPATING BANKS
Chartering and supervisory authority. State banks in Kansas had
been subject to supervision by a Bank Commissioner, with power to conduct
examinations and require reports, for eighteen years prior to the enactment
of the depositors' guaranty law.
The Bank Commissioner was appointed by the
Governor, with the advice of the Senate, for a tern of four years. The
Commissioner and each of his deputies must have had, prior to appointment,
three years practiced, knowledge of banking or one term as Bank Commissioner.
During the life of the guaranty fund no changes of major importance occurred
in the powers of the Bank Commissioner, except as a member of the Charter
Board with respect to the opening of new banks.
Charters for new banks, as for other corporations, were granted by
the Charter Board, which consisted of the attorney-general, the secretary of
T/ For a summary of the decision of the United States Supreme Court
regarding the Oklahoma depositors' guaranty fund law see the preceeding chapter,
"Deposit Guaranty in Oklahoma," pp.
2/ Assaria State Bank of Assaria, et al. v* Dolley, Bank Commissioner
of the StaTe of Kansas and Tulley, State Treasurer, United States Supreme Court
Reports, 55 Law ed., U.S. 219-221, pp. 123-28.
3/ Abilene National Bank of Abilene, et al. v. Dolley, Bank Com
missioner, and Tulley, State Treasurer, United States Supreme Court, 57 Law ed.
707.
-13state, and the Bank Commissioner. Until 1911/ applications for bank and
other charters were to be granted if the purpose was a lawful one and the
applicants acting in good faith; and in the case of banks the Commissioner
was to make an examination and issue a certificate of authorization to trans
act banking business if in compliance with the banking law. In 1911 an
amendment to the incorporation law provided that in the case of an application
for a bank charter, the Charter Board should make a careful examination of
the financial standing and character of the incorporators, the public
necessity in the community in which the bank was to be located, and whether
the capital proposed was commensurate with the requirements of law, and to
refuse a charter if either of these was determined unfavorably.
The validity of this limitation on the organization of new banks
was soon questioned by proposed organizers of a fifth bank at Abilene, on
the ground that it violated the fourteenth amendment to the Constitution of
the United States. The Supreme Court of Kansas ruled that the law did not
contravene that amendment and was a reasonable exercise of the police power.
This decision is of particular interest because of its description of the
role of banks and the consequent difference between a bank failure and a
failure of other types of enterprise.
Banks are indispensable agencies, through which the industry,
trade, and commerce of all civilized countries and communities are
now carried on. ...banking has ceased to be, if it ever was, a
matter of private concern only, like the business of a merchant,
and for all purposes of legislative regulation and control it may
be said to be "affected with a public Interest." ...If a merchant
cannot meet his bills promptly, the general public is not disturbed.
He is not ruined at once, and if he should fail the effects are
limited to comparatively a few persons. If a bank is unable to meet
a check drawn upon it, the refusal is an act of insolvency. Its
doors are closed, its business is arrested, its affairs go into
liquidation, and the mischief takes a wide range. Those who have
-14been accommodated with loans must pay, whatever their readiness or
ability to do so. Further advances cannot be obtained. Other banks
must call in their loans and refuse to extend credit in order to
fortify themselves against the uneasiness and even terror of their
own depositors. Enterprises are stopped. Business is brought to a
standstill. Securities are enforced. Property is sacrificed, and
disaster spreads from locality to locality. All these incidents of
the banking business are matters of common knowledge and experience.
They clearly distinguish banking from the ordinary private business,
illustrate its public natur^, and show that it is properly subject
to the police power of the state, vested in its Legislature. 1/
A general revision of the State banking code, separate from the
deposit guaranty law, was also made in 1909« This code remained essentially
the same, with relatively few modifications of the statutory restrictions
on the operations of banks until the guaranty fund had become relatively
unimportant through the withdrawal of most of the participating banks.
In 1925 a state banking board was established to act in an advisory
capacity with the Bank Commissioner concerning all matters pertaining to
the conduct of the banking department and the administration of the State
banking laws. The board was composed of the Commissioner as ex officio
a member and chairman, and four other members appointed by the Governor for
the same term of office, all to be bankers of at least five years actual
banking experience in Kansas. The members of the board were paid expenses
and per diem for time actually engaged in performing their duties, with no
salary.
Participation in the deposit guaranty system. Except for the
special examination required for admission to the guaranty fund, and the
power to terminate membership in the guaranty fund for violation of the
guaranty law, the guaranteed banks were subject to the same supervision as
other State banks.
The absence of information regarding the results of
examinations of banks for admission to the guaranty system has been men
tioned above. However,
1/ Schaake,et
http://fraser.stlouisfed.org/
7, 1911), XL pac. 80,
Federal Reserve Bank of St. Louis
8
the Bank Commissioner, in his Biennial Report,
al. v. Dolley, et al. (Supreme Court of K&nsas, October
85 Kans. 598).
-15September 1, 1920, Indicated, that high standards were adhered to in exam
ining banks for admission to the guaranty system.
"We now have 676 State "banks whose deposits are guaranteed by
the Bank Depositors' Guaranty Fund of Kansas, and there are continual
requests from the State banks to come under the law. The department
has made the requirements for operation under its protection very
stringent. The qualifications of the management and the condition
of the bank's books, notes and records must be of the highest
standard. It is our opinion, that as long as the law is optional,
that these requirements should be rigid." 1/
Information with respect to terminations of membership in the fund
for violation of law is also inadequate• In one case, which eventually came
before the State Supreme Court, the Bank Commissioner wrote a bank that had
for many years
been violating/the law regarding loan limitations:ieap-Maay-yeasrs-» "...your
bank is no longer under the depositors' guaranty law and your depositors are
no longer protected thereby. Kindly remove the guaranty sign and erase any
reference to guaranteed deposits from your windows, stationery or other
places." The bank paid no attention to the letter. About six weeks later
the bank was closed for insolvency, and the Commissioner's failure to issue
guaranty fund certificates led to litigation. The Court found that the bank
had complied with all provisions of the deposit guaranty law, though violating
other laws, and the Commissioner's power to terminate participation was limited
to cases of violation of the deposit guaranty law.
In addition, the depositors
had not been notified, and their right to protection was not cut off by the
Commissioner's letter to the bank, even though it were assumed that the letter
2/
had the effect of cancelling the bank's participation in the system. So far
as is known, this is the only action initiated by the Bank Commissioner during
il
the entire period of the fund to terminate the participation of any bank.
1/ Fifteenth Biennial Report of the Bank Commissioner of the State of
Kansas, 1920, p. 5*
2/ Board of Commissioners of Labette County v. Bone, State ttawk Com
missioner, {supreme Court of Kansas," April 10, 1926), 245 Pac. 123, 120 Kans. 673.
3/ In another case there is uncertainty whether the bank withdrew, or was
from further participation because of failure to pay the assessments
excluded
http://fraser.stlouisfed.org/
levied. Reference to Wichita State Bank in State v. Bone,244 Pac. 852,120 Kans.620.
Federal Reserve Bank of St. Louis
-16Supervisory powers of the Bank Commissioner» The powers of the
Bank Commissioner over all State hanks related chiefly to examinations, bank
personnel, maintenance of capital and reserves, and the closing of banks. The
powers of the Commissioner are summarized in Table 1.
Supervisory experience. The Bank Commissioner during the first four
years of the period of operation of the deposit guaranty system, J. N. Dolley,
endeavored to improve the quality of supervision by appointing examiners on
a basis of qualifications as indicated by examinations and by eliminating
those who had been appointed for political reasons.
In 1915 the staff of
the department was placed under the State civil service, with competitive
examinations for examiners. Nevertheless, bank supervision was handicapped,
as in other States, by frequent changes in the Commissionership and by a
salary scale for examiners insufficient to retain the most competent men.
During the twenty years that the system operated, eight persons held the
office of Commissioner. Of these, three served the statutory four-year term,
the others for shorter periods, and none was reappointed to a second term.
The high turnover of examiners is indicated by the fact that the lists of
examiners in the Biennial Reports of the Bank Commissioner from 1908 to 1928
show the names of 95 persons, of which 68 appear only once, 2k appear in two
reports, and 3 in three reports.
Commissioner Dolley also attempted to improve the quality of bank
management by raising the caliber of cashiers and managing officials. In
his report to the Governor in 1910 he stated that several cashiers and
managing officials of State banks had been removed from their positions for
-17Table 1 .
SUPERVISORY POWERS OF BAM COMMISSIONER IN KANSAS
Item
Opening of new banks
Examinations and reports
of condition
Frequency of examinations
1/
Powers
Commissioner to issue certificate of
authorization to transact banking business
if examination reveals compliance with
banking laws. In 1911, as member of
State Charter Board to participate in
decisions regarding chartering of new banks.
At least twice a year, by Commissioner or
deputy, and whenever deemed necessary.
Scope of examinations
Full, true and careful examination.
Reports of condition
Four each year on form prescribed and when
called for by Commissioner, and any addi
tional statements when deemed necessary
to obtain a full and complete knowledge
of condition of bank; to be verified by
oath of president or cashier and attested
by signature of at least three of Directors.
Bank management
Removal of undesirable assets or
discontinuance of undesirable
practices
Authorized to order any loan in excess of
legal limit to be reduced to the limit
within sixty days.
Impairment or deficiency of
capital
Commissioner to require impairment of
capital to be made good within ninety days.
Impairment and use of reserves
Commissioner to require impairment of re
serves to be made good within thirty days.
In 1915 empowered to regulate conditions
under which checks could be drawn on portion
of reserves held in other banks, and to sus
pend reserve requirements for specified
periods of time.
Removal of bank officers,
directors, or employees
Upon written order of Bank Commissioner,
Board of Directors to remove any officer
found to be dishonest, reckless or incom
petent; failure to do so cause for cancella
tion of certificate of authorization to
transact business.
Table 1. SUPERVISORY POWERS OF BANK COMMISSIONER IN KANSAS (continued)
Item
Powers
Taking possession or
closing a bank
Required to close and take possession of a bank
If insolvent, with following conditions deter
mining insolvency: when cash market value
of assets insufficient to pay liabilities;
when unable to meet demands of creditors
in usual and customary manner; when legal
reserve not made good as required by law.
If officers refuse to submit bank to examina
tion or be examined under oath as to bank's
condition.
If examination shows bank has willfully vio
lated any requirement of the banking law.
If bank refuses or neglects to comply within
ninety days with any requirements lawfully
made by Commissioner in writing.
If capital impaired for period exceeding
90 days.
If affairs placed by bank under control of
Commissioner.
Handling of closed banks
Return to owners
Commissioner, by thorough examination, to
ascertain whether bank can resume business or
liquidate indebtedness to satisfaction of all
creditors.
Liquidation
Unless able to resume business or selfliquidate, closed bank to be liquidated under
direction of Commissioner by receiver appointed
by him. In 1925/ authorized to investigate
and audit all receiverships of failed State
banks liquidated or in process of liquidation
since 1919«
Sale of assets or capital
stock
On court order, and at request of Commissioner,
assets may be sold by receiver.
l/ As at beginning of deposit guaranty system (i.e., as in 1909 revision
of banking laws) with amendments to 1927, when most of the participants in the
deposit guaranty system had withdrawn.
-19various causes of inefficiency, dishonesty and questionable hanking.
1/
In his
report in 1912, he stated that numerous incompetent and dishonest officers
had been summarily removed from office and their places filled with practical
£/
and experienced bank managers. In the same report he stated:
"This department has just recently issued an order providing
that any person desiring to become a cashier or managing officer
of a Kansas state bank must have had at least two years' actual,
continuous experience in banking, and the record of this two years'
experience must show that they were persistently faithful to their
work; and further than this, unless they have had at least five years'
actual experience and their record first-class for that period, they
must report to the banking department and take a written examination
on the Kansas banking laws in general, the corporation law as it
applies to banks, the negotiable instruments law, and the practical
and technical points of everyday business and banking. If they pass
this examination with a grade of at least seventy per cent they are
issued a certificate entitling them to become the cashier or
managing officer of a Kansas state bank." 3/
These efforts to improve the caliber of bank managing officers
appear to have been relaxed under succeeding Bank Commissioners. About three
years later the examinations for bank cashier were discontinued, and no
mention is made in later reports of the Commissioners, until 1928, of use
of the Commissioner's power to obtain the removal of bank officials found to
be incompetent or guilty of illegal or questionable practices. The quality
of supervision appears to have deteriorated in other respects also. Banks
found to be insolvent or in financial difficulties were nursed along by the
department instead of being closed, and Kansas bankers later reported that
during this period supervision was the poorest in the history of the banking
y
department.
17 Tenth Biennial Report of the Bank Commissioner, Sept. 1, 1910, p. xiv.
2/ Eleventh Biennial Report of the Bank Commissioner, Sept. 1, 1912, p. 3 .
3/ Ibid., p. 5«
"%/ Interviews in 1934 with Kansas bankers familiar with the situation
during the-period of deposit guaranty.
-20Throughout the period when the deposit guaranty system was in
full operation, supervision was handicapped by insufficient funds and
operating staff. The annual cost of the banking department, from 1910 to
y
1926, was approximately $40,000 to $85,000, or about $4-5 to $85 per bank.
The Bank Commissioner's salary was $2,500 up to 1915# and $4,000 from that
year to 1925*
Salaries of the deputies, who were the bank examiners, were
$1,800 until 1919 and $2,500 from that year to 1925. The number of bank ex
aminers ranged from 8 to 12. The number of operating banks ranged from about
800 to about 1,100. With two examinations a year, each examiner was apparently
£/
required to make nearly two hundred examinations a year.
The effectiveness of bank supervision appears also to have been
handicapped by deficiencies in the statutory requirements for bank operations.
The most serious defect was the absence, up to 1927, of any special limita
tions on loans by a bank to its own officials or directors. This omission
was recognized by the Bank Commissioner, and restrictive legislation was
3/
recommended in his biennial reports in 1920 and in 1922. Another serious
omission was the lack of any penalty for violation of the section of the law
l/ Expenditures of the building and loan bureau and of the blue-sky
department, which were also under the supervision of the Bank Commissioner,
are not included in these figures. A special appropriation in 1925 for exami
nation and audit of receiverships is also excluded. Appropriations for the
banking department were substantially increased in 1926, with an increase in
the number of examiners.
2/ The Federal Deposit Insurance Corporation in 1942 had 4 examiners
and 4 assistant examiners in Kansas to make one examination per year of approxi
mately 245 banks, or an average of about 30 examinations per year per member of
the examining force. In comparing the size of the examining force with the ex
amining task allowance should also be made for the fact that the banks examined
by the Corporation are of larger size, on the average, than those examined by
the State examiners in the 1920*s. About one-fifth of the banks examined by the
Corporation in 1940 held deposits of $500,000 or more, while only one-tenth of
the banks examined by the banking department of the State in the 1920 *s held de
posits of $500,000 or more.
3/ Fifteenth Biennial Report of the Bank Commissioner, p. 5/ and
Sixteenth Siennial Report of the Bank Commissioner, p. 7»
-21limiting loans to a single borrower. However, it is doubtful that the
powers possessed by the Bank Commissioner were used to the utmost extent.
Even though no penalty was prescribed for loans in excess of the legal limit
to a single borrower, the Commissioner had power to require the reduction of
such loans to the legal limit, and to close a bank if it was found to have
wilfully violated any requirement of the law; and any bank which failed within
ninety days to comply with any lawful requirement of the Commissioner in
writing, according to the law, forfeited its charter.
There was also a provision of the law in force at the time deposit
guaranty was inaugurated, but which was repealed in 1917/ that held great
potentialities for minimizing the risks of failure. This was the requirement
that a bank should not receive deposits in excess of ten times its unimpaired
capital and surplus. Retention and enforcement of this provision, accompanied
by thorough bank examinations and careful appraisals of each bank's net worth,
could have been used as a powerful weapon in the prevention of unwise ex
pansion and in forcing banks to correct improper financial policies long
before the stockholders1 cushion had been wiped out by losses.
Statutory limitations on bank operations. The principal statutory
limitations on banking operations, under the banking law in force at the
time of enactment of the guaranty law and amendments adopted while the
guaranty law was in operation, are summarized in Table 2.
The major defect in the statutory req.uirements for bank operations in
Kansas as indicated by comparison with provisions in other States, and by the
comments and recommendations of the Bank Commissioners in their biennial reports
to the Governor, was the absence of limitations on loans to officers, employees,
directors and stockholders, and the absence of penalties for violation of the
mAvimum size of loans to a single borrower.
-22Table 2. STATUTORY REQUIREMENTS FOR BARK OPERATIONS IN KANSAS
1/
Provisions of law
Item
Responsibility of officers,
directors, and stockholders
Examination of bank
Directors to make quarterly a thorough examina
tion of the books, records, funds and securities
to be recorded in detail and copy forwarded
to bank commissioner«
Losses resulting from viola
tions of law
Officers and directors personally liable for all
deposits received and debts contracted knowing
bank to be insolvent or in failing condition*
Officers also personally liable for overdrafts.
Liability of stockholders
Par value of shares (i*e*, usual double
liability).
Bonding of active officers and
employees
Good and sufficient bond, approved by Board of
Directors and held by custodian appointed by
them, required for cashier and any other offi
cers handling funds, amended in 1919 to include
employees.
Limitations on loans and
investments
Loans to bank examiners
No specific provisions; however, Bank Commissioner
or deputies not to examine bank in which a stock
holder in any way financially interested.
Loans to officers and
employees
No provision.
Loans to directors
No specific provision.
Loans to stockholders
No provision.
Maximum to single borrowers
(not to apply to discounts on
bills of exchange, warehouse
receipts, or commercial or
business paper actually owned
by the person negotiating the
same)
15 percent of capital and surplus with loans
in excess of this amount to be reduced within
sixty days on written order of Commissioner.
Maximum secured by real estate
No provision.
Secured by own capital stock
(applicable also to purchase
of own stock)
Forbidden unless necessary to prevent loss on
debt previously contracted; and if acquired
to be disposed of within six mouths.
-23Table 2. STATUTORY REQUIREMENTS FOR BANK OPERATIONS IN KANSAS (continued)
Item
Limitations on ownership of
real estate and stocks
Maximum in banking house and
equipment
Provisions of law
33 l/3 percent of capital. In 1921, amended
to 50 percent of capital and surplus.
Time limit on real estate
acquired by collection of debt
Five years and to be disposed of within thirty
days thereafter.
Other real estate
Forbidden, except that acquired by collection
of debt, or held at time of passage of Act
with latter limited after one year to 50 per
cent of capital (amended in 1917 to 33 l/3
percent of capital and surplus and in 1921 to
50 percent of capital and surplus).
Bank stocks
Prohibited, except Federal Reserve bank stock
after 1915* 2/
Other corporate stocks
Prohibited, except when acquired through col
lection of debt and to be disposed of within
six months.
Limitations relating to deposits
Maximum aggregate deposits
Ten times capital and surplus continuously for
six months. Repealed in 1917« 3/
Maximum rate of interest
payable on deposits
3 percent on deposits eligible for guaranty.
In 1911, amended to rate approved from time
to time by Commissioner, to be uniform for
all banks in each county.
Receipt of deposit when in
solvent or in failing circum
stances
Forbidden.
Required reserves
Total required kj
Until 1915/ 20 percent of total deposits in
cities and towns with population under 5/000,
and 25 percent of total deposits in cities with
population over 5/000, or if bank a reserve
depository. In 1915/ for banks in cities under
50.000 population with credits due other banks
less than 20 percent of deposits - 12 percent
of demand deposits and 5 percent of time de
posits (amended in 1919 to 7 percent and 3 per
cent, respectively); for banks in cities over
50.000 population, and in smaller cities if
credits due other banks are more than 20 percent
of deposits - 15 percent of demand deposits and
5 percent of time deposits (amended in 1919 to
10 percent and 3 percent, respectively).
-24Table 2. STATUTORY REQUIREMENTS FOR BANK OPERATIONS IN KANSAS (continued)
Item
Required reserves (continued)
In actual cash in hank
Character of balance
Limitations on borrowing
Maximum amount
Maximum value of assets
pledgeable as security
Limitations on payment of
dividends
Earnings to be carried to
surplus prior to dividends
Provisions of law
One-fourth; amended in 1915 to one-third, re
ducible to one-fourth upon approval of Bank Com
missioner for a bank in a city with less than
1,000 population.
In cash or in reserve depositories located in
commercial centers or other points approved by
Bank Commissioner, but not in banks in which
depositing bank stockholders have stock, unless
such bank is approved by the Commissioner.
50 percent of paid-up capital, for temporary
purposes; Commissioner to require cessation of
borrowing for reloaning.
120 percent of amount borrowed.
10 percent until surplus equal to 50 percent
of capital.
When losses equal or exceed un
divided profits
Not in excess of 50 percent of net earnings
until surplus restored to former amount.
When reserve impaired
Forbidden.
When insolvent or capital im
paired
Forbidden.
Maximum
Not in excess of net profits on hand after
deducting losses and bad debts.
frfirnwnmi capital Stock
New banks
Other banks
Graduated by population of city or town:
Over 15,000 population
2.000 to 15,000 population
under 2,000 population (after 1925)
1.000 to 2,000 population (to 1925)
500 to 1,000 population (to 1925)
Under 500 population (to 1925)
$50,000
25/000
15,000
20,000
15,000
10,000
May not reduce capital below above amounts and
subject to limitations on deposits (above).
-25Table 2. STATUTORY REQUIREMENTS FOR BANK OPERATIONS IN KANSAS (continued)
Footnotes
1/ As at beginning of the deposit guaranty system (i.e., as in the 1909
revision of the banking lavs) with amendments to 1927, vhen most of the partici
pants in the deposit guaranty system had withdrawn. Except as noted, provisions
related to all incorporated State banks, whether or not participating in the
guaranty system, and so far as applicable, also to private banks.
2/ In 1921 banks with minimum capital and surplus of $50,000 permitted to
invest not over 5 percent of paid-in capital and surplus in one or more Edge Act
corporations.
3/ Any bank accepting deposits in excess of this amount for a continuous
six-month period and for 30 days thereafter subject to cancellation of charter
and of participation in guaranty system.
k f In 1915 Bank Commissioner authorized to suspend requirements for 30 day
periods and to renew suspension for 15 day periods.
-26INSUFFICIENCY AND CLOSING OF THE GUARANTY HJND
Inadequacy of the guaranty fund» The first failure of a participant
bank occurred after the Kansas guaranty fund had been in operation a little over
a year.
The liquidation of this bank was completed, and the balance due de
positors paid by the guaranty fund, three years later. No other failure
occurred until the fund had been in operation nearly a decade, and it was,
of course, still later before any obligations of the fund arising from that or
subsequent failures became due, since payments from the fund were not made until
completion of liquidation of a failed bank.
The system was fully operative in all respects, with the fund meeting
its obligations as they became due, for nearly fourteen years. However, a
large future liability was accumulated as a result of the numerous failures
accompanying and following the depression of 1921. By June 1923 a total of
37 participant banks, with deposits of nearly ten million dollars, had closed
because of financial difficulties.
Of these, four had been reopened with no
obligation falling on the guaranty fund, and three had been completely liqui
dated and the depositors paid in full at a cost to the guaranty fund of about
$90,000. The future obligations of the fund in the other 30 banks, consisting
of deposits unrecoverable from the proceeds of liquidation, together with
interest to completion of the liquidation process and payment by the fund,
amounted to upwards of $4 million.
With so small an amount of obligations
having fallen due, the income of the fund had been restricted to the regular
assessments of l/20 of 1 percent per year and one special assessment at this
rate levied in 1922. By June 1923 the accumulated balance of the guaranty
fund was about $835/000.
-27About the middle of June 1923 the American State Bank, Wichita,
was closed. This had been the largest bank operating under the State law,
though it had dropped to second place at the time of failure, when it had
deposits of nearly $5 million.
It was apparent that liquidation of this
bank by the usual process might wreck the guaranty system, in view of the
fund's liability in banks still in process of liquidation. A year after
its failure, the American State Bank was reorganized under the name, State
Reserve Bank, with the banks participating in the deposit insurance system
assuming about $1,400,000 of the loss.
Withdrawals from the system. For another two years the guaranty
fund continued to pay depositors in the failed banks as liquidation was
completed, using the proceeds of special assessments, which began to be
levied at the maximum number per year in 1924, and depleting the previously
accumulated balance. By March 1925/ & total of 18 banks had been paid off
by the fund. Then the Bank Commissioner ceased making payments from the
guaranty fund because of difficulties encountered in determining the precise
date on which the liquidation of each bank was completed and hence the order
of priority of the obligations falling upon the fund. At that time, about
40 banks, with deposits at time of failure of $9 million and in which the
eventual losses amounted to about $4 million, were in process of liquidation,
while the balance in the guaranty fund had been reduced to a small figure.
With a prospect of continued assessments for several years at
the maximum rate of one-fourth of 1 percent per year, the participating
banks began to withdraw from the system. However, withdrawal was deterred
by the provision of the law that six months' notice of intention to withdraw
was required and the provision that banks which withdrew remained liable for
-28assessments to cover losses in any banks which failed prior to the expiration
of the six months' period» The bonds which the banks had deposited as surety
for the payment of assessments, amounting to one-half of 1 percent of the
■bank’s guaranteed deposits, were much smaller than the prospective future
y A test
assessments to meet losses in the banks which had already failed.
case was therefore brought to the State Supreme Court to determine whether
a bank might withdraw and be released from the liability of future assessments
by forfeiting the bonds deposited with the State Treasurer.
The Court
decided on April 10, 1926, that this could be done and most of the participating banks withdrew during the next few months.
Insolvency and disposition of the fund. With the withdrawal of
most of the banks from participation in the guaranty system, the insolvency
of the fund was obvious, since the liabilities in closed banks were much
greater than the proceeds from the sale of the forfeited bonds. Under these
circumstances depositors in some of the closed banks contended that the
amount realized from the bonds should be distributed pro rata among holders
of all of the unpaid certificates instead of being paid to the holders of
certificates in banks the liquidation of which, was completed at the earliest
dates. This view was not accepted by the State Supreme Court, and the validity
of the law as stated was affirmed by the Court, namely, that payments should
be made to depositors in failed banks in the order of priority of completion
of liquidation, and a special Commissioner was appointed as a fact-finding
agent of the court to determine the priority of completion of liquidation
'
17 The losses actually sustained in the banks in process of liquida
tion in early 1925 were more than 2 percent of the aggregate deposits of the
operating guaranteed banks at that time.
2/ State of Kansas v. Roy L. Bone, Bank Commissioner (1926), 2kk Pac.
852, 120 Kans. 620, and 246 Pac. 180, 121 Kans. 151.
-29of the various banks. The report of this Commissioner, which was made after
holding hearings open to all interested parties, was accepted by the Court
1/
in a decision on April 7, 1928; and the proceeds from the sale of the bonds
were distributed on August 1 of that year. Full payments were made on the
deposits of nine banks, which, with two others that had been paid by the
Commissioner subsequent to March 1925, brought to 27 the number of failed
banks in which all guaranteed deposits were paid. The depositors of two other
banks, which were found to have been fully liquidated on the same day, received
enough, from the distribution of the proceeds of the forfeited bonds, together
with a final dividend after the law was repealed, to give them a recovery of
93 percent and 95 percent, respectively, of their deposits. Except for the
depositors of these two banks, all of the depositors paid by the fund received
interest to the date of payment on the balances due them. Under the court
decision, the cost of litigation regarding the disposition of the assets of
the guaranty fund was borne by the holders of the certificates that were finally
paid, and this was prorated and deducted from the total principal and interest
due each depositor.
Because of variation in the length of time required to complete
liquidation of the various banks, the order in which the banks were completely
liquidated differed considerably from the order in which they failed. Con
sequently, the guaranty fund paid off the remaining claims of depositors of
some of the banks which failed in each of the years 1921, 1922, 1923# and
1924, and did not pay off the depositors in other banks which failed in each of
those years. No banks which failed in 1925 or in later years received anything
from the guaranty fund. All of the guaranteed banks which failed prior to
1921 were paid off in full by the guaranty fund.
Xf State of Kansas v. Roy L. Bone, Bank Commissioner (1928), 128
Kans. 818, 266 pac. 85.
-30Under the decision of the State Supreme Court in 1926, banks with
drawing from the fund, and those ceasing operations through liquidation or
conversion to a national bank were entitled to have returned to them the
bonds or cash deposited as surety for future assessments, provided that these
bonds or cash were not needed to pay claims against the guaranty fund arising
from banks which had closed prior to the date of withdrawal or cessation of
operations.
In view of the large claims upon the fund in connection with
banks which failed prior to 1926, no such refunds were made.
Repeal of the law. On March l4, 1929, the deposit guaranty law was
repealed. The act of repeal authorized the return of the surety bonds or
cash to banks which had paid all assessments to the date of repeal. However,
the State Supreme Court held that the authorization of the return of the
bonds was invalid since the certificate holders of failed banks which had
1/
been members of the fund had a vested right in the proceeds of the bonds.
NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number of participating banks. The number of banks operating in
Kansas which participated in the guaranty system, the number eligible for
participation which did not do so, and the number ineligible for participation,
are given in Table 3* The ineligible institutions include national banks,
trust companies, and private banks. The great majority of the ineligible
institutions were national banks. The maximum numbers of trust companies and
of private banks during this period were, respectively, 18 and 6. These in
stitutions were authorized, under the guaranty law, to become eligible by
taking out charters as State banks.
By the end of 1911, after two and one-half years of operation, about
one-half of the banks which were eligible for admission to the guaranty system
had become members of the system.
This constituted two-fifths of all of the
1/ William A. Smith, Attorney General
http://fraser.stlouisfed.org/
missioner X1929) 128 Kans. 805, 280 Pac. 767.
Federal Reserve Bank of St. Louis
v. H.W. Koeneke, Bank Com
-31Table 3. NUMBER OF OPERATING BANKS IN KANSAS PARTICIPATING AND NOT
PARTICIPATING IN TEE DEPOSIT GUARANTY SYSTEM, 1909-1928, BY YEARS
Total
Year number
end
of
1/ opera
ting
banks
Eligible to participate
Total Partici-• Not partici
2/
pating
pating 4/
3/
Not eligible
Participating banks
to
per 100 —
participate Operating
Eligible
banks
banks
/
1
1909 1,038
825
4o4
421
213
38.9
49.0
1910 1,077
1911 1,107
1912 1,113
1913 1,141
1914 1,153
860
888
401
442
462
481
459
446
217
219
219
221
225
37.2
39.9
41.5
42.2
44.1
46.6
49.8
51.7
52.3
54.7
427
437
430
426
427
243
237
243
44.0
44.8
46.2
47.5
48.5
55.2
55.5
57.3
59.0
60.3
282
698
681
651
409
377
369
357
371
49.7
51.9
51.7
51.5
62.5
65.4
611
381
399
78
39
547
794
794
894
920
928
1915 1,196
1916 1,220
1917 1,250
1918 1,291
953
983
1,007
1,039
508
526
546
577
613
649
1919 1,338
1,076
1920 1,374
1921 1,375
1922 1,349
1,092
683
1,091
1,067
714
1923 1,323
1924 1,297
1,038
1,022
1925 1,269
1926 1,223
1927 1,153
992
946
1928 1,102
872
833
432
439
420
252
262
284
282
285
275
277
277
281
269
65.4
65.6
50.2
63.7
48.1
61.6
32.6
6.8
3.5
42.2
8.9
4.7
1/ Decanter 31/ or nearest available date.
1?/ For I9H-I 928, number of State banks (excluding trust companies and private
banksj as given in Biennial Reports of the Bank Commissioner, or tabulated from in
formation therein.
3/ From Bank Commissioner of Kansas, or records in the Commissioner's office.
From number eligible and number participating.
5/ Number of national banks, from annual reports of the Comptroller of the
Currency, plus number of trust companies and private banks, tabulated from data in
biennial reports of the Bank Commissioner of Kansas. Most of these institutions
were national banks, since the number of trust companies and private banks did not
exceed 24 in any year.
-32banks, including trust companies, operating in the State.
During the next
ten years the number of participating banks, and the proportions of eligible
and of all operating banks, steadily increased. By the end of 1921, nearly
two-thirds of the eligible banks, and more than one-half of all banks opera
ting in the State, had become members of the guaranty system.
Early in 1922 the number of participating banks, and also the number
of banks operating in the State, began to decline. During the next four years
the decline in the number of participating banks was slightly more, relatively,
than in the total number of banks, so that by the end of 1925 about two-fifths
of the eligible banks, and somewhat less than one-half of all operating banks,
were members of the system. During 1926 and 1927 the great majority of the
members of the guaranty system withdrew, leaving only 9 percent of those
eligible, and 7 percent of all operating banks, in the system at the end of
1927.
Only 31 banks continued their participation until the law was repealed
in March 1929«
Deposits of participating and nonparticipating banks. Estimates
of the deposits of participating and nonparticipating banks are given in
Table 4. In 1912, three years after the guaranty system was inaugurated,
more than three-fifths of the deposits eligible for participation in the
system, and about one-third of the deposits in all banks in the State, were
in guaranteed banks. By 1921 three-fourths of the deposits of all banks
eligible for participation in deposit guaranty, and over two-fifths of the
deposits in all banks in the State, were in guaranteed banks.
These pro
portions were, respectively, larger and smaller than the corresponding pro
portions for the number of banks, indicating that the guaranteed banks were
larger banks, on the average, than the nonguaranteed State banks, but smaller,
on the average, than national banks operating in the State.
In 1928, when only
-33TABL3 4. DEPOSITS OF OPERATING BANKS IN KANSAS PARTICIPATING
AND NOT PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM,
1909-1928, BY YEARS
(amounts in thousands)
Total
deposits
Year of operaend ting banks
State banks: eligible
___ to participate______
Total 2/ Partic- Not pa'ripating ticipa3/
ting 4/
1909 $189,360
$97,891
$45,523
$52,368
$l,6l4
90,061
46,827
54,712
43,234
43,871
40,358
38,971
42,163
1,791
2,094
2,144
1,999
46,051
2,568
y
1910
1911
1912
1913
1914
171,039
182,694
194,176
190,739
210,952
103,476
105,090
116,693
1915
1916
1917
1918
1919
232,978
330,129
399,976
132,106
180,125
220,985
1920
1921
1922
1923
1924
446,622
410,932
426,727
410,617
484,437
1925
1926
1927
1928
427,824
486,973
456,972
450,608
442,600
457,251
98,583
245,419
286,225
264,276
239,149
233,991
223,990
261,807
241,215
224,874
207,794
211,618
63,118
66,119
74,530
86,055
118,042
152,479
169,559
204,669
190,966
180,003
179,721
167,563
195,424
168,082
62,083
68,506
Banks ineligible
to participate
Private National
banks
banks
and
6/
trust
com
panies 5/
1,700
3,344
4,336
Deposits of partici
pating banks per
$100 of deposits —
In opera- In eliting
gible
banks
banks
$89,855
24.0#
46.5#
79,278
27.4
29.9
32.5
34.7
35.3
52.0
82,320
88,606
83,505
92,260
98,304
146,660
174,655
36.9
35.8
38.1
55.5
61.0
62.9
63.9
65.1
65.5
69.0
69.1
71.5
75,860
81,556
4,369
6,496
178,036
194,252
73,310
59,146
54,270
56,427
7,242
6,855
7,520
175,104
164,928
42.8
72.3
75.3
7,676
185,216
43.8
178,951
42.1
40.8
40.3
74.8
74.6
36.8
17.6
1.6
69.7
35.2
3.4
66,383
73,133
79,192 145,682
7,052 200,742
3,340 208,?78
8,792
6,694
8,623
9,333
11,185
213,838
209,063
217,111
225,473
234,448
39.6
42.0
.7
76.8
1.6
1/ December 31, or nearest available date.
2/ Deposits of all banks and trust companies operating under State law, from annual
report for 1930 of the Bank Commissioner, adjusted to exclude private banks and trust
companies (see note 5).
3/ Estimated from deposits reported for assessment from individual bank records in
B«-nk Commissioner's office.
4/ Estimated by deducting deposits of participating banks from deposits of banks
eligible to participate.
5/ Tabulated from deposits of the individual banks and trust companies as given in
bankers' directories.
6/ Frcm annual report of Controller of the Currency, 1910-1929.
-34one bank in twenty of those eligible remained in the guaranty system, the
deposits of the guaranteed banks were only 2 percent of the deposits in
all guaranteed banks, indicating that the banks remaining in the system were
comparatively small banks.
The deposits of participating banks given in Table 4 should not be
considered identical with the deposits specifically covered by guaranty,
since public funds otherwise secured are included in the table.
Concentration of bank deposits.
Table 5 shows the amounts of de
posits held on September 12, 1914, and September 15, 1922, by the banks
participating in the guaranty system grouped according to their deposits.
These years are chosen because they are representative, respectively, of the
pre-war and the post-war parts of the period during which deposit guaranty was
in operation.
In both years the largest bank held slightly over 3 percent of
the deposits of all participating banks, and over 14 percent of the deposits
of all the participating banks were concentrated in the largest 10 banks.
Failures of participating and nonparticipating banks. During the
twenty years of operation of the Kansas deposit guaranty system, l4l partici
pating banks closed because of financial difficulties. The aggregate deposits
of these banks at time of closing amounted to approximately $30 million.
Twenty-two of the closed banks reopened or were taken over by other banks
without a payment, or obligation due, from the guaranty fund.
Of the 119 which
entailed obligations on the fund, three had previously suspended and reopened.
During the entire period of operation of the guaranty fund, 79
failures occurred among banks that were not participating in the deposit
guaranty system. The deposits of these failed banks amounted to about $10
million.
Several of the banks had previously been participants in the guaranty
system, but had withdrawn from the system more than six months prior to failure.
-35Table 5. NUMBER AND DEPOSITS OF BANKS PARTICIPATING IN THE
KANSAS GUARANTY SYSTEM, SEPTEMBER 12, 1914, AND SEPTEMBER 15, 1922 l/
Banks grouped by amount of deposits
Number Amount of
of
deposits
banks (thousands
of dollars)
All guaranteed banks,
September 12, 1914Banks with
$100,000 or
$100,000 to
$250,000 to
deposits of —
less
$250,000
$500,000
491
70,329
100.0
100.0
251
51.1
38.1
8.2
23.0
40
16,148
28,184
14,107
9
3
5,771
3,913
1.8
.6
.2
8.2
2,206
6,960
10,217
.2
1.0
2.0
3.1
9.9
14.5
703
185,915
100.0
100.0
160
11,074
57,947
42,955
22.8
49.5
17.9
6.0
31.2
23.1
6.7
2.4
12.5
187
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
More than $2,000,000
Largest bank
Largest 5 banks
Largest 10 banks
All guaranteed banks,
September 15, 1922
Percentage Percentage
of
of number
of banks aggregate
deposits
1
...
—
2,206
4o.i
20.0
5.6
3.1
Banks with deposits of —
^100,000 or less
$100,000 to $250,000
$250,000 to $500,000
348
126
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
More than $2,000,000
47
17
5
32,269
23,296
18,374
.7
Largest bank
Largest 5 banks
Largest 10 banks
—
- -
5,856
18,374
26,752
.1
.7
1.4
17.3
9.9
3.2
9.9
14.4
l/ Tabulated from statements for individual banks' as given in the reports
of the Bank Commissioner.
-36The number and deposits of the banks closed each year are given in
Table 6. Only two of the failures among the participating banks occurred
during the first ten years. During this period failures among the nonpartici
pating banks were more frequent. However, during the latter ten years of
operation of the system, failures were more frequent among the participating
than among the nonparticipating banks.
A more detailed tabulation by years of the failures which entailed
obligations on the deposit guaranty fund is given in Table 7» The average
annual rate of failures entailing obligations on the fund was 1.2 for each
100 members of the system; and the deposits of those failures averaged $1.12
per year for each $100 of deposits in participating banks.
However, as pre
viously noted, nearly all the failures occurred during the latter half of the
period of operation of the guaranty system, and for that 10-year period the
failure rate was about twice as high as the average for the entire lifetime
of the system.
Failures by size of bank« In Table 8 the size distribution of
banks which failed during the period of operation of the fund is compared,
for guaranteed banks and for nonguaranteed State banks, with the average size
distribution of operating banks. The largest bank among the failures was
the American State Bank, Wichita, which closed June 18, 1923> and a few
months before its failure had deposits of nearly $6,000,000. At that time
it was the largest bank in the guaranty system, and also the largest bank
operating under State law. One other bank with deposits of more than
$1,000,000 was among the failures.
The deposits of these two banks accounted
for over one-sixth of the deposits of all of the closed participating banks.
-37Table 6. NUMBER AND DEPOSITS OF STATE BAMS IK KANSAS CLOSED BECAUSE OF
FINANCIAL DIFFICULTIES, JUNE 30# 1909/ TO MARCH 14, 1929/ BY YEARS
Year
or
period
Number of banks
Deposits (in thousands of dollars)
Total Participating in Not par TotalParticipating in Not par
deposit guaranty ticipa
deposit guaranty ticipa
Reopened Entail- ting
Reopened Entail- ting
with no ing obwith no ing obobliga- liga
obliga- liga
tions on tions
tions on tions
the guar- on the
the guar- on the
anty fund fund
anty fund fund
Total
220
22
119
79
$39/948
$4,295 $25,265
$10,388
Subtotals
1909-1919 1/
1919-1929 2/
13
207
22
2
11
117
68
1,554
38,394
—
803
4,295 24,462
751
9,637
155
155
1913
1914
5
2
5
2
1915
2
2
2
2
2
1918
1919
1920
1921
1922
33
13
1925
1927
19
45
35
1928
22
1929 5/
2
5
11
20
1923
1924
1926
1
3
8
2
6
2
8
4
15
19
3
3
3
349
186
94
648
94
122
1/
219
1,086
122
648
1/305
2,821
4,518
8,984
3,213
662
605
1,431
10
8
1
15
27
17
3
4
10
14
19
2
2,807
5,820
.86
.25
1.43
$1.04
.11
1.59
1
Annual rate per 100 operating banks or
per $100 deposits in operating banks
1909-192$
n vi
1.39
1909-1919 1/
.1 ^
.04
1919-1929 2/
2.08
2.68
349
186
879
5,124
3,572
230
i j Midyear 1909 to midyear 1919.
"2/ Midyear 1919 to March l4, 1929«
3/ No failures occurred in 1909, 1911, 1912/ 1916/ or 1917*
%/ Not available.
■5/ To date of repeal of the deposit guaranty law, March 14.
718
2,110
711
3,357
7/235
2/593
1,087
15
2,237
570
789
3,600
2,806
223
82
$1.31
.09
2.09
282
1,600
3,349
148
$.66
.14
.93
-38Table 7. NUMBER AND DEPOSITS OF FAILED BANKS ENTAILING OBLIGATIONS ON
THE DEPOSIT GUARANTY FUND IN KANSAS, JUNE 30, 1909, TO MARCH 14, 1929, BY YEARS
Year
or
period
Total
Subtotals
1909-1919 2/
1919-1929 3/
Number
Deposits
(in dollars)
119
$25,265,351
2
802,909
Number sus
pended per
100 active
banks
1.2
1/
.04 1/
2.25 1/
Deposits in
closed banks
per $100 of
deposits in
active banks
$1.12
1/
.09 y
1.78 y
117
2b,462,442
Year k/
1315“
1
155,404
.5
.68
1919
1
647,505
.2
.38
1920
1921
1922
2
8
15
19
10
219,478
2,109,525
3,357,030
7,235,319
2,593,250
.3
2.7
1.5
.11
1.10
1.86
4.03
1.55
15
27
17
3
2,237,286
2.3
4.4
4.3
1.14
2.14
3.54
1923
192U
1925
1926
1927
1928
1929 5/
1
3,599,881
2,805,638
222,930
82,105
1.2
2.1
3.8
13.0 1/
3.16
12.48 1/
2/ Midyear 1909 to midyear 1919*
3/ Midyear 1919 to March lb, 1920.
%/ No failure occurred among participating banks in 1909 nor 1911-193-8 .
5/ To repeal of law on March 14.
-39Table 8. SIZE DISTRIBUTION OF FAILED PARTICIPATING AND NONPARTICIPATING
BANKS IN KANSAS COMPARED WITH AVERAGE SIZE DISTRIBUTION OF OPERATING
STATE BANKS: PERIOD OF OPERATION OF DEPOSIT GUARANTY SYSTEM
Number of banks
Average Failed Average
number banks annual
of
number
operaof
ting
failed
banks
banks per
100 active
banks
Participating banks—
total
Banks with
$100,000 or
$100,000 to
$250,000 to
deposits of—
less
$250,000
$500,000
$500,000 to $1,000,000
$1 ,000,000 to $2,000,000
$2 ,000,000 or more
Nonparticipating State
banks— total
Banks with deposits of—
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
$2,000,000 or more
Average
deposits
of opera
ting
banks
(in thou
sands)
Deposits
Failed Average annual
amount of de
banks
(in
posits in failei
thou
banks per $100
sands) deposits in
operating banks
463
i4l
1.5
$111,090
$29,560
$1.35
133
55
56
2.1
8,949
33,578
30,127
9,060
3,387
I.92
1.37
203
89
20
1.4
l.l
26
9
3
8
1
1
1.6
.6
1.8
12,291
1,216
8,509
509
79
.8
235
47
23
1.0
.6
185
64
6
18
6
3
—
l
.5
.9
—
6,585
1.11
5,389
3,927
1.55
.50
2.34
87,832
10,382
.60
13,324
29,101
21,518
2,613
3,582
2,402
1.00
.62
.57
11,934
8,730
3,215
1,785
—
W
.76
17,636
-40More than half of the failed participating banks had deposits of less than
$100,000, but these banks held only 11 percent of the deposits of all the
closed participating banks. Mo regular relationship between size of bank
and frequency of failure is shown by the figures. Among the participating
banks the highest frequency rates were in the smallest and in the largest
size groups.
Failure frequency rates among the nonparticipating banks, taken as
a whole, and for each size group, were much lower— in most cases about half
as high— as among the participating banks. This might be taken as evidence
in support of the view that participation in deposit insurance tended to
make banks undertake riskier loans and relax their managerial diligence. This
is not necessarily the case. The difference may have been due to a greater
reluctance among the stronger banks than among weaker ones to participate in
the system.
Comparison with failures in other States. In Table 9 failure rates
for both number and deposits are shown for guaranteed and nonguaranteed banks
in Kansas, and for banks in contiguous States and in the entire United States.
The period covered is 1910-1928, which includes the entire period of opera
tion of the bank depositors' guaranty fund in Kansas, except for the last
six months of 1909 and the first two and one-half months of 1929«
The total number of bank failures in Kansas during 1910-1928, rela
tive to the number of operating banks, was lower than in the United States
as a whole, and also lower than in any of the four States contiguous to
Kansas.
If only State banks are considered, the failure rate in Kansas was
also lower than in the entire United States, and lower than in the four
-4 1 -
Table 9. ANNUAL BANK FAILURE RATES IN KANSAS, 1910-1928, COMPARED WITH
RATES IN CONTIGUOUS STATES AND IN THE UNITED STATES
Failures per year per
Deposits per year in failed banks
100 operating banks
per $100 in operating banks
State
State
State National
and
State National
and
national banks
national banks
banks
banks
banks
banks
1.0
1.2
»3
ML
$1.08
$.14
Guaranteed banks
Nonguaranteed banks
1.4
.7
1.4
.9
„
.3
1.31
.34
1.31
.73
.14
Four contiguous States l/
1.3
1.4
_j8
.56
.88
.27
1.1
1.0
1.9
1.6
1.2
1.1
2.4
2.1
.7
.2
1.0
.8
.80
.30
1.19
.52
1.16
.51
2.64
.89
.39
.02
.61
.38
1.1
1.4
¿5
.28
.40
.14
Kansas - total
Nebraska
Missouri
Oklahoma
Colorado
Entire United States l/
missioners in the various States; Willis, Banking Inquiry of 192$; annual, reports
of the Comptroller of the Currency; Federal Reserve Committee on Branch, Group and
Chain Banking, "Changes in the Number and Size of Banks in the United States,
1834-1931"; and. Federal Reserve Bulletin, September 1937*
-42contiguous States combined, but slightly higher than in one of the con
tiguous States. However, the failure rate of the guaranteed banks in Kansas
was higher than the failure rate of all State banks in two of the contiguous
States, Nebraska and Missouri, and lower than in the other two contiguous
States, Oklahoma and Colorado.
The failure rates in terms of deposits are somewhat different than
for number of banks. For deposits, the failure rate of all banks in Kansas
was higher than for the four contiguous States combined, and more than twice
as high as that for the entire United States. This rate for all State banks
was higher in Kansas than in two of the contiguous States, Missouri and
Colorado, and lower than in the other two contiguous States, Nebraska and
Oklahoma. When only guaranteed banks in Kansas are considered, the failure
rate, in terms of deposits, was higher than for State banks in any of the
contiguous States, except Oklahoma, and nearly four times as high as the
corresponding rate for all State banks in the entire country.
In one of the contiguous States, Nebraska, a deposit guaranty
system was operative during most of the period embraced by these figures;
and in one other State, Oklahoma, a deposit guaranty system was in existence
for more than one-half of the period. The other two contiguous States had
no deposit guaranty. The figures for number of bank failures in these States
do not indicate that the existence of deposit guaranty was a significant
causal factor in the frequency of such failures. However, in the case of
deposits, the failure rates in the State banks in Nebraska, in Oklahoma, and
in the guaranteed banks in Kansas, were all distinctly higher than the rates
for State banks in Missouri, in Colorado, and in the nonguaranteed banks in
Kansas.
-43Causes of bank failures. The Biennial Reports of the Bank Com
missioner provide considerable Information regarding the causes of bank
failures during the period of operation of the bank depositors' guaranty
fund*
Failures during the first 13 years of operation of the guaranty
fund (1909-1922) are ascribed chiefly to dishonesty or to excessive loans
to favored interests.
"Every bank that has been in distress under the supervision
of the present bank commissioner can trace its trouble directly
to loans to officers and directors." l/
"During the two years covered by this report— September 1,
1920, to September 1, 1922— there have been failures of twentytwo state banks and one trust company...The insolvency of sixteen
of these twenty-three institutions is the result of dishonesty on
the part of some officer. Of the other seven, two or possibly
three may be classed as failures due to the bad judgment or incampetency of officials. The failuresof the others of the seven were
caused by an improper use of the banks' funds to such an extent that
one would be almost justified in classing such use as criminal. In
some cases the misuse of the bank's funds was represented by loans
to the active officers of the bank without security. In other
cases the loans were made to business concerns in which the officers
and directors were interested. Without exception these loans were
in excess of the legal limit." 2/
The Comptroller of the Currency, in his report for 1921, made the
following statement regarding bank failures in Kansas.
"From information furnished by Commissioner Foster it appears
that during the operation of the guaranty law up to June 30, 1921,
five guaranteed banks...failed. In three instances failure
was caused by criminal acts of officials; one due to the failure
of a large debtor, and one loss sustained upon worthless paper
placed in the bank by one of the officials. In the same period
there were 11 failures of 'unguaranteed' banks...In five cases
failure was due to criminal acts on the part of officials, one to
speculations of officer, three to injudicious banking and inability
to realize upon real estate and other paper, one to failure of a large
debtor, and one was closed as a result of Internal dissensions." 3/
1/ Fifteenth Biennial Report of the Bank Commissioner, 1920, pp. 4-5»
2j Sixteenth Biennial Report of the Bank Commissioner, 1922, pp. 3 and 4.
3/ Annual Report of the Comptroller of the Currency, 1921, p. 189.
-44Dishonesty and loans to officers' interests are also emphasized
by T. Bruce Robb, in his study of the operation of State deposit guaranty
funds. At the time his book was written, only three guaranteed banks in
Kansas had failed but all of these banks were wrecked by embezzlements
1/
of and excessive and illegal loans to officers.
Reports of the Bank Commissioner subsequent to 1922 emphasize bad
loans and frozen assets associated with a general depreciation in values,
and incompetency, as the chief causes of bank failures, though dishonesty
and an excessive number of banks are also considered to be important.
"While the majority of the...bank failures in this State
were due to so-called 'frozen loans', this cognomen might well
be defined as 'depreciation in values', over which, all analytical
thinking people will agree, no Kansas banker or group of Kansas
bankers had control, and which depreciation could not have been
foreseen. There were a few failures which were the result of mis
management, and, still worse, plain dishonesty and misappropria
tion of funds by bank officials. These, however, were in the
minority." 2/
"An examination of the records discloses the fact that these
failures were largely due to incompetency, and in some few in
stances dishonesty. Added to this the fact that our state is
overbanked, making it difficult for the smaller banks to make
earnings sufficient to absorb losses, accounts for seme of the
failures. We cannot ignore the fact that 'depreciation in values'
also had a part in the numerous failures during the period covered
by this report."
In Table 10 the specific causes stated in the Bank Commissioner's
reports for the failure of banks during the period of operation of the
guaranty fund are classified in four categories:
(a) dishonesty on the
part of officers or employees; (b) excessive loans directly or indirectly
to certain business interests, usually the interests of an influential
official or stockholder; (c) reversal of prosperous conditions in an im
portant industry and depreciation of property values associated therewith;
l/ T. Bruce Robb, The Guaranty of*Bank Deposits, pp. 117-122.
2/ Seventeenth Biennial Report of the Bank Commissioner, 1924, p. 3. The
failure of the American State Bank, Wichita, largest bank in the guaranty system,
was one of those ascribed to dishonesty.
3/ Eighteenth Biennial Report of the Bank Commissioner, 1926, p* 3«
-45Table 10. CAUSES OF BANK FAILURES IN KANSAS REPORTED BY THE BANK
COMMISSIONER, PERIOD OF OPERATION OF THE GUARANTY SYSTEM
Biennial
period
ended
Sept. 1
Guaranteed banks— total
1912
1920
1922
1924
1926
1928
1930 4/
Nonguaranteed banks— total
Ï9Ï5
Total
number
of
failures 1/
139
I
34
T
43
5
1
17
35
2
76
7
2
2
1920
2
1924
11
10
32
1926
1928
1930 4/
2
—
—
15
6
32
29
33
2
19
5
1
1
—
4
1
1
4
1
—
51
1
39
5
4
l4
10
16
3
7
24
6
2
1
1
2
—
12
8
26
4
4
96
1
1
5
8
40
1916
1918
1922
Number of failures ascribed
______ in full or in part to—
Dis- Excessive Depre- Incom- Other Cause
honesty loans to ciation petence 3/
not
of
favored
of
or misgiven
offi- interests values managecials
2/____ment
2
—
5
15
2
3
4
l/ Excludes 2 guaranteed banks and 3 nonguaranteed banks which were listed as
suspensions by the Federal Reserve Committee on Branch, Group and Chain Banking,
but not in the Biennial Reports of the Commissioner. There were no failures of
participating banks in the bienniums ending in 1912, 1914, and 1916, nor of non
participating banks in the bienniums ending in 1910 and 1912.
2/ Includes causes described as "bad loans" or "frozen assets". Sane of these
should undoubtedly be classified in the preceding column.
3/ Includes failure of correspondent bank, other bank failures, and insufficient
volume.
4/ Banks closed to March 14, 1929.
-M 6-
and (d) incompetence or mismanagement.
With the exception of "bad loans"
and "frozen assets" the causes cited for the failure of each bank are readily
classified among these four general groups of causes of bank failures. In
view of the statement regarding the relation of frozen assets to depreciation
of values, and the substantial declines which occurred in the prices of farm
products and in land values during the 1920's, "bad loans" and "frozen assets"
are here classified in group (c). In some of these cases the "bad loans"
should probably be ascribed to one of the other categories.
Information regarding causes of bank failures in Kansas during the
period 1921-1930 is also given on the schedules collected by the Federal.
1/
Reserve Committee on Branch, Group and Chain Banking. Unfortunately, many
of the causes cited on these schedules are descriptions of the situation of
the bank at time of failure and do not reveal the real causes responsible
for the failure. However, it is believed that a classification of the causes
of failure given on these schedules throws considerable light on the factors
responsible for failures in Kansas during the second decade of operation of
the bank depositors' guaranty fund. In Table 11 the causes of failure listed
on the schedules collected by the Federal Reserve Committee on Branch, Group
and Chain Banking are grouped, so far as possible, in a manner similar to the
grouping in the preceding table.
A review of the causes of failure of the banks which resulted in
the largest amounts of loss to the guaranty fund and to depositors indicates
that excessive loans to officers and directors and to their interests, and
dishonesty on the part of officers, were more important than is indicated by
the number of banks in which the loss is ascribed primarily to these causes.
1/ These schedules were prepared in the office of the Bank Com
missioner Trom information furnished by that office to the Federal Reserve
Committee.
-47Table 11. CAUSES OF BANK FAILURES IN KANSAS, 1921-1930, REPORTED BY THE
FEDERAL RESERVE COMMITTEE ON BRANCH, GROUP AND CHAIN BANKING
Item
no.
1
2
3
4
5
6
7
8
1/
Item
Dishonesty of officials - total
Defalcation
Dishonesty, misappropriation, shortages
Excessive loans, speculation, irregular
ities - total
Failure of large debtor
Heavy or frozen loans to officers or
stockholders
Speculation
Excess loans
Heavily overloaned
Irregularities
Number of cases
Primary
Contributing
cause
cause
44
"55
2
13
12
1
14
~5
40
7
1
3
3
1
2
1
2
23
3
4
6
--
"W
3
—
4
11
3
—
8
3
13
Reversal of prosperous conditions in an
industry or area and decline in values total
Decline in real estate values
Unforeseen agricultural or industrial
disasters, such as floods, drought,
boll weevil, etc.
Crop failure, general farm conditions
Bad loans, poor loans, frozen loans,
inability to make collections
Excessive real estate holdings
Incompetent or poor management - total
Incompetent management
Insufficient diversification
167
14
15
l6b
1
71
58
3
16
17
18
19
20
21
22
23
Other causes - total
Heavy withdrawals
Failure of affiliated institution
Failure of correspondent
Purchased paper, without recourse paper
Insufficient earnings
Volume of business too small
Depleted reserves
Miscellaneous
21
5
7
4
1
1
—
1
2
104
72
2
1
4
13
4
5
3
9
10
11
12
66
‘
l/ Specific items are from schedules collected by the Federal Reserve Cornmittee on Branch, Group and Chain Ba.nk1.ng, the grouping by the author of this
report. The tabulation was made by the author of this report from the schedules,
which were made available through the courtesy of the Board of Governors of the
Federal Reserve System.
- 118-
Five banks accounted for about one-third of the entire loss to the guaranty
fund and to depositors in guaranteed banks, and for four of these banks the
information available indicates that failure was due to dishonesty and ex
cessive and risky loans to officers and directors or their interests. The
other one is ascribed to bad loans and inability to make collections, with
out specification of the interests to which the loans had been made.
The foregoing information is sufficient to enable certain im
portant conclusions to be reached regarding the causes of failures of
State banks in Kansas during the period of operation of the bank depositors’
guaranty fund. Most of the failures which occurred from 1910 to 1922, and
a substantial number of those which occurred from 1922 to 1929, were due
to dishonesty on the part of bank officials. The great majority of the
failures during the latter period were due to managerial incompetence, or
to the depressed agricultural conditions, or to a combination of these two
elements.
However, even during that period, most of the banks which caused
the greatest losses to the fund or to depositors failed because of dis
honesty and excessive and risky loans to bank officials.
Procedures in the handling of failed banks. When a bank was closed
by the Bank Commissioner, or placed in his hands by the board of directors
of the bank, he could retain possession of the bank for a period not exceed
ing twelve months (six months prior to 1913) to ascertain whether it could
be rehabilitated and reopened. As indicated by the figures in the preceding
tables, about one-sixth of the banks that failed while participants in the
guaranty system were reorganized, or their deposit liabilities assumed by
other banks. There were no payments from, or obligations of, the deposit
guaranty fund in these cases, as the fund was not empowered to participate
in such arrangements as in Oklahoma, and became liable for depositors' claims
-k 9 -
against a failed bank only after the assets of the bank had been liquidated.
Failed banks, except those reopened or taken over, were liquidated
by receivers appointed by the Bank Commissioner.
When the deposit guaranty
system was established, the receiver was required to be a resident of the
county in which the bank was located. Four years later, this was modified
to require only residency in the State. This made it possible, after
failures became numerous in the early 1920's, for the Bank Commissioner to
appoint a "general receiver" who took charge of all closed banks, with the
details handled by receivership assistants. The biennial report of the
Bank Commissioner dated September 1, 1926, after this procedure had been
established, stated that liquidating expenses had been greatly reduced and
much time saved in winding up the affairs of the failed banks. At that time
57 banks were in process of receivership, with the personnel of the "receiver
ship department" of the Commissioner's office listed as the general receiver,
assistant general receiver, two special examiners, and three receivership
assistants.
In 1927 the receivership process was scrutinized by the special
commissioner appointed by the State Supreme Court to determine the order of
completion of liquidation of the failed banks, and was described in the de1/
cision of the State Supreme Court the next year.
The date of the dividend
paid by the receiver, which he regarded as the final dividend, after collecting
as much as possible from the assets and stockholders' liability, was held to
be the date of completion of liquidation, though in each case some admin
istrative details, possibly unknown liabilities, and perhaps additional re
coveries on assets regarded as worthless may have remained, and a reserve
fund
been retained to pay final costs of administration and unknown
l/ Kansas v. Bone (192Ü), 120 Kans. 8l8, 266 Pac. 85.
-50liabilities.
FINANCIAL HISTORY OF THE GUARANTY FUND
Sources and adequacy of information. Published information re
garding the bank depositors' guaranty fund in Kansas is not sufficient to
provide an adequate analysis of its operations. The biennial reports of the
Bank Commissioner contain no statements of the fund, though the balance on
hand in certain years is given. For a few of the failed participant banks,
some information is given for deposits, payments from the fund, or receiver's
percentage dividends. Receipts and disbursements of the fund for fiscal
years ending June 30 are given in the reports of the Treasurer of State,
but without identification of the original sources of receipts from the Bank
Commissioner nor any classification of disbursements. The decision of
the State Supreme Court regarding disposition of the fund provides some
information regarding failed participant banks which had been completely
liquidated by 1928, with no payment to that time from the fund.
Some further
information is available in surveys of deposit guaranty systems in operation
1/
in various States.
Additional information has been obtained from surviving records
in the office of the Bank Commissioner. These records include:
a "Guaranty
Fund Individual Ledger" showing admission and termination dates of participa
tion, deposits reported for assessment and the amount assessed for each
assessment date, together with totals of deposits and assessments for most
of the dates; a record of the amount of principal and interest paid deposi
tors for each of the failed banks whose depositors were paid from the fund;
receivership records showing for most of the failed banks the amount of guaranty
TJ These include Robb, The Guaranty of Bank Deposits (Houghton
Mifflin Company, 1921); Thornton Cooke, articles In the Quarterly Journal of
Economics, November 1913 and November 1923; article and legislative summary in the
Digitized forfederal
FRASER "Reserve Bulletin, September 1925; and Blocker, The Guaranty of Bank De*
http://fraser.stlouisfed.org/
posits (The School of business, University of Kansas, lyzy).
Federal Reserve Bank of St. Louis
-51fund certificates issued, the amount of receiver's certificates issued
(representing deposits and other liabilities not covered by the guaranty),
and the percentage dividends paid by the receiver; and some additional
information regarding the status of the fund at various dates and the bonds
and cash forfeited by banks that had withdrawn by the end of October 1927.
Income, expenses, and deficit of the guaranty fund« A summary
statement of the receipts and expenditures of the Kansas bank depositors'
guaranty fund, for the entire period of its existence, is given in Table 12.
The figures in the table take into account receipts and disbursements sub
sequent to repeal of the law. They exclude payments to the depositors in
failed banks which were made from the proceeds of liquidation of the assets
of those banks. The losses incurred by the guaranteed banks in the American
State Bank, Wichita, which was reorganized instead of being placed in liquida
tion and paid off by the guaranty fund, are also shown in the table since
those losses were part of the cost of the guaranty system to the participa
ting banks.
The total receipts of the guaranty fund itself amounted to $2,800,000,
of which about three-fifths was derived from the assessments upon the partici
pating banks, and about one-fourth from bonds and cash deposited as surety
for payment of assessments and forfeited by banks which withdrew prior to
repeal of the law. Including the loss incurred in the case of the American
State Bank the participating banks paid a total sum of over $4,000,000 to
meet the losses in guaranteed banks closed because of financial difficulties.
The total obligations of the bank depositors* guaranty fund, in
cluding those in the American State Bank, amounted to more than $10,000,000.
This represents the deposits in guaranteed banks which failed during the
-5 2 -
Table 12. RECEIPTS, EXPENDITURES, AND DEFICIT OF THE KANSAS DEPOSITORS’ GUARANTY FUND
Fund and asso
ciated cost
Receipts
Assessments collected, 1909-1929 1/ $1 ,703,360
Other contributions by partici
pating banks 2/
2,222,266
Interest received 3/
143,423
Source not identified 4/
176,730
Total receipts 5/
$4,245,779
Expenditures
Payments to depositors of failed
banks, as tabulated from data
for the individual banks:
Principal of deposits
$3,859,367
Interest 6/
361,302
Additional payments or unidentified
expense 7/
7,144
Guaranty
fund
American State Bank
reorganization
$1,703,360
798,278
143,423
176,730
$1,423,988
$2,821,791
$1,423,988
$2,435,379
$1,423,988
361,302
7,144
Total expenditures 8/
$4,227,813
$2,803,825
$1,423,988
Unpaid obligations
To depositors of failed participa
ting banks 9/
$6,051,150
$6,051,150
—
l/ As tabulated from entries in the "Guaranty Fund Individual Ledger1' in the office
of the Bank Commissioner. For the years 1925-1929, assessments paid were less than the
amounts levied. See Table 13.
2/ Of guaranty fund, forfeiture of deposited bonds and cash by withdrawing banks,
consisting of $733,900 forfeited by banks that withdrew by the end of October 1927
(statement in records in Bank Commissioner's office), $51,922 forfeited by banks that
withdrew subsequent to October 1927 or participated to repeal of the law (estimated),
and $10,456 premiums and interest received by fund on the sale of forfeited bonds sold
in December 1927. In American State Bank reorganization, portion of deposit liability
assumed by participating banks.
3/ Includes amounts reported as "interest" and as "transfers from general fund,"
both apparently representing interest on the fund balance.
4/ Total received from Bank Commissioner, as given in biennial reports of the
Treasurer of State, less reported receipts from assessments and forfeiture of deposited
bonds and cash. This amount probably consists in part of collections on delinquent
assessments, in part of additional receipts from sale of forfeited bonds, and in part
of receiver^ collections on assets of failed banks after payment of depositors by re
ceivers and the guaranty fund.
5/ From biennial reports of the Treasurer of State from beginning of fund to June 30,
1956. The excess of receipts over expenditures, amounting to $17,966, remained to the
credit of the depositors* guaranty fund as of June 30, 1956.
6/ Includes court costs of $15,631 which were met from the fund and deducted from
the amount due depositors in the banks benefiting from the court decision regarding dis
position of the assets of the fund.
7 / Difference between total warrants redeemed (see note 3) and payments to de
positors as tabulated for the individual banks.
8/ Total warrants redeemed, as shown in the biennial reports of the Treasurer of
State”from the beginning of the fund to June 30, 1956.
9/ Banks with no payments, or less than full payments, from the guaranty fund.Esti
matedfrom guaranty fund certificates Issued, adjusted for percentage dividends paid
http://fraser.stlouisfed.org/
Tw Reserve
receiver*
Federal
Bank of St. Louis
-53period of the fund in excess of the amounts recovered through receiverships
and reorganizations, plus the interest on certificates paid by the guaranty
fund to depositors in failed banks. It does not include accrued interest on
the guaranty certificates that were never paid.
The difference between the obligations of the guaranty fund and the
income of the fund is the approximate amount of the final deficit or default.
This figure amounted to over $6,000,000.
Annual data regarding assessments levied and paid are shown in
Table 13* Until 1924 the annual assessment remained at one-twentieth of 1 per
cent, except in 1922, when one special assessment was levied and the banks paid
a total of one-tenth of 1 percent.
Fran 1924 to 1928, inclusive, which were
the last five full years of operation of the fund, four special assessments
were levied each year, making the total assessment for each of these years onefourth of 1 percent.
However, during the later years the assessments levied
were not collected in full. In addition to the regular and special assessments,
banks admitted to the fund each year were required to contribute a proportionate
share of the fund, equal to what they would have paid had they entered in 1909,
if operating at that time, or at time of opening if commencing business in a
later year.
Table 14 shows the receipts and disbursements of the guaranty fund
for fiscal years ended June 30, and also the cash balance of the fund on June 30,
and the amount of bonds and cash held on that date as security for payment of
These data are from the biennial reports of the Treasurer of State,
future assessments./ differences between the yearly figures for receipts as
shown in this table, and those from assessments in the preceding table, re
flect the timing of the assessments and the dates on which bonds and cash de
posited as security for future assessments were forfeited by withdrawing banks
and regarded as receipts of the guaranty fund.
-5 4 -
Table 13. RATES AMD AMOUNTS OP ASSESSMENT, AMD OTHER CONTRIBUTIONS BY
PARTICIPATING BANKS, KANSAS DEPOSITORS' GUARANTY FUND, BY YEARS, 1909-1929
Calendar Assessment
year
rate (per
cent of
deposits) l/
Assessments levied V -----------------Regular Special Initial
for banks
admitted
Assess Other con
ments tributions
paid 2/ by partici'
pating .
banks à.'
$1,933,602 $929,997 $902,579 $101,l06 $1/703,300 $2,222,266
Total
Total
--
1909
.05
16,961
1910
I9II
1912
1913
17,831
22,570
23,311
28,315
1914
.05
.05
.05
.05
.05
32,360
17,685
18,109
21,174
24,171
27,615
1915
1916
1917
I9I8
1919
.05
.05
.05
.05
.05
30,394
37,169
48,451
71,023
84,399
27,206
33,082
I92O
1921
1922
1923
.05
.05
97,121
107,325
—
41,917
58,490
74,458
---
-------
...
—
--—
—
85,380
91,126
.10
156,885
1924
.05
.25
77,772
3^3,954
1925
1926
1927
1928
I929
.25
.25
.25
.25
.05
368,209
66,668
290,505
65,899
11,746
1,482
79,833
146
4,461
17,831
22,570
23,311
28,315
2,137
4,144
4,745
3,188
4,087
32,360
6,534
12,533
9,941
30,393
37,170
48,451
71,023
84,399
11,741
16,199
107,325
97,120
156,886
273,166
301,481
60
342,951
129,405
24,896
8,945
1,321
74,920
70,562
3,249
1,482
16,961
923
3,080
226
81,042
74,692
32,056
16,961
--
210,672
33,843
8,497
--*•—
77,772
343,955
1,423,988
)
)798,278
)
l/ Initial assessment in 1909, thereafter regular annual assessment of onetwentieth of 1 percent, plus special assessments levied.
2/ From summary given, or tabulated from entries, in the "Guaranty Fund Individual
Ledger" in the office of the Bank Commissioner. Prior to 1925, the data available do
not distinguish between amounts levied and amounts collected, and they are assumed to
have been the same. Assessments paid do not include an allowance for a portion of the
amount shown in Table 12 as receipts of the fund from unidentified sources, (see note 4
to that table).
3/ In 1923/ loss to participating banks in the reorganization of the American State
Bank.“ In 1927-29, estimated receipts of fund from forfeiture of bonds and cash de
posited to secure payment of assessments, by withdrawing banks and those remaining in
the fund to repeal of the law. Amount may be understated (see notes 2 and 4 to Table 12).
-55Table 14. RECEIPTS, DISBURSEMENTS, AND BALANCE, KANSAS
DEPOSITORS* GUARANTY FUND, BY YEARS, 1910-1950 l/
Year
ended
June 30
Total
1910
1911
1912
1913
1914
1915
1916
1917
1918
Total
$2,821,791 $2,678,369
16,965
39,881
24,837
29,477
34,235
33,239
40,567
119,240
1923
1924
173,117
546,786
107,169
101,587
101,578
146,126
2,522
87,061
1,639
__
---
290,612
336,749
341,502
406,158
149,931
429,801
485,464
584,114
725,869
800,047
190,499
16 242,411
--
13,180
81,683
111,160
$276,377
28,702 116,693
—
4,222
4,802
$16,965
56,846
—
313,963
405,826
946,584
1,135,622
151,257
70,770
21,860
30,808
535,019
143,086
86,468
847,175
11,767
3,o4o
4,834
4,646
5,270
971,463 32,571
22,844 155,854
218,593 28,563
220,045 660,339
672,191 53,576
1,105,835
932,335
8,219
931
95,577
3,994
63,164
85,491
30,224
26,934
24,539
34,500
2,153
1,313
637
1,699
22,876
21,719
-—
19,383
18,995
-
91,302
851,821
1929
65,427
60,157
1930
1931
1932
1933
1934
17,808
16,530
21,671
38,821
—
1935
1936
1937
1938
1939
—
-
1940
1941
1942
19^3
1944
-
—
-
Bonds and cash held
as security for pay
ment of assessments
June 30
546 512,450
—
631,690
-733,277
60,795 845,600
489,930 457,248
1927
491
156
Balance
on
June 30
11,434
13,721
93,989
107,806
87,866
1928
23,257
40,310
705
364
983
1,341
30,717
71,552
1920
1921
1922
__
1,283
51,928
Disbursements
$143,423 $2,803,825
23,496
28,194
32,596
71,552
91,863
1926
16,965
38,898
40,567
47,706
1919
1925
Receipts
From
Interest
Bank Com3/
missioner 2/
1,278
1,586
1,489
705
364
491
156
---
--
2,760
388
-—
383
---
144
—
-
4li
1,151,717
1,106,998
1 ,062,825
898,944
47,500
34,500
---
21,082
18,612
18,200
18,200
18,056
18,056
«•»
--
mrito
—
-56Table 14. RECEIPTS, DISBURSEMENTS, AND BALANCE, KANSAS DEPOSITORS*
GUARANTY FUND, BY YEARS, 1910-1950 - continued
Year
ended
June 30
_________ Receipts_________ _DisTotal
From
Interest burseBank Comments
raissioner
1945
1946
1947
1948
1949
1950
- -
- -
- -
- -
- -
—
m
m
- -
- -
- -
- -
9
—
1
7
-----
—
- -
-----
-----
-----
73
Balance
on
June 30
Bonds and cash held
as security for payment of assessments
June 30
18,056
18,056
18,047
„
18,046
- -
18,039
-----
17,966 4/
-----
- -
1/ From Biennial Reports of the Treasurer of State.
2/ Mostly derived from assessments, and forfeiture of bonds and cash by with
drawing banks. In the later years includes an unknown amount (probably small) from
recoveries on assets of failed banks.
3/ The state treasurer was required by the bank depositors' guaranty law to
credit the fund quarterly with its proportionate share of interest received from
state funds, computed at the minimum rate of interest provided by law, upon the
average daily balance of the fund.
4/ This balance was held by the State Treasurer to the credit of the guaranty
fund on June 30, 1956.
Note: Because of rounding, data for individual items may not add precisely to
the totals given.
-57Insured deposits and losses in failed banks, by years. Table 15
gives the amount of insured deposits of the banks that failed each year
while participating in deposit guaranty, the recoveries from the liquida
tion of assets, payments by the fund and (in 1923) by participating banks
in the American State Bank reorganization, and the losses to the depositors.
The amount of noninsured deposits and other liabilities, and the recoveries
and losses on them, are also shown in the same table. Table 16 shows for
each year the percentage of the deposits in failed banks estimated to have
been insured, and of the insured deposits the percentages recovered from
the liquidation of assets or paid by the guaranty fund or participating banks.
For all the failed banks entailing obligations on the guaranty fund,
84 percent of the deposits were insured. In the case of the failure in 1910,
only 30 percent of the deposits were insured, due to the fact that this Bank
closed prior to the change in coverage on time and savings deposits.
For the entire period while the law was on the statute books, 53 per
cent of the insured deposits of the failed banks were paid from the liquidation
of assets of the banks. The guaranty fund assessments, including the receipts
from forfeiture by withdrawing banks of bonds and cash deposited as surety
for future assessments, provided over 11 percent of the deposits, and the
guaranteed banks provided an additional 7 percent through assumption of
losses in the American State Bank. The remaining 29 percent of the insured
deposits was lost to the depositors. This loss, of course, was concentrated
in the banks which did not share in the distribution of the assets of the
fund under the guaranty law and the supporting court decision that payments
were to be made to depositors in order of completion of liquidation of the
failed banks.
-58Table 15. OBLIGATIONS TO CREDITORS PAID AND UNPAID, FAILED BANKS
INVOLVING OBLIGATIONS ON THE KANSAS DEPOSITORS* GUARANTY FUND, BY YEAR OF FAILURE l/
Year
£/
Total
2/
Noninsured deposits and
Insured deposits paid_________ _____other liabilities
Directly By fund or
Unpaid
Total
Paid 6/
Unpaid
from liqui participa (loss to de
5/
dation of ting banks positors)
assets
y
Total $21,151,418 $11,240,901 $3,859,367 $6,051,150 $3,763,185 $1 ,805,042 $1,958,143
1910
46,810
18,108
28,702
—
108,594
56,469
52,125
1919
496,584
94,351
402,233
—
150,951
28,681
122,270
1920
1921
1922
1 ,910,270
36,855
328,807
500,151
1 ,461,713
21,376
187,644
256,113
91,399
15,479
l4l,l63
244,038
634,791
69,533
242,425
431,140
145,668
203,808
1923
1924
1925
1926
1927
1928
1929
189,740
2,636,734
5,824,674
2,226,155
2,080,697
3,229,600
2,244,030
197,203
68,921
93,388
96,352
1,484,781
328,512
96,977
545,431
1,050,565 1,040,738
2,459,402 1 ,790,121 1,575,151
172,709
1,409,531
643,915
1 ,216,296
1,612,661
1,588,909
155,567
57,342
—
864,401
1,616,939
655,121
41,636
11,579
389,882
18,596
2,672
247,484
15,527
2,401
826,922
21,866
96,757
227,332
142,398
3,069
271
l/ Tabulated from data for the individual failed 'banks published in the biennial
reports of the Bank Commissioner, or shown in individual claims registers, receiver
ship reports, or other surviving records in the Office of the Bank Commissioner. In
a few cases some estimation has been necessary.
2/ There were no failures of participating banks in 1909 nor 1911-1918»
3/ Guaranty fund certificates issued, plus the portion of receivers' certificates
issued in the American State Bank case estimated to have represented unusual deposits.
4/ Paid by fund, except for $1,423,988 assumed by participating banks in the
reorganization of the American State Bank, Wichita, in 1923*
5/ Receivers' certificates issued, excluding those in the American State Bank
case estimated to have represented insured deposits.
6/ Preferred claims, assumed to have been paid in full, plus payments on re
ceivers' certificates estimated from percentage dividends paid.
-59Table l6. PERCENTAGE OF DEPOSITS INSURED, AND PERCENTAGE OF INSURED DEPOSITS
RECOVERED FROM LIQUIDATION OF ASSETS AND PAID BY GUARANTY FUND OR PARTICIPATING
BANKS, BANK FAILURES UNDER THE KANSAS DEPOSIT GUARANTY SYSTEM, BY YEARS
Percentage
of total
deposits
insured
Total
Total
83.7^
100.0#
53.1#
18.3#
1910
30.1
100.0
38.7
61.3
—
1919
76.7
100.0
19.0
81.0
—
1920
1921
1922
86.5
90.6
100.0
100.0
100.0
100.0
100.0
49.2
63.3
50.8
17.2
39.5
30.7
7.8
100.0
100.0
100.0
100.0
100.0
58.5
49.9
70.8
78.9
83.2
Year
of
failure l/
~
1923
1924
1925
1926
78.5
80.5
85.8
93.0
89.7
1927
80.0
1929
88.5
83.9
1928
Percentage of Insured deposits
Paid from
Paid by
Unpaid
liquidation guaranty
(loss to
of assets
fund or
depositors)
participa
ting banks
77,7
39.8
42.2
—•»
- - » .
—
28.6#
__
5.1
20.7
27.1
28.9
41.5
50.1
29.2
21.1
16.8
1/ There were no failures of participating banks in 1909 nor i9H-19lb
- 60 -
Comparison of assessment receipts and losses in failed banks.
Table 17 compares the amount of assessments collected each year with the
liability of the fund on account of failures in that year. The figures are
also shown cumulatively, with the cumulative excess or deficiency.
Such an
excess or deficiency, it should be noted, is a different concept from that
of an accumulated surplus or deficit in the fund. It does not take account
of interest received on the cash balance of the fund, or that accrued on
the fund* s unpaid obligations, nor of the lapse of time before the unpaid
deposits of a failed bank became legal obligations of the fund. What the
deficiency figures show is the additional assessment that would have been
necessary to have paid all insured deposits without incurring interest costs
or other expenses.
For nearly half of the period of operation of the fund, that is,
to the end of 1918, there was a cumulative excess of receipts. For those
years, most of the assessment receipts accumulated, since only one failure
occurred. However, the obligations of the fund resulting from the second
failure, in 1919, exceeded the entire cumulative receipts to that time. The
failures of the early years of the 1920's, together with the absence of
special assessments (except one in 1922), resulted in a rapidly mounting
cumulative deficiency, reaching over $5 million by the end of 1923» From
1924 to the repeal of the law, the deficiency continued to mount, though
less rapidly because of increased receipts with the levy of more additional
assessments.
The final deficiency, if no account is taken of the receipts
from forfeiture of securities posted to assure payment of future assessments
nor of the contributions of the banks in the American State Bank reorganiza
tion, was over$8 million; this was reduced to about $6 million if the receipts
-61Table 17. ANNUAL ASSESSMENT RECEIPTS, LIABILITY FOR DEPOSITS IN
FAILED BANKS, AND CUMULATIVE DEFICIENCY, KANSAS DEPOSITORS' GUARANTY FUND
Assess
Deposit
Cumulative
ments
Deposit
liability Assessments
Excess of
collected of the fund
and
liability receipts
contributions of the fund
1/
2/
Year
1909
$16,961
1910
1911
1912
1913
1914
17,831
22,570
23,311
28,315
32,360
1915
1916
1917
1918
1919
30,394
37,169
48,451
71,023
84,399
$28,702
----
"
$28,702
141,348
208,911
--
257,362
mm
328,385
402,233
77,772
343,954
1925
1926
1927
1928
1929
342,950
129,405
24,896
8,945
1,321
864,401
1,616,939
655,121
41,636
11,579
96,352
Additional:
Forfeiture of
securities—
798,278
Contributions—
1,423,988
T7
34,792
57,362
80,673
108,988
171,741
425,489
1,586,169
3,365,272
816,624
156,885
--
--
1920
1921
1922
1923
1924
97,121
107,325
$16,961
--
3
412,784
509,904
617,229
774,115
851,887
28,702
28,702
28,702
28,702
28,702
28,702
28,702
28,702
430,935
527,287
952,776
2,538,945
5,904,217
1,195,842
6,720,841
1,538,793
1,693,094
1,702,039
1,703,360
7,585,242
9,202,181
9,857,302
9,898,938
9,910,517
2,501,638
9,910,517
3,925,626
9,910,517
1,668,198
$16,961
Deficiency
(excess
liability)
—
6,090
28,660
51,971
80,286
112,646
143,039
180,209
228,660
299,683
--
...
----
-—
--
---
----
--—
**»
—
$18,151
17,383
335,547
1 ,764,830
5,052,330
5,524,999
6,046,449
7,533,982
8,164,208
8,196,898
8,207,157
7,408,879
5,984,891
Frcaa Table I .
2/ Deposits paid from the fund, including loss to participating banks on
reorganization of the American State Bank, plus deposits unpaid. From Table 15*
-62from forfeited securities and the contributions in the American State Bank
reorganization are included.
These estimates indicate that aggregate assessments of $10,000,000
would have been sufficient to have met all of the losses to depositors in
failed guaranteed banks up to the time the law was repealed.
The assess
ments actually collected, excluding the proceeds from forfeiture of bonds
and cash held as surety for payment of assessments, and the contributions
in the American State Bank reorganization were about $1,700,000.
In Table 18
the assessment rate per $100 of deposits each year is compared with the
assessments collected and losses on deposits in failed banks, also expressed
as rates, that is, amount per $100 of deposits in participating banks at
the beginning of the year. An average annual assessment of one-half of
1 percent would have provided for all losses on deposits in failed banks.
The assessments collected, excluding proceeds of forfeiture of bonds and
cash deposited as surety for the payment of assessments, and the contributions
in the American state Bank reorganization, averaged about one-thirteenth
of 1 percent per year. The total contributions of the guaranteed banks,
including the forfeited securities and their loss in the case of the
American State Bank, was equivalent to an average annual assessment of
about one-sixth of 1 percent.
The maximum annual rate of assessment, according to the interpre
tation of the law by the Bank Commissioner, was one-fourth of 1 percent per
year. Under the provisions of the law, it was not possible to levy assess
ments sufficient to meet the claims falling upon the fund. Further, the
maximum permissible rate could not be levied at the time when the banks
failed and it became obvious that the future liabilities of the fund were
-63Table 18. COMPARISON OF ANNUAL RATES OF ASSESSMENT WITH RATES REQUIRED TO MEET
DEPOSIT OBLIGATIONS IN FAILED BANKS,
KANSAS DEPOSITORS' GUARANTY FUND, BY YEARS, 1909-1929
Year
1909-1929
average
Assessment
rate per
$100 of
deposits i f
$1.00
Per $100 of deposits in
participating banks at
beginning of year
Assessments Losses on
collected
deposits in
failed banks
2/
$o.o€T
$0.44
—
1909
.05
.04
1910
1911
1912
1913
1914
.05
.05
•05
.05
.05
.04
.05
.04
.04
.05
1915
1916
1917
1918
1919
.05
.05
.05
.05
.05
.04
.04
.04
.05
.05
1920
1921
1922
1923
1924
.05
.05
.10
.05
.25
.05
.06
.09
.04
.21
.05
.22
.88
1.87
.49
1925
1926
1927
1928
1929
.25
.25
.25
.25
.05
.18
.08
.03
.13
.04
.44
.96
.83
.59
1.68 3/
.06
- —
—
—
—
—
—
.24
I / Computed from assessment receipts (Table 17) and deposits in participating
banks-(Table 4).
2/ If the contributions in the American state Bank reorganization and the
proceeds of the forfeited securities and cash are included, this rate is $0 . 17 .
3/ Annual rates (i.e ., 4.8 times rate for failures occurring prior to
March- 14, 1929).
-64mounting rapidly. This was because the fund did not actually become liable
for any payments until a closed bank was fully liquidated.
Settlement of the affairs of the fund. The major problems in
closing the affairs of the Kansas depositors* guaranty fund had been met
and settled prior to repeal of the law. The great majority of the partici
pating banks had withdrawn in 1926 or 1927, and the bonds and cash they had
posted as security for future assessments had been forfeited and trans
ferred to the guaranty fund account with the State Treasurer. The proceeds,
together with undisbursed receipts from assessments and interest on the
fund's cash balance had been used to pay depositors of closed banks in the
order of liquidation of the banks in accordance with the decision of the
Supreme Court. These payments were made in August 1928 to the depositors
of the banks whose claims were met in full; and in October dividends were
paid, to the extent of the amount available, to the depositors of the next
two banks in order of completion of liquidation, which under the court
decision were to share equally.
Upon repeal of the law, the bonds and cash deposited as surety
for payment of future assessments by the banks that remained in the fund
were also forfeited and transferred to the guaranty fund. The proceeds,
together with assessment and interest receipts subsequent to the time of
the previous dividend, made possible an additional dividend to depositors
of the two banks; and this was paid on October 1, 1931* About $30,000 was
retained in the fund held by the Treasurer to pay claims that had not been
presented and nearly $2,000 was subsequently received as interest.
Claims
of about $14,000 were paid during the ensuing years up to 1950. The remainder
was still held by the Treasurer of State in the guaranty fund as of June 30, 1956.
17 See Table 14.
-65APPRAISAL OF THE KANSAS DEPOSIT GUARANTY SYSTEM
The burden of assessments. Assessments during the first few
years of the Kansas bank depositors' fund, at the regular rate of onetwentieth of 1 percent per year, were comparatively light; and bankers
do not appear to have protested that the assessments were a financial
burden upon the banks. However, as soon as it became apparent, in the
early 1920's, that future assessments at the maximum rate would be necessary
for several years, the banks felt that the assessments would be a heavy
drain on their earnings and sought means of escaping the burden. Since
participation in the system was voluntary, and under the State Supreme
Court decision withdrawal could be accomplished by forfeiture of bonds
amounting only to two years' assessment at the maximum rate, most of the
banks chose this method of avoiding the inevitable burden of assessments.
Had withdrawal not been possible on these conditions, it is probable that,
as in certain other States with deposit guaranty, a larger number of State
banks would have taken out national bank charters.
It is not possible to determine how much the earnings of the
banks participating in the Kansas deposit guaranty system would have been
affected by an assessment high enough to have met the losses in failed
banks, inasmuch as earnings data are not available for the individual banks
nor for the participating banks as a group. However, earnings data are
available for all State banks, and an estimate can be made of the impact
on earnings bad all State banks participated.
The earnings data and
average total capital accounts for all State banks are shown in Table 19«
Had deposit guaranty covered all of the State banks during the
-66Table 19. SELECTED DATA FROM STATEMENTS OF EARNINGS AND DIVIDENDS, AND
TOTAL CAPITAL ACCOUNTS, ALL STATE BANKS IN KANSAS, 1909-1928
(in thousands of dollars)
Interest
Calendar
on
Gross
year
deposits l/ losses 1/
Net
profits l/
Dividends 2/
Total
capital
accounts 3/
$62,299
$28,113
$60,798
$44,1*26
$754,792
797
361
2,945
1,692
21,375
1910
910
1,007
417
322
3,131
1911
1,818
1,872
23,441
25,153
27,055
1913
1914
1,456
1,623
1*80
2,892
1915
1,847
2,223
1917
3,178
3,772
4,291
493
635
849
3,444
4,204
4,371
4,643
5,1*22
Total
1909
1912
1916
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1,239
4,937
4,820
4,702
4,437
4,508
4,625
4,293
3,909
3,725
398
61)2
830
978
1,437
2,093
2,575
2,514
2,262
2,519
2,955
2,923
2,430
2,879
3,126
3,143
5,054
2,984
2,190
1,963
1,637
1,675
1,513
1,395
2,187
2,l4l
2,108
1,985
28,381
2,376
2,607
32,269
34,723
2,933
3,083
3,369
37,028
39,814
43,769
3,366
1,748
1*8,197
49,757
1*8,929
47,253
45,443
1,780
1,611
1,1*81
1,676
44,657
44,073
42,135
1*0,929
2,669
2,209
1,902
30,411
17 Federai Reserve Bulletin, February 193&, P* 122. Tabulated from data
in the Biennial Reports of the Bank Commissioner.
2/ From Biennial Reports of the Bank Commissioner.
3/ Capital, surplus and reserves— computed average at all call dates in
year,“tabulated from consolidated statements of assets and liabilities in
Biennial Reports of the Bank Commissioner.
-67entire 20-year period of operation of the guaranty system, aggregate
assessments of approximately $12.5 million (or $8.5 million in addition
to the assessments and contributions paid by the guaranteed banks) would
have been necessary to meet the losses in closed banks.
y
The net profits
of the banks, after deducting the assessments and contributions which the
guaranteed banks made to the guaranty system, amounted to an average of
8 percent per year on the total capital accounts of the banks. Absorption
out of profits of the remaining loss to depositors in failed banks would
have reduced this average rate of profit to about
6.8 percent per year on
total capital accounts.
Whether an item of expense, such as an assessment for meeting
losses in failed banks, comes out of profits can never be determined exactly.
If the expense item is one which is borne by all or a large majority of the
operating banks in the area, it is probable that certain other items of
income or expense may be affected more than the profits of the banks.
The
banks in Kansas, during the period of operation of the guaranty system, paid
interest on deposits aggregating slightly more than the net profits of the
banks.
A reduction of one-fifth in the interest paid on deposits would
have thrown the cost of deposit guaranty entirely upon the depositors.
The
presence of nonguaranteed banks, both those operating under State law and
those operating under national charters, made it difficult for the guaranteed
banks to make this kind of adjustment as a means of preserving their profits
in the face of the additional expense.
Another interesting comparison is the total cost of deposit
guaranty, in a form to have met all of the losses to depositors, with the
amounts actually charged off by the operating banks as losses on loans,
l/ Estimated on the assumption that percentage recoveries from assets of
failed nonparticipating banks were the same as for failed participating banks en
obligation on the guaranty fund. The recoveries ana losses of the failed
Digitized for tailing
FRASER
nonparticipating banks have not been tabulated.
-68investments, and other assets. The latter figure, for the entire 20-year
period, amounted to $28 million for all State banks, which is more than
twice the total loss to depositors (including the loss met by the guaranty
fund) in all failed banks. The losses charged off amounted to an average
of 0.8 percent per year of loans and investments. An increase in this
allowance for losses by one-half, or to 1.2 percent per year of loans and
investments, placed in the guaranty fund, would have met all of the losses
in failed banks.
Losses in mismanaged banks. In about one-third of the banks in
which losses to the guaranty fund or to depositors occurred, the failure was
attributed by the Bank Commissioner in full or in part to dishonesty, mis
management, excessive loans to officers, or irregular practices.
The loss
in these banks amounted to about two-thirds of the total loss to the guaranty
fund and to depositors in all guaranteed banks.
The large percentage of the
loss which occurred in banks which were dishonestly run, mismanaged, or opera
ted improperly is due to the fact that nearly all of the larger banks which
failed did so because of the way they were managed.
The bulk of the failures
attributed primarily to incompetence, inability to make collections, or to
causes reflecting adverse economic circumstances, were small banks.
Of the
five banks which caused the largest losses to the guaranty fund, depositors,
or participating banks, and which together were responsible for nearly onethird of all of the losses, four failed because of dishonesty or mismanagement.
The failures ascribed solely to dishonesty by the Bank Commissioner include
the American State Bank, Wichita, which for several years prior to its failure
was the largest bank operating under State law.
-69Defects of the Kansas system. The failure of the Kansas system
of guaranty of hank deposits was due to the character of that particular
system and the circumstances surrounding its operation, not to the im
practicability of applying the insurance principle to losses from bank
failures.
The Kansas system suffered from several serious defects.
First. The regular rate of assessment, one-twentieth of 1 percent
per year, was far too low and decidedly inadequate; and special assessments
could not be levied at the time when they were obviously needed, because
of the delay in making payments to depositors in closed banks until com
pletion of liquidation of the bank.
Second. The maximum reserve fund which could be accumulated,
$1 ,000,000, and the amount to which it could be depleted before assessments
were resumed, $500,000, were too small. The maximum accumulation, which
amounted to approximately one-half of 1 percent of the largest volume of
deposits in guaranteed banks, was only two-thirds of the loss assumed by
the guaranteed banks in one failure.
Third. Prompt payments could not be made to depositors in the
failed banks. Deposit guaranty or insurance does not fulfil its proper
function if depositors are unable to obtain their guaranteed funds promptly.
To achieve its purposes, deposit insurance or guaranty must provide for no
significant interruption in the flow of payments in the community in which
a failed bank is located.
Fourth.
Losses to the guaranty fund were not recognized, in the
fund's accounts, at the time banks failed. As a consequence, the fund accumu
lated large liabilities which were not reflected on its books nor in the
assessments levied. Reserves for losses should have been established at
the time each bank failed, on the basis of an appraisal of the liquidating
- 7 0 -
value of the bank's assets, so that the accounts of the fund would reflect
its true condition.
Fifth.
Banks were able to withdraw from the system without full
responsibility for obligations which accrued while they were participants
in the system.
Sixth.
Provisions of law relating to loans to officers and
directors and their interests, and in regard to excessive loans to single
borrowers, were inadequate; and supervision over banking practices, particu
larly the practices of the large banks, was inadequate.
This element in the
failure of the Kansas deposit insurance system, as in the case of the
Oklahoma system, leads to a conclusion of vital importance to the success
of other systems of deposit guaranty or insurance.
That is, that dishonesty,
favoritism to special interests, and excessive loans to enterprises in which
responsible officials of the bank are connected, will lead to disaster, and
that the supervisory authorities must be alert and vigorous in watching
the policies of the larger banks in which the risk is concentrated.
DEPOSIT GUARANTY IN TEXAS
prepared by
Clark Warburton, Chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
June 1958
TABLE OF CONTENTS
DEPOSIT GUARANTY IN TEXAS
Page
Background of the guaranty legislation
Banking prior to 1909
Introduction of guaranty legislation
1
1
2
Character of the deposit guaranty legislation
Admission of banks
Deposits covered by guaranty
Assessments
Administration and custody of the fund
Expenses of administration
Method of paying depositors
4
4
5
7
3
11
11
Supervision and regulation of participating banks
Powers of the Department of Banking
Supervisory experience
Statutory limitations on bank operations
14
14
18
20
Modification and closing of the deposit guaranty system
Adequacy of the fund and cost to bankers
24
24
Number, deposits, and failures of participating banks
Participating and nonparticipating banks
Deposits of participating and nonparticipating banks
Concentration of deposits
Failures of participating and nonparticipating banks
Comparison with failures in other States
Causes of bank failures
procedures in handling closed banks
29
29
30
32
Financial history of the guaranty fund
Sources and adequacy of information
Income, expenses, and refunds
Deposits and losses in failed banks, by years
Comparison of assessment receipts and losses in failed banks
49
49
51
6l
Appraisal of the Texas deposit guaranty system
The success of the Texas system
The burden of assessments
Defects of the Texas system
72
72
73
36
40
43
48
69
j6
LIST OF TABLES
Table
Page
Supervisory powers of state banking board, and of
commissioner of insurance and banking, in Texas
lb
2
Statutory limitations on bank operations in Texas
21
3.
Number of banks in Texas participating and not participating
in the deposit guaranty plan, 1910-1927
31
4.
Deposits of banks in Texas participating and not participating
in the deposit guaranty plan, 1910-1927
33
5.
Deposits protected by guaranty in Texas, 1910-1925
3b
6
Size distribution of banks participating in deposit guaranty
in Texas, 1911, 1918 and 1924-
35
7.
Number, disposition, and deposits of failed state banks in Texas
during period of operation of deposit guaranty plan
38
8.
Size distribution of failed banks involving obligations on the
Texas deposit guaranty system compared with average size
distribution of active banks, 1910-1926
bl
9.
Bank failure rates in Texas, 1910-1926, compared with rates in
contiguous states and in the United States
42
Causes of suspension of state banks in Texas, 1921-1930, as
reported on schedules prepared by the commissioner of banking
for the Federal Reserve Committee on Branch, Group and Chain
Banking
46
Receipts and disbursements of the Texas depositors guaranty fund
53
Receipts, disbursements, and balance of the permanent depositors'
guaranty fund in Texas, by fiscal years, 1910-1927
54
13.
Special assessments, withdrawals, and losses of the Texas
depositors guaranty fund, fiscal years, 1910-1927
57
14.
Settlement of the Texas depositors guaranty fund, and refunds
to participating banks
62
1.
.
.
.
10
.
12.
11
15.
T otal deposits, insured deposits and obligations to depositors of
failed banks, Texas depositors guaranty fund, by years
64
16.
Percentage of deposits insured, and percentage of insured de
posits paid by guaranty fund and recovered from liquidation
of assets, bank failures under the Texas depositors guaranty
fund, by years
68
17.
Comparison of assessment receipts and liability for deposits in
failed banks, Texas depositors guaranty fund
70
18.
Relation of deposits and losses in suspended banks in Texas to
deposits and capital accounts of active banks, 1921-1933
74
DEPOSIT GUARANTY IN TEXAS
The Texas law providing for the guaranty of bank deposits was
enacted on May 12, 1909, with deposit insurance to "become effective January
1, 1910. At the time of enactment a deposit insurance plan was in operation
in Oklahoma and laws had been enacted in Kansas and Nebraska that had not yet
become effective.
The Texas law remained on the statute books for nearly eighteen
years, but was in full operation only sixteen years.
In February 1925 the
law was amended to permit banks to withdraw from the guaranty system under
specified conditions, and within a year most of the participating banks had
withdrawn.
In September 1926 the fund became unable to meet its obligations.
The law was repealed on February 11, 1927* Litigation over disposition of the
assets of the fund prevented final settlement of its affairs until 1931, at
which time all remaining obligations to depositors of failed participating
banks were paid and the remainder of the fund distributed among the partici
pating banks, with additional liquidating dividends during the next two years.
BACKGROUND OF THE GUARANTY LEGISLATION
Banking prior to 1909» Prior to 1905 most of the banks operating
in Texas were either private banks or national banks. The Constitution of the
State of Texas adopted in 1845, when Texas became one of the United States,
included the provision:
"No corporate body shall hereafter be created, renewed
or extended with banking or discounting privileges.
,,y
This provision was
T] Constitution of the State of Texas, 184-5, Article VII, Section 30
Vernon's Constitution of the State of Texas, Annotated, Vol. 3, P- 5^1•
- 2 -
retained in revised constitutions in l86l and 1866. The Constitution of 1869,
adopted at the time of the reconstruction government, omitted the provision.
y
About eighteen State banks were chartered
while that Constitution was in
effect, some of which remained in operation after the provision prohibiting
2/
establishment of banks was reinstated in 1876.
As agricultural and commercial activities expanded there developed
a recognition of a need for additional financial facilities. The movement
for a State banking system began to gain momentum and finally in 1904 the
Constitution was amended to permit its establishment.
In 1905 legislation
was enacted authorizing the chartering of State banks and providing for a
system of supervision and regulation. With the exception of a few amendments,
this law remained in force during the entire period during which the Texas
system of deposit guaranty was in operation.
Introduction of guaranty legislation. Insurance of bank deposits
was proposed in Texas twenty years before it was adopted. At the fifth annual
meeting of the Texas Bankers' Association, Dallas, May 8, 1889, Mr. E. M.
Longcope, cashier of a national bank, gave an address urging a constitutional
amendment permitting establishment of State banks and outlining a plan for
3/
guaranteeing deposits.
After mentioning some important aspects of a banking
1/ Ibid., p. 1 7 2 . Ten of these banks were established under a
general banking law passed in 1874.
2/ In 1923, corporations operating under a charter authorized by the
State of Texas prior to adoption of the Constitution of 1876 were made subject
to each and every provision of the statutes regulating and controlling
banks and banking within the State. General Laws of the State of Texas 1923,
ch. 185, section 6 (p. 424).
3/ Proceedings of the Fifth Annual Convention of the Texas Bankers
Association, held at Dallas, Texas, May 8, 9, and 10, 1889, pp. 14-19.
- 3 -
code, such as reserve requirements and restrictions on loans, he said:
"I
come now to the discussion of a plan, the enactment of which in my humble
opinion, would be the capstone to our financial system.
It is a guarantee
fund for depositors." He estimated the losses to depositors from failures of
national banks in Texas at about l/30 of 1 percent a year, and made the follow
ing suggestion for a deposit insurance assessment rate:
”1 consider one-tenth
of one percent, ample, for this amount invested in first-class bonds by the
banking superintendent would in twenty years be self-sustaining. At the end
of that time the tax might be taken off the banks that had paid it every year
for that period, but continued on the others."
After the panic of 1907 deposit guaranty became a widely debated
proposal, and in 1908 the Texas State Democratic organization pledged the
party to such legislation. When the Governor called this to the attention of
the legislature in 1909 he found the measure was met with violent opposition.
National banks were especially hostile, arguing that the State banks would be
given an unfair advantage.
So powerful was the opposition that the regular
1909 session adjourned without passing the law.
When the legislature reconvened in a special session to further con
sider the guaranty legislation it found itself divided into two factions:
one
wanted a deposit insurance or guaranty law; the other was interested in a plan
whereby each bank would furnish a bond or some form of security to protect its
own deposits.
Confronted with a deadlock situation the legislature again ad
journed . Finally after a stormy second session a compromise was reached and a
law was passed embodying both plans, leaving to each bank the option of which
method it would use. The two plans were described respectively as the "depositors1
guaranty fund" and the "depositors1 bond security system."
-4CHARACTER OF THE DEPOSIT GUARANTY LEGISLATION
Admission of banks« Each State bank was required to make its choice
by October 1, 1909, between joining the guaranty fund, or depositing bonds or
other securities with the Commissioner of Insurance and Banking. Private banks
were authorized to join the bond security system but not to participate in the
deposit guaranty plan.
Banks which chose the bond security system were required to deposit
bonds or other securities equal in amount to the capital stock of the bank.
The effect of this on the protection given depositors was essentially the same
as a doubling of the minimum capital requirement.
It was neither an insurance
system nor an application to deposits of the principle applied to circulating
notes in many States in the 1830*s to l850*s and to national banks in 1863 that
bonds or securities for the full amount of the issues should be deposited with
y
the supervisory authority.
Banks which chose to participate in the deposit guaranty plan were
required to file a detailed statement of their assets and liabilities with the
State Banking Board. The State Banking Board had discretionary power to reject
an application for participation in the guaranty plan. If the Board declined
an application, it was required to inform the bank what conditions would be
necessary to make it eligible for approval. When a bank had once made its
decision to participate in the deposit guaranty system, it was not permitted to
change. Withdrawal from the guaranty fund was therefore impossible, until the
l/ National banknotes were protected not only by the deposit of
United States government bonds, but also by United States government guarantee.
amendment of 1925, except by placing the bank in liquidation and obtaining a
new charter, national or State. However, after the early part of 1916 banks
that chose the bond security system were permitted by the State Banking Board
to change to the deposit guaranty system. Previous to that time only one
bond security bank is known to have changed to the guaranty system, by surrender
ing its old charter and taking out a new charter.
During the five years that organization of State banks had been per
mitted prior to inauguration of the deposit guaranty system, over five hundred
such banks had been established. Of these, over 90 percent chose the deposit
guaranty system. By the end of 1920 another five hundred banks had been chart
ered by the State, and almost all of these also chose the deposit guaranty
system. Less than a hundred banks chose the bond security plan.
Deposits covered by guaranty. Guaranty of deposits in Texas was
limited to deposits that did not bear interest and were otherwise unsecured.
Texas was the only one of the eight States with a deposit guaranty plan which
limited insurance coverage to noninterest-bearing deposits. However, this
limitation excluded from insurance a smaller proportion of deposits than would
have resulted in most States from such a provision, because Texas banks held
relatively smaller amounts of time and savings deposits.
The banks which participated in the deposit guaranty system at its
beginning held about 90 percent of the deposits of all banks eligible for
participation, but only about 16 or 18 percent of the total bank deposits in
the State. The small size of the latter percentage resulted primarily from the
fact that national banks and private banks, most of them banks that were in
operation prior to establishment of the State banking system in 1905, together
-6held over four-fifths of all bank deposits in the State. During the first ten
years of the deposit guaranty system, the organization of additional State banks,
together with some conversions from national banks and the advantages of being
able to advertise that deposits were guaranteed, resulted in an increase in the
deposits of banks participating in the guaranty system to about 30 percent of the
total deposits of all banks in the State.
As in other States with deposit guaranty, various cases arose involving
the definition of deposits.
Quite a number of such cases reached the courts for
y
decision, and same were carried to the State Supreme Court.
In several cases,
the Question was whether particular obligations of an insolvent bank were
deposits or some other form of liability.
Such cases involved distinguishing
the general depositor relationship from a special deposit, a trust fund, a
cashier’s check not arising from a deposit account, a clearing house certificate,
a loan to the bank, a promissory note given in purchase of a bond, liability of
the bank as guarantor on an overdue unpaid note, and liability of a bank for
the value of bonds left for safekeeping and diverted to the bank's use. These
various forms of bank liabilities were held not to be deposits subject to the
protection of the guaranty fund. Other cases involved the question of whether
particular deposit accounts were noninterest-bearing and unsecured, particularly
when attempts were made in failing banks to change interest-bearing or secured
deposits, or a loan to a bank, into a noninterest-bearing and unsecured status
before the bank was taken over by the Commissioner for liquidation. Another
group of court cases arose in relation to public funds. The State law required
17 For a more detailed description of court cases regarding the
definition of insured deposits, see Appendix A, pp.
-7 -
banks that accepted public funds on deposit to give security for them. However,
under some circumstances tax collectors or other officials made temporary deposits,
without obtaining such security, which were held to be protected by the fund.
Because of the difficulties in defining deposits subject to guaranty
the law was amended in 1923 to exclude from insurance coverage an interestbearing or secured deposit that had been changed to a noninterest-bearing
unsecured deposit within ninety days prior to the closing of a bank, and any
deposit made by a creditor of a bank for the purpose of converting a loan into
a guaranteed deposit. Further, the issuance of noninterest-bearing certificates
of deposit was forbidden.
The 1923 amendments to the law specifically provided
that no public funds would be covered by the deposit guaranty.
Assessments. Banks admitted to the guaranty plan were required to pay
an initial assessment of 1 percent of their average daily deposits for the
12-month period ending on November 1, 1909, excluding United States Government,
State, or other public funds otherwise secured, and also excluding savings
deposits.
Banks organized less than one year prior to, or organized subsequent
to the enactment of the law, were required to pay an assessment of 3 percent
of their capital and surplus, subject to later adjustment on the basis of
average deposits. Annually, after the first payment, assessments of one-fourth
of 1 percent of average daily deposits on the same basis as the initial assess
ment were required until the fund should reach a maximum of $2 million, raised
in 1921 to $5 million. The State Banking Board was also authorized to levy
special assessments up to a maximum of 2 percent of average daily deposits in
any one year in the event of an emergency, or if the fund became depleted below
the amount on hand at the beginning of the year, or below $2 million ($5 million
-8after 1921) after that figure had been reached. The annual assessments were due
January 1, and hence in practice most failures entailed, under the law, an
y
assessment to restore the fund.
Administration and custody of the fund. Administration of the guaranty
fund was placed in a State Banking Board to consist of the Attorney General, the
Treasurer of the State, and the Commissioner of Insurance and Banking. The
Commissioner of Insurance and Banking was appointed by the Governor, while the
Attorney General and Treasurer were elected biennially by the voters of the State.
The banks participating in deposit guaranty were required to pay to
the State Banking Board one-fourth of the assessments levied on them, including
the initial assessment. The remainder was held by the banks themselves in the
form of demand deposits credited to the State Banking Board and subject to call
at any time for use in paying deposits of a failed bank.
The law provided that in case of the voluntary liquidation of a
participating bank, the State Banking Board was to return to the bank, after
all depositors of failed banks had been paid in full, the pro rata part of the
fund paid in by the liquidating bank. This provision was taken to mean that
the participating banks were the owners of the fund, and the Commissioner
accordingly authorized the banks to include their contributions to the fund
among their assets in reports of condition. For a number of years after the
1/ Such special assessments, it appears, would not be necessary if
assessments from banks admitted to the fund after the beginning of the year
exceeded the deposits of a failed bank, or for a period in 1920, when the fund
was larger than $2 million. In fact, there were several cases of failed banks,
during the period for which statements of the fund are available, with payments
from the fund but no matching special assessment on the participating banks.
-9beginning of the system, the State Banking Board levied a separate special
assessment for the amount needed to pay depositors in each bank that failed,
keeping the accounting therefor separate from the fund accumulated from the
initial and regular annual assessments, and as the subrogated assets of the
failed bank were liquidated, repaid the proceeds to the participating banks as
dividends on the special assessment. The participating banks were therefore
instructed to show two guaranty fund items among their assets, designated,
respectively, as "Interest in the Guaranty Fund," and "Assessment, Guaranty
Fund." These were described by the Bank Commissioner as follows:
•Interest in the Guaranty Fund.' This fund is kept intact and shall
have an annual increase of one-fourth of one per cent of the average
daily deposits of all member banks until same reaches a total of
$5,000,000.00. The said one-fourth of one per cent is figured and
based on the average daily deposits of member banks for each previous
fiscal year ending November 1st. When paid in by the bank, it is
likewise charged to ’Interest in the Guaranty Fund,’ one-fourth sent
to State Banking Board for Treasurer, and three-fourths of amount is
credited to Banking Board on individual ledger.
Now, we revert to the other fund known as ’Assessment, Guaranty
Fund.’ This is a fund that is used when any bank is assessed for the
payment of any amounts assessed to take care of deposits of a failed
bank. When a member bank fails, the Commissioner pays out of the
permanent fund, known as ’Interest in Guaranty Fund' the amounts due
the depositors, then assesses the member banks proportionately accord
ing to their list as sent in on the previous year ending November
1st, as exhibited by the ’Average Daily Deposit Report.' When paid
in this restores the amount to the permanent fund as before. The
banks thus assessed pay, in cash, to the Commissioner, their respective
proportionate amounts for the failed bank, and charge the amount to
the ’Assessment in Guaranty Fund.’ Also, they should keep a subsidiary
account, a miniature ledger, showing the amounts of assessments in each
and every failed bank. Later, when the Commissioner has collected in
from the failed banks, and pays a dividend, he sends to each contribut
ing bank a check for respective dividends, and the bank credits
’Assessment, Guaranty Fund* with the dividend keeping that under proper
head in subsidiary ledger. By keeping the subsidiary ledger, the bank
is able at all times to know just how it stands on each and every
liquidation. When final dividend is paid on any given liquidation then
-10the bank shall close the subsidiary ledger account on that particular
liquidation thus closed, and charge the loss to ’Profit and loss1 on
the General Ledger, crediting the amount so charged to 'Assessment,
Guaranty Fund.' l/
Under this procedure the permanent fund accumulated from the annual
assessments was a revolving fund usable for the immediate payment of depositors
of a closed bank, with the amounts withdrawn for this purpose restored from
§/
the proceeds of the special assessments.
The losses sustained by the guaranty
fund in protecting depositors thus came out of the special assessments, not
out of the regular annual assessments. The permanent fund could therefore be
appropriately treated, as it was, as an asset of the participating banks.
However, treating it as an asset of the participating banks did not involve any
income to the banks on the portion of the fund held by the State Treasurer.
This was held on a noninterest-bearing basis, and no interest appears in the
accounts of the permanent fund, either in the books of the State Banking Board
or as carried in the "interest in the Guaranty Fund" accounts on the books of
the participating banks.
The guaranty fund accounts maintained by the Commissioner of Insurance
and Banking, and the fund statements published by the Commissioner, also kept
the permanent fund separate from the special assessments to take care of deposits
of failed banks and the recoveries from the assets of failed banks, until the
fiscal year beginning in 1920. For the next two fiscal years the data pertaining
to both were shown in a combined statement in the annual report of the Commissioner
of Insurance and Banking.
After the establishment of a separate Department of
T7 J. L. Chapman, Bank Commissioner, "Exegesis of the Guaranty Fund
Law," The Guaranty Fund Bulletin, December 1923, PP* 16 and 17*
2/ In several cases, amounts withdrawn were not restored by special
assessments, and this was taken into consideration in the final settlement of the
affairs of the fund.
-11Banking in 1923> the Bank Commissioner did not publish any statements of the
fund. However, in talks and correspondence the special assessments were
referred to as "Contributions, 11 thus distinguishing them from the annual
assessments.
Expenses of administration.
Expenses of the Commissioner in
enforcing the act, and payments for salaries and expenses of bank examinations
were met from the general funds of the State. However, each bank was required
to pay the "just and reasonable" cost, as certified by the Commissioner, of
each examination, general or special, with maximum amounts scaled according
to capital stock and permanent surplus specified in the law. After 1923, the
expense of examinations was assessed on the banks in proportion to the assets
and resources held on the dates of examination. All examination fees collected
by the Commissioner were paid into the State treasury to the credit of the
general revenue fund. As a result of this procedure, no expense items appeared
in the financial statements of the depositors' guaranty fund.
Method of paying depositors. Prior to the deposit guaranty legisla
tion, an insolvent State bank was liquidated by a court-appointed receiver.
Under the guaranty legislation, gill insolvent State banks were liquidated under
the direction of the Commissioner, through a receiver or some competent person.
In the case of a closed bank participating in the guaranty plan, the Commissioner
was required by law to pay as large a proportion of the deposits as possible from
the cash that could be made immediately available from the assets of the bank.
The State Banking Board ruled that sufficient cash should be held for the same
proportionate payment on other deposits and obligations to creditors.
The
remainder of the guaranteed deposits were to be paid by the State Banking Board
from the guaranty fund.
-12Rules adopted by the State Banking Board provided that upon closing
of a bank the Commissioner should immediately submit to the Board an estimate
of the amount required from the guaranty fund, and that upon approval of this
amount or a revision thereof by the Board, the Board should draw an order upon
the State Treasurer to pay the needed amount to the Commissioner, who then paid
the depositors, personally or through a State bank examiner or a special agent.
Any indebtedness of a depositor to the bank was deducted from the amount due
him on his guaranteed deposit.
Claims for guaranteed deposits presented after
90 days (4-5 days prior to 191?) were not entitled to payment from the guaranty
fund, but were entitled to an equitable share of the proceeds of liquidation of
the assets of the bank.
Upon payment of the guaranteed deposits of an insolvent bank from the
guaranty fund the Board ordered checks to be drawn by the State Treasurer upon
the participating banks, in proportion to their deposits in the fund subject to
his check, for the purpose of immediately restoring the cash portion of the
guaranty fund. The Board also levied a pro rata assessment upon the participat
ing banks, equal to the amount of those checks, requiring payment within five
days by a credit on the member bank's books to the Treasurer's demand deposit
guaranty fund account, thus restoring that portion of the fund.
In the course of liquidation of the assets of a failed bank, the
Commissioner paid to or set aside for the guaranty fund the dividends to which
the fund was entitled by subrogation of the rights of depositors whose claims
had been paid by the fund.
These amounts were then repaid by the State Banking
Board to the participating banks, pro rata according to the amounts contributed
to the special assessment for the failed bank.
In June 1927, after repeal of the
-1 3 -
guaranty law, the practice of prorating and returning to the assessed partici
pating hanks the recoveries from the assets of failed hanks was discontinued,
and such recoveries were kept as dividends set aside for the guaranty fund.
The final dividend of a hank in liquidation could not be made until
after a year subsequent to the notice given creditors of the closing of a bank.
If the assets were sufficient to repay all deposits, the guaranty fund was
entitled to 6 percent interest on the guaranteed deposits from the date that
checks had been drawn on the participating banks.
If all guaranteed deposits
were paid and provision made for payment of other deposits, the Commissioner
could return the bank to the stockholders for completion of liquidation.
The treatment of these various transactions on the books of the
participating banks, and of the loss after receiving the final dividend from
a failed bank, have been described above. This entire process, though seemingly
cumbersome,
appears to have worked satisfactorily up to the time that most of
the participating banks withdrew following the change in the law in 1925*
However, the court cases that arose in the definition of deposits or regarding
the insurance status of certain accounts often delayed completion of the
liquidation process. When the number of failures became relatively large in
the twenties the liquidation process became further delayed.
Mention should also be made of an alternative procedure that was used
in a number of cases. This was reorganization of the failed bank, or sale of
its assets to a new bank, together with enforcement of the stockholders'
liability and a payment from the guaranty fund sufficient to enable the successor
bank to assume the liabilities of the closed bank. The law did not specifically
mention this procedure, but it was permissible under the powers of the State
-1 4 -
Banking Board and Commissioner. A closed bank could resume business with the
consent of the State Banking Board "under such condition as may be approved by
it," and the Commissioner was authorized to sell the property of a closed bank
the
on "such terms as/court may direct" and when necessary to enforce the liability
of the stockholders. The legality of this process was confirmed by a court
decision in a case brought by a stockholder of a bank handled in this way in
an effort to avoid payment of a stockholder's assessment under the double
y
liability provision.
SUPERVISION AND REGULATION OF PARTICIPATING BANKS
Prior to 1905, as mentioned earlier in this report, only a few State
chartered banks were in operation, the banking system consisting almost entirely
of private banks and national banks.
State banks had been subject to supervision
for about four years prior to enactment of the deposit guaranty legislation.
For the most part the existing law governing the regulation and supervision of
banks was left unchanged by the deposit guaranty legislation, and except for
the requirement of a special examination before admission to the guaranty system
the participating banks were subject to the same regulations and supervision as
those choosing the bond security system.
Various changes were made in the regulatory and supervisory provisions
of the banking code during the time that deposit guaranty was in operation. This
was particularly the case in 1923, when rather extensive amendments to the law
were made.
Powers of the Department of Banking. When the general banking law was
enacted in 1905, the Commissioner of Agriculture, Insurance, Statistics and
History was given the added title of Superintendent of Banking and was delegated
1/ Houston National Exchange Bank v. Chapman, State Commissioner of
Insurance and Banking, Court of Civil Appeals of Texas, Galveston, May 15, 1924,
263 s.w. 929.
-15the task of bank supervision. By 1909> the duties of this office had been
divided, with those relating to insurance and banking exercised by a Commissioner
of Insurance and Banking. This Commissioner was required to be experienced in
insurance, and not personally interested in any banking corporation under his
supervision.
In 1923 the Department of Insurance and Banking was divided, with the
Department of Banking headed by a Bank Commissioner. The Bank Commissioner was
required to be a practical banker with not less than five years actual banking
experience in a position not lower than that of cashier. The law also provided
for a Deputy Bank Commissioner whose experience must be that of a practical
banker. The State Banking Board, which had been established by the deposit
guaranty law, was continued with the Bank Commissioner serving in the place of
the former Commissioner of Insurance and Banking.
Under the deposit guaranty legislation the State Banking Board was
given control and management of the depositors' guaranty fund with power to
adopt all necessary rules and regulations in harmony with the act for the
management of the fund. The Board also had general supervision and control of
the bond security system, and the power of regulation, control and supervision
of all State banking corporations as provided in the Act. However, the
Commissioner of Insurance and Banking retained most of the powers of supervision
under the law already in force, with some additional duties prescribed by the
deposit guaranty law.
A summary of the supervisory powers given the State Banking Board and
the Commissioner is shown in Table 1. Those given to the State Banking Board are
so designated, the others were assigned directly to the Commissioner of Insurance
and Banking, or, after 1923, the Bank Commissioner.
Table 1. SUPERVISORY POWERS OF STATE BANKING BOARD, AND OF COMMISSIONER
OF INSURANCE AND BANKING, IN TEXAS
Item
Opening of new banks
Examinations and reports
of condition
Frequency of examinations
Powers l/
Commissioner to issue certificate of authority
to transact banking business, specifying whether
under guaranty fund or bond security system, and
showing that bank has complied with the banking
laws to the satisfaction of the State Banking
Board. In 1913, charters to be approved by the
State Banking Board: the Board to inform itself
as to the financial standing and character of the
incorporators, the public necessity for a bank in
the community, and adequacy of the proposed capi
tal, with charter to be refused if any finding
unfavorable.
At least once in each quarter of each calendar
year, amended in 1923 to at least every four months
and whenever deemed necessary or expedient. 2/
Scope of examinations
Thoroughly and fully.
Reports of condition
To be submitted for any date, at least twice a
year, and in form required by Commissioner; and
any additional statements deemed necessary for
enforcement of the deposit guaranty law.
Bank management
Removal of undesirable assets
or discontinuance of un
desirable practices
Commissioner to order discontinuance of illegal,
unsafe, or unauthorized practices disclosed by
examination.
Impairment or deficiency of
capital
Commissioner to require impairment of capital
below legal requirement to be made good, and
to require increase of capital if depositcapital ratio found to be above specified limit. 3/
Removal of bank officers,
directors, or employees
No specific provision. To report to Attorney
General, for such proceedings as may be required,
whenever director or officer has abused his trust
or is guilty of misconduct or malversation, or
when bank has failed to comply with orders re
garding banking practices.
-17Table 1. SUPERVISORY POWERS OF STATE BANKING BOARD, AND OF COMMISSIONER
OF INSURANCE AND BANKING, IN TEXAS - Continued
Item
Taking possession or
closing a bank
Handling of closed banks
Return to owners
Powers
Required to close and take possession of a bank;
If insolvent, with a bank that refuses to submit
its affairs to examination or found to have
violated its charter or the law, to be treated
as an insolvent bank;
If continuance in business will seriously jeop
ardize safety of depositors or other creditors;
If affairs placed under control of Commissioner
by the bank.
Bank may resume business upon conditions approved
by State Banking Board, evidenced by written
statement of the Commissioner. If bank deems
itself aggrieved by Commissioner’s possession
or liquidation procedure may apply to district
court, which may, in its judgment, order him
to return the bank to its owners (repealed in 1923).
Liquidation
Unless returned to owners, closed bank to be
liquidated by Commissioner, through receiver or
some other competent person and under direction
of district court.
Sale of assets or
capital stock
No special provision, but sale of assets to
successor or another bank permitted under general
power to dispose of assets.
l/ As at the beginning of the deposit guaranty system (i.e., as granted in the
1905 law or as amended by the 1909 law), with amendments during the period of
operation of the deposit guaranty system.
2/ In 1914 less frequent examination of banks members of the Federal Reserve
System was authorised, provided such banks were examined by the Comptroller of
the Currency or a Federal Reserve bank.
2j For the maximum deposit-capital ratio scale, see Table 2.
-18-
Supervisory experience. For the major portion of the period during
which the deposit guaranty system was in operation, the effectiveness of bank
supervision appears to have been hampered by various circumstances:
frequent
changes in membership of the State Banking Board resulting from the biennial
election of two of its members, short terms for the Commissioner because of new
appointees with changes in the Governorship (there were twelve different Commission
ers during the period of deposit guaranty); insufficient attention to banking by
the Commissioner because of the requirement that he be experienced in insurance
and his attention to that part of his duties; inadequate salaries and too small
an examining staff; a heavy examination workload resulting from the requirement
of four examinations of each bank per year, so that examinations were not thorough;
and lax enforcement of banking laws resulting from frequent failure to secure
convictions in local courts when charges were made against bank officers.
Several years later a president of one of the State banks described
the deficiency in bank supervision during the period of deposit guaranty as
follows:
The danger to the Guaranty Fund was caused very largely by our
loose method of supervision at that time. We had to learn. We were
pioneers and in granting charters we granted them without any investi
gation as to the need for the bank or as to the capability of the
people who were going to man that bank. If they had the money and if
the stockholders seemed to be good then the charter was granted,
regardless of the need in the community and whether or not the people
in charge were experienced in banking. You can take a list of the
failures we had and half of those banks should not have had a charter . . .
The examinations at that time were superficial. They were not thorough
and they did not compare any more with the examinations we have today
in the State system or national system than if it were a different
process altogether, l/
¿7 Mr. Thos. E. Baker, President, Commercial State Bank, Nacogdoches,
Texas, interview with Miss Florence Helm, Division of Research and Statistics,
Federal Deposit Insurance Corporation, October 2k, I93I+.
-19The difficulty of convicting bankers who had violated the banking
code also was described at a later time by another bank president:
Even when bankers signed statements admitting criminal violation
of the state banking laws, members of the banking department tell me,
that it was frequently impossible even to secure an indictment, let
alone a conviction.
A great deal of the trouble arose because the banking commissioner's
lawful duties ended when he had presented the evidence of violations of
law to the courts. The bankers had to be tried either in the county
courts or in the district courts. This meant that the county attorney
had to prosecute the case. Usually the county attorney or district
attorney was interested in being reelected to that job or a better one.
Bankers are usually rather influential people in the community and it
became the practice for the county attorney to determine the vigor of
his prosecution by the probable effect of such a prosecution on his
election. Since, under the guaranty fund plan, no depositors lost any
money, they were not very mad at bankers even when the bank failure
came about as a result of simple fraud, l/
This laxity of supervision was acknowledged by one of the Bank
Commissioners several months before the repeal of the law.
"...the speaker believes a vigorous and forceful policy of
enforcing the law and strict requirements respecting the manner
in which many of our banks have been conducted would have operated
to prevent, to a very large extent, the enormous losses suffered by
the Guaranty Fund since its establishment... No stretch of the
imagination is required to assert that the Guaranty Fund as it has
been administered in Texas has been a constant premium upon
dishonesty and criminal recklessness, and carelessness in the
management of some of the banks." 2/
Another factor that may have contributed to the cost of failures to
the fund was a tendency of the banking department to delay closing banks that
were known to be in a failing condition. This situation was described in 1925
by the Bank Commissioner as follows:
17 Notes by Professor W. N. Peach, University of Oklahoma, on an
interview October 5, 1941 (used by permission of Mr. Peach).
2/ Charles 0. Austin, Commissioner of Banking, in (Our State Banking
System," The Texas Bankers Record, 15 (June 1926), p. 37.
-2 0 -
f,To the "best of my knowledge and belief at the present time all
of the banks about which the department has had any serious concern
have closed and are now in process of liquidation. Most of these
failures were banks known to this department to be absolutely insol
vent for a long time, but which appear to have been kept open with
the hope that they might work out their own salvation. Bank failures
do not develop over night, but are usually the result of conditions
well known and fully recognized for a long time before the crisis
develops. None of the failures which have occurred so far this year
should have been any surprise to any person having access to the bank
examiners1 reports and most of them should have been no surprise to
the public at large for the reason that the banks have been notoriously
insolvent and generally discussed in the communities where they existed
for many months prior to their closing.” l/
That in at least one case the Commissioner of Insurance and Banking
made strenuous efforts to delay closing a bank, because he did not want to
draw the necessary amount from the guaranty fund, is c3.ear from a court deciêion
in a case that arose after the bank was finally closed about three years
later.
2/
Some of these situations were corrected, or partially so, with
modifications of the banking law, especially those in
1923; but by that time
the bankers were worrying about the eventual cost and had initiated the
campaign against the guaranty system that led to its modification in
and to repeal of the law in
1925
1927 *
Statutory limitations on bank operations.
Statutory limitations on
bank operations under the banking code in operation when deposit guaranty was
adopted, or as amended at that time or later, are shown in Table 2.
Provisions
relating only to savings banks, establishment of which was authorized under
the 1905 law, are not included.
Very few, if any, banks appear to have been
organized under these provisions, and such banks were presumably ineligible
for participation in the deposit guaranty system because of the limitation of
the guaranty to noninterest-bearing deposits.
YJ From statement by Bank Commissioner Charles 0. Austin to the
state bankers, Southwestern Bankers Journal 2^ (April 1925)> p. 11*
2/ First State Bank of Eastland, insolvent in 1921, but not closed
for liquidation until January 1924. Austin, Banking Cotranlssioner. v. Fleming,
Court of Civil Appeals of Texas, Eastland, Feb. 11, 1927* 290 S.W. 835 .
-2 1 -
Table 2.
STATUTORY LIMITATIONS ON BANK OPERATIONS IN TEXAS
Provisions of lav l/
Itera
Responsibility of officers,
directors, and stockholders
Examination of bank
No provision except provide records and informa
tion for State examiners.
Losses resulting frora
violations of law
Officers and directors responsible for deposits
received or debts contracted knowing banks to
be insolvent or in failing condition.
Liability of stock
holders
Par value of shares (i.e., usual double liability).
Bonding of active offi
cers and employees
Required for officers with power of cashier or
treasurer, amended in 1917 to cover all officers
required to handle funds of bank, for amount
approved by Board of Directors and in form approved
by Commissioner.
Limitations on loans and
investments
Loans to bank examiners
Prohibited.
Loans to officers and
employees
Loans to officers to be approved by Board of
Directors.
I.oans to directors
In excess of 10 percent of capital stock and
surplus to be approved by Board of Directors.
Loans to stockholders
No provision.
Maximum to single borrow
ers (not to apply to
bills of exchange or
discounts collateralled
by warehouse receipts
under specified condi
tions)
25 percent of capital stock including permanent
Maximum secured by real
estate
50 percent of reasonable value, and aggregate not
to exceed 50 percent of the bank’s "securities."
Secured by own capital
stock (applicable also
to purchase of own
stock)
Prohibited unless necessary to prevent loss on
debt previously contracted; and if acquired to
be sold or disposed of within six months.
surplus if equal to one-half or more of the
capital stock; amended in 1914 to 30 percent of
capital stock; and in 1917 to 25 percent of
capital stock and certified surplus. In 1914
discounts for financing movement of farm products
excepted with permission of Commissioner.
Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN TEXAS - continued
Provisions of law
Item
Limitations on ownership of
real estate and stocks
Maximum in banking house
and equipment
No provision to 1923, then banking house limited to
50 percent, and furniture and fixtures to 15 per
cent, of capital stock and permanent surplus with
out permission of State Banking Board.
Time limit on real es
tate acquired by col
lection of debt
Five years.
Other real estate
Prohibited.
Bank stocks
Not over 10 percent of stock of such bank, including
loans secured by such stock, unless necessary to
prevent loss on debt previously contracted and in
such case to be disposed of within six months.
Other corporate stocks
No specific provision but presumably illegal because
of lack of enumeration in powers granted.
Limitations relating to de
posits
Maximum aggregate de
posits
Maximum rate of interest
payable on deposits
Receipt of deposit when
insolvent or in failing
circumstances
Required reserves
Total required
Capital to be increased by 50 percent if average
daily deposits for year ended Nov. 1 exceeded fol
lowing multiple of capital and surplus:
5 for
6 tt
over $10,000 and under $20,000
H
of $20,000 but under $40,000
7
8 M
of $40,000 "
"
$75,000
11
of $75,000 "
“
$100,000
9
10 IT
of $100,000 or more
No provision.
Forbidden.
25 percent of demand deposits; amended in 1914 to
percent for banks with capital of $25,000 or more
and 15 percent for other banks.
20
In actual cash in bank
10 percent of demand deposits; amended in 1914 to 8
percent for banks with capital of $25,000 or more
and 6 percent for other banks; requirement elimina
ted in 1920.
GhaiftofrciJ« ai Tonln
Tiny Inn 1n nnnii of on iIqhhiÌI hi miji m iU m ilili
11>■ DlilT'
-2 3 -
Table 2.
STATUTORY LIMITATIONS ON BANK OPERATIONS IN TEXAS
continued
Provisions of lav
Itera
Required reserves
Character of balance
Limitations on borrowing
Maximum amount
Maximum value of assets
pledgeable as security
Limitations on payment of
dividends
Earnings to be carried to
surplus prior to divi
dends
May be in cash or on deposit in any national or State
bank approved by Commissioner, with capital stock of
$50,000 or more, with limit in any one bank of 20
percent of total deposits, capital and surplus.
As approved by Board of Directors; amended in 191^
to paid-in unimpaired capital stock, or with
approval of Commissioner to amount of unimpaired
capital stock and surolus.
150 percent of amount borrowed.
10 percent until surplus equal to 50 percent of
capital stock.
When losses equal or ex
ceed undivided profits
Forbidden.
When reserve is impaired
No provision.
When insolvent or capi
tal impaired
No provision.
Maximum
Net profits on hand after deducting losses and bad
debts.
Minimum capital stock
Few banks
Other banks
$100,000 in p3.aces with 20,000 or more population;
$ 50,000 in places with 10,000 but less than 20,000
population;
$25,000 in places with 2,500 (amended in 1923 to
800) but less than 10,000 population;
$10,000 in places with less than 2,500 (amended in
I923 to 800) population.
See limitations on deposits (above)
Tj Provisions relating to benks of deposit and discount while the deposit
guaranty law was in force. For some of the items, the law contained separate
provisions for trust companies, or for savings banks or savings departments, which
are not enumerated here. Special provisions applicable to banks members of the
Federal Reserve System, adopted in 191*1 or later (relating chiefly to reserves
and to rediscounts at Federal Reserve banks) are also omitted.
-2 k MODIFICATION MD CLOSING OF THE DEPOSIT GUARANTY SYSTEM
Adequacy of the fund and cost to bankers» The deposit guaranty
system of Texas, until the privilege of withdrawal was granted in 1925, did
not suffer, as in the case of other State systems, from an assessment rate too
low to meet the cost.
The maximum permitted rate in any year, 2 percent of
deposits other than savings deposits, was substantially higher than in the
other States with deposit guaranty in operation during the same decades; and
the accumulated fund and proceeds from the assessments were sufficient to enable
payments to depositors of all the banks that failed, as promptly as the claims
could be established and proved.
It was only after most of the participating
banks had withdrawn and the accumulated fund had been tied up in liquidation that,
late in
1926, the fund could not at once meet its obligations to depositors of
failed banks.
During the first decade the cost to the participating banks was small.
The initial assessment of 1 percent and the regular annual assessments of 1/4
of
1 percent per year had provided by 1920 an accumulated fund to the maximum of
$2 million.
This was about 3/4 of 1 percent of the deposits of the participating
banks after their wartime expansion.
Relatively small portions of the fund had
been used from time to time to make disbursements in closed banks, but the major
part of such withdrawals had been repaid from the proceeds of special assessments,
and the accumulated fund was considered by the banks as an item among their assets,
nonearning, but of first-class quality.
The special assessments to meet the cost
of paying the guaranteed deposits of failed banks, after allowance for the
dividends received from the liquidation of the assets of the failed banks, had
averaged about
3/100 of 1 percent of the deposits of the participating banks.
-2 5 -
The system was hailed by the Commissioner of Insurance and Banking, and by the
bankers, as a marvellous success.
The Commissioner of Insurance and Banking, in 1919, in his annual
report, described the success of the system as follows:
There is a feature of the State banking system that, while it
does not stamp it as unique among the financial systems of the country,
accords to it a prestige, in fact, which few of them possess. I refer,
of course, to the protection of unsecured and non-interest bearing
deposits. Without this protection to the public, the system, under the
excellent supervision of Texas laws, would be admirable; with it, it
is unsurpassed. There is no question to my mind that its steady growth
to its present colossal proportions has been due in a large measure to
the increasing public confidence in its impregnable solidarity and
strength which this guaranty against public loss engenders.
By creating this device, the Legislature has not alone accorded
absolute protection to the public; it has induced the public to turn
its funds freely over to the banks for use in promoting the public
welfare. During all the years the guaranty fund has been in operation,
it has cost the banks only about $ 300,000— a sum about one-tenth of
one per cent, of the present deposits of the system, which in propor
tion to the amount of money protected at this cost over the period of
years it has been established, becomes infinitesimal... the rate of
insurance, computed upon the volume of losses paid, has been about
.0021. Surely in dollars and cents alone, it is the best investment
the banks have ever made.
3ut the good it has wrought has not been confined to the protec
tion of depositors' money. It has utterly eliminated from community
life the injurious effects of a bank failure. State banks may close
today; but if they do, the serenity of the people is not disturbed,
for the depositors know that within a few weeks at the longest,
their funds will be returned to them. This effect, by itself, is
well worth the cost of procuring it. l/
The attitude of bankers in 1920 was described, after the repeal of
the law, by the Secretary of the Texas Bankers Association, as follows:
Bankers of recognized ability insisted that the guaranty fund system
was the greatest piece of constructive legislation ever enacted in the
country. They pointed to the record of the ten years. They preached
the plan at bankers' conventions. They expanded with pride over the
fund's accomplishments and growing importance. 2/
if Forty-fourth Annual Report of the Texas Commissioner of Insurance and
Banking for the year ending August 31» 1919, Pertaining to Banking» pp. 9-10.
2 / W. A. Philpott, Jr., Secretary, Texas Bankers Association, "The
Failure of the Guaranty Fund in Texas," American Bankers Association Journal,
March 1927, P* 659»
"
""
- 26 -
In the early 1920's Texas suffered severely from the postwar
depression of 1921.
Fifty "banks failed, requiring more than $8 million of
withdrawals from the fund and of assessments on the participating hanks,
during the
18-month period from the early part of November 1920 to the early
part of May .1922.
approximately
The magnitude of these assessments, which amounted to
3 percent of the deposits of the participating banks, made the
bankers aware of the burden as well as the benefits of the guaranty.
However,
the guaranty of deposits was given credit for helping to soften the impact of
the depression, and the bankers continued for the most part to support the
principle of deposit insurance.
The Commissioner of Insurance and Banking,
in his report for the year ending August 31, 1921, stated:
"The State Bank Guaranty Fund has rendered a signal service the
past year. The non-interest bearing and unsecured deposits in each
and every guaranty fund bank that has had to close its doors have
been paid in full as soon as this Department could make and collect
the assessments against the banks, and the claims were properly proven
up. ...the State Bank Guaranty Fund is still intact with two million
dollars, as the law provides. I do not hesitate to say that I firmly
believe this fund has saved the situation with the State banks of
Texas. It has established confidence in the minds of the depositors,
and rightly so, and has been the means of keeping the money in the
banks, thereby keeping it in circulation." l/
In the summer of 1922, the vice-president of a Dallas bank who later
became Commissioner of Banking, referring to the deposit guaranty law, stated:
"For many years after the adoption of this law it was highly
successful, and was rarely ever discussed as a business hazard to
the banks which were members of the system. It became an outstanding
and shining mark among all the States of this Union that had adopted
the guaranty of deposits scheme, as a case of a successful enforce
ment of a guaranty of deposits law."
l7 Forty-sixth Annual Report of the Commissioner of Insurance and Banking
for the year ending August 31, 1921, Pertaining to Banking, p. 4.
-2 7 -
"I believe I know the sentiment of the people of Texas as well
as any man in Texas. I believe I know that it would be as utterly
impossible to get the legislature of this State to repeal that guaranty
fund act as it would be to get the legislature of this state to advise
the people to remove the capitol building from Austin to the city of
Fort Worth."
"Some of our neighboring states have had a disastrous record with
respect to the guaranteeing of bank: deposits. Some of them have had
a very successful record. I think it is proper to say that the record
of Oklahoma has given the guarantee scheme a black eye all over the
United States, but we must consider this, gentlemen, that the conditions
in Oklahoma were far different from what have existed in Texas* Okla
homa banks have been subjected to the political machinations of as
unscrupulous a bunch of political highbinders, according to ray informa
tion, as has ever come down the pike, if you will permit me to indulge
in colloquial language.11 3j
At about the same time Thomas B. Love, also from Balias, who had
been Commissioner of Insurance and Banking at the time the law was enacted,
commented as follows:
"The Texas Guaranty Fund system of State Banks overwhelmingly has
made good, and has had a record breaking career. It has broken all
records for growth in number of banks and also for growth in their
average strength and in the volume of their business, and while its
record of twelve years protection of deposits... in from 500 to 1,000
separate and independent banking units without the loss of a cent to
any depositor, abso3.utely is without a parallel, at the same time,
notwithstanding the cost of the protection, it has broken all records
for stockholders earnings for a considerable group of newly organized
banks." 2/
In June 1922 the first convention of State bankers in Texas since the
beginning of the State banking system was held, and unanimously adopted a
resolution approving the guaranty fund law, and urging that no new charters be
issued for banks operating under the bond security plan.
The bankers made
T/ Charles 0. Austin, vice-president, Dallas Trust and Savings Bank,
"Why We Are in the State Banking System," The Texas Bankers Record, June 1922,
pp. hi and 48.
2/ Thomas B. Love, "State Bank Laws and the Guaranty Fund," The Texas
Bankers Record, July 1922, p. 19*
-2 8 -
several recommendations for clarification of the deposits protected by the
guaranty and for elimination of all interest-bearing deposits from assessment,
most of which were api>roved by the Legislature in the 1923 amendments to the
i/‘
guaranty fund law.
During the next two years the attitude of the bankers toward deposit
guaranty changed decisively.
latter part of
Even after the general business recovery in the
1922 and during 1923, failures continued in sufficient numbers
to require assessments above 1 percent a year.
The liquidating facilities of
the Banking Department were strained, and in addition the liquidation process
was delayed by litigation over such matters as determination of the guaranteed
deposits and collection of stockholders* liability.
Consequently, only a
small part of the special assessments was being recouped by the participating
banks, and the amount of eventual recovery was doubtful.
By 192 4 many of the
bankers were greatly perturbed about the burden of the assessments, some of
them were converting their institutions to national banks, others were preparing
to do so.
The major part of the effort of the bankers to get out from under the
deposit insurance assessments was concentrated in a campaign in 192*4- and early
1925 for repeal of the deposit guaranty law.
They did not at that time succeed
in this aim, but they were able to obtain amendments to the lav permitting with
drawal from the guaranty system with a refund to each withdrawing bank of its
pro rata share of the net accumulated fund, as previously had been possible
through voluntary liquidation, and making the bond security system more attrac
tive by enlarging the kinds of bonds eligible for deposit under that system.
TJ The Texas Bankers Record, Vol. 11, July 1922, p. 23 .
-2 9 -
The resulting exodus of banks from the guaranty fund system into the bond
security system was accelerated after a decision by the State Supreme Court
early in 1926 that the bonds to be deposited could be taken from the bank’s
1/
own portfolio.
By the latter part of September of that year, only 108 banks
remained, in the deposit guaranty system.
On September 29, 1926, one of the remaining participating banks
failed.
A dividend of 30 percent was paid to depositors from the "cash and
available assets of the bank/’ but the balance in the guaranty fund, exclusive
of amounts due to be refunded to banks that had withdrawn, was insufficient to
pay the remaining amount of the guaranteed deposits*
By the end of the year,
six other participating banks had failed, with deposits becoming a claim on
the fund, and withdrawals had reduced the number of participating banks to 3^*
In January 1Q27, two more banks failed with deposits becoming a claim on the
fund; and in february the law was repealed, with only 26 banks remaining as
participants to the date of repeal*
NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Participating and nonparticipating banks.
When the deposit guaranty
and bond security systems went into operation at the beginning of 1910> more
than nine-tenths of the State-chartered banks in Texas chose the deposit guaranty
system.
During the next decade there was a large increase in the number of
State banks, with almost all of the new banks also choosing the deposit guaranty
system.
By 1920 the proportion of the State banks participating in deposit
guaranty had increased to 96 percent) remaining at this figure until withdrawal
¿7 Texas Bank and Trust- Company v. Austin, Banking Commissioner,
Supreme Court of Texas, Feb. 3j 1926. 280 S.W. l6l.
-3 0 -
from the system was permitted in 3-925*
With the change in law, most of the
participants withdrew, only 4 percent of the State banks remaining in the guar
anty system by the beginning of
1927 .
When deposit guaranty became effective, less than half the banks
operating in the State were eligible for participation, because more than
half the banks were national banks or private banks.
y
During the next decade,
when many new State banks opened, the number of private banks declined and the
number of national banks increased slowly.
Because of these changes, the
proportion of all banks in the State that participated in the deposit guaranty
system increased from 39 percent at its beginning to a maximum of 5® percent
in 192]..
As the assessments on participating banks became heavy during the
next few years, a few took out national charters.
rated in
This movement was accele
1925> apparently because some of the banks, when they decided to with
draw, preferred to obtain national charters rather than to join the bond
security system.
The number and percentage of banks participating and not participa
ting in the deposit guaranty system, at the beginning of each year, are shown
in Table
3 * The number of private banks, it should be noted, is an estimate'
derived from midyear data, but the resulting error in the total number of banks
is not sufficient to affect in a significant degree the computed percentage of
all banks in the State participating in the deposit guaranty system*
Deposits of participating and nonparticipating banks* Deposits of
banks participating in the deposit guaranty system were about
of the deposits in all State banks, but only about 17 to
90 to 95 percent
31 percent of the
TJ Though the" Texas law permitted national banks to participate in
the deposit guaranty system, this was impossible under a ruling of the Comptroller
of the Currency. Private banks were not permitted to become members of the
guaranty system.
-3 1 -
Table 3. NUMBER OF BANKS IN TEXAS PARTICIPATING AND NOT PARTICIPATING
IN THE DEPOSIT GUARANTY PLAN, I9IO-I927
CallTotal
State banks and trust companies 1/
date
number Total Participa- Members
Private National Percent particinearest of
ting in
bond
banks 2/ banks
pating in deposit
Jan. 1 banks
deposit
security
guaranty plan
guaranty
system
Of State Of all
banks
banks
1910
1911
1912
3 913
1203
1308
1370
lkk2
IQlh
1536
1915
1551
1532
1530
1572
1579
1916
1917
1918
1919
515
627
688
759
849
704
<349
790
777
831
836
874
788
789
828
43
45
45
55
61
59
54
47
b6
170
167
166
171
171
169
167
164
159
152
884
841
43
90?
ia
l4i
990
hi
970
34
34
34
130
126
120
122
1920
1921
192?
l6kl
9*8
1717
103I
1923
1924
1647
1645
1004
970
950
1925
1926
1618
1582
933
834
1927
1524
1681
472
582
6U3
782
936
916
896
337
34
37
497
748
113
92
86
518
514
516
512
516
91.7
92.8
93.5
92.8
92.8
533
534
530
539
543
93-1
93-5
94.4
94.7
552
556
551
557
573
95-7
572
656
656
96.0
95.1
96.0
96.6
96.5
96.4
40.4
4.3
39.2
44.5
46.9
48.8
51.3
50.9
50.7
51.6
52-7
53.3
55.3
57.7
57.7
56.8
55.7
55.4
21.3
2.2
T7 Compiled from biennial reports of the Commissioner of Insurance and
Banking and records of the State department of banking.
2/ Approximate number at beginning of year. Figures are averages of number
for previous and succeeding midyear dates, from the recently revised Federal Reserve
tabulations.
Zj Annual reports of the Comptroller of the Currency.
-32deposits of all banks in the State, during the period from the beginning of the
guaranty to the time withdrawals were permitted in 1925«
Deposits of partici
pating and nonparticipating banks by years are shown in Table U.
Neither the amount of deposits protected by the guaranty, nor the
amount of unsecured and noninterest-bearing deposits, in all State banks, is
available in the published data for Texas State banks*
±1
In Table 5 figures
are given which are described as the "amount of deposits in these guaranty-fund
banks protected by the law at the beginning of each of the 16 years," obtained
from official records by the man who was Commissioner of Insurance and Banking
when the law was enacted.
A comparison of these figures with those for all
State banks, excluding categories most likely to have been secured or interestbearing, and making a rough allowance for the small number of banks members of
trie bond security system, suggests that they probably provide a reasonable
estimate of the amount of guaranteed deposits.
On this assumption the guaran
teed deposits covered about four-fifths of total deposits in the participating
b^n^s, or about one-fifth of the total deposits in all banks in the State*
Concentration of deposits*
Table 6 gives tabulations of the number
and deposits of banks participating in the deposit guaranty system for the
three dates of September 1911, December I9I0, and December I92U.
These dates
IT The categories of deposits in the call reports segregate savings
deposits and time certificates of deposit, which were doubtless interest-bearing,
but for most of the period do not segregate State and other public funds. Further,
amounts reported as "due to banks and bankers", which are included in total de
posits in Table 4 , were also in part secured or interest-bearing, and a portion of
the major deposit item, "Individual deposits", also doubtless bore interest. The
annual deposit insurance assessment was based on the average daily deposits for the
preceding year, excluding government deposits otherwise secured and also savings
deposits; this figure (which is not now available) must have included some interestbearing deposits.
*33-
Table h.
DEPOSITS OF B A M S IN TEXAS PARTICIPATING AND NOT PARTICIPATING IN
THE DEPOSIT GUARANTY PLAN, 1910-1927
(in thousands)
Call
All
date
barks
nearest
Jan. 1
State banks and trust companies
Total Fart ic ipa t ins Members
bond
in deposit
y
guaranty 2/
security
system
Private
hanks h j
National
banks 5/
3/
$4,030
5,827
6.694
9,562
10,499
•$12,821
12,477
9,289
8,4o6
14,987
15,552
15,305
15,976
1910 $274,147
299.436
1911
1912
299*755
1913
395,051
1914
358,169
$51,473
1915
1916
305,391
390.400
73,452
101,340
605,860
762,863
61+2,901
160,253
215,821 203)935
190',6l8 178,632
11,005
11,886
11,986
321,008
265,881
14,537
13,872
10,174
10,713
17,148
15,818
20,661
16,055
19Ü7
1918
1919
1920 1,131,551
861,550
756,042
1922
1921
913,038
1923
1924 1,075,190
1925 1.159,096
1926 1,256.577
1927 1.065,531
60.897
63)489
98,73.3
95,983
335,545
279,753
237,510
262,488
306)568
322,365
268,586
228)741
$47,443
55,070
56,795
89,151
85,484
64.163
92,934
149.248
227,336
251,775
289,420
301,704
95,084
5,925
173,502
222,816
12,602
13,203
13,850
17,499
18,064
17,692
17,054
16,142
15,566
16,012
$209,853
226,062
Percent in banks
participating in
deposit guaranty
Of deposits Of deposits
in State
in all
banks
banks
92.2
17.3
18.4
248,336
90.4
89.5
90.3
89.I
216,952
87.4
273,508
434,784
91-7
93.1
94.5
93-7
777,942
564,105
501,478
634,408
752,804
95.7
95.0
95-7
95-9
94.4
28.4
30.9
30.1
820,676
832,425
93-6
35-4
2.6
26.0
223,664
283,135
430,302
531,066
820,778
18.9
22.6
23.9
21.0
23.8
24.6
26.7
27.8
27.6
26.9
7-6
.6
17 From biennial and annual reports” of The Commissioner of Insurance and
Banking and summaries of reports of condition of State banks published by the Commissioner.
2; 1910-1Q2S; residual obtained by subtracting deposits of banks participating
in the bond security system from total for all State banks and trust companies; 1926,
interpolated from number and deposits of participating banks on January 1 , 1925 and May
1926. on basis of number participating on January 1 , 1926 (in May 1926, loO banks with
deposits of i?9;657*000 remained in the guaranty fund system, according to statement of
the Bank Commissioner in The Texas Bankers Record, June 1926, p- 38); 1927; tabulated
from deposits reported in oank directories for banks that had not withdrawn from the
deposit guaranty system.
3/ I9IO-I925, tabulated from deposits reported in bank directories for the
banks that were members of the bond security system; 1926 and 1927* residual obtained
by subtracting deposits of banks participating in deposit guaranty from total for all
State banks and trust companies.
h j Averages of deposits for previous and succeeding midyear dates, from the
recently revised Federal Reserve tabulations.
5/ Annual reports of the Comptroller of the Currency.
-S^Table
5.
DEPOSITS PROTECTED BY GUARANTY IN TEXAS, 101 0-1.92 5
About
Jar.. 1
Protected
I 9IC
1?H
i37-oSG
deposits
(in
thousands)
1/
47,059
40.835
70)153
73.838
1912
1913
1914
191?
1^"*£•
I?!?
1Q18
1919
55,060
74 ,74?
123,012
167)868
126,387
Protected deposits as percent of -Total deposits
Total deposits
Total deposits in
in all banks in
participating
in all State
Texas
banks
banks
79*8£
85.5
87.7
87.7
13.856
86.4
77.3
78.5
79.2
76.9
15.7
16.6
19.8
20.6
85.8
75.0
80.4
73-8
82.4
82.3
70.8
76.8
18.0
19.1
20.3
22.0
19.7
33.8
80.2
1923
268.971
218)186
179,145
201)304
102U
235:554
82.1
78.8
80.0
81.4
1925
24i?378
80.0
1920
1021
1922
73 .5#
77-8
66.3
76.7
76.8
23.8
25.3
23.7
22.0
21.9
74.9
20.8
78.0
75-4
T7 From "Guaranty of Deposits in Texas State Banks", statement of Thomas
B. Love, Congressional Record. Vol. 77> Part 4, p. 3332-
-3 5 -
Table 6 . SIZE DISTRIBUTION OF BANKS PARTICIPATING IN
DEPOSIT GUARANTY IN TEXAS, 1911, 1918 AND 1924
1/
Number of banks —
Sept. 1 Dec. 31 Dec. 31
1911
1918
1924
All participating banks
Banks with deposits of-$100; 000 or less
$100,,000 to $250,000
$250,000 to $500,000
$ 500,000 to $1 ,000,000
$1 ,000,000 to $2 ,000,000
$2 ,000,000 to $5 ,000*000
Over $5;000,000
Largest hank
Larsest 5 hanks
largest 10 banks
Percent of total
Banks with deposits of-$ 100,000 or less
$100'.000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2 ,000,000
$2 '000,000 to $5 ,000,000
Over $5,000,000
I-ar^est hank
Largest 5 hanks
Largest 10 hanks
628
850
510
352
294
137
34
25
7
95
15
6
l
l
-i
5
10
§22
$48,323
$199,989
$297,365
211
20,530
14,244
4,855
5,005
22,296
44*272
46,771
13,601
56,825
1,666
2,023
24,883
67,968
35,058
5,419
37,170
39,340
9,067
9> 3 7
5,419
19,520
30,533
9,067
27,759
43,773
3^3
1
203
100
30
11
1
1
1
5
5
10
Deposits (thousands of dollars)“'
Sept. 1 Dec. 31 Dec. 31
1924
i9.ll
1918
10
—
2,023
0.438
21,290
73,394
100.0
1C0.0
100.0
100.0
100.0
100.0
81.2
15.1
41.4
23.5
38.2
22.6
11.1
42.5
29.5
10.0
11.2
22.1
19.1
2.4
0-9
.2
.2
34.6
16.1
4.0
--
3.0
0.8
0.1
.2
.8
1.6
.1
.6
1.2
3-3
1.2
0.1
.1
0.6
1.1
10.4
3-4
4.2
4.2
13-3
19.5
4.6
23.4
24.7
12.5
22.9
12.5
13.2
17.5
10.6
2 .7
2 .7
9.8
15-3
3-0
3.0
9.3
14.7
j „ 4- ~
17 For 19-U* compiled from data
for individual "banks in the annual report
of the Commissioner of Insurance and Banking. For 1918 and 1924 compiled from data
for State hanks published in Rand McNally Bankers Directory, omitting banks members
of the bond security system. Both the number and deposits differ somewhat from those
shown in the reports of the Commissioner.
-3 6 -
are used to indicate the degree of concentration of deposits close to the
beginning, middle, and end of the period of operation of the deposit guaranty
system.
Most of the participating bariks were small to medium in size, and
there is no evidence of heavy concentration of risk in any one bank.
The
largest bank in the system held about 3 or 4 percent, and the largest ten banks
from
15 to 20 percent, of the deposits of all participating banks.
The major reason for the small number of large banks in the Texas
deposit guaranty system was the fact that most of the large banks in the State
were the older banks operating under national charters obtained prior to estab
lishment of the State banking system in 1905.
The size difference may be seen
by comparing the numbers of banks shown in Table
3 with the deposits in Table
h. The average size of the national banks, throughout the period of operation
of the deposit guaranty system, was about four times as large as the average
size of the State banks.
Failures of participating and nonparticipating banks. During the
sixteen years of operation of the guaranty fund, l^h participating banks, with
deposits of nearly $40 million, failed.
Sixteen of these were liquidated or
reorganized without a payment from the guaranty fund.
Failures occurred during each year the system was in operation, except
for 1Q10.
During the first ten years 19 participating banks failed.
Toward the
end of 1920, with deflation and depression, failures became more numerous.
1921 there were 33 failures of participating banks, and during the remaining
period of operation of the fund an annual average of about two-thirds that
number.
In
Unt:!l 1925 the number of banks operating under the bond security
system was small, and only one failure among those banks is reported.
In 1Q26
and the early weeks of 1927* up to the repeal of the law, 21 banks operating under
the bond security system failed, with deposits of nearly $5 million.
All of these
except one had been members of the guaranty fund system and had withdrawn sub
sequent to the change in law in 1925*
Table 7 shows the number and deposits of the failed banks each year,
with rates per ICC banks and per $100 of deposits in operating banks.
The
average annual rate of failures entailing obligations on the guaranty fund was
1.0 for each 100 members of the system; and the deposits of those failures
averaged $1.36 per year for each $100 of deposits in participating banks.
How
ever, as indicated above, most of the failures occurred in the 1920*8 . For the
first ten years of the system, the average annual rate of failures involving
obligations on the guaranty fund was only 0.2 per 100 participating banks, and
the deposits of those failures averaged only $0 .4-5 per year for each $100 of
deposits in participating banks.
The foregoing figures do not include failures of private banks.
Private
banks were ineligible for the deposit guaranty system, and few of them, if any,
.joined the bond seem:ity system.
No information is available for failures of
private banks during the years 1910-1920. From the beginning of 1921 to the
repeal of the guaranty law in February 1927; there were failures of 59 private bank
with deposits for about half of these estimated at more than $6 million.
y
These data suggest an annual average failure rate for those years of about 8 per
1/ Data collected by the Federal Reserve Committee on Branch, Group
and Chain Banking.
-3 8 -
Table 7 .
NUMBER, DISPOSITION, AND DEPOSITS OF FAIT,ED STATE BANKS IN TEXAS
DURING PERIOD OF OPERATION OF DEPOSIT GUARANTY PLAN
T l7
Number of banks^'
Year
Total Involving With no
and
Kroiro l/
payments payment
from
from
guaranty
fund
Deposits (in thousands of dollars)^
Banks with no
Total Banks with
payments
parents frora
from guaranty juara nty fund
fund
guaranty
fund
1
—\
IT\
-tf•N
4 ,82?
4,610
39,&-9
33,017
212
6,6X2
2.3
.U7 2/
1.q4
16
39 >41-5
37,627
1,788
1.2
1.42 6/
22
5,036
_
5,036
1.7
1.34
-—
230
35
125
*3
.1
.1
.5
.4
.4
.2
.1
.2
.38
.06
38
I9IO-I91 9 19
1920-1927 157
16
22
3
35
130
_
154
3-
*6,824
138
Guaranty
fund
banks
banks
$37,627
176
Total
Annual failure rates
riumber
Depos it s
ner 100 v e r $100
m
active
active
banks
1.2
^-5, S/
$l.fa
Bond
security
hanks
1911
22
1912
1913
2
1
1
1914
h
1915
191Ì
1917
] 91P
1.919
1920
1921
19^1 -B
-1
s
2
1
r\
d
O
33
CL
1
1
k
3
j
-T
)_
__—
1
1
Q
JO
-19
—
—
-2
207
513
3,343
- ÌT3
65
1.2S5
24
1,255
39
3
12^525
2S8
O f
106
--
1.10
4,246
2.1
1*0
1*8
2.5
1 .58
3.1
1.36
18.9
13.97
—
7
1,303
1
lU
3,475
2
->i-f
.9
2,889
4 «349
—
.03
2,889
2
2
3
3
.06
5,921
21
l6
Ik
.11
4.57
15
1Q27 7/
19^7“B 7/
•TO
3-30
j •j
23
IQ
7
--
.22
523)
258)
17
I926-B
__
•13
12,002
—
r O-Jr5,olp
I924
1926
3,343
173
::fcdc.
*1
1 Q25
125
207
513
—
133
1
2
—
35
---„
--
]
1
21
10
10
2^0
5',105
2,348
201
4,826
1,833
103
279
515)
1 ,303)
—
153.
—
50 )
3,475)
2.49
1.42
T J No failure in 1Q10. Lines marked B in 1921, 1926, and I927 refer to
banks operating under the bond security plan; other cases refer to banks operating
under the guaranty fund system*
-3 9 -
Table 7 ,
NUMBER, DISPOSITION, AMD DEPOSITS OF FAILED STATE BANKS IN TEXAS
DURING PERIOD OF OPERATION OF DEPOSIT GUARANTY PLAN - continued
2j
Excludes "banks reorganized under new charters, or taken over
by another hank, except those mentioned in the reports of the Commissioner
of Insurance and Banking as closed for insolvency, or in the Commissioner^
records as requiring a withdrawal from the guaranty fund, or appearing on
the Federal Reserve list of suspended hanks* A list of "Guaranty Fund
Liouidations” in the Bank Commissioner1s office includes the following num
ber of such excluded cases: 1919y Is 1920, 1 ; 1921, 2; 1922, 1; 1923;
192U, 5j 192?, 28; and 1926, 8 . Some of these banks were probably in finan
cial difficulty, though able to reorganize without aid from the guaranty
fund.
3/ From reports of the Commissioner of Insurance and Banking in
cases for which deposits at date of failure are given (1911-19^2, 191Ô-1Q20,
and most of the cases in 1921-1922); from schedules prepared for the Federal
Reserve Committee on Branch, Group and Chain Banking for most of the remain
ing cases for 1921-1927; and from Rand McNal3.y Bankers Directory, for latest
available date prior to failure, for cases not elsewhere available.
b j Relative to banks operating at the beginning of each year.
2J Rates for the 16 banks involving payments from the guaranty
fund are 0.2 for number and .^0.^5 for deposits*
6/
Rates for the 138 banks involving payments from the guaranty
fund are 1*0 for number and $1*3<S for deposits.
7/ To February 11.
-Uo100 private banks, with deposits of nearly $12 per $100 of deposits in operating
"banks. These rates are much higher than for the State banks during the same
period.
A size distribution of the failed banks involving payments from the
guaranty fund is given in Table 8.
While the larger banks show somewhat higher
failure rates than the smaller banks, there is not the direct correlation be
tween size of bank, and failure rate that occurred in the case of the Oklahoma
and North Dakota deposit guaranty systems.
The largest bank participating in
the Texas deposit guaranty system that failed had deposits of nearly $3 million.
Comparison with failures in other States, Because of the great size of
Texas and its diversity of economic characteristics, comparison of bank failure
rates with those of contiguous States is probably of less significance than in
the case of other States with deposit guaranty systems.
Nevertheless, such a
comparison is made in Table 9*
For all banks, the failure rate in Texas, while the deposit guaranty
system was in operation, in terms of number, was lower than in any of the four
contiguous States, and also lower than for the United States as a whole.
For
State banks, the failure rate in Texas was about the same as that for the entire
United States and one of the contiguous States, and lower than that in the other
three contiguous States.
But as in other States and the entire United States,
the rate for State banks was much higher than that for national banks.
In the case of failure rates based on deposits, the rate for State
banks in Texas was higher than that for the entire United States and for two of
the contiguous States, Arkansas and Louisiana, but lower than for the other two
contiguous States, New Mexico and Oklahoma-
-4 1 -
Table 3. SIZE DISTRIBUTION OF FAILED BANKS INVOLVING OBLIGATIONS ON TEE TEXAS
DKFOSIT GUARANTY SYSTEM COMPARED WITH AVERAGE SIZE DISTRIBUTION OF
IQIO-I926
A
Size category
C T I V
E
Operating
banks
(average)
y
Total number of banks
Number with deposits of -$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
-i'sco'ooo to $1 ,000,000
$1 ,000,000 to $2 ,000,000
$2,000,000 or more
Total deposits (in thousands)
In tanks with deposits of —
§100£060 or less
$100,000 to $250,000
$250,000'to $500,000
$ 500,000 to $1 ,000,000
$1,000,000 to $2,000,000
$2,000,000 or more
B A N
K S ,
Failed
banks
(17 years)
Percentages of total
Failed
Operating
banks
banks
Failure
rate per
year 2/
831
138
100.0
100.0
418
240
108
56
49
i4
40.6
35.5
4o
17
8
11
6
10.1
8.0
4.3
2
50.3
28.9
13.0
4.8
2.0
1.0
$177,7^2
$37,631
100.0
100.0
$1.24
20,467
2,864
38,276
38,213
23,078
23,219
29,489
7,808
5,046
16.6
7.6
20.7
13.3
22.3
22.6
13.4
-82
1.19
5,017
8,399
11.5
21.5
21.5
15.8
8,497
1 3 .1
1.4
1.0
.8
1.2
.8
1.6
2.0
1.5
•77
1.75
2.14
1.00
---rr— *___ *__„
4, 191Sj Sept. 12, I91U; midyear, 1917; year-end, 1918, 1920, 1922, and 1924. Distri
butions for the first three dates compiled from data for individual State banks published
in annual reports of the Coramissioner of Insurance and Banking, and for the other five
dates as published in Rand McNally Bankers Directory, excluding banks members of the
bond security plan.
2/ Average annual number of failures per 100 active banks, and annual average
deposits in failed banks per -$100 of deposits in active banks. The latter rate for all
failures is slightly below the rate given in Table 7 , note 6, because the average de
posits of operating banks on the eight dates for which the size distribution is available
is larger than the annual average computed from data for the beginning of each year.
Table $ .
BANK FAILURE HATES IN TEXAS, 1910-1926, COMPARED WITH RATES
III CONTIGUOUS STATES AND ITT THE UNITED STATES
Failures per 100 operating
banks (annual average) l/
State y:ul otate
national banks
banks
National
banks l/
Deposits in failed banks per
$100 in operating banks
(annual average) l/
State and State national
banks barks 1/
national
banks
0-9
1.2
0.4
$0.64
$ 1.47
$0.31
Four contiguous States
1.7
2.0
1.0
0.93
l.??
.62
6.0
3-1
.9
3.50
1.30
.4
.84
■?5
_j2
.28
Nev Mexico
Oklahoma
Arkansas
Tioui si an a.
:;t ire Un 11ed States
)! r
"7
*+• I
1.8
1.1
2.4
1.4
1.2
1.6
1.0
1.2
*r1f
5.84
2 .4o
2.86
1.05
.42
•33
.02
O
-3t
Texas
•13
.68
T J Rate's" Tor State banks in Texas computed frcrT dVta in Tables 3, ^ and
i.e,; on basis of data for active banks at beginning of year. Other rates based on
active bank data for midyear dates- The difference may affect the rates slightly*
Causes of hank failures*
The published reports of the Commissioner
of Banks in Texas do not provide information regarding causes of hank failures
while the guaranty system was in operation, except for the first three failures,
which are described as follows:
It is interesting to note that the failure of all three of these hanks
was traceable to one common cause, to wit: an irresponsible head
dominating a weak and confiding cashier,
(Regarding the first failure) So much of the paper of the bank, which
appeared in order until attempts to collect it was begun, was shown
to l-?ve been placed there for fraudulent purposes, many forgeries of
checks on depositors1 accounts uncovered, and false entries made that
the work of closing up the affairs of the bank has been slow.,.
(Regarding the second failure) Chief stockholder pled guilty on two
indictments and was sentenced to four years. Cashier also pleaded
guilty to receiving deposits when bank was insolvent.
(Regarding the third failure)
...due to the act of the president in
placing ... worthless paper in the bank. 1/
In various articles and talks the Bank Commissioners and liquidating
officials of the Department commented on the causes of bank failures, usually
stressing dishonest management.
In 1923 the General Liquidating Agent of the
Department, speaking on the basis of information obtained in closing the affairs
of failed banks, said:
First in importance, I should say that outright thievery, corrupt,
illicit and illegitimate banking practices are to blame. Second, I
should say that economic conditions are responsible. Third, I think
that reckless, injudicious advances of credit are to blajne. 2/
1/
Annual Report of the Commissioner of Insurance and Banking, for
the year 1Q11-12, pertaining to banking, pp. 19, 20, 21, and 23*
2/ W. L* Peterson, General Liquidating Agent, Department of Insurance
and Banking, "Liquidating State Banks.*1 The Texas Bankers Record, 12 (June 1923)
p. ^ 9 *
The next year the Banking Commissioner also stressed managerial inadequacies.
In one article be raised the question how the assessments might be reduced
and answered* f,When the defaulting and speculative officials are removed and
the incompetent banker displaced.’1 In another* mentioning what he had learned
in his experience with the Department* he said:
.. .if you can exclude the looter, the defaulter, the speculator, and
the incompetent banker* it will not be necessary for another bank to
close in five years in Texas* provided* of course* you have good
supervision and reasonably rigid examinations/1 l/
In the year following the repeal of the guaranty fund law* the Commission
er of Banking* in a review of the effects of the law* commented:
’'Banks fail from one or more of the following causes: (l) incompetence
of officers and directors; (2) excessive lines of credit to a few
customers; (3) carrying speculative lines: (4 ) embezzlement by officers
or employees. The records of the Department of Banking show that fail
ures are traceable to one or more of these causes almost invariably.t: 2j
Other commentators on bank failures in Texas while the guaranty
system was in operation also stressed dishonesty and incompetence* though also
citing such factors as losses and withdrawals which may have been associated
therewith or with adverse economic conditions.
When Robb’s book on the
guaranty of deposits was written* there had been fourteen failures of banks
participating in the Texas deposit guaranty system.
He describes the specific
causes of failure in several of these cases* saying they are fairly representa
tive and concluding:
1/ J* L. Chapman. Commissioner of Banking* in The Guaranty Fund Bulletin*
May 192^* p. 6* and The Texas Bankers Record* 13 (June 1924), p. 30.
2/ James Shaw* Commissioner of Banking* as reported in the Journal of
the American Bankers Association, 21 (July I928)* p. 6 b /
-liS -
"In the majority of cases their direct cause was due to human depravity
and incompetence which even the more stringent hanking laws of 1909
failed to eliminate.” 1/
The Comptroller of the Currency, in a summary in his report for 1921
of the experience of States with deposit guaranty, stated that out of 51 fail
ures in Texas, 13 were due to criminal acts of officers, 3^ to losses, of
which six were on account of cotton loans and one to drought, and 3 were not
21
accounted for.
The deposit guaranty plan was in operation in Texas during six of
the ten years covered by the study of bank suspensions of the Federal Reserve
Committee on Branch, Group and Chain Banking.
In the questionnaire submitted
by the committee a list of causes of failure was given, to be checked as
primary or contributing in each case.
The causes of failure in Texas as
reported on these schedules, which were prepared in the office of the Commission
er of Banking, are given in Table 10 . The figures relate to 188 banks which
failed during the years, 1921-1930. All but about 30 of these closed prior
to repeal of the deposit guaranty law.
While the greatest stress was placed
on incompetent management and heavy' withdrawals as primary causes and on losses
due to unforeseen agricultural or industrial disasters as the principal contri
buting cause, defalcation was given as a primary or contributing cause in nearly
3/
a third of the cases*
1/ Thomas Bruce Robb, The Guaranty of Bank Deposits (Houghton Mifflin
Company, 1921), pp. 152-154.
2/ Annual Report of the Comptroller of the Currency, 1921, p. 189*
3/ Compiled ’ey the author from the original schedules, which were
made available through the courtesy of the Board of Governors of the Federal
Reserve System.
-4 6 -
Table 10. CAUSES OF SUSPENSION OF STATE B A M S IN TEXAS, I92I-I93O, AS REPORTED
ON SCHEDULES PREPARED BY THE COMMISSIONER OF BANKING FOR TEE FEDERAL
RESERVE COMMITTEE ON BRANCH, GROUP AND CHAIN BAILING
Cause of failure
Number of cases
Primary
Contributing
cause
cause
Total number of suspensions
188
Defalcation
Ino ompe t en t management
Ins uffi c ient cltvers 1f icat ion
Losses due to unforeseen agricultural or industrial
disasters such as floods, drought, boll weevil^ etc.
Decline in real estate values
Heavy withdrawals
Fai 3.ure of affiliated institution or correspondent
Other causes
33
135
2k
39
26
1
123
16
135
39
ll
10
70
-U 7 -
Some of the Texas bankers and bank supervisory officials believed
that the problem of incompetent and dishonest bank management was accentuated
by the existence of deposit guaranty, for two reasons: it encouraged incompe
tent persons to open new banks; and second, it made conviction of bank
officials for illegal actions more difficult.
This point of view was force
fully expressed by the Bank Commissioner in 192.6:
:!From 1910 down to a very recent date it was quite the popular
fashion for men who were out of jobs or who had failed in some other
business to organize Guaranty Fund banks and offer the public the
same degree of safety afforded by the old, well-established, conser
vative banker of ample capital and experience* The speaker ventures
the assertion that more banks have been organized in our state to
furnish salaries for jobless men than to meet any necessity for
banking facilities...
... The existence of the law has in itself invited weak and
vicious banking methods. A number of banks have built up their
business almost solely through the exploitation of the protection
afforded the depositors by the Guaranty Fund. Many bankers have
engaged in reckless and unsafe business methods of banking, upon
the theory that if their banks should get into trouble the Guaranty
Fund would come along and contribute enough fresh capital to absorb
their losses. A number of dishonest bankers have systematically
stolen from their banks year after year and used the funds for per
sonal transactions and speculative deals, knowing that if their
banks failed the Guaranty Fund would pay depositors and there would
be no demand upon trie part of the depositors that these dishonest
officials be punished.V l/
The Secretary of the Texas Bankers Association also emphasized this
point of view in an article published shortly after repeal of the law.
"The plan makes for too many banks and too few bankers. The
incompetent, the inefficient, the reckless, the venturesome, and
the careless, are attracted to banking; because they know their
reckless and unsafe methods will be protected by the guaranty fund,
which will at the proper time furnish new capital and absorb the
community's loss. The dishonest, the incompetent, the reckless in
bank management have leaned heavily on the guaranty fund in Texas....
1/ Charles 0* Austin, Commissioner of banking, in "Our State
Banking System," The Texas Bankers Record, IS (June 1926), pp. 36-37 .
-48The plan makes it impossible to prosecute bank wreckers and
inside crooks. Generally the banker is a prominent citizen* He
may even speculate with his deposits* His bank closes and the good
and solvent banks of the state pay his depositors. His former cus
tomers are his friends and neighbors. They have their money. Why
should he go to the penitentiary? Therefore he is not indicted.
Scores of such incidents have happened in Texas. Only one will be
cited. A bank president and a broker friend looted the bank until
its liquidating assets were nil* He and the friend disappeared.
In sixty days, as the law provided, the depositors of the closed
bank received dollar for dollar from the guaranty fund. Shortly
thereafter the ex-banker returned to 'face the music1. What was
it? A public reception and a welcoming demonstration! He was a
popular man* The state failed after repeated trials to get an
indictment against him in his home county where the law prescribed
he must be prosecuted.” 1/
Procedures in handling closed banks. As in Oklahoma, various
procedures were used by the Department of Banking in handling closed banks
involving payments from the guaranty fund.
However, much less use was made
of the procedure of approving an assumption of al3. the insured deposits by
another bank or a successor institution with a payment from the guaranty
fund: less than one-fifth of the cases were handled in this way.
In more
than four-fifths of the cases the failed bank was liquidated by the Depart
ment of ?ankv.iw/ with the insured deposits P^id by the fund, though in some
of these cases 8 large part of the assets may have been sold to a successor
or neighboring bank*
Descriptions of the details of arrangements made with successor
or absorbing institutions, when this method was used, are available for only
three cases, as follows:
Farmers and Merchants State Bank of Waco, closed March 17, 1915f1The non-interest bearing and unsecured deposits of this bank
were paid by the First National Bank of Waco under a contract entered
into by the Commissioner of Insurance and Banking and the State
T7 W. A. Philpott, Jr.'/ "The Failure of the Guaranty Fund in Texas/’
American Bankers Association Journal, March 1927, p. 680.
-1*9-
Banking Board on the one hand and the First National Bank on the other,
providing that the amount so advanced by said bank should be repaid
from time to time out of the proceeds of the liquidation of the insol
vent bank, and any deficiency ultimately existing would be paid to the
First National Bank by the State Banking Board out of the Depositors’
Guaranty Fund/ 1 1/
West Texas Bank and Trust Company, San Antonio, closed April 3; 1916
"The bank was reorganized with the assistance of some of the
more influential stockholders and finally took over the entire assets
of the defunct bank. The state banking board paid the new management
$200,000 from the guaranty fund to protect it from loss in the liquida
tion of t?ne assets of the failed bank. According to the commissioner
no part of this sum will ever be returned."2/
First State Bank, Bronte, closed January 11, 1922
"The Commissioner of Insurance and Banking "sold, assigned, and
delivered to the Guaranty State Bank of Bronte, Texas, all of the
property and assets of said First State Bank of every kind and charac
ter, including the liability of the stockholders of said bank and all
funds to be realized on account thereof../’ 3/
FINANCIAL. HISTORY OF THE GUARANTY FUND
Sources and adequacy of information. During the early years of the
Texas deposit guaranty system, as has been indicated in the description of
the administration and custody of the fund, assessments on the participating
banks on account of guaranteed deposits of failed banks paid by the fund,
and recoveries from the liquidation of assets of the failed banks used in
repaying as much as possible of those assessments to the participating banks,
were kept separate from the permanent guaranty fund built up from the initial
and regular annual assessments.
This separation appears in the annual
|7 Report of Commissioner of Insurance and Banking for the year
ending August 31y 1916, Pertaining to Banking, p. l8 .
2/ Robb, The Guaranty of Bank Deposits, p. 15^, information attri
buted to letter of bank commissioner. The records of the Department of Banking
indicate that a small additional payment was made from the fund. The total
payment was less than one-tenth of the deposits of the closed bank.
3/ Houston National Exchange Bank v. Chapman, 263 S.W. 929. The
payment from the guaranty fund in this case was $30 ,000, about one-sixth of
the total deposits of the bank.
-5 0 -
statements of the fund published in the reports of the Commissioner of
Insurance and Banking for fiscal years up to the end of August 1920.
However, in nine of the eighteen bank failures during this period in which
withdrawals were made from the guaranty fund, no special assessments were
made on the participating banks, and in a few of the cases where assessments
were made small amounts of additional withdrawals from the fund were required
for which additional assessments were not made.
Most of the withdrawals that
were unaccompanied by assessments on the participating banks, and recoveries
from the failed banks for which such withdrawals were mad.e, were included in
the annual statements of the fund, but were not fully identified; the recover
ies, for example, being reported among "miscellaneous collections."
During the two fiscal years 1920-21 and 1921-22, special assessments
on participating banks were included in the statements of the fund under the
heading, "Contributions to Guaranty Fund by member banks to replace money
advanced to pay depositors of failed banks," but the amount for each of the
fiscal years differs from that shown in another statement listing the banks
on account of which they were made, though the difference between the aggre
gates for the two fiscal years together is relatively small.
fiscal years, no statements of the fund are available.
For subsequent
No annual report was
published by the Commissioner of Banking subsequent to establishment in 1923
of a separate Department of Banking; and no statements of the fund have been
found in the records that remain in the Department, except those pertaining
to its disposition after repeal of the law.
Data for withdrawals to pay depositors of the various failed banks,
and for the percentage dividends paid by those banks on creditors’ claims,
-51including those of the fund, are available in the records of the Department
y
of Banking.
Some additional information regarding the affairs of failed
banks is available, for the early years of the fund, in the published annual
reports of the Commissioner; and for the later years, in schedules collected
by the Federal Reserve Committee on Branch, Group and Chain Banking.
Some
iaformation on the annual assessments for the permanent fund and the special
assessments or "contributions" and repayments thereon are available from
£/
other sources, such as banking .journals and correspondence.
The cash balance of the guaranty fund with the State treasurer as
of November 1930, other balances with the Bank Commissioner as of July 193^^
and detailed information regarding the claims on the fund at that time are
available in an audit report prepared in connection with the final settlement
of the fund's affairs.
Additional information regarding the settlement of
the fund's affairs is available in court decisions and records.
From these various sources, and from estimates of the annual
assessments paid by the participating banks from
1922 to 192?, derived from
the assessment rate and the amount of the banks' deposits, it has been possible
to prepare a reasonably complete statement of the receipts and disbursements of
the fund throughout the entire period of its existence.
Income, expenses, and refunds. A summary of the aggregate receipts
and disbursements of the Texas depositors guaranty fund, covering both the
permanent fund and the "contributions" and repayments thereon, and also the
1 7 These records were examined by the writer of this report in
January 1956.
2/ A letter from Mr. J. A. Pratt to Mr. Thomas B. Love, former
Bank Commissioner, dated August Q, 1933y a^d made available by Mr. Love,
gives some information on assessments not elsewhere available.
-5 2 -
balance returned to tbe participating banks* is given in Table 11.
ments for tbe permanent fund totalled about
returned to the banks-
$5 million* all of which was
The special assessments or "contributions” to meet
the claims of depositors in failed banks amounted to
about
Assess
$17 million* of which
$6 million was refunded from the proceeds of liquidation of the assets
of the failed banks.
Table 12 gives the annual receipts and disbursements of the perma
nent fund* built up from the various sources of information described above.
For the years from 1922 to 1Q26 the figures given are a reconstruction from
data that are not complete* and must be regarded as approximations only* as
considerable estimating has been necessary.
Transactions subsequent to re
peal of the law early in 1927 are not shown in this table.
However* the
demand deposit portion of the guaranty fund that was attributable to the
banks that withdrew prior to September 2Q* 1926* which was cancelled by
order of the State Banking Board in December of that year* is included in
the statement for the fiscal year 1926-27-
The remaining balance of the
permanent fund was returned to the banks that participated in the final
settlement of the affairs of the fund.
Table 13 shows* by fiscal years ending August 31* the special
assessments or "contributions"* and the recoveries from liquidation of failed
banks repaid to the participating banks* to the summer of 1927*
Another
part of the table shows the withdrawals from the fund on account of the
banks that failed in each of the fiscal years (which are not identical* of
course* with the "special assessments" levied in the same fiscal years)* and
also the eventual losses and recoveries for such banks.
-5 3 Table 1 1 .
RECEIPTS AND DISBURSEMENTS OF THE TEXAS DEPOSITORS GUARANTY FUND
Total
Permanent
fund (to
mid-1927)
y
Special
assess
ments
(to mid-
1927)
Settlement
transactions
and adjustments
(after mid-1927)
3/
y
Receipts
Assessments
Recoveries from
failed banks
Interest
Other receipts
Total receipts
$23,059,300
•¥5,394,817
^1.7 ,090,883
$573,600
5,507,414
61¡.,610
23,477
320,207
13,070
4,184,246
1,002,961
51,540
28,654,801
5,751,571
21,275,129
1 ,628,101
455,269
16,115,184
582,685
Disbursements
Fayments to depositors
17}153A38
Expenses and adjustments
25,573
Refunds to participating
banks
11,175,090
Total
di sbursement s
28,65 4,801
23,477
20,334
---
~—
—
5,237
3,73^,621
4,184,246
3,557,223
4,210,226
20,299,430
4,145,145
ments, amounting to $1,5^1,3^6, was combined with the excess in the special assessment
accounts and subsequent recoveries in the process of settlement of the affairs of the
fund.
2/ From Table 13 and notes thereto. The excess of receipts over disburse
ments, amounting to $975*699* includes the following;: $025*35^
"excess withdrawals,”
representing special assessments in excess of amounts paid to depositors in the case of
some failed banks; the special assessments in late 1926 and in I927 which had not been
disbursed to depositors of failed banks, am.oimtir.ig to $137 ,169; and a small amount re
maining from other special assessments, largely in the form, of uncashed checks.
3 / From Table li; and notes thereto.
- 5 4 -
Table 12.
RECEIPTS, DISBURSEMENTS, AITD BALANCE CF THE PERMANENT DEPOSITORS' GUARANTY FUND HI TEXAS,
EY FISCAL YEARS, 1910-192? l/
Fiscal
Assessment income
year
Assessment
Assessments collected
or
Annual assess- From newly
refunds k/
period ments on parorganized
ending
ticipating
banks 3/
Aug» 31
banks 2/
Total
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
$4,760,903
431,834
63,852
99,978
127,590
176,797
159,606
147,857
206,620
327,567
270,448
1920
1921
1922
372,224
43,937
1923
1924
478,373
578,840
1925
633,578
199,676
9,557
1926
1927
432,569
$633,913
$3,73^619
Net incomc
from assess
ments 5/
$1 ,660,197
Other
receipts
§/
54,450
32,778
34,676
48,308
121,363
53,7 ^
9,516
31,529
21,978
38,243
131,483
229,891
325,228
296,778
89,217
178,727
ll<0,624
410,327
75,364
156,346
41,022
58,110
84,390
55,4*10
mm
37,374
32,737
29,190
80,498
29,089
--
49,071
193,278
219,373
—
179,964
M
M
M
M
M
M
M
M
2,592,271
268,380
259,000
M
M
M
M
-
—
28
5
34
--
675
-M
M
M
M
44,393
15,989
9,754
-M
398,876
--
633,578
M
M
199,676
-2,582,714
Balance in
fund, end
of year S/
Portion of
fund balance
with State
treasurer 9/
$356,754 $475,605
431,834
63,852
103,638
179,202
197,561
mm
--
Other
disburse
ments 7 /
M
M
M
M
26,492
130,354
1,900
123,607
115,315
10,364
17,796
1*6,801
267
—
$431,834
495,686
^99,318
$123,952
149,843
778,525
194,720
975,411
244,061
1,013,654
1,118,645
1,262,575
1 ,601,892
260,226
231,186
1,864,280
*»09,349
2,315,638
2,421,660
2 ,681,998
2,892,197
3 ,290,806
547,833
3,924,384
4,124,060
l,54l, 3 ^
253,413
327,977
594,588
652,145
716,895
816,609
975,003
1,124,578
1,126,967
-5 5 -
Footnotes t o Table 12
l/ To Aug. 31, 1922, from annual reports of the Commissioner of Insurance
and Banking psrtaining to banking, adjusted as indicated below. Subsequent
to Aug. 31> 1922, as described in notes to the various columns. Adjustments
prior to Aug. 31> 1922, are as follows: to add figure for cash portion of
fund as of Aug. 31> 1913* from the Texas Bankers Record, Dec. 1913> p. 18;
to add estimated data for 191^-15 for which no statement is available; to
insert for 1915-16 and 1916-17 payments to depositors in closed banks not
accompanied by assessments on participating banks, and repayments from the
assets of such banks, in receipts and disbursements instead of including
them in the balance of the fund] and for 1918-19* 1920-21, and 1921-22 to
exclude items pertaining to special assessments on the participating banks
and repayments thereon from the proceeds of liquidation of failed banks.
Estimate for 191^-15 prepared on following assumptions: (l) that there were
no "misc. collections" nor "misc. refunds"; (2) that collections from newly
organized banks were negligible in view of the fact that number of banks
decreased by 22 compared with an increase of 18 in the preceding year; (3 )
that difference between balance at beginning and end of the year, derived
from statements for preceding and subsequent year, is therefore the net
income from assessments; and (k) that the cash portion of the fund m s onefourth of the estimated total. Annual assessments on participating banks
for 191^-15 estimated from average deposits at call dates for base year
and average rate of assessment on such deposits for the preceding and sub
sequent year; and assessment refunds as the difference between that figure
and the net income from assessments.
2/ For 1909-10, initial assessment of 1 percent of average daily deposits;
for 1910-11 to 1921-22, inclusive, annual assessment of l/k of 1 percent of
daily deposits plus adjustments for new banks at end of first year of operation,
except that in 1920-21 the annual assessment was omitted (for types of de
posits excluded from assessment, see page 7 )♦ For 1922-23 to 1925-26, in
clusive, estimated by applying to the estimated total deposits in participating
banks an extrapolation of the ratio in prior years of assessments collected
to such deposits. For 1926-27, from difference between total and special
assessments collected, as reported in Lacy v. State Banking Board, 11 S.W.
(2d) ^96, and a memorandum in the records of the State Banking Department.
j/ 3 percent of capital stock (subject to adjustment at end of first
year of operation to 1 percent of deposits). Not available prior to 1911-12
nor subsequent to 1922. For 1909-10 and 1910-11 included, if any, with annual
assessment. For 1922-23 and 1923-24, netted against assessment refunds in
estimate for that item (see note 4). For subsequent years assumed none.
k/ Mostly to banks voluntarily liquidating, including those becoming
national banks, which were refunded what they had paid into the fund less
any portion used to pay depositors in closed banks, i.e., not covered by or
due on special assessments. Includes also refunds to new banks at end of
first year of operation when 1 percent of average daily deposits was less than
3 percent of capital stock. For 1922-23 and 1923-2^, estimated from difference
between estimated net income from assessments (see note 5) and estimated assess
ments collected. For 192^-25 and 1925-26 assumed none, because refunds to ba.nira
withdrawing after the 1925 amendment to the law were not made until after repeal
of the law. For 1926-27, amount of demand deposits cancelled in December 1926,
as given in law of May 30, 1931.
-5 6 Footnotes t o Table 12 - continued
J5/ Amount for 1922-23 and 1923-24 estimated from change between call
dates nearest August 31 in amount reported in asset and liability statements
of all State banks as "Interest in guaranty fund." As of Sept. 15, 1922,
the amount shown in such reports was $2,7 ^* 000, which compares with the
cumulative net income from assessments to Aug. 31* 1922, of $2,751*781»
For 1924-25 and 1925-26, taken as same as estimated annual assessment. For
1926-27 assessment refunds (i.e., demand deposits cancelled - see note 4)
in excess of the annual assessment.
6/ Reported as miscellaneous collections, with adjustments indicated by
note T. Consists largely of recoveries by the fund from assets of banks in
which fund had paid depositors without making an assessment on the participa
ting banks, including interest in a few cases where full repayment was made.
The aggregate amount of such recoveries, excluding interest, tabulated from
data for the banks for which such recoveries are reported, was $320,207. Interest
in the cases where full repayment was made, at 6 percent, is estimated at
$13,070. For years subsequent to 1922, assumed negligible (no data available).
7 / Mostly payments to depositors in closed banks in cases where no assess
ment was made on the participating banks, or payments to depositors exceeded
such assessments. Data for 1922-23 and 1923-24 relate to four banks, referred
to in a record of withdrawals in the Bank Commissioner's office as "additional
liabilities for which the original assessment is insufficient.1' The aggregate
amount of such payments to depositors, tabulated from data for the banks for
which such payments are reported to have been made, was $455*269« The excess
of this over recoveries on principal (see note 6), or loss, amounting to
$135*062, nay be compared with $135*311 given in the final audit as an
adjustment for such under-assessments (see Table 14).
8/ Figures for years subsequent to 1922 from balance at end of that
fiscal year plus net income from assessments and other receipts and minus
other disbursements. For Aug. 31* 1923* figure given here is smaller than
a figure of $3*250,000 given as the approximate amount in the permanent
guaranty fund in a statement by V/. L. Peterson, Deputy Bank Commissioner,
"Statistics of Guaranty Fund," published in The Guaranty Fund Bulletin,
Oct. 1923* P* 12* and also included in Thornton Cooke, '*The Collapse of Bank
Deposit Guaranty in Oklahoma and Its Position in Other States," Quarterly
Journal of Economics, Nov. 1923* PP. 131-34. Figure given here for Aug. 31*
1925* is also smaller than a figure of $4,054,445 for May 1, 1925* given in
the Federal Reserve Bulletin, Sept. 1925* p. 633* and supported by statement
of the Commissioner of Banking, in a letter published in The Texas Bankers
Record, April 1925* P* 9* that the permanent fund exceeds four million
dollars. It is probable that the figures in these statements for the two
dates, like the published statements for the fiscal years 1920-21 and 1921-22,
include some balances from unused special assessments or from liquidation of
failed banks and not yet repaid to the participating banks.
9/ For years subsequent to 1922 estimated as follows: 1923-1925, cash
with Treasurer of the preceding year plus one-fourth of net income from assess
ments (estimate for 1925 exceeds by a small amount $968,556 reported as the
cash portion of the fund on May 1, 1925* in Federal Reserve Bulletin,
Sept. 1925* p. 633)* 1926 and 1927* estimated from casl'i held by Treasurer to
credit of guaranty fund on Nov. 1, 1930, given in the audit of 1931, adjusted
for amounts that would not have been in the cash portion of the permanent
fund iOB Aug. 31 of 1926 and 1927* respectively. Por 1910 not reported a&d
not estimated.
-57Table 13. SPECIAL ASSESSMENTS, WITHDRAWALS, AND LOSSES OF THE TEXAS
DEPOSITORS GUARANTY FUND, FISCAL YEARS, 1910-27
Year
ended
Aug. 31
1/
Special
assessments
levied
2/
Recoveries from Data for banks closed in the respective fiscal
years
failed banks re
Losses
Recoveries Number of
paid to partici Withdrawals
banks
pating banks 3/ from fund 4/
5/
§J
$11,645,724 $6,332,768
Total $17,090,883 $4,184,246
$17,978,492
55,808
22,112
133,348
55,428
658
658
61,234
79,249
15,158
1912
133*314
1913
1914
1915
61,234
17*710
1916
200,000
1917
61,539
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
--
—
28,436
17,495
13,206
601
27,433
30,770
52,104
3*991,453
4,179,380
222,777
1,244,680 1,184,407
2,416,448 1,265,938
3,772,317 (
875,639^(1,263,159
137,169!/(
—
362,961
—
276,627
—
--
—
---
123*607
115,316
4,025,113
4,207,247
1,948,389
1,743,686
3,744,070
858*157
575,458
--
10,449
3,161,296
2,977,998
1,197,842
1,219,474
1,703,860
505,248
521,688
138
77*920
3
61,234
1
1
64,091
86,334
4
5
~
»
123,607
—
l(A,867
2
2
21
750,547
524,212
2,040,210
11
11
26
11
863,817
1,229,249
352,909
53,770
31
9
l/ No failure occurred and conseq.uently no special assessment was made In the
fiscal years ending in 1910 and 1911*
2/ Fiscal years 1911-12 to 1921-22, inclusive, from report of Commissioner of
Insurance and Banking pertaining to banking for year ended Aug. 31* 1922, pp. 69-72;
1922-23, summary of Bank Commissioner's report for year ending Aug. 31* 1923* The
Texas Bankers Record, Oct. 1923, P» 27; 1923-24, assessments for 2-year period of
1922-23 and 19^3-04* amounting to $3*661,128 as reported by Commissioner of Banking
(The Southwestern Bankers Journal, Jan. 1925, p. 8), less the assessments for
1922-23* 1924-25 and l$2$-i&, from letter of J.A. Pratt to Thomas B. Love, Aug. 9*
1933* with amount for the latter year adjusted to exclude $135*311 assessed in
connection with the final settlement which appears to have been included by Mr* Pratt;
1926-27* from records of Banking Department and statement in Lacy v. State Banking
Board, 11 S.W. (2d) 495*
3j Repayments to the participating banks, or available for such repayments, from
the liquidation of the assets of the banks for which the special assessments were
levied, or from withdrawals from the fund in excess of amounts actually paid to de
positors. Data for 1911-12 to 1921-22, inclusive, from report of Commissioner of
Insurance and Banking pertaining to banking for the year ending Aug. 31* 1922,
pp. 69-71* 1922-23, dividends to the participating banks, summary of Bank Commis
sioner's report for year ending Aug. 31, 1923* The Texas Bankers Record, Oct. 1923,
p. 27; 1923-24, dividends to the Guaranty Fund for 2-year period of 1922-23 and
1923-24, amounting to $2,450,345, as reported by Commissioner of Banking (The
Southwestem Bankers Journal, Jan. 1925, p. 8), less the dividends to participating
banks in 1^2é-23* 1^5-2?, estimated as difference between total recoveries and those
in previous years and available at final settlement of the fund.
-58Table 13. SPECIAL ASSESSMENTS, WITHDRAWALS, AND LOSSES OF THE TEXAS
DEPOSITORS GUARANTY FUND, FISCAL YEARS, 1910-27 - continued
4/ Tabulated from data for the Individual failed 'banks, from records of the
Department of Banking and, for 1926-27, from the 1931 audit of the fund. In
cludes $455,269 withdrawn from the permanent fund to pay depositors In cases
where special assessments were not levied or were insufficient, and $825,354 of
withdrawals in various cases in excess of payments to depositors. The payments
to depositors of the hanks that failed In the fiscal year, 1926-27, amounting
to $575,458, and $7,226 to depositors of banks previously closed, were made in the
process of settlement of the affairs of the fund. The rest of the withdrawals,
amounting to $16,115,185, represents the proceeds of special assessments used,
prior to repeal of the law, in paying depositors of failed hanks.
5/ Tabulated from data for the individual banks: for 1911-20, from data pub
lished in the biennial reports of the Commissioner of Banking or in the records
of the Department of Banking; for 1921-26, estimated from claims of the guaranty
fund, as shown in records of the Department of Banking, or in schedules prepared
for the Federal Reserve Committee on Branch, Group and Chain Banking and per
centage dividends paid, as shown in records of the Department of Banking; for
1926-27 from data in the 1931 audit report and the records regarding settlement
of the affairs of the fund.
6/ Difference between withdrawals and losses. Includes unused withdrawals
assessed on participating banks, estimated at $825,354, and recoveries of $320,207
in failed bank cases for which no special assessments were made. Also includes
recoveries of $1,002,961 collected subsequent to June 15, 1927, and held until
settlement of the affairs of the fund. The remainder, amounting to $4,184,246,
represents the portion of the recoveries repaid to participating banks prior to
repeal of the law.
7 / This consisted of two special assessments at the maximum rate of 2 percent
levied on the banks remaining in the guaranty system on Sept. 29, 1926: one for
$60,709 levied in 1926, the other for £f6,46l levied in I927.
-59-
In the attempt^ after repeal of the law, to settle the affairs of
the guaranty fund, numerous difficulties arose because of conflicting claims
or the balance available.
1Q26,
Banks that had withdrawn prior to September 29;
claimed full refund of the portion of their assessments paid to the
Treasurer and retained as the cash portion of the fund.
If this were done,
the depositors of the last nine banks that failed could not be paid in full.
In addition, the depositors of the bank that closed on September 29, 1926,
claimed preference over the depositors of the eight subsequent failures.
Litigation on these points was carried to the State Supreme Court, which
decided in December 1928 that provisions of law regarding priority of payments
under the normal operation of the fund did not mean preference in the case of
insolvency; and since the law contained no provision for that contingency,
the balance in the fund was to be treated as a trust fund, to be distributed
1/
pro rata among all claimants.
In pursuance of this decision, the State
Banking Board, in November 1930, made a 30 percent repayment to the depositors
of the nine failed banks and the same percentage refund to the banks that had
been members of the system on their cash interest in the permanent fund.
Early the next year a second 30 percent dividend was ordered, and these payments
to depositors of the nine banks were made.
Payments to the banks were begun
but were halted by further litigation, and numerous difficulties emerged
regarding the amounts due the respective banks.
In addition to the balance in the permanent fund at the repeal of
the law, there was available for return to the banks a portion of the special
l7 Lacy et al• v. State Banking Board et al., Dec. 12, 1928, 11 S.W.
(2d) 1*96; Lydick v. State Banking Board, Dec. 12, 1928, 11 S.W. (2d) 505, and
Jan. 23, 1929, 12 S.W. (2d) 95^-
-60-
assessments, referred to as "excess withdrawals,” levied to pay the guaran
teed deposits in banks that had failed prior to September 1926, which had
not been needed to meet the claims presented.
In 1929, the State Banking
Board began to refund these ’’excess withdrawals/
an injunction.
1 but
this was halted by
Also, recoveries by the fund from the liquidation of assets
of failed banks that became available subsequent to June 15, 1927, ka& not
been repaid to the participating banks, and were held by the Bank Commissioner.
There also remained further recoveries to be expected from the assets of the
failed banks.
Problems had arisen in the determination of the equity of the
respective participant banks in both the "excess withdrawals" and the proceeds
of liquidation of the assets of failed banks.
In April 1931 the State Banking Board outlined a plan for paying
the remaining guaranteed deposits of the failed banks and for returning all
remaining assets of the fund to the banks that had participated in the system,
in accordance with a judgment of the District Court of Travis County regarding
the procedure to be used in settling the affairs of the fund.
y
This plan
was submitted to the state legislature, which approved it, ordered an audit
of the fund, and terminated all other litigation regarding the fund, in an
act approved in June 193^*
This act provided that the guaranteed deposits
of the last nine failures among the participating banks were to be paid in
full, and that the balance of the fund; including the proceeds of liquidation
of assets of failed banks applicable to the subrogated claims of depositors
vs id. by the fund, was to be returned to the former members of the system in
proportion to their respective claims as determined by the audit and recommenda
t i o n of the State Banking Board*
This legislation and the results of the
T ] J. C. McNair et al. v. Farmers State Bank et al., Ninety-eighth
District Court of Travis County, cause no. 48965, April 7, 1931, and May 11, I931.
-61-
audit were implemented by a further judgment of the District Court of
Travis County, and payments in accordance therewith were made in September
1931*
Small additional liquidating dividends, from additional collections
from the assets of failed banks, were made in
1932
and
1933*
A suMnary of the method of settlement of the affairs of the fund,
showing how the depositors in the last nine banks that failed were ultimately
paid, and how the permanent fund and the residue of collections from the
assets of the failed banks was returned to the former participating banks,
is given in Table lU.
Deposits and losses in failed banks, by years* Estimates of the
insured deposits in failed banks and the portions paid from the guaranty
fund and from proceeds of liquidation of the assets of the banks, and of
noninsured deposits and of the portions paid and unpaid, are given for cal
endar years in Table 15*
The sum of the insured and noninsured deposits, as estimated in
this table, is about
3
percent smaller than total deposits of the same banks
at time of failure, as given in Table 7-
For abou/t three-fourths of the
failed banks the amounts of insured and noninsured deposits, respectively,
are derived from the claims reported in connection with the liquidation of
the banks; and in many of these cases the total of the claims representing
the deposits differs from the figure ret>orted as total deposits at date of
1/
— *
failure.
Such differences may be due to various reasons: in some cases
the figure given for deposits at date of failure may be taken from a call
X/ Theclaims""data are from a claims record book in the Bank
Commissioner's office, apparently prepared in connection with payment of
final dividends from liquidation of the banks and settlement of the affairs
of the guaranty fund, and from schedules prepared in 1930 for the Federal
Reserve Committee on Branch, Group, and Chain Banking.
-62Table 14.
SETTLEMENT OF THE TEXAS DEPOSITORS GUARANTY HIND, AND
REFUNDS TO PARTICIPATING BANKS
Balances available l/
Permanent fund, balance in 1927 2/
Special assessments accounts, balance in 1927: 3/
Representing excess withdrawals
Special assessments of 1926 and 1927
Other remaining funds from assessments or collections
from assets of failed banks
Collections subsequent to 1927:
Recoveries from failed banks 4/
Interest on excess withdrawals and recoveries 5/
Adjustment for insufficient assessments 6/
Total
Settlement payments 1/
Paid to depositors in 1930 and 1931 j j
Expenses of settlement of fund 8/
Refunds to participating banks— total 1/
In credits toward additional special"*
assessments needed (see above) 9/
573,600
In cancellation of demand deposits due
the guaranty fund 10/
308,382
In cash, as follows:
In 1929, portion of excess withdrawals 11/ 374,853
In 1930 and early 1931, prior to audit
283,257
After settlement act, audit, and
supporting court order 12/
1 ,889,529
Additional liquidating dividends in
1932 and 1933 13/
127,602
Total
$1,541,346
825,354
137,169
13,176
1,002,961
51,540
573,600
$4,145,146
$582,685
5,238
3,557,223
$4,145,146
1/ Excludes $2,592,271 from the permanent fund, consisting of demand deposits
cancelled by order of the State Banking Board* That action was taken seven weeks
prior to repeal of the law, on December 24, 1926, but was in reality part of the
process of settlement of the affairs of the guaranty fund.
2j See Table 12.
3/ See note 2 to Table 11.
%J From audit report of 1931* Includes: dividends from liquidation of failed
banks set aside for the guaranty fund, $476,765; amounts immediately payable from
liquidation balances, $186,519; and estimated additional amounts available from
liquidation balances, $339,677* The audit report also estimated the guaranty
fund's share of the appraised value of remaining unliquidated assets of the failed
banks to be $21,027: this is disregarded, as there is no evidence that any of this
was received by the guaranty fund.
5/ From audit report of 1931* Covers Interest received from June 15, 1927 to
April 1, 1930, on funds held by the Bank Commissioner, as follows: $31,081 on
overassessment funds; $19,450 on dividends to the fund received from the liquidation
of failed banks; and $1,010 on a part of the three-fourths demand deposit portion
of the permanent fund that had been collected by the Commissioner.
-636/ Includes $135,311 allocated to the participating banks to cover withdrawals
from the permanent fund for payment of depositors in cases where no special
assessment was made or payments to depositors exceeded such assessments (see
note 7 to Table 12); and $438,289 for the excess of payments from the fund to
depositors of the last nine failed banks, in fiscal year 1926-27, over the
special assessments on the remaining banks participating in the system (for these
amounts, see Table 13) • As provided in the settlement act and described in the
audit report, the latter adjustment involved cancellation of the assessment
made in early 1927, amounting to $70,461, and an allocation of $4-9,170 in lieu
thereof to the banks that were participating in the system on September 29, 1926,
with the remainder not specifically allocated but in effect distributed among
all the banks to which refunds were due.
7/ From audit report of 1931* Includes; (1) payments to depositors of the
nine banks that failed on or after September 29, 1926, totalling $575,459, of
which $255,643 was paid in Nov. 1930, $202,503 in April 1931 (before the settlement
act and audit report), and the balance of $117,313 in September 1931 (after the
settlement act, audit report, and supporting court order); and (2 ) $7,226 to de
positors of previously failed banks that had not been paid because of particular
circumstances•
8/ Includes settlement expenses of $5,007 shown in the audit report of 1931, and
a balancing item, of $230 assumed to represent additional expenses.
9/ As indicated in note 5, a part of this was specifically allocated among
banks that had withdrawn before September 29, 1926, and those that remained as
participants after that date, with the remainder in effect distributed among all
the banks to which assessment refunds were due.
10/ Includes: the uncollected demand deposit portion of the special assessment
of~l927, amounting to $30,952 (from audit report); the remaining demand deposit
portion of the interest in the permanent guaranty fund of participating banks
that had withdrawn prior to September 29, 1926, to which refunds were due, or of
participants after that date, amounting to $264,364; and an estimated allowance
of $13,066 for other remaining demand deposits in the guaranty fund.
11/ From audit report of 1931»
12/ Includes $1,877,731 paid in September under a District Court order of the
preceding month, $8,77» paid in accordance with a supplementary order of July 1932,
and $3,022 believed to have been paid under another supplementary order. The
precise distribution of these sums to the various participant banks is given in
the audit report and summarized in the court orders. Attorneys' fees amounting
to about $87,000, incurred by the banks in handling their claims, were paid and
deducted from the payments to the respective banks.
13/ Paid in three dividends on Sept. 20, 1932, March 1, 1933, and Jvsae 1, 1933»
-64Table 15. TOTAL DEPOSITS, INSURED DEPOSITS AND OBLIGATIONS TO DEPOSITORS OF FAILED BANKS, TEXAS
DEPOSITORS GUARANTY FUND, BY YEARS
Year
Total
Subtotals
<20 banks
reopened
118 other
banks
Insured deposit obligations paid 2/
~
Insured
t^aid directly
Paid by fund! V
~*
deposits l/ from liquidaRecovered from
Not recovered
tion of assets
liquidation of
from liquida
it/
assets
tion of assets
(loss to fund)
$26,390,233
$8,411,745
$6,332,763
$11,645,725
8,548,637
6,688,387
155,422
1,704,828
4,103,504
4,103,504
17,841,596
1,723,358
6,177,341
9,940,897
6,054,249
2,991,239
1910
1911
1912
1913
1914
162,089
32,683
14,393
97,092
83,146
1915
377,763
2,195,592
289,733
l,859,10g
1916
1917
1918
152,333
28,091
97,750
mm»
1919
1920
1921
1922
1923
1924
76,953
»m m
74,862
53,843
....
104,960
19,37^
727
18,647
961,015
106,605
1,723,383
2,243,416
817,628
392,574
1,505,365
653,025
417,961
833,339
1,846,132
2,860,016
76,550
1,370
»»
8,096,567
4,360,506
1925„
1926
1927
Noninsured deposits
Total 5/
Paid bj
Unpaid 7/
3,422,496
1 ,561,886
143,665
104,960
464,185
164,200
479,804
35,628
1,847,587
254,870
14,857
$10,157,753 $7,094,743
» »
43,100
4,08l
77,458
6,546
27,250
44,843
6,546
27,250
40,311
11,077
276,627
135,237
l,l4f,4o8
135,237
1 ,086,622
4,515
28,471
4,515
» »
--
»»
461,836
4,867,819
1,464,065
610,543
1 ,562,492
1 ,410,707
827,212
93,180
»»
28,471
396,630
3,474,549
1,424,109
870,173
997,843
1,009,130
499,350
14,241
—
3 ,063,010
»»
» »
12,328
658
$3,063,010
72,283
5,175
—
4,532
»»
60,786
»»
--
181,877
1,906,790
1,303,532
688,251
805,441
214,753
1,567,759
120,577
511,589
497,541
4,767
9,474
291,261
181,922
192,402
208,089
-65Footnotes to Table 15*
l/ For 1921-1927* except for banks taken over or succeeded by other banks
with a payment from the guaranty fund: "preferred claims” as reported on
schedules prepared for the Federal Reserve Committee on Branch, Group, and
Chain Banking, or withdrawal from the guaranty fund, whichever is larger*
For 19H-I 92O and for the banks in subsequent years taken over or succeeded
with a payment from the guaranty fund: estimated from total deposits and the
average ratio of preferred claims to total deposits in the cases available
for banks of similar size*
2/ All approved claims against the guaranty fund were paid, and it is
therefore assumed that no insured deposits were unpaid.
3/ Total insured deposits (i.e., "preferred claims" in most of the
1921-T927 cases) in excess of withdrawal from guaranty fund (assumed none if
withdrawal exceeded "preferred claims").
kj From sources described in note 5 to Table 13*
5/ For 1910-1920: difference between estimated total deposits (see Table 7)
and insured deposits. For 1921-1927: for banks going through the liquidation
process, claims shown in record book in Bank Commissioner's office, described as
claims of every nature other than those recognized against the guaranty fund,
and including for these years a total of $706*99^ in claims that were preferred,
offset, or settled; for banks succeeded or taken over with a payment from the
guaranty fund, difference between total deposits and estimated insured deposits.
6/ Difference between estimated total said estimated loss.
7 j For 1910-1920: from information in annual reports of the Commissioner of
Insurance and Banking, or estimated (for a few cases) to be similar relative
to deposits as the loss to the guaranty fund. For 1921-1927: estimated from
the amount of general claims and percentage dividends paid. It is assumed that
the claims classified as preferred, offset, or settled were paid in full.
In the case of banks reorganized, or taken over by another bank, with a payment
from the guaranty fund, it is assumed that other creditors were paid in full
(no information is available regarding losses in these cases).
-66report prior to failure; some deposits on the books at time of failure are
never claimed or are disallowed; some deposit liabilities not on the books at
time of failure may be claimed, proved, and allowed; and the records are not
clear as to whether government deposits secured by fledge of assets are
1/
included in the claims record.
For the failed banks that were taken over
by a successor or another bank (with a payment from the guaranty fund), and
for some of the other failures during the early years of the system, this
information is unavailable, and the reported total deposits have been divided
between insured and noninsured on the basis of banks of similar size for which
the information is available.
Of the
138 failed, banks entailing payments from the guaranty fund,
20 were reorganized or taken over without going through the liquidation
2/
process.
These banks were of larger average size than the others, for they
l/ The claims record book in the Bank Commissioner’s office shows
the claims of the guaranty fund for the final dividend to be paid from the
assets of each failed bank, and Ttclaims of every nature other than those
recognized against the guaranty fundn, with the latter divided between general
claims and those preferred, offset, or settled. Because of the relatively
small amounts in the last group, and the absence of mention of secured claims,
it appears likely that secured claims are not covered by this record* Secured
claims reported on the schedules prepared for the Committee on Branch, Group,
and Chain Banking include borrowings, and cannot be taken to indicate the
amount of secured deposits. It should be noted also that in many cases the
claim of the guaranty fund for final dividend is less than the withdrawal
from the guaranty fund to pay depositors, even after adjustment of the latter
figure for an excess withdrawal. Neither the withdrawal from the guaranty
fund nor the claim of the fund for final dividend represents the amount of
the Insured deposits. This is because the law provided for payment of as much
as possible of the insured deposits from the cash that could be made available
immediately from the failed bank, with the remainder to be drawn from the fund
and assessed on the participating banks.
2/ There were a few other cases in which a portion of the deposits
of a failed bank were assumed by another bank, with the residue and a portion
of the assets of the bank going through the liquidation process.
-67held about one-third of the deposits of all the failed banks*
It has been
assumed that in these cases all the deposits of the failed bank were assumed
by the successor or absorbing bank, and consequently that there was no loss
on the noninsured deposits*
The losses of the guaranty fund in the twenty
cases, which was the full amount of the payments except in two cases, were
about one-fifth of the estimated insured deposits, compared with nearly
three-fifths in the banks going through the liquidation process.
Table 16 shows for each year the percentage of the deposits in
failed banks estimated to have been injured, and of the insured deposits
the percentage recovered by the depositors and the fund from the liquidation
of assets and the percentage representing the loss to the fund#
failed banks entailing obligations on the guaranty fund,
deposits are estimated to have been insured*
y
For all the
70 percent of the
Of the insured deposits, 56
percent were paid from the liquidation of assets of the bank, either directly
to the depositors or to the guaranty fund on the claims paid by the fund.
This is about the same proportion as in the case of both the Oklahoma and
Kansas systems of deposit insurance.
As has been indicated, the remaining
insured deposits were paid from the guaranty fund, and except for the last
nine banks among the failures, were made promptly.
Of the noninsured deposits, the estimates in the preceding table
indicate that about
70 percent were paid from the liquidation of the assets
of the failed banks, and the other 30 percent lost to the depositors.
The
1/ This percentage and the percentages for each year in Table l6,
are computed from the insured deposits shown in this table and the total
deposits for the same banks shown in Table 7* If computed from the sum of
insured and noninsured deposits in Table 16 , the insured deposits of all the
failed banks would be J2 percent of total deposits.
-68Table 16. PERCENTAGE OP DEPOSITS INSURED, AND PERCENTAGE OP INSURED
DEPOSITS PAID BY GUARANTY RJND AND RECOVERED FROM LIQUIDATION
OF ASSETS, BANK FAILURES UNDER THE TEXAS DEPOSITORS GUARANTY
FUND, BY YEARS
Year
of
failure
Total
Subtotals
2Ù banks
reopened
ll8 other
banks
1910
1911
1912
1913
1914
1915
1916
1917
1918
Percentage
of total
deposits
insured l/
100.0
31.9
24.0
44.1
67.6
100.0
78.2
1.8
19.9
71.4
100.0
9.7
34.6
55.7
66*2
80.3
78.2
21.4
50.3
4.9
28.3
78.3
100.0
100.0
100.0
100.0
99.3
51.3
46.2
43.9
.7
2.5
73.6
65.7
100.0
100.0
76.7
84.7
20.3
2.7
12.6
—
78.9
80.7
1920
1921
1922
76.6
1925
Percentage of insured deposits 2/
Paid directly
Paid by guaranty fund
from liquida
Recovered
Not recovered;
tion of assets from assets i.e., loss to
fund
JOA
1919
1923
1924
Total
67.5
75.0
63.9
67.4
70.9
1926
85.2
1927
95.1
—
100.0
100.0
51.2
—
«■«ft
—
2.9
—
3.8
100*0
96.2
ll.l
21.3
51.4
44.3
40.8
48.1
18.6
15.0
22.6
60.1
—
100.0
100.0
100.0
100.0
100.0
16.2
100.0
100.0
100.0
4.8
30.7r
24.8
—
«ft«ft
29.1
33.6
33.1
54.6
54.0
16.3
10.3
41.2
53.0
64.9
y computed, from total deposits in Table 7 and. insured deposits in Table i>.
~2j Computed from data in Table 15*
-69relatively larger recovery from the liquidation of assets on noninsured
deposits than on insured deposits is due, of course, to the assumption
that there were no losses on noninsured deposits in the case of the twenty
banks reopened or taken over without going through the liquidation process.
Comparison of assessment receipts and losses in failed banks.
Assessments for deposit guaranty in Texas, because of the features of the
Texas lav, were substantially in excess of the losses. A tabulation of
the cumulative excess or deficiency of assessment receipts relative to
losses, such as that given for the Oklahoma and Kansas funds in the preceding
chapters, would be irrelevant. Except for delay in making assessments in a
few cases, the cumulative receipts frcm the special assessments were always
in excess of the cumulative net deposit liability by the amount of recoveries
from assets of failed banks. The assessments for the permanent fund, in
addition, were accumulated, though used in part as a revolving fund to meet
depositors' claims in advance of the collection of special assessments.
The assessments paid each fiscal year, including both the special
assessments and those for the permanent fund, are shown in Table 17> along
with the net deposit liability of the fund (i.e., losses of the fund), and
also the loss that would have been incurred had the insurance covered all
deposits. The rates of each of these per $100 of deposits in the participa
ting banks are also given in the table.
The total assessments collected averaged about four-fifths of 1 per
cent per year of the deposits of the participating banks. About one-half of
the total assessments were for the permanent fund or were recovered from the
failed banks, and were refunded to the participating banks. The losses on
account of the insured (unsecured non-interest-bearing) deposits averaged
-70Table 17. COMPARISON OF ASSESSMENT RECEIPTS AND LIABILITY FOR DEPOSITS
IN FAILED BANKS, TEXAS DEPOSITORS GUARANTY FUND
Fiscal
year
ended
Aug. 31
Total
Total
assessments
y
$23,059,302
Subtotals
1$I6-1'9&)
3,382,499
1921-1926 18,956,477
Net deposit ■■yet'TIab’m t y ' Per $100 of deposits in participating banks, Jan. 1
liability of fund with
of guaranty full coverage Total Net liability Net lia
assessof fund
bility of
fund 2/
fund with
ments
full coverage
$!
$11,645,725 $14,708,734
$0.83 4/
$0.42 4/
$0.53 4/
¥»0,556
13,599,440
.25 4/
1.32 %/
.03 4/
.75 5/
.03 4/
.95 y
.10
.001
.11
.001
358,320
10,765,718
1910
1911
1912
1913
1914
431,834
63,851
291,to3
211,980
293,471
55,428
658
1915
1916
1917
1918
1919
177,316
385,231
300,947
15,158
276,627
1920
1921
1922
1923
1924
1925
1926
1927
356,757
318,757
550,952
4,115,888
4,641,038
1,723,053
2,995,288
4,1*05,895
1,075,315
720,326
mm mm
mm
60,603
658
a* —
.34
19,690
•28
337,413
.41
.20
.17
.18
—
W «l
rnmmm
mmm
—
mm 4m
10,449
3,161,298
2,977,996
1,197,842
1,219,474
1,703,860
505,248
521,687
.91
.12
.51
.24
22,192
.17
1.55
2.04
.68
mmwm
wmm>
mm mm
.02
.30
.03
.36
—
—
mm mm
—
—
—
.003
1.19
1.31
4,61(0,471
3,328,133
1,377,276
1,418,960
1.03
.48
.42
2,233,320
601,280
668,738
1.46
1.13
5/
.56
.53
5/
.01
1.75
1.46
.55
.49
.74
.63
5/
1j Assessments for permanent fund (Table 12-first two columns), plus special
assessments (ifeble 13) with the subsequent assessment equivalent ($573*600) included
with 1927.
2/ Loss to guaranty fund in banks closed in the respective years (Table 13)*
3/ Loss to guaranty fund plus estimated loss to other claimants on noninsured
deposits and other liabilities*
4/ Rates per year.
3/ Not significant because of small, number of banks participating on January 1.
-71about two-fifths of 1 percent per year of the deposits of participating hanks.
Had all deposits been covered by the Insurance, the losses would have averaged
about one-half of 1 percent per year of the deposits of participating banks.
This is a little higher than the corresponding rate for the Kansas deposit
guaranty system, but substantially less than that for the Oklahoma system.
As has been indicated, failures and losses were light from the
beginning of the system until 1920. For the eleven fiscal years, 1910-20,
the loss to the guaranty fund averaged only one-thirtieth of 1 percent per
year of the deposits in participating banks; but during the six fiscal years,
1921-26, the losses on insured deposits averaged three-fourths of 1 percent
per year, and would have been nearly 1 percent a year had all deposits been
insured.
The relation of the assessments and losses in Texas to the capital
accounts of the participating banks has not been computed because of the
absence of tabulations of the capital accounts of the participating banks.
However, if the participating banks had the same ratio of capital to deposits
as all State banks, and this is likely because about 95 percent of the State
banks participated until the revision of the law in 1925, the losses on in
sured deposits averaged 1.5 percent per year on total capital accounts, and
on all deposits 1*9 percent per year of total capital accounts. For the six
fiscal years in which the failures were concentrated, 1921-26, the losses
on insured deposits were equivalent to about 3 percent per year, and those
on all deposits to nearly 4 percent per year, of the total capital accounts
of the participating banks.
-72APPRAISAL OP THE TEXAS DEPOSIT GUARANTY SYSTEM
The success of the Texas system. As an insurance system, the
Texas deposit guaranty plan «as an unqualified success as long as most of
the State banks were participants. This success, in contrast to failure
of the other seven State plans operating during the period from 1907 to
1930, was due to two features of the guaranty lav not included, or retained
only a short time, in other systems:
(1 ) the accumulation of a sizable
permanent fund used as a revolving fund to provide for immediate payment
of depositors; and (2) the levy of special assessments after each failure
to recoup the permanent fund, with a maximum rate sufficiently high to cover
all obligations on the fund. The difference In the rate for special assess
ments was particularly important. In Texas this was 2 percent per year on
the deposits of participating banks, excluding savings deposits and public
funds, which were excluded from the insurance because they were interest-
y
bearing or secured.
In addition to being more sound actuarially, the Texas system was
superior to the Kansas system in another respect. It paid depositors
promptly, and did not accumulate large potential obligations in banks that
had closed.
2/
rrrtgrinfti law in nWlAhnma was similar to that of Texas, with
at first no limitation on the maximum assessment to restore withdrawals from
the permanent fund, and then a maximum of 2 percent per year. But in 1913
the maximum was reduced two-fifths of 1 percent effective at once and one-fifth
of 1 percent effective three years later. In Nebraska special assessments were
permitted for several years to a maximum of 1 percent of deposits, but in
1923 this was reduced to one-half of 1 percent. No other State had a maximum
higher than one-half of 1 percent.
-73The burden of assessments. The success of the Texas system, until
the time when most of the participating banks had withdrawn under the pro
visions of the 1925 amendment to the law, raises the question of whether it
could have survived the depression of the early 1930's had it continued with
most of the banks as participants. The possibility of survival involves
two problems.
First, were the deposits and losses in suspended banks during
the years 1927-1933 so much greater than those of 1921-1926 as to have made
the fund inadequate? Second, would the burden on the banks have been so
heavy that they could not have supported it? It was the weight of this
burden after 1920, of course, that made it possible for the banks to secure
the amendment under which they withdrew.
Certainly, the burden on the participating banks after 1920 was
such that, had the legislature failed to respond, many of than would have
converted to national banks or reorganized under new charters to enable them
to shift to the bond security plan. An average of three percent a year of
their capital accounts was probably a sizable share of their profits, and
1/
a burden that they could not have been expected to continue to accept.
However, had participation In such a system been required of all banks in
the State, the burden would have been less, and could have been shifted to
a large extent to the banks' customers.
The data in Table 18 throw considerable light on the question of
whether the Texas plan of deposit guaranty, covering all State banks,
or all State and national banks, might have remained solvent throughout
the depression of the 1930's, and how burdensome it would have been. The
table shows, for the 1921-1926 period and for the 1927-1933 period, estimates
1/ Information is not available on bank profits in Texas.
-74Table 18. RELATION OP DEPOSITS AND LOSSES IN SUSPENDED BANKS IN TEXAS TO
DEPOSITS AND CAPITAL ACCOUNTS OP ACTIVE BANKS, 1921-1933 l/
Issr-Tsse
$2.92
j g
$1.28
Ï.1S
1.42
$•94
"73*
.90
$.24
^T7
.29
2.58
2.66
.72
.36
.76
.03
none
.30
.04
.03
1927-1933
3.38
.88
1921
1922
1923
1924
1925
1926
5*28
2.71
1.31
1.69
2.07
1.55
1.22
.21
.36
1.27
.29
.32
l.to
1.88
2.47
.30
.76
.17
.12
.09
1.14
.63
1927
1928
1929
1930
1931
1932
1933
10.60
1*94
7.37
2.85
.63
1.47
.93
.63
.73
.68
.77
.66
.55
.11
.33
.61
.14
1.06
4.60
.89
2*54
.08
.18
3.05
.61
2.80
.03
.02
.004
.36
.79
.75
.22
$3.86
3.83
.42 3.90
1.39
.23
.36
.41
.22
.18
.05
.09
.02
.32
$2.00
1.61
2.20
5.17
.92
2.96
2.97
.11
none
1.45
.22
.16
.50
.16
8.96
2.45
1.28
2.83
3.57
1.58
.36
•
1921-1933
—J
VO
Year
or
period
Losses on deposits in Losses on deposits in
Deposits in suspended suspended banks per
suspended banks per
'banks per $100 of de- $100 of deposits in
$100 of capital acposits in active banks
actlve banks____ counts in active banks
State National Total State National Total State National Total
banks banks
banks banks
banks banks
1.30 13.31
.72 2.17
.69 10.35
.10
.02
2.02
4.37
3.63
1.18
1.28
1.90
1.16
.91
.25
.49
.11
1.70
6.78
3.27
3.41
1/ Ratios in this table have been computed from data obtained or compiled from
various sources. Deposits in suspended banks: banks participating in the deposit
guaranty system, Table 7; other State banks and national banks, Banking and Monetary
Statistics, pp. 287, 289, and 291* Losses in suspended banks: banks participating
in the deposit guaranty system, Table 15; other State banks, statement of Bank
Commissioner Charles 0. Austin, in The Texas Bankers Record, June 1926, p. 38, letter
from J. A. Pratt to Thomas B. Love, Aug* 9, 1$33, and the assumption that for banks
closed in 1931-1933, losses in those reopened were 10 percent of deposits smd for
those liquidated to percent of deposits; national banks, compiled from information
for the individual banks in the ^niiai reports of the Comptroller of the Currency*
Deposits and capital accounts of active State and national banks: data for June 30
of each year prepared by the Board of Governors of the Federal Reserve System for
a forthcoming publication.
-75of the deposits and losses in suspended banks relative to those in active
banks, and the losses relative to the capital accounts of active banks, for
all State banks, all national banks, and for both groups of banks* These
data indicate that for the years 1927-1930# the average burden of the losses
would have been no heavier than for 1921-1926. However, for 1931 and for
1933 the failures would have entailed heavier burdens than in 1921, the
worst year of the preceding period. This is much more striking when the
losses on deposits of failed banks are related to the capital accounts than
to the deposits of the participating banks, for in the early 1930's the
banks had smaller capital accounts relative to their deposits than in the
early 1920's.
The data also indicate that a deposit insurance system covering
both State and national banks would have been relatively less costly than a
system covering State banks only. For both the 1921-1926 and the 1927-1933
periods, the average annual loss on deposits in suspended banks was less than
one-half of 1 percent per year of the deposits of State and national banks
taken together, compared with nearly 1 percent for State banks alone. Taken
by itself, this might seem to support the contention that deposit insurance
had led to reckless banking, and that a system embracing both State and
national banks might have been as burdensome as that covering only State
banks. Such a conclusion is not warranted, for the difference in failure
rates between State and national banks was general throughout most of the
United States, and particularly in the agricultural areas where the States
1/
with deposit insurance systems were located.
1/ See Table 9 and. similar tables in the chapters dealing with the
other State systems.
-76It should also he recognized that a deposit insurance system
like that of Texas might become insolvent even though the average ultimate
loss burden is less than the permissible assessment rate.
Depositors in
failed banks should, be paid promptly, and this involves a combination of
a revolving fund large enough and collections from assessments high enough
to repay promptly a larger amount of deposits than those represented by
losses, though not the entire amount of the deposits of the failed banks,
since in most cases some assets of a failed bank can be utilized almost
immediately.
Here, too, the data suggest that the Texas system could have
survived the depression, had it covered all State and national banks, with
a corresponding enlargement of the permanent fund.
The deposits of the
suspended State and national banks during the crucial years of 1931-1933
were somewhat lower, relative to deposits in active banks, than those of
State banks during the three years 1921-1923* For a system, covering the
State banks a larger permanent fund than the maximum specified in the
Texas law would have been required.
Defects of the Texas system. Hie conclusion that the Texas system
appears actuarially sound, and if applied to all banks in the State could
have survived an extremely serious depression like the early
not mean that it was without defects.
1930's does
It shared some of the defects of
the other State systems.
First, of course, is ttBEk the fact that the system could not be
extended to all banks operating in the State.
That is to say, with the
dual banking system, the State of Texas, alone, could not have maintained
the deposit guaranty system through prolonged adverse circumstances.
-77Second, as in other States, the system failed to cope adequately
with dishonest management of banks.
In part this was due to the judicial
system of Texas, under which it was often difficult or impossible for the
Banking Department to secure punishment, or even indictment, of bank offi
cials for violations of law. Though losses to the guaranty fund on account
of dishonestly operated large banks were of less relative importance in
Texas than in Oklahoma and Kansas, more adequate enforcement of banking
laws would undoubtedly have substantially reduced the losses.
Third, as in other States, bank supervision was inadequate.
The
very nature of the banking business, under which income-earning assets
are acquired by an expansion of liabilities that perform a unique function
in the economy and on which interest need not be paid, provides so strong
an incentive to overexpansion and excessive risktaking that carefully
drawn banking codes and rigorous inspections are needed if a system of
insurance of those liabilities is to be successful.
In addition to defects of the kind ccnmon to all the State deposit
insurance systems, the insurance coverage afforded by the Texas system was
not as comprehensive, because of noncoverage of interest-bearing deposits,
as that in the other systems operating during the same period.
DEPOSIT INSURANCE IN NEBRASKA
Prepared by
Clark tfarburton, Chief
Banking and Business Section
Division of Research and Statistics
ederal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
July 1958
DEPOSIT INSURANCE IN NEBRASKA
TABLE OF CONTENTS
Page
Origin and constitutionality of the deposit guaranty lav
Background of the guaranty legislation
Constitutionality of the deposit guaranty law
Decision of the United States Circuit Court
Decision of the United States Supreme Court
1
1
Character of the guaranty legislation
Admission of banks
Deposits insured
Assessments
Administration and custody of the fund
Indebtedness of the guaranty fund
Method of paying depositors and of liquidating failed banks
Bankers conservation fund
Expenses of administration
4
4
Supervision and regulation of guaranteed banks
Supervisory authority
Supervisory powers
Supervisory experience
Statutory limitations on bank operations
2
2
3
4
7
9
10
11
15
15
l6
l6
17
18
25
Closing of the guaranty fund
25
Number, deposits, and failures of participating banks
Number of participating banks
Deposits of participating and nonparticipating banks
Concentration of banks deposits
Failures of participating banks
Failures by size of bank
Comparison of failures with those in other States
Causes of bank failures
Procedures in handling failed banks
35
35
35
Financial history of the guaranty fund
Sources and adequacy of information
Income and obligations of the guaranty fund
Comparison of assessments and losses
Bankers conservation fund
Administrative cost of the depositors* guaranty fund
Settlement of the affairs of the guaranty fund
Appraisal of the Nebraska depositors1 guaranty fund
37
37
40
44
46
51
57
57
59
67
74
76
Jo
79
LIST OF TABLES
Table
1.
2
.
3.
5.
6
.
7.
.
8
9.
10.
11.
Page
Supervisory powers of state banking board, and of department of
trade and commerce, in Nebraska, 1911-1929
19
Statutory limitations on bank operations in Nebraska, 1911-1929
26
Number of operating banks in Nebraska participating and not
participating in the deposit guaranty system, 1912-1930# by years
36
Deposits in operating banks in Nebraska participating and not
participating in the deposit guaranty system, 1912-1930, by years
38
Numbei and deposits of state banks in Nebraska, October 31, 191^,
and June 30, 1927
39
Number of state banks in Nebraska closed because of financial
difficulties, July 1, 1911, to March 18,1930, by years
4l
Deposits of state banks in Nebraska closed because of financial
difficulties, July 1, 1911, to March 18, 1930, by years
k2
Size distribution of failed banks in Nebraska entailing obligations
on the guaranty fund compared with average size distribution
of operating banks
43
Annual bank failure rates in Nebraska, 1912-1929, compared with
rates in contiguous states and in the United States
k$
Causes of bank failures in Nebraska, 1921-1930, reported on schedules
prepared for the federal reserve committee on branch, group
and chain banking
50
Banks closed in Nebraska during the life of the guaranty fund commission 53
12
. Receipts,
expenditures, and deficit of the Nebraska depositors*
guaranty fund
60
13
. Rates and amount of assessments, Nebraska depositors* guaranty fund
62
Ik.
Receipts, expenditures, and balance, Nebraska depositors' guaranty
fund, by years
6k
15. Total deposits, insured deposits and obligations to depositors of
failed banks, Nebraska depositors' guaranty fund, by years
66
16 . Percentage of deposits insured, and percentage of insured deposits
paid by guaranty fund and recovered from liquidation of assets,
bank failures under the Nebraska depositors* guaranty fund,
by years
68
LIST OF TABLES - continued
Table
17*
18.
19.
20.
Page
Annual assessments levied, liability for deposits in failed banks,
and cumulative deficiency, Nebraska depositors1 guaranty fund
69
Comparison of annual rates of assessments levied with rates
required to meet deposit obligations in failed banks,
Nebraska depositors* guaranty fund, by years, 1911-1930
72
Balance, bankers conservation fund, Nebraska, midyear and year-end
call dates, 1923-1929
75
Receipts and expenses for administrative purposes, Nebraska
depositors* guaranty fund, May 1, 1923* to Dec. 31 * 1929
77
DEPOSIT INSURANCE IN NEBRASKA
The Nebraska law for guaranty of bank deposits was enacted April
25, 1909» At that time the deposit insurance system of Oklahoma was in
operation and the Kansas law had been enacted. The effective date of the
Nebraska law was postponed for nearly two years pending litigation regarding
its constitutionality. An amending act in 1911 provided that assessments
were to begin on July 1 of that year. The insurance became effective when
the first assessment had been paid.
The guaranty law in Nebraska continued in operation for 19 years.
By 1930 the liabilities of the guaranty fund far exceeded the amounts which
were available to the fund; and on March 18 of that year applicability of
the guaranty to future failures was repealed, with assessments to be continued
at a reduced rate for ten years. However, under a decision of the State
Supreme Court rendered in 1932 all assessments under this act and those under
the old act subsequent to 1928 were declared, because of changed conditions,
to have became confiscatory and hence unconstitutional.
In the next year
the entire deposit insurance law was repealed, and final settlement of the
affairs of the fund was completed in 193^*
ORIGIN AND CONSTITUTIONALITY OF THE DEPOSIT GUARANTY LAW
1/
Background of the guaranty legislation. State banks in Nebraska
had been subject to supervision, with regular examinations, for over twenty
years prior to the adoption of deposit guaranty.
In the 1890‘s, poor crops
and the depressed economic conditions of the nation resulted in numerous
l/ An account of the origin of deposit guaranty legislation in
Nebraska i¥ given by Z. Clark Dickenson, in Bank Deposit Guaranty in Nebraska,
Bulletin No. 6, Nebraska Legislative Reference Bureau (191*0.
’
-2 -
bank failures and a contraction, within a period of four years, by about
one-half in the total deposits of the incorporated banks in the State. In
1893, William Jennings Bryan, representative in the Federal Congress from
Nebraska, introduced a bill proposing deposit insurance for national banks;
and in 1897 and again in 1899 bills were introduced in the Nebraska legislature
to establish a deposit insurance system for State banks.
Such bills were
also introduced in the legislatures of 1905 and. 1907 with the approval of
the Banking and Currency Committee, but failed of passage.
In 1908, both the Democratic national convention, which met in
July, and the Nebraska Democratic State convention, which met in September,
adopted planks favoring deposit guaranty.
Early in January 1909, the new
Governor recommended deposit guaranty to the legislature; and a bill embodying
his suggestions and approved by William Jennings Bryan was introduced in
March and enacted in the following month.
Enactment of the law, it may be
noted, was not the consequence of another wave of bank failures.
In fact,
during the six years just prior to 1909, there had been only three failures
of State tanks, one each in 1903, 1904, and 1907.
Constitutionality of the deposit guaranty law. The deposit guaranty
law was attacked immediately after its enactment in 1909 with the claim that
it was unconstitutional.
The basis for claiming that deposit guaranty was
1/
unconstitutional was essentially the same as in Oklahoma and in Kansas.
Decision of the United States Circuit Court. A few days before
the Nebraska deposit guaranty law was to go into effect a temporary injunction
l/ For summaries of the arguments that the deposit guaranty laws
of Oklahoma and Kansas were unconstitutional, see the reports Deposit Guaranty
in Oklahoma and Deposit Guaranty in Kansas.
-3was granted by members of the Circuit Court of the United States for the
District of Nebraska restraining the State Banking Board from putting the
law into operation.
Shortly afterward the court declared the law to be
unconstitutional and made the injunction permanent.
This decision was based
on the contention that the law appropriated the assets of one bank to meet the
obligations of another bank, resulting in taking the property of one person
without compensation to pay the debts of another, and thus was contrary to
the Fourteenth Amendment to the Constitution of the United States and article
1/
1 of the Constitution of Nebraska.
Decision of the United States Supreme Court. The decision of the
Circuit Court made the deposit guaranty law in Nebraska ineffective pending
appeal to the United States Supreme Court.
In Oklahoma and Kansas, where
deposit guaranty laws had also been challenged, the constitutionality of the
legislation had been upheld, respectively, by the Supreme Court of Oklahoma
and the United States Circuit Court of the District of Kansas; and the laws
were therefore placed in operation pending the results of appeal to the
United States Supreme Court.
Arguments regarding the constitutionality of the deposit guaranty
laws in the three States were heard by the United States Supreme Court at its
fall term in 1909. On January 3» 1911, the United States Supreme Court rendered
a unanimous decision upholding the constitutionality of the Oklahoma law, and
I / First State Bank of Holstein, Neb. v. Shallenberger (1909),
1?2 F. 999*
-4 1
made the same decision applicable to the Kansas and Nebraska laws.
CHARACTER OF THE GUARANTY LEGISLATION
Admission of banks. Participation in the deposit guaranty plan
in Nebraska was made compulsory for all State banks.
was required for admission to the guaranty plan.
into effect approximately
No special examination
At the time the law went
650 banks were operating under State law and became
participants in the system.
In 1919, an amendment provided that new banks
could operate for two years before being required to participate.
Two years
later this provision was removed.
In 1921 provision
was made for a separate fund, to be known as the
"Co-operative Bank Protective Fund," for co-operative banks.
However, no
mention is made of such banks nor of the Co-operative Bank Protective Fund
in reports of the State banking department or reports of investigations of
the depositors' guaranty fund.
Deposits insured. The guaranty protected all deposits (modified
in
1925 to deposits not otherwise secured), including claims of holders of
exchange.
Payment of interest on a deposit, directly or indirectly, at a
rate higher than 5 percent per year, reduced in
prohibited; and payment of
1926 to k percent, was
a higher rate was to be taken as evidence that
the transaction was a loan and not protected by the guaranty.
amendment in
Under an
1917 any evidence of indebtedness issued to a stockholder,
officer or employee representing money obtained for the benefit of the
l7 Noble State Bank v. Haskell (1911), 219 U.S. 112; and
Shallenberger v. First State Bank of Holstein (1911), 31 S. Ct. 189, 219
U.S. 114, 55 L. Ed. 117. The decision of the United States Supreme Court
in the Oklahoma case is described in more detail in the report Deposit
Guaranty in Oklahoma.
-5-
bank was to be construed as a loan to the bank and not protected by the
guaranty.
In the original law no special provision was made regarding
public funds, but an amendment of 1911 provided that no security other
than the guaranty was necessary for such funds, thus superseding the previous
requirement that depository banks furnish bonds covering deposits of public
funds.
In 1923 an amendment provided that receipt of deposits upon any
collateral agreement or condition other than an agreement for rate of
interest and length of time to maturity was prohibited, and that any money
deposited under such an agreement was excluded from guaranty:
this was
repealed two years later.
In connection with the payment of deposits of failed banks, numerous
cases arose of interpretation of the law regarding insurance coverage.
The
lines of demarcation resulting from these decisions are indicated by the
cases referred to here. Accrued interest on a certificate of deposit to
date of payment, or date of maturity if paid subsequently, was protected
/
1
along with the principal.
Money paid to a bank for purchase of a Federal
Government bond, with the bond not delivered or the money diverted to the use
of the bank, did not constitute a deposit within the meaning of the guaranty
2/
act. A credit to a checking account or a certificate of deposit issued in
exchange for negotiable paper, such as a promissory note or Government bond,
was a valid deposit protected by the guaranty, because such negotiable paper
l/ State v. Nebraska State Bank of Milligan (1923)# 196 N.W. 679#
111 Neb. 3^0; State v. Farmers' State Bank of Culbertson (1925), 204 N.W. 795#
113 Neb. 679.
2/ In re Cronk, State v. Fanners Bank of Page (1923)# 194 N.W. 865,
110 Neb. 6?6; State v. Atlas Bank of Neligh (1926), 209 N.W. 33^#
Neb. 65O.
-6was the equivalent
1/
of money.
But a certificate of deposit issued for paper
that had no real value, such as a third mortgage on real estate with prior
liens equalling the value of the property, or in circumstances indicating an
2/
attempt to defraud the bank, was not protected.
A correspondent bank, which
in the ordinary course of business had honored drafts of a bank that failed
in excess of its balance, was protected on the overdraft by subrogation to
3/
the rights of the original holder of exchange.
In various cases, certificates of deposit were found to represent
funds procured for the benefit of the bank, or in the interest of the owners
or stockholders, and thus to represent loans rather than deposits protected
y
by the guaranty.
A certificate of deposit issued at the maximum permissible
rate of interest, but with a bonus of
1 percent, or with interest for a
longer period than the duration of deposit, was held to be a loan and excluded
5/
from guaranty.
A cashier's check, payable at a future date, issued in payment
of a loan, and including interest in excess of
§/
be excluded on the same ground.
5 percent, was also held to
However, payment of a bonus to a depositor
by an officer of a bank, even though charged to the bank but this fact unknown
1/
to the depositor, did not remove the protection of the guaranty.
Similarly,
17 State v. American State Bank, Lincoln (1924), 199 N.W. 21, 112
Neb. 182; State v. American State Bank of Aurora (1924), 199 N.W. 501, 112
Neb. 272; State v. Newcastle State Bank (1926), 207 N.W. 683# 114 Neb. 309*
2/ State v. Kilgore State Bank (1925), 205 N.W. 297, 113 Neb. 772.
3/ Nebraska National Bank of Hastings v. Bruning (1926), 209 N.W.
510, 114 Neb. 719*
4/ E.g., State v. Farmers State Bank of Winside (1924), 199 N.W.
812, 112 Neb. 380j State v. Gross State Bank of Gross, 202 N.W. 460; 113 Neb.
119; State v. Farmers State Bank of Bayard, 203 N.W. 572, 113 Neb. 3^*
2/ Imas v. Farmers' State Bank of Decatur (1917), 165 N.W. 145,
101 Neb. 778; State v. Security State Bank of Eddyville (1927)# 2l6 N.W. 169#
ll6 Neb. 165 .
6/ State v. Banking House of A. Castetter, Blair (1923), 194 N.W.
784, 110 Neb. 564.
7/ State v. Rolling (1924), 199 N.W. 839, 112 Neb. 474; State v.
Wayne County Bank of Sholes (1924), 201 N.W. 907# 112 Neb. 792.
-7 -
a deposit made with a collateral agreement with a third party, unknown to the
depositor, was protected "by the guaranty fund, but a deposit with a collateral
1
agreement for the benefit of the depositor was not so protected.
/
Also,
clearance of checks at par by a correspondent bank against an account on
which it paid interest at the maximum legal rate did not constitute additional
2/
interest nor deprive the deposit of protection by the guaranty fund.
Where a county treasurer had deposited funds in excess of the amount
permitted in a single bank
(50 percent of the paid-up capital of the bank),
it
the court held that the entire deposit was protected by the guaranty fund»
In another case the court held that a surety company which had paid its
liability on a bond covering deposits of a county treasurer in excess of the
limitation, taking an assignment of the rights and remedies of the treasurer,
was entitled to payment out of the guaranty fundT
Unpaid taxes of a failed
bank that were not settled by the receiver were ordered paid from the guaranty
5/
fund, inasmuch as the tax lien had priority over depositors’ claims.
Assessments. Assessments for meeting the cost of deposit guaranty
were levied upon the banks on the basis of total average daily deposits
exclusive of public money otherwise secured.
T/
116 Neb. 852;
118 Neb. 7^3.
2/
118 Neb. 65o.
3/
112 Neb. 126.
of the court.
4/
!>/
ik o .
Semi-annual reports of such
State v. Citizens’ State" Bank of Chadron (1928), 219 N.W. 188,
State v. Farmers’ State Bank, Erickson (1929)# 226 N.W. 332,
State v. Nebraska State Bank of Harvard (1929)# 225 N.W. 778,
State v. Peoples State Bank of Anselmo (1924), 198 N.W. 1018,
This was a reversal, upon rehearing, of the original opinion
State v. State Bank of Gering (1925)# 206 N.W. 758, 114 Neb. 213«
State v. American State Bank of Lincoln, 209 N.W. 621, 114 Neb.
-8 -
deposits were required on the first of June and the first of December of each
year, with assessments levied on July 1 and January 1.
annual assessments were at the rate of one-fourth of
The first four semi-
1/
1 percent.
The
succeeding regular semi-annual assessments were at the rate of one-twentieth
of 1 percent.
New banks were to pay b percent of their capital stock into
a credit fund, together with a further assessment to a "just and equitable
sum11, arranged so that the first two semi-annual assessments, plus the
2/
credit fund, would amount to not less than 1 percent of average daily deposits.
The 1911 amendments provided that the regular semi-annual assessments of
one-twentieth of 1 percent of the average daily deposits should cease when
the fund reached 1 l/2 percent of such deposits, to be renewed when the fund
became depleted below 1 percent.
Special assessments were authorized if the fund should be reduced
below 1 percent of total average daily deposits (one-half of 1 percent during
the first year of operation of the fund).
The special assessments were not
to exceed 1 percent of average daily deposits in any one year. In 1923 an
amendment provided that special assessments subsequent to that year should not
exceed one-half of 1 percent of average daily deposits in any one year. No
provision was made for the deposit of bonds or other security as a guaranty
for the payment of assessments.
I/ Under the ^mended law of 1911# these were levied in July 1911,
January and June 1912, and January 1913»
2/ From April 4, 1919# to February 25# 1921# a different provision
was in force. This required a new bank, within two years after it had opened
for business, to pay 1 percent of its average daily deposits, as shown by its
last two semi-annual statements.
-9Administration and custody of the fund. The administration of
the guaranty fund was placed in the hands of a State Banking Board, composed
of the Governor as chairman, the Auditor of Public Accounts, and the Attorney
General.
The State Banking Board was also responsible for the examination
of banks and other aspects of bank supervision.
In 1919 a Department of
Trade and Commerce was organized, with a Secretary appointed by the Governor.
Administration of the banking laws was placed in that department, and handled
as a Bureau of Banking under the Secretary of the department.
Dissatisfaction with the administration of the guaranty fund
resulted in the creation in 1923 of a Guarantee Fund Commission, composed
of the Secretary of the Department of Trade and Commerce as chairman, and
seven other members appointed by the Governor from among panels of three
persons each, recommended by representatives of the banks in seven regions
of the State. Each person nominated on the panels was required to have
been an executive officer of a State bank for five years. Another change
in the administration of the fund was made in 1929 when the Guarantee Fund
Commission was abolished, administration of the fund reverted to the
Department of Trade and Commerce, and the position of Bank Commissioner was
created.
No part of the assessments was collected at the time they were
levied. The assessments were kept in the banks assessed and credited to
the account of the Secretary of the State Banking Board (in 1919# the
Department of Trade and Commerce; and in 1923# the Guarantee Fund Commission)
in the form of deposits subject to call ’ey draft. The law also provided
that funds received by the State Banking Board (or Department of Trade and
-1 0 -
Commerce or Guarantee Fund. Commission) from the liquidation of hanks which
had failed and the deposit liabilities of which had been paid by the guaranty
fund should be deposited in solvent banks in proportion to the guaranty fund
assessments levied on those banks.
♦
Banks going into voluntary liquidation or changing to a national
bank charter were required to pay to the Secretary of the State Banking
Board any assessments which had been levied upon them but had not been
called for by the Board. These funds were to be deposited in any bank
designated by the Secretary of the State Banking Board.
In 1919 such
funds were ordered held in a special reserve of the guaranty fund which
could not be used until the fund itself was depleted but were to be used
before a special assessment was levied; and the State Treasurer was
authorized to invest the special reserve in certain types of bonds, the
interest being added to the special reserve. Two years later an amendment
provided that the special reserve should be drawn against along with calls
upon the operating banks for payments from their parts of the guaranty fund,
with any balance remaining after three years from date of surrender of
authority to transact a banking business to be refunded to the stockholders
of the bank or their representatives.
Indebtedness of the guaranty fund. The original law contained no
provision against the contingency that the regular and special assessments
authorized by the law might be inadequate to pay all of the deposits in
closed banks.
be borrowed.
In 1923 an indirect method was devised by which funds could
The receiver of a failed bank could borrow money on a "receiver's
certificate" at a rate of interest to be fixed by the court supervising the
-1 1 -
receivership.
In the case of a failed bank the depositors of which had
been paid from the proceeds of a draft on the guaranty fund, the amount
of the receiver1s certificate could not exceed the estimated market value
of the assets remaining in the receivership and the money thus borrowed
was paid over to the guaranty fund.
In the case of a failed bank the depositors
of which had not yet been paid by the guaranty fund, the amount of the
receiver*s certificate could not exceed the amount needed (in addition to
available cash) to pay the depositors.
In either case the debt thus incurred
was to be paid so far as possible from the proceeds of liquidation of the
assets of the bank, and the guaranty fund was responsible for the payment of
any such certificates still unpaid upon completion of liquidation of the bank.
All receivers1 certificates were to be registered by the Secretary of the
Department of Trade and Commerce and were required to be paid by the guaranty
fund in the order of registration.
Method of paying depositors and of liquidating failed banks. The
State Banking Board, or Department of Trade and Commerce, was authorized to
take possession of any bank for a sufficient length of time to make a
thorough examination of its affairs, and if found insolvent, until a receiver
was appointed*
The insolvency of a bank was reported by the State Banking
Board to the Attorney General, who applied to the district court of the
county in which the bank was located for appointment of a receiver or, in
the absence of judge or judges thereof, to any judge of the State Supreme
Court.
The district court held jurisdiction over the receivership.
The depositors in a bank placed in receivership were to be paid
-1 2 -
promptly.
The amount necessary to pay the depositors, in addition to
available cash from the assets of the bank, was determined by the court
having jurisdiction over the receivership, collected from the guaranteed
banks by the State Banking Board, or Department of Trade and Commerce, and
paid to the receiver of the failed bank for distribution to depositors.
amendment in
An
1923 provided that holders of certificates of deposit were not
to be paid until their maturity.
The law provided that depositors* claims in a failed bank were
to have priority over all other claims, except taxes, and that the guaranty
fund was to be subrogated to the rights of depositors paid from the fund.
After 1923 receivers' certificates representing borrowings by the receiver
underwritten by the guaranty fund, had priority over the guaranty fund with
respect to payments from the proceeds of liquidation of the assets of the bank.
Stockholders of an insolvent bank had the right, while a bank was
in charge of an examiner or of a receiver, to restore the bank's credit,
capital, and reserves, to repay any advances made by the guaranty fund, and
to reopen the bank with the permission of the Department of Trade and Commerce.
In 1923 an amendment to the law provided
that the officers, stockholders,
or owners of an insolvent bank could furnish to the Department of Trade and
Commerce a bond sufficient to assure full settlement of all the liabilities
of the bank within a stated time, and then proceed with the liquidation of
the bank.
This made it possible for the owners to reduce the cost of a
receivership and thus to reduce the amount of assessment on account of
double liability, in cases where collection of double liability from stock-
-13holders provided sufficient funds to pay all of the liabilities of the
bank.
The 1923 amendments also provided alternative methods of handling
closed banks, designed to permit prompt reopening and to keep as many banks
operating as possible.
One of these alternatives was sale by the receiver
of all the assets of the bank to new stockholders, with the approval of the
Guarantee Fund Commission and under the direction of the court, with the
receiver authorized to draw on the guaranty fund to meet any deficiency
after the sale to meet claims payable from the guaranty fund. This procedure
was prohibited in case the majority owners of the capital stock, whose acts
did not show criminal liability, objected and showed the court that the
bank could be made solvent within one year.
In 1925, sale of assets in this
manner to new stockholders was permitted without actual payment of the
deficiency by the guaranty fund by permitting the reorganized bank to hold
receivers* certificates as bills receivable in an amount approved by the
Department of Trade and Commerce.
The second method for handling closed banks, adopted in 1923#
was a provision that the Department of Trade and Commerce, after taking
possession of a bank, could turn it over to the Guarantee Fund Commission
to operate as a going concern, with the consent and assignment of the owners
of a majority of the capital stock. A "bankers conservation fund," described
below, was established to make loans to banks operated by the Commission.
A bank operated by the Guarantee Fund Commission could be closed at any
time either by the Commission or by the Department of Trade and Commerce.
-14The 1923 law placed the liquidation of closed banks which could
not be reoper.ed in any of these ways in the hands of the Guarantee Fund
Commission.
This was done by a provision that the Department of Trade
and Commerce should ask the Attorney General to apply to the District Court
for an order directing the Department to take charge of the bank and wind
up its affairs, and that the bank should then be liquidated by a receiver
appointed by the Guarantee Fund Commission. The same act provided that
receiverships pending at the time the act became effective should, after
four months, be handled in the same way.
Supervision of the receivership
remained under the District Court.
One more provision of the 1923 amendments designed to provide more
efficient liquidation should be noted. At the request of the Department of
Trade and Commerce, the court with jurisdiction over the liquidation could
order all or part of the assets to be sold, with the Department of Trade and
Commerce permitted to bid. In case the Department was the highest bidder,
the assets of the bank were turned over to the Guarantee Fund Commission for
liquidation, the proceeds thereof being used to reimburse the guaranty fund
for the payments it made to the depositors.
This procedure made it possible
to eliminate the maintenance of liquidating agents for each of the various
closed banks until all assets were disposed of, and enabled the Guarantee
Fund Commission to consolidate the process of disposition of the assets of the
various closed banks.
In 1929# when the Guarantee Fund Commission was abolished, the
District Courts were required to appoint the Secretary of the Department
-15of Trade and Commerce as receiver for all failed banks, thus concentrating
the handling of the affairs of closed banks in that Department.
Bankers conservation fund. The amendments in 1923 provided for
a "bankers conservation fund" for use in preventing the closing of banks
and conserving the guaranty fund. Assessments for this fund were authorised
at not more than one-fourth of 1 percent of average daily deposits in any
year with a maximum fund at any time of one-third of 1 percent of average
daily deposits. The bankers conservation fund was used by the Guarantee
Fund Commission to make "deposit" in banks operated by the Commission.
The
fund remained the property of the contributing banks, to be carried on their
books as an asset until repaid or charged off.
When a bank operated by the
Commission was placed in receivership a deposit from the bankers conservation
fund had the same priority as other deposits.
Expenses of administration. No provision was made in the original
deposit guaranty law regarding the expense of administering the law.
Such
expenses were part of the cost of administering the general banking code by
the State Banking Board, and were met by appropriations from the general
fund of the State. Operating banks were assessed examination fees designed
to meet the cost of bank supervision.
In 1923, when the Guarantee Fund Commission was created, provision
was made for an administrative fund not exceeding $15,000 in any one year,
to be collected by an assessment on all State banks on the basis of average
daily deposits at the time of the last semi-annual statement of the banks.
This assessment for the administrative fund was collected through drafts
drawn on the banks by the Secretary of the Department of Trade and Commerce,
and was then transmitted to the Secretary of the Guarantee Fund Commission.
- l 6-
Closed banks were assessed by the State Banking Board, or Depart
ment of Trade and Commerce, to meet the cost of receivership, with minimum
and maximum amounts per day specified by the law.
SUPERVISION AND REGULATION OF GUARANTEED BANKS
State banks in Nebraska had been operating under the supervision
of a State Banking Board and a State Bank Examiner for approximately twenty
years prior to enactment of the deposit guaranty law. At the time of enact
ment of the deposit guaranty law the banking code was revised.
Supervisory authority. General supervision and control of banks
and banking under the laws of the State was entrusted to the State Banking
Board, composed of the Governor as ex officio chairman, the Auditor of Public
Accounts, and the Attorney General. The Governor appointed a Secretary of the
State Banking Board, who must have had at least three years’ practical
experience in actual banking. A suitable number of bank examiners, who
were also required to have three years' experience in banking, were appointed
by the Governor. No member of the examining force was permitted to examine
the affairs of a bank in which he had a personal interest, or of which he
had been an officer or employee within one year of his appointment as
examiner.
In 1919 supervision of banks was transferred to the Department of
Trade and Commerce, with a Secretary appointed by the Governor with the
advice and consent of the Senate as executive officer of the Department.
Examination and supervision of operating banks remained directly in charge
of the Secretary of the Department of Trade and Commerce until 1929# when
-17the office of Bank Commissioner was created. The Bank Commissioner, under
the executive direction of the Secretary of the Department, was placed in
charge of administration of the banking laws pertaining to operating banks.
The Guarantee Fund Commission, which was created in 1923 and
abolished in 1929# had no duties with respect to examination and supervision
of regularly operating banks.
The duties of the Guarantee Fund Commission
were confined to the handling of suspended banks, including operation of
banks taken over by the Commission, disbursements from the guaranty fund,
and liquidation of assets of failed banks placed in receivership.
Supervisory powers. The supervisory powers of the State Banking
Board, at the time of adoption of deposit guaranty, related chiefly to
bank examinations, and to requests for appointment of a receiver.
Two
examinations each year were required, and additional examinations could be
made at any time. Fees for examinations were specified in the law, ranging
from $15 to $50 for each examination, but not more than two fees in a year,
payable into the general fund of the State. Fees were increased in 1919
and 1921. In the latter year the minimum fee for each examination was
$25, and the maximum $125 plus one cent per thousand dollars of resources
in excess of five million dollars.
No bank could open without the authorization of the State Banking
Board, but the Board was required to issue such authorization if the bank
had been organized in the prescribed manner.
The State Banking Board was
authorized to require any bank to restore impaired capital or reserves;
it was not given power to order removal of undesirable or illegal assets,
or the removal of officers, employees, or directors.
-1 8 -
A&ditional powers were conferred on the supervisory authority by
later amendments, particularly in 1919 and 1921.
All executive officers of
banks were required to be licensed by the Department of Trade and Commerce.
Such officers were required to be of good moral character, known integrity,
business experience and responsibility, and capable of conducting a bank on
sound banking principles. Bank officers at the time this provision went into
effect were deemed to have a three months* license subject to revocation
by the Department.
In the same year the Legislature and Governor approved
a law making the promotion of public necessity, convenience, and advantage
a condition for the granting of a bank charter. However, this provision
was suspended by a referendum petition and later defeated by a vote of the
1/
people.
The supervisory powers of the State Banking Board from 1911 to
1919# and of the Department of Trade and Commerce from 1919 "to 1929# are
summarized in Table 1.
Supervisory experience. The Secretary of the State Banking Board
when the deposit guaranty law went into effect, 3dward Royse, had already
held that office for several years, and remained until his death in 1917*
Contemporary commentators regarded his administration of the office highly
and considered this to have been an important factor in the small number
2/
of failures during that time.
Thornton Cooke, in one of his articles
l/ Compiled Statutes of Nebraska, 1922, section 7997# and Final
Report of the Banking Investigation, p. 7* The Final Report of the Banking
Investigation also indicates that the licensing provision was reversed by
referendum, but this is not supported by other sources of information.
2/ From 1903 to 1917# inclusive, there were five State banks placed
in receivership, one each in 1903# 1904, 1907# 1914, and 1916*
-19Table
1.
SUPERVISORY POWERS OF STATE BANKING BOARD, AND OF DEPARTMENT
OF TRADE AND COMMERCE, IN NEBRASKA, 1911-1929
Item
Organization of banks;
Opening of new banks
Consolidation of banks
Examinations and reports of
condition:
Frequency of examinations 2/
Powers l/
Board (in 1919, Department) to issue certificate
and charter upon approval of bank*s organization
statement and certification of paid-in capital,
if satisfied that the applicants are of integrity
and responsibility; and in 1921 that public
necessity, convenience and advantage will be
promoted.
To be approved by Board, or Department.
Twice a year, and any additional deemed
necessary or proper by Board. In 1919# at
discretion of Department..
Scope of examinations
A thorough examination.
Reports of condition
Reports of assets and liabilities at least
four times a year, in 1919 on form prescribed
by Department; and any special reports
requested or required.
Bank management:
Removal of undesirable assets
or discontinuance of undesirable
practices
No specific provision.
Impairment or deficiency of
capital or reserves
Board (in 1919# Department) to require
impairment of capital or reserves below
legal minimum to be made good within a
specified time.
Removal of bank officers,
directors, or employees
No specific provision. In 1921, executive
officers to be persons of good moral character,
known integrity, business experience and
responsibility, and capable of conducting
affairs of a bank on sound banking principles;
and ai1 executive officers to be licensed by
the Department of Trade and Commerce, with
existing officers to have a 3-months license
subject to revocation. Department empowered
to revoke license of an executive officer of
a bank conducting its business in an unsafe or
unauthorized manner or endangering the interests
of the stockholders or depositors.
-2 0 -
Table 1.
SUPERVISORY POWERS OF STATE BANKING BOARD, AND OF DEPARTMENT
OF TRADE AND COMMERCE, IN NEBRASKA, 1911-1929 - continued
Item
Taking possession or closing a bank;
Take possession for examination
Request court to appoint receiver
Powers
Examiner on direction of Board, (in 1919#
Department) authorized to take possession
of any bank, and if found insolvent, or
conducting business in an unsafe or unau
thorised manner, or endangering the interests
of depositors, to retain possession until
appointment of receiver.
Whenever from an examination or report it
appears that capital is impaired, bank is
conducting business in an unsafe jr unau
thorized manner, or endangering the interests
of depositors, or (in 1919) fails to make
required reports or statements or to comply
with all provisions of the banking law.
Also, if affairs placed by bank in hands
of Board (or Department).
Take possession and place bank in
In 1923 Department to take possession under
charge of Guarantee Fund Commission any of foregoing conditions, or if officers
or employees refuse to submit books or affairs
to an examiner, or an officer refuses to be
examined under oath, or neglects or refuses
to observe any order of the Department, or
it is considered unsafe and inexpedient for
bank to continue business. After taking
possession, bank to be placed in charge of
Guarantee Fund Commission.
Handling of closed banks: 3/
Return to owners
Liquidation
Upon investigation and finding by Board (or
Department) that bank’s credit and funds
are in all respects restored, law has oeen
complied with, and any indebtedness to
Guaranty Fund repaid with interest.
Unless returned to owners, to be liquidated
by receiver appointed by Court; assets to be
sold on terms approved by Court. In 1923#
Court to direct the Guarantee Fund Commission
to name receiver. In 1919# Department of
Trade and Commerce may turn bank over to
owners for liquidation upon presentation of
satisfactory bond by an incorporated surety
company, with such liquidation process subject
to review by Department and if not satisfactory
appointment of receiver.
-2 1 -
Footnotes to Table 1.
l/ As at the beginning of the deposit guaranty system (i.e., as given in the
1909 law or amendment in 1911) with amendments during the period of operation of the
system, except those adopted less than a year prior to the termination of deposit
guaranty on March 18, 1930» The supervisory authority until 1919# was the State
Banking Board, referred to as the Board; from then until I929, the Department of
Trade and Commerce, referred to as the Department, with its Secretary as executive
officer.
2/ In 1915# examination by Federal Reserve of State member banks acceptable at
discretion of State Banking Board in lieu of State requirements.
3/ Excluding the handling of closed banks by the Guarantee Fund Commission after
its-creation in 1923*
-22on deposit guaranty, commented as follows, quoting first from a resident of
Nebraska:
"In Nebraska," writes Mr. E. R. Gurney of Fremont, a keen observer
"...we have had a capable and vigorous administration of our State
Banking Department for something like fifteen years past. Our banks,
therefore, are sound from the standpoint of assets and also from the
influence of supervision."...
What Mr. Gurney says of the Nebraska Banking Department is ...
true. The Secretary of the Board, Mr. Royse, has done such excellent
work that the changing state administrations of ten years have wisely
kept him continuously in office, l/
It is to be observed ... that under the administration of the
Nebraska banking department the promise to pay depositors immediately
on failure seems not to have caused reckless banking. 2/
Subsequent to 1917# there was less continuity in the headship of
the supervisory office. Five persons held the office during the 13 years,
3/
serving from two to four years each.
There was also less continuity in
the services of bank examiners.
When the State Banking Board was abolished,
and the Department of Trade and Commerce established, there was a complete
y
turnover of examiners.
As in other States with deposit insurance, the examining load was
heavy.
For a number of years, this was an increasingly serious situation
in Nebraska because of a large increase in the number of banks with no
expansion of the examining force.
In 1911 the Board had nine examiners
and this number remained unchanged until 1919# while the number of banks
i f Thornton Cooke, "Four More Years of Deposit Guaranty," Quarterly
Journal of~Economics, XXVIII (Nov. 1913)# pp. 99-100.
2/ Ibid., p. 104.
3/ As indicated by the names of persons signing the biennial reports
of the department.
kf None of the names of examiners in the last report of the Secretary
of the State Banking Board (for 1918) appears in the first report of the
Department of Trade and Commerce (for 1919-1920).
-23increased by 40 percent.
With two examinations a year of each bank, each
examiner was apparently required to make about
the beginning of deposit guaranty, and over
decade.
150 examinations a year at
200 a year by the end of the
In 1919 the requirement of two examinations a year was removed,
and during the succeeding years the number of examiners was increased to
14 in 1927# while the number of banks reached a peak in 1920.
the number of banks per examiner declined from over
Consequently,
100 to about 60.
The salary of the Secretary of the State Banking Board from 1909
to 1919 was $3*000 and that of examiners $2,000.
Appropriations for the
banking department for this period were about $30,000 per year, or from
about $50 to about $30 per bank.
With establishment of the Department of
Trade and Commerce in 1919, the salary of the Secretary was $5,000.
of examiners, which were fixed by the Governor, are not available.
Salaries
Members
of the Guarantee Fund Commission, from 1923 to 1929# were on a per diem basis
for time spent on the work of the Commission.
Appropriations for the Depart
ment of Trade and Commerce increased from about $60,000 in 1921 to about
$95#000 in
1928: in addition from 1923 to 1928 appropriations for expenses
of the Guarantee Fund Commission were $15,000 per year.
In addition to enlarged appropriations after establishment of the
Department of Trade and Commerce, more powerful supervisory tools were avail
able.
The requirement, in 1921, for the licensing of executive officers of
banks was of great potential importance and helped to strengthen supervision
for a time.
The so-called license law passed by the legislature of 1921,
has done much to remedy the situation. Prior to that time the
department had no authority to remove a bank official. The only
-2 4 -
remedy was to close the bank if it could be shown to be insolvent. With
this licensing law the department can, and has in many instances, removed
an executive officer of a bank who was not properly qualified to perform
his duties. 1/
Nevertheless, the quality of bank sjpervision appears to have continued to
decline.
The retiring Governor of the State in 1929 stated that two weeks
after he assumed office in 1925 the Secretary of Trade and Commerce gave him
a list of 123 banks that were hopelessly insolvent and should have been closed
long before, and an additional list of 92 banks with the report that nothing
2/
short of a miracle could save them.
Shortly after repeal of the applicability
of deposit guaranty in 1930* the Bank Commissioner commented as follows:
A supervision which permits banks to operate as going institutions
until their accumulated losses exceed their capital stocks by 400 to
600 percent can not be defended. It must be replaced by something
better if Nebraska is to maintain a system of State banks...
The banking department has been charged with suddenly shifting
frcm one extreme policy of slackness in its supervision, to an
opposite extreme of rigid severity. This charge is not denied...3/
The Bank Commissioner attributed this change in the rigors of supervision to
the revision of the banking laws made in April 1929# but this explanation does
not appear to be adequate.
The previous powers with respect to capital impair
ment, illegal actions of bank officials (for which there were criminal penalties,
fines, and imprisonment, specified in the banking code), and revocation of
licenses of executive officers, were adequate, if properly enforced, to have
prevented the deterioration described by the Commissioner.
‘
I/ C. H. Randall, "Facts and Fallacies on the Guaranty Law," address
as retiring president before the 1922 convention of the Nebraska Bankers»
Association, The Northwestern Banker, Vol. 27 (November 1922), p. 72.
2/ Message of the retiring Governor, Nebraska House Journal,
Forty-fifth Session, 1929# P* 47.
37 Talk by George W. Woods, Bank Commissioner, before Group I of the
Nebraska Bankers* Association at Lincoln, May 18, 1930, as reported in the
Commercial and Financial Chronicle, May 31, 1930.
-25Statutory limitations on bank operations. The principal statutory
limitations on hanking operations, tinder the banking law at the time the
insurance system went into effect and during its operation up to 1929* are
summarized in Table 2. Some of the statutory limitations on bank operations
which have been found helpful in other States were not a part of the banking
code of Nebraska during this period.
While loans to officers and employees
were prohibited, until 1925 no provision covered loans to corporations con
trolled by an officer of a bank. No maximum limit was placed on loans secured
by real estate. There was no limitation on the amount of deposits relative to
capital, as was the case in seme of the other States with systems of deposit
insurance.
In general, penalties and sanctions other than closing a bank,
or prosecution of individual bank officials through the offices of district
and state attorneys, were not available to the State Banking Board (or Secretary
of the Department of Trade and Commerce). As in other States, the drastic
procedure of closing a bank was used sparingly, and prosecution of bank
officials under criminal proceedings for irregularities disclosed by bank
examinations was not in practice an effective procedure.
CLOSING OF THE GUARANTY FUND
From the beginning of deposit insurance in Nebraska in 1911 to
the end of 1919 only two State banks failed.
In 1920 there were five failures.
With the depression of 1921 and continued adverse conditions in agriculture,
failures became more numerous, with 25 placed in receivership in 1921 and 22
in the following year. By the end of 1927 about 155 other insolvent banks
had been taken over for operation by the Guaranty Fund Commission or had been
placed in receivership. About the middle of the 1920’s, after the maximum
assessment rate had been reduced in 1923, it became necessary to make use of
-26Table 2 .
STATUTORY LIMITATIONS ON BANK OPERATIONS IN NEBRASKA, 1911-1929
Item
Responsibility of officers, directors,
and stockholders:
Examination of bank
Provision of law l/
Directors to make at least twice each year
a thorough examination of the books, records,
funds and securities to be recorded in detail
and copy forwarded to Secretary of State
Banking Board (in 1919# Department of Trade
and Commerce).
Losses resulting from loans
made in violation of legal
limitations
Officer or employee knowingly violating such
limitations liable (in 1919# under his bond)
for any resulting loss. In 1923 every di
rector participating in or knowingly assent
ing to such violation to be liable for
damages sustained by the bank, shareholders,
or any other person.
Liability of stockholders
Usual double liability.
Bonding of officers and
employees
Board of directors may require cashier and
other officers handling funds to give bond.
Limitations on loans and investments:
Loans to bank examiners
In 1925 loan to a person connected with
Bureau of Banking or an employee of Guarantee
Fund Commission prohibited.
Loans to officers and employees
Prohibited. In 1925# loan to a corporation
of which an officer of the bank is a member
to be approved by Board of Directors.
Loans to directors
Must be approved by Board of Directors.
Loans to stockholders
Aggregate amount limited to 50 percent of
paid-up capital and surplus.
Maximum to single borrowers
(not applicable to discount of
bills of exchange or of com
mercial paper owned by negoti
ator)
Twenty percent of paid-up capital and surplus.
Maximum secured by real estate
No provision.
When reserve is deficient
New loans or discounts prohibited.
-27Table 2 .
STATUTORY LIMITATIONS ON BANK OPERATIONS IN NEBRASKA, 1911-1929
continued
Item
Limitations on loans and investments continued;
Maximum total loans and investments
Secured by own capital stock
Limitations on ownership of real
estate and stocks;
Maximum in banking house and
equipment
Provision of law
Eight times, amended in 1913 to ten times
and in 1919 to fifteen times, capital and
surplus.
Prohibited unless necessary to prevent loss
on debt previously contracted.
One-third, amended in 1919 to one-half, of
paid-up capital.
Other real estate
Prohibited, except acquisition for collection
of debt, with maximum of 50 percent of paid-up
capital (in 1919* 75 percent).
Corporate stocks
Prohibited, except to prevent loss on debt
previously contracted, with maximum of 10
percent of paid-up capital. In 1915 owner
ship of stock in Federal Reserve bank pei»mitted.
Time limit on ownership of
assets acquired by collection
of debt
Five years for real estate, six months for
corporate stock.
Limitations relating to deposits:
Maximum amount of deposits
No provision.
Maximum rate of interest on
deposits
Five percent; in 1925 (effective April 1,
1926), k percent.
Receipt of deposits when insolvent
Prohibited.
Required reserves;
Total required
15 percent of deposits for banks in places
under 25*000 population; 20 percent for
banks in cities over 25*000 population. 2/
In 1921, on savings deposits payable on
presentation of passbooks, 5 percent.
In cash 3/
For banks with 15 percent total reserve,
one-third; for banks with 20 percent total
reserve, two-fifths.
-
Table 2.
28-
STATUTORY LIMITATIONS ON BANK OPERATIONS IN NEBRASKA, 1911-1929
continued
Item
Required reserves - continued:
Permissible character of remainder
Limitation on borrowing:
Maximian
Provision of law
1911* balances due from other solvent banks.
Two-thirds of paid-up capital (modified in
1915 to full amount of paid-up capital and
surplus) except borrowing for payment of
depositors. Additional borrowing permitted
after 1923 with written consent of Secretary
of Department of Trade and Commerce.
Power of supervising
authority to require reduction
No provision.
Maximum value of assets pledgable
as security
No provision to 1923* when limited to 1 l/2
times amount of obligation except with
consent of Secretary of Department of Trade
and Commerce.
Limitations on payment of dividends:
Earnings to be carried to surplus
prior to dividend
One-fifth of earnings until surplus reaches
20 percent of paid-up capital.
When losses exceed or equal
undivided profits
Prohibited.
When reserve impaired
Prohibited.
When capital impaired
Prohibited.
Maximum
Net profits on hand less the losses and bad
debts.
Minium capital stock:
New banks
Other banks
Graduated by population of village, town or
city:
100 or less population
- $10,000)
100 to 500 population
- 15 ,000)
500 to 1,000 population
- 20,000) in 1921,
1.000 to 2,000 population
- 25*000) $25,000
2.000 to 5*000 population
- 35*000
bj
5.000 to 25*000 population - 50,000
25.000 to 100,000 population - 100,000
100.000 to more population - 200,000
No reduction below above amounts, and any
reduction to be approved by State Banking
Board (or Department of Trade and Ccaamerce).
-2 9 Footnotes t o Table 2 .
l/ As of the beginning of the deposit guaranty system, with amendments
during the period of operation of the system, except those adopted less than a
year prior to termination of deposit guaranty on March 18, 1930» Special provisions
for savings banks, or for cooperative banks, are omitted.
2/ Not applicable after 1915 to banks complying with reserve requirements
of the Federal Reserve Act.
3 / In 1919, two-fifths of the cash reserve was permitted to be in United
States Government bonds, reduced in 1925 to one-fifth.
bj In 1923# effective until Jan. 1, 1925# in places of less than 1,000
inhabitants, if no other bank was available, $15 ,000.
-3 0 -
the borrowing procedure established at that time. By 1927 difficulties
were encountered in marketing the receivers* certificates, which were guaranteed
by the Guarantee Fund Commission, because of the prospective insolvency of the
guaranty fund, and their issue was halted.
Under the changed condition of the guaranty fund, the attitude of
bankers toward the system rapidly altered, and they attempted to have the
law repealed or declared unconstitutional. Late in 1928 a suit was instituted
to enjoin collection of the special assessment of December 15 of that year,
renewing the contention that the guaranty law was unconstitutional, and
asking for a review and reversal of the decision made in 1911.
In April 1929
a district court acted favorably and granted an injunction prohibiting collection
of the assessment.
This made the law temporarily inoperative, pending an
appeal to the State Supreme Court.
The decision of that Court, rendered in
December 1929, dismissed the complaint of the bankers, held the law constitutional,
and dissolved the injunction.
y
The bankers then appealed to the United States
Supreme Court which heard the appeal early in 1931*
In the meantime, more banks had failed, the law had been extensively
revised and the Guarantee Fund Commission abolished in April 1929# and all the
banks it had been operating were placed in receivership except a few that
were reorganized and reopened.
At the same time another act authorized the
Governor to make a thorough investigation and audit of the business transactions
and activities since the beginning of 1919 of the Department of Trade and
17 Abie State Bank v. Weaver (1929)# 227 N.W. 922, 119 Neb. 153*
-3 1 -
Commerce and the Bureau of Banking, the Guarantee Fund Commission, and
receivers of State "banks.
In the next month the Legislature had voted to
repeal the deposit guaranty law, but the repeal act failed to receive the
Governor's approval.
In the Spring of 1930 a special session of the Legislature was held
to deal with the guaranty fund.
A preliminary report of the banking investigation
was prepared and submitted by the Governor in his message to the special
session.
On March l8, 1930, the legislature
lated to future failures.
repealed the law so far as it re- ^
To aid in paying existing claims against the fund,
the same act established a Depositors* Final Settlement Fund consisting of
the remaining balance of the guaranty fund and of receipts from annual assess
ments upon the banks for ten years of one-fifth of
deposits.
1 percent of average daily
An appropriation was made by the Legislature for the reimbursement
of deposits lost in the banks which had been operated by the Guarantee Fund
Commission, and a constitutional amendment was submitted to the people providing
for an appropriation of $8,000,000 to discharge the obligations of the deposit
guaranty fund.
It was hoped that collection of the assessments for 1928 and
1929 which had been held up by the injunction, the appropriation to be authorized
by constitutional amendment, and the assessments to be levied for the Depositors*
Final Settlement Fund would be sufficient to pay all claims in full.
In February 1931 the United States Supreme Court rendered its
decision on the appeal from the State Supreme Court decision of 1929 up
holding the constitutionality of the guaranty fund law.
In this decision, the
United States Supreme Court upheld its former decision of 1911 and the 1929
decision of the Nebraska Supreme Court that the guaranty law was constitutional.
-32However, in the course of the opinion, the United States Supreme Court noted
that the law was sustained as a police regulation, and that a police regulation,
though valid when made, may become, by reason of later events, arbitrary and
confiscatory in operation, and that the decision upholding the constitutionality
of the act would not preclude a subsequent suit for the purpose of testing, in
the light of later actual experience, the validity of assessments made there
under, alleged to be unreasonable and confiscatory, and hence repugnant to the
due process clause of the Fourteenth Amendment.
The c ->urt also took judicial
notice of the legislation of March 1930 which had altered the situation by
transferring the December 1928 and subsequent assessments under the former
guaranty law to the use of a Depositors’ Final Settlement Fund, and by limiting
future assessments.
Considering this reduction in the extent of the obligation
for future assessments, the Court declared itself unable to say that the modified
statute was confiscatory or other than a reasonable method of liquidating the
1/
guaranty plan.
The legislation of March 1930 for settling the claims on the deposit
guaranty fund was not successful.
The State Supreme Court held that the
appropriation for the reimbursement of deposits lost in banks which had been
2/
operated by the Guarantee Fund Commission was unconstitutional. The proposed
constitutional amendment authorizing an appropriation for payment of the
general obligations of the fund was rejected at the polls.
Further, in the
light of the opinion of the United States Supreme Court about the possibility
1/ Abie State Bank v. Bryan (1931), 51 S. Ct. 252, 282 U.S. 7&5>
75 L. Ed. £90. The opinion of the Court was delivered by Chief Justice Hughes.
However, it is perhaps worthy of note that Willis Van deVanter, who was one of
the judges of the United States Circuit Court which declared the original
Nebraska law unconstitutional, was a Justice of the United States Supreme Court
at the time of this decision, having been appointed after the hearings by that
court on the constitutionality of deposit guaranty laws in Oklahoma, Kansas,
and Nebraska.
2/ Weaver v. Koehn (1930), 231 N.W. 703# 120 Neb. 114.
-33that assessment under a law originally constitutional might become unreasonable
and confiscatory under changed conditions, the bankers brought another suit
contesting the validity of the assessment provisions of the March 1930 law.
This suit, after a favorable decision by a district court, was appealed and
heard by the State Supreme Court in 1932.
The State Supreme Court, in its decision
rendered in November of that year, held that the part of the
1930 law repealing
the application of the guaranty to future failures was constitutional, but that
the part of the act establishing the Depositors’ Final Settlement Fund lacked
the public purpose necessary to support it as an exercise of the police power,
and that it took the property of one person and gave it to another, thus
depriving the one of his property without due process of law.
Recognizing that
this would make the assessments from December 1928 to March 1930 valid under
the original act, the court ruled also on the contention that changed conditions
made those assessments confiscatory, noting that the failure of the United States
?
Supreme Court to find them so was because that court had been unable, in view
of the new legislation, to determine whether the assessments were confiscatory.
The reasoning and opinion of the State Supreme Court on this point is given
below.
The public purpose sufficient to support the constitutionality
of the depositors’ guaranty fund was the stabilization of commerce and
the creation of public confidence in the banks. It had a public purpose.
It was within the reasonable exercise of the police power...
...state banks ... challenge the constitutionality of the assess
ments levied under the provisions of the Depositors* Guaranty Fund
Law beginning with the special assessment of December 15, 1928...
for that by reason of changed conditions the regulatory act in its
operations has becon« confiscatory...
If under the facts it is confiscatory it is violative of the
Fourteenth Amendment to the Federal Constitution. If it is confiscatory,
then it can no longer be sustained as a constitutional legislative
enactment under the police power for a public purpose. If confiscatory,
- 34 -
the public advantage does not justify taking of private property
for what, in its purpose, is a private use.
In addition to the changed condition relating to changed
statutory enactments, there are facts and circumstances inherent
in the conditions of the banking business in this state since
December, 1928. These facts are established by the record.
It was a fact determined in 1928 that, due to the unprecedented
number of failures of state banks, the depositors" guaranty fund
was faced with a deficit of millions, and that it was impossible
to restore the solvency of the fund. The comparatively small
regular assessments had been levied and collected. In addition,
the larger and more oppressive special assessments have been
levied regularly for years, in the vain hope of restoring the
solvency of the fund. The banks were faced with an indefinite
continuance of these regular and special assessments, At the
same time, the public purpose which this legislation undoubtedly
had in the beginning was no longer served. From the condition of
the fund itself, instead of a stabilizer of the state banks, it
became a menace and a threat, sufficient to cause a great loss
of public confidence in the banks with subsequent loss of business
and earning power...
From any viewpoint from which we consider these assessments,
it is apparent that all public purpose has been abandoned in
relation thereto and that it now amounts to taking the property of
one class of citizens to pay another class in contravention of the
constitutional rights of the plaintiffs, l/
This decision stated in effect that the deposit guaranty plan
was constitutional as long as depositors were protected.
It became unconstitutional
when it had been clearly demonstrated that this public purpose was not ful
filled.
This decision was not specifically confirmed by the United States
Supreme Court, but was in effect approved by that Court by declining to
2/
review the case.
l/
124 Neb. 51.
Hubbell Bank v. Charles Vi. Bryan, Governor (1932), 245 N.W. 20,
2/ Bryan v. Hubbell Bank of Hubbell (1933)# 53 S. Ct. 785, 289 U.S.
753# 77 L. 3d. 1498.
-35'
The action of the United States Supreme Court, announced in May-
1933 # made impossible any collection by the guaranty fund of the disputed
assessments.
In the same month the Legislature of Nebraska repealed all
remaining portions of the deposit guaranty law.
The Department of Trade and
Commerce then proceeded to wind up the affairs of the fund.
Final payments
to depositors from the small remaining balance in the fund were made in July
1934.
NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number of participating banks. The number of State banks in
Nebraska, all of which participated in the deposit guaranty system, and the
number of national banks in the State, which did not participate, are given in
Table 3 for each year of operation of the deposit guaranty fund.
At the time the guaranty law went into effect, about 73 percent of
the banks operating in the State were operating under State law and therefore
became participants in the guaranty system.
During the next eight years, this
proportion steadily increased, due primarily to the conversion of national
banks to State banks, and reached 84 percent in 1919»
stable for the next eight years.
This percentage remained
During the remaining two years of the
guaranty system, the proportion operating under State law declined, falling
to
80 percent of the total number of operating banks at the end of 1929*
Deposits of participating and nonparticipating banks. The proportion
of total deposits in all operating banks held by the State banks was much
smaller, throughout the period of deposit guaranty, than the percentage of
number of banks.
The national banks were, on the average, considerably larger
banks than the State banks.
-36Table 3*
NUMBER OF OPERATING BANKS IN NEBRASKA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1912-1930# BY YEARS
Year
end l/
All banks
operating in
Nebraska
916
Participating
in deposit
guaranty 2/
669
Not partici
pating in de
posit guaranty
247
241
237
1911
1912
1913
1914
1915
965
694
728
983
i#007
803
1,031
1,110
839
1917
192
190
l#133
942
999
1#009
191
1916
1918
1919
1920
1921
1922
935
1,168
1#196
765
920
1#170
986
1,137
955
938
1928
1,118
1,101
1,072
1,043
1,012
882
726
1929
804
647
1923
1924
1925
1926
1927
928
218
204
189
187
184
182
180
173
903
169
160
855
157
156
157
883
Percentage
Participating
3/
73.0
74.2
75.^
77.8
79.7
81.4
82.9
83 .I
84.1
84.4
84.3
84.0
83.9
84.3
84.2
84.7
84.5
82.3
80.5
l7 Dec. 31 # or nearest available date. Call dates for State and
national banks are not identical in several years.
2/ All State banks, from annual reports of the Bureau of Banking.
For 1919# 1920, and 1921, some of these banks may not have been participants,
because of the provision of the 1919 law (removed in 1921) that new banks were
not required to participate until they had been operating two years. The only
information regarding nonparticipants is for Nov. 13# 1920, when 40 banks did
not show the item, "Depositors Guaranty Fund" in their statement as published
in the report of the Bureau of Banking. Two years later no bank emitted this
item.
3/ National banks, from annual reports of the Comptroller of the
Currency. —
-37At the beginning of deposit guaranty, about 40 percent of the bank
deposits in the State were held by State banks.
For a number of years this
percentage increased, reaching 59 percent in 1921# and remaining between 55
and 59 percent until 1928.
During the last two years of deposit guaranty,
the deposits in State banks declined relative to those in national banks, so
that by the end of 1929 only 4-7 percent of the deposits in the State were in
banks participating in the deposit guaranty system.
The deposits of partici
pating banks, all of which were insured, and those of nonparticipating banks
are given in Table 4 for each year of operation of the guaranty system.
Concentration of bank deposits. Table 5 shows the amounts of
deposits held on October 31# 1914, and June 30# 1927# by the State banks
in Nebraska grouped according to their deposits.
These years are chosen as
representative of the earlier and later parts of the period during which the
deposit guaranty system was in operation.
In 1914 the largest State bank in Nebraska held 1.1 percent, and in
1927 the largest bank held 2.3 percent, of the deposits in gill State banks.
The largest 10 banks held, on these dates, respectively, 7 and 9 percent of the
deposits in all State banks.
The concentration of deposits in a few of the
largest banks m s not so great in Nebraska as in Kansas and in Oklahoma during
periods of operation of guaranty deposit plans.
Failures of participating banks. During the 19 years of operation
of the deposit guaranty system in Nebraska,
because of financial difficulties.
360 participating banks closed
Only seven of these failures occurred
during the first half of the period of operation of the fund.
One of the
banks which closed was a bank which had previously suspended and had been
- 3 8 -
Table 4.
DEPOSITS IN OPERATING BANKS IN NEBRASKA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1912-1930, BY YEARS.
_______________________ (in thousands of dollars)______________________
Year
end 1 /
All banks
operating in
Nebraska
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
193,591
204,925
213,726
216,796
2to,870
3*1-2,671
419,232
477,761
513,211
432,113
387,641
433,992
430,220
484,897
Banks partici
pating in deposit
guaranty 2/
73,890
82,528
92,747
100,812
114,1jS8
165,528
223,499
259,875
278,769
255,067
216,478
1926
1487,291
470,090
1927
474,300
46l,646
238,754
239,985
271,529
281,547
275,552
274,525
252,460
436,850
191,658
1923
1924
1925
1928
1929
Banks not
participating
in deposit
guaranty 3/
119,701
122,397
120,979
115,984
126,382
177,143
195,733
217,886
234,4te
177,046
171,163
195,238
190,235
213,368
205,744
194,538
199,775
209,186
215,192
Percentage of
deposits in all
banks held by
participating banks
38.2
40.3
43.4
46.5
47.5
48.3
53.3
54.4
54.3
59-0
55-8
55.0
55.8
56.0
57.8
58.6
57*9
54.7
47.1
l7 Dec. 31# or nearest available date. Call dates for State and
national banks are not identical in several years.
2/ Deposits in all State banks, from annual reports of the Bureau of
Banking. Includes dividends unpaid. See note 2 to Table 3 regarding banks
that may not have been participants in 1919, 1920, and 1921. The 40 banks
omitting the item "Depositors Guaranty Fund" from their statements as of Nov.
13 , 1920, had deposits on that date of $3 ,336,000.
3/ Deposits in national banks, from annual reports of the Comptroller
of the Currency.
-39Table 5.
NUMBER AND DEPOSITS OF
BANKS IN NEBRASKA,
OCTOBER 31, 1914, AND JUNE 30, 1927
S T A T E
Banks grouped by amount of deposits
Number
Amount of
Percentage
Percentage
of
deposits
of number
of aggregate
banks
(thousands
of banks
deposits
_________ of dollars)_________________________
All State banks, October 31,
1914
Banks with deposits of —
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
760
93,420
100.0
100.0
387
303
64
5
l
22,684
45,783
50.9
39.9
24.3
Banks with deposits of —
£100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2 ,000,000
$2 ,000,000 to $5,000,000
Over $5,000,000
Largest bank
Largest 5 banks
Largest 10 banks
8.4
•7
.1
49.0
21.9
3.7
l.l
1.1
1,023
3,991
6,4l8
Largest bank
Largest 5 banks
Largest 10 banks
All State banks, June 30,1927
20,451
3,479
1,023
4.3
6.9
275,038
100.0
100.0
100
7,380
348
60,511
102,826
65,362
22,301
11.5
39.9
34.4
11.7
1.9
4.5
2.7
22.0
37..4
23.7
8.1
.1
2.3
872
300
102
17
4
1
10,398
6,260
3.9
6,260
16,658
6.1
24,853
9.0
2.3
-to-
reopened.
fund.
Of the closed banks, 317 entailed obligations on the guaranty
The other 43 were reopened without obligations on the fund.
The deposits
in the guaranteed banks closed because of financial difficulties amounted to
$85 million, of which $7 ¿4-million were deposits in the cases entailing
obligations on the guaranty fund.
The number and deposits of the banks closed each year, with ratios
to the number and deposits of operating banks at the beginning of the year,
are given ii. Tables 6 and J.
The average annual rate of failure, computed
at the number of banks which failed per 100 operating at the beginning of
each year, was 2.2.
However, as has been mentioned, nearly all of the failures
occurred during the latter half of the period of operation of the fund.
9g years that the fund was in operation prior to
For the
1921, the average annual rate
of failure was 0.1 per 100 operating banks, and the deposits in the closed
banks averaged $0.09 per $100 in operating banks.
For the remaining 9 years
of the system, the average annual rate of failure was 4.2 per 100 banks.
The
deposits of the closed banks, for this period, averaged $3*57 per year for
each $100 of deposits in operating banks.
The latter rate, for the entire
period of operation of the fund, was $2.25 per year for each $100 in operating
banks.
Failures by size of bank.
In Table
8 the size distribution of the
failed banks which entailed obligations on the guaranty fund is compared with
the average size distribution of operating banks.
The failures show very little
correlation with size of bank, except for a low failure rate among the largestsized banks.
The largest bank among the failures was the Security State Bank,
- 4 1 -
Table 6.
Total closed
Number
Per 10Ô
active
banks
Year or
period l/
360
Total
HUMBER OF STATE B A M S IN NEBRASKA CLOSED BECAUSE OF FINANCIAL
DIFFICULTIES, JULY 1, 1911, TO MARCH 18, 1930, BY YEARS
Reopened or affairs
closed without obli
gation on the guaranty
fund 3/
2.2 8/
135
Subtotals
July 1, 1911 to
Dec. 31 , 1920
7
.1
Jan. 1, 1921 to
March 18, 1930
353
4.2
1914
1
.1
—
1916
l
.1
—
1920
1921
1922
5
•5
2.6
26
18
2 .3
2 .3
1.9
39
4.2
23
22
1923
1924
1925
1926
1927
1928
1929
1930
Tf
36
4.0
4l
58
79
11
4.6
6.8
10.9
8.1 8/
Placed directly
in receivership 4/
_iw
7
^3
128
—«
1
1
__
1
—
—
4
34
2
Number 2/
Taken over for
operation by
Guarantee Fund
Commission 5/
182
Commission opera
ted banks placed
in receivership 6/
182
rr11"■’
w* mm
Total entailing
obligations on
the guaranty
fund 7 /
317
7
182
182
310
l
~
-
1
l
-
--
1
5
~»
....
22
12
7
8
7
l
__
10
10
-
5
25
22
15
13
20
22
22
46
37
9
8
25
31
29
4o
54
3
6
12
15
21
46
79
116
9
im 0 1915;
im c or 1917-1919«
1 m nr im r\
No failures occurred In 1911-1913,
2/ Tabulated from information regarding the individual banks in the biennial reports of the Department (Bureau) of Banking, reports
of special investigations ordered by the Legislature, schedules prepared for the Federal Reserve Committee on Branch, Group, and Chain Banking,
surviving records in the Department of Banking, and receivership records in custody of the library of Nebraska State University.
3/ Reopened, taken over, or liquidated. Includes 10 banks (2 in 1926 and 8 in 1929) which had been taken over by the Guaranty Fund
Commission. Of the 43 banks, 33 were reopened subsequent to April 30, 1929, when the Secretary of the Department of Trade and Commerce was authorized
to approve a reorganization plan of a failed bank to which owners of 65 percent of the deposits and unsecured liabilities had agreed.
4/ Three of these banks (1 placed in receivership in 1923, 1 in 1924, and 1 in 192a) were later reopened or taken over with a payment
from the guaranty fund.
5/ Excluding the 10 banks mentioned in note 3*
Î>/ In 1925 includes one bank reopened and another taken over with a payment from the guaranty fund.
7 / Banks placed in receivership directly plus Commission operated banks placed in receivership.
B/ Annual rates.
-42-
Table 7.
DEPOSITS OF STATE BANKS IK NEBRASKA CLOSED BECAUSE OF FINANCIAL
DIFFICULTIES, JULY 1, 1911, TO MARCH 10, 1930, BY YEARS
All banks closed
Amount (at date
per «plOO of
closed or taken
deposits in
over by Guaranty
active banks
Fund Commission)
Year or
period
Banks reopened or
affairs closed
without obligation
on the guaranty
fund 2/
Banks placed
directly in
receivership
Deposits of —
1/
Banks taken over
Commission oper
for operation by
ated banks placed
in receivership
Guarantee Fund
Commission
3/
Banks entailing
obligations on the
guaranty fund (at
date placed in
receivership)
"3/
$84,959,817
$2.25
1,258,257
.09
83,701,560
3.57
1914
122, 4lS
.13
-
122,4l8
—
—
122,4lS
1916
110,244
.10
-
110,244
—
—
110,244
1920
1921
1922
1 ,025,595
6,090,037
4,957,906
4,134,588
4,886,130
11 ,244,134
.37
2.39
— —
——
— -
1 ,025,595
6,o4l,4l6
4,757,562
2,417,549
1,545,812
5,153,851
8,458,402
3.01
11 ,825,928
4.29
4.87
Total
Subtotals
July 1, 1911 to
Dec. 31# 1920
Jan. 1, 1921, to
March 18, 1930
1923
1924
1925
1926
1927
1928
13#367,757
17,075,467
1 ,651,211
1929
1930
1.73
2.04
4.14
6.76
4.10 3/
------
1 0 , 699,7^
48,621
200,344
197,519
$25,556,8u 4
24,298,547
l#025,59?
6,o4l,4i6
4,757#5o2
1,574, 124
525,919
2 ,058,026
1,024, too
43,122
—
6,995#727
1 ,278,245
$35,932,301
—
1,258,257
« ...
823,472
9#056,824
372,966
$48,703,267
i40,703,267
35,932,301
------
2,560,464
4,162,692
9,186,108
7 #443,996
11 ,782,806
12,544,285
1 ,022,916
—
843,425
1 ,019,893
3 ,095,825
4,822,674
5,586,104
7,724,723
12,039,057
—
$61,489,105
1,250,257
60,230,848
5,847,080
5,629,226
7,724,723
19,835,304
1 ,278,245
For number' 'of banks in each group,' and sources of" data, see Table 6 and notes thereto.
Of the total deposits of these banks, .$8 ,812,583 were in 33 banks reopened after April 30# 1929 (see note 3 to Table 6).
Annual rate.
The difference between these aggregates represents deposits paid in excess of those received while the 182 banks were operated by
the Guarantee Fund Commission.
17
2/
3/
2.29
$10,699#746
-1)3Table
8.
SIZE DISTRIBUTION OF FAILED BANKS IN NEBRASKA ENTAILING
OBLIGATIONS ON THE GUARANTY FUND COMPARED WITH AVERAGE
SIZE DISTRIBUTION OF OPERATING BANKS
Number of banks
Average
Failed Average
number
banks annual
of opera
number of
ting banks
failed
banks per
100 active
banks l/
852
317
2.0
200
$100,000 or less
$100,000 to $250,000
366
214
$250,000 to $500,000
$500,000 to $1 ,000,000
6l
$1 ,000,000 to $2 ,000,0< » 9
$2,000,000 or more
2
74
142
73
27
1
2.0
2.1
1.8
2.3
.6
—
- -
Total
Deposits
Average
Failed
banks
deposits
of opera (in
ting
thou
banks (in sands)
thousands)
2
/
Average
annual
amount of
deposits in
failed banks
per $100 de
posits in
operating
banks 1/
$206,611
$74,262
$1.92
12,873
61,979
4,769
23,462
39,435
19,354
11,287
1,627
1.98
2.02
I.83
2.62
7,757
—
Banks with deposits of—
73,280
25,050
•77
-
17 Computed! from data in the foregoing columns and the length of time”"
the deposit guaranty system was in operation (18.7 years).
2/ For banks operated as "going concerns", deposits are as of the date
taken over"by the Guarantee Fund Commission.
-k k -
Omaha, with deposits of approximately $1,500,000.
No other bank with
deposits of more than $1 ,000,000 failed during the life of the guaranty
fund.
The Security State Bank was the seventh largest bank operating under
State law.
Deposits of this bank constituted 2 percent of the deposits of all
guaranteed banks which failed prior to repeal of the applicability of the
law.
Concentration of risk in large banks, and failure of these banks,
does not appear to have been an important factor in the insolvency of the
Nebraska guaranty fund.
However, there is evidence that the majority of
the large banks in the fund were not in good condition.
Of the six banks
larger than the Security State Bank, Omaha, three failed within eighteen
months after the repeal of the guaranty provisions of the law, and one
was absorbed prior to the close of deposit guaranty under conditions
indicating that the bank was about to fail.
The other two consolidated and
converted to a national bank at about the time the guaranty law was
repealed.
Comparison of failures with those in other States. In Table 9
bank failure rates, for both number and deposits, are shown for Nebraska,
for banks in contiguous States, and for the entire United States.
table covers the years
The
1912-1929, which includes the period of operation
of the Nebraska deposit guaranty system except for the last half of 1911
and the early part of 1930.
The failure rates in Nebraska were substantially
higher, both for national banks and State banks, than for the entire United
States.
For number of failures, the rate for state banks in Nebraska was
higher than in three, lower than in two, and the same as one of the contiguous
-4 5 -
Table 9*
ANNUAL BANK FAILURE RATES IN NEBRASKA, 1912-1929, COMPARED
WITH RATES IN CONTIGUOUS STATES AND IN THE UNITED STATES 1/
Failures per year per'
100 operating banks
State State National
and banks
banks
nat'l
banks
Deposits per year in' failed
banks per $100 in operating banks
State
and
nat*l
banks
State
banks
National
banks
Nebraska
2.0
2.3
0.9
$1.40
$2*25
$0.41
Six contiguous States
1.8
1.9
1.1
.92
1.29
.44
4.2
3.49
1.38
.31
.70
.54
4.48
1.86
3*1
1.3
2.3
3-7
2.5
1.5
.3
.3
.9
1.7
1.72
2.27
.15
.36
1.41
1.3
1.6
Jo
.30
.43
.15
South Dakota
Iowa
Missouri
Kansas
Colorado
Wyoming
Entire United States
3*9
2.0
1.1
1.1
1.8
2.1
1.2
1.63
.52
1*13
.95
.92
.02
l/ Tabulated from data from the following sources: reports of bank
commissioners in the various States; Willis, Banking Inquiry of 1925; annual
reports of the Comptroller of the Currency; Federal Reserve Committee on Branch,
Chain and Group Banking, "Changes in the Number and Size of Banks in the United
States, 1934-1941;" and Federal Reserve Bulletin, September and November, 1937*
-In
states; in terns of deposits, the rate for Nebraska was higher than in four,
and lower than in two of the contiguous States. Deposit guaranty systems
were in operation in two of the contiguous States, Kansas and South Dakota,
during most of the period covered "by this table. The failure rates in
Nebraska were higher than in Kansas, but lower than in South Dakota.
Causes of bank failures. In 1930 the legislature of Nebraska ordered
a special investigation and audit of failed banks in the State. She report
of this investigation contains a discussion of the causes of failure without
1/
making an attempt to estimate the number due to specific causes. An analysis
of the evidence collected by the investigation which was made by Mr. T. Bruce
Robb for the Department of Business Research of the University of Nebraska is
also without an estimate of the number of failures due to the various causes
2/
mentioned.
Relatively little is said in the report of the Banking Investigation
about theft, embezzlement, or defalcation on the part of bank officials. Such
overt acts were apparently not regarded as a major cause of failure in many
of the banks which failed during the period of operation of the guaranty fund.
More attention is given to dishonesty by the study of the Department of Business
Research of the University of Nebraska. A number of cases are cited of dis
honesty on the part of bank officials, shortages due to the abstractions of
cashiers, forged notes, and loans obtained on worthless paper, to which the
'j
following statement is added:
T/ A. C. Shallenberger, Final Report of the Banking Investigation,
pp. 6-9»
2/ T. Bruce Robb, State Bank Failures in Nebraska (1934)# pp. 27-28.
-47If space permitted the recital of such sordid banking
transactions, it would unfortunately be greatly extended. The
first impression one gets from this record is the complete
lack of any feeling of public responsibility for their actions
on the part of these bank managers.
Both the banking investigation and the Department of Business
Research placed great stress on speculation, loans to interests with which
bank officials were associated, and loans in excess of the legal limits.
The report of the Banking Investigation described the influence of these
elements as follows:
The World War inflated prices, both of land and other
property, to such an extent that a business boom developed
which swept many bankers, business men and even farmers into
a maelstrom of speculation. Standards of values and normal
basis of credit were completely lost sight of and sound busi
ness principles were forgotten...Land speculation, a most
dangerous economic disease for bankers to contract, became
epidemic either through loans on lands or by indirect purchases
by bank officers...
Millions of dollars of worthless loans encumbered the note
cases of the banks audited by this office. Very often more than
half of the notes in failed banks were found worthless because the
officers making them were speculators, not bankers.
The same aspect of the situation was described by Mr. Robb, in the report
of the Department of Business Research, as follows:
One of the great weaknesses of a decentralized system of
unit banks as developed in this country is the opportunity it
affords to men of affairs to enter the banking business and
use the community’s deposits to lubricate their private ven
tures. No man can successfully serve two masters, and the
spectacle of a banker in the role of a credit man making loans
to his own enterprises is grotesque. The period of rapid
growth in the number of banks was especially productive of
this type of banker. It was a period of rising prices and
speculative excesses, and the banking business was disgraced by
bankers who were using their institutions to finance their own
-k&-
mercantile operations, or the tenants on their own farms, or as
a dumping ground for the paper collected by their automobile
agencies or that growing out of their cattle transactions.
Almost without exception, the losses following in the train of
this kind of banking were appalling.
An excessive number of banks, inadequate earnings, and manage
ment by incompetent officials are also emphasized as important joint factors
in the widespread collapse of banks in Nebraska.
Incompetence may wreck a
bank with good earning power. However, incompetent management appears most
frequently when new banks are opened freely; and an excessive number of banks
in a locality in relation to the volume of business available in the locality
is a major factor in inadequate earnings. The report of the Banking Investiga
tion describes the influence of these factors in Nebraska as follows:
...hundreds of banks were chartered for which there was
no economic use and men permitted to operate them who, for want
of ability and honesty, have disgraced the business of banking.
Too many banks and too few bankers bred bankruptcy in the banking
business.
...The unsafe and unnecessary expansion in banking during
the boom period because of no limiting of charters led to an
extraordinary and dangerous increase in loans and credits.
W h e r e too many banks make competition ruinous, bad loans become
common because there are not enough safe borrowers to absorb
the funds that must be loaned to make a show of profit.
Mr. Robb, in reviewing the evidence collected by the banking investigation
makes similar statements regarding incompetent management and an excessive
number of banks.
It is not out purpose...in this section to consider cases where,
more often than not, bank officers were honest and well meaning,
but where either through indolence or stark ignorance of sound
banking practice they showed themselves grossly incompetent to
operate a bank. It would only be expected that where banks were
organized with such feverish haste as occurred between 1910 and
1920, many cases would come to light of men permitted to operate
banks who were utterly unfit to receive and loan other people’s
money.
-49Economic circumstances and rapid economic changes, particularly
the sharp reversal in prices of agricultural $xo ‘.ucts after the close of the
World ,7ar and the renewed decline in those prices which set in about 1926, were
also important elements in the large number of bank failures in Nebraska.
Nevertheless, the report of the banking investigation and the analysis by
the Department of Business Research of the University of Nebraska give only
a moderate stress to the decline in agricult■'oral prices.
This decline is
considered to be the occasion for bank failures, but speculation, loans to
bank officials and their interest, incompetent management, and an excessive
number of banks are emphasized as more fundamental causes.
A similar emphasis is indicated in the causes of failure of banks
which closed during the period 1921-1930# as reported in the schedules col1/
lected by the Federal Reserve Committee on Branch, Group and Chain Banking.
Out of 3^0 failures for which a primary cause of failure is mentioned, only
34 are attributed to the decline in real estate values or to losses due to
unforeseen agricultural or industrial disaster, while 38 are attributed to
defalcation and 264 to incompetent management. However, land values and
agricultural conditions are stressed as an important contributing factor
in a great majority of the failures. A classification of the primary and
contributing causes of failure reported on these schedules is given in
Table 10.
17 Schedules prepared in 1931 in the office of the Bureau of Banking
of Nebraska, for the Federal Reserve Committee on Branch, Group and Chain
Banking.
-5 0 -
Table 10. CAUSES OF BANK FAILURES IN NEBRASKA, 1921-1930, REPORTED ON
SCHEDULES PREPARED FOR THE FEDERAL RESERVE COMMITTEE ON
BRANCH, GROUP AND CHAIN BANKING
Item l/
Dishonesty of officers— total
Defalcation
Officer’s irregularities or shortages
Inside bank robbery
Dishonesty of former management
Misuse of bank funds, excessive loans,
irregularities— total
Misuse or misapplication of bank funds
Excess loans, or overloaning
Excessive and illegal loans
Loans to stockholders and relatives
Failure of large debtor
Violation of State banking laws
Reversal of prosperous conditions, decline in
values— total
Unforeseen agricultural or industrial
disaster, such as flood, drought, etc.
General deflation, or general depression
Decline in value of farm products, or
deflation of agricultural prices
Decline in real estate values
Incompetent or poor management— total
Incompetent management
Insufficient diversification
Long-term loans on real estate
Excessive operating cost
Other causes— total
Heavy withdrawals
Failure of other banking institutions
Insufficient operating income
Lack of business
Lax enforcement of State banking laws
Miscellaneous
Number of cases
Contributing
Primary
cause
39
3B
cause
17
T3
3
29
27
37
II
21
1
1
85
227
4
28
16
23
36
30
32
143
281
264
16
1
iff
14
8l
"55
11
1
21
2
6
56
86
2?
4
11
4
37
3
“
I/ Specific items are from schedules collected by the Federal Reserve
Committee on Branch, Group and Chain Banking, the grouping by the author of
this report. The tabulation was made by the author of this report from the
schedules, which were made available through the courtesy of the Board of
Governors of the Federal Reserve System.
-5 1 ~
procedures in handling failed banks* Until organization of the
Guarantee Fund Commission in 1923 almost all the banks closed because of
financial difficulties were placed directly in receivership, with the receiver
appointed by the district court and the affairs of the bank closed under
jurisdiction of the court.
out a receivership.
In only two cases had banks been reopened with
In the receivership cases the procedure was for the
guaranty fund to pay the receiver an amount which, together with the proceeds
of the readily liquidated assets of the bank, enabled him to pay all the
deposit claims.
However, when failures became numerous in 1921 the amount that
was required to be drawn from the guaranty fund was reduced by a device for
receivers* borrowings developed by a group of banks participating in the
deposit guaranty system.
This was later described as follows in a message
of the Governor to the Legislature and in court testimony by one of the
bankers associated with it.
"... state bankers...organized the State Agricultural Loan
Association and sold stock and association notes to member banks to
the amount of two million dollars. The proceeds of the stock and
note sales were used in paying off depositors in failed banks.
The assets of the failed banks then became the property of the
association.1* l/
!,...I served with the Agriculture Loan Association... with
the consent of the various District Courts we issued receiver
certificates which were endorsed and guaranteed by the Agricul
ture Loan Association then sold to solvent banks and the
proceeds used to pay off depositors immediately. In fact,
the only difference between what we did and what has been
done since by the Guarantee Fund Commission was that it,
th<- latter, was legalized by the law. This was more or less
voluntary; no legal provision had been made for it. Stockholders
were all voluntary stockholders and the Agriculture Loan Association
assumed responsibility of endorsing receivers certificates and the
banks who bought them assumed the responsibility of their being paid
l7 Farewell message of Governor Adam McMullen to the Nebraska
Legislature, Jan. 3 , 1929, Nebraska House Journal, Forty-fifth Session,
1929, p. 50.
-52but the depositors got their money and the object was to keep the
Guarantee Fund from breaking down. The failures at that time, occurred
so rapidly and with such large liabilities that the assessments were
not bringing in enough money to pay the depositors." 1/
After establishment of the Guarantee Fund Commission in 1923 banks
in difficulty were turned over to that Commission for operation as a "going
concern" or appointment of a receiver; and a few months later existing
receiverships were transferred to the Commission for appointment of a new
receiver to complete the process of liquidation. Members of the Guarantee
Fund Commission served as the receivers, with the receivership process
supervised, as previously, by the district courts. The Commission organized
two departments, one for going banks and one for those in receivership, with
the Secretary of the Commission as an executive officer. The Commission
inherited 58 receiverships, and handled the affairs of 226 other banks before
2/
it went out of existence in 1929*
The hope that banks could be rehabilitated by operation as going
concerns proved futile.
Of 228 banks closed because of financial difficulties
between May 4, 1923, and. May 1, 1929— the establishment and termination dates
of the Commission— about 200 were treated as "going concerns" for varying
lengths of time ranging from a portion of a month to more than three years.
Table 11 gives a distribution of 192 banks according to the length of time
they were operated by the Commission, and also the number operated as going
17 Testimony of George W. Woods in District Court of Lancaster
County, in Abie State Bank v. Bryan, from records of the United States Supreme
Court, Transcripts of Records and File Copies of Briefs. \Q^O. Vol. 38, Case
Wo. 63, pp. 240-41.
2/ Final Report of the Banking Investigation. The difference
between th"e figure of 226 and that of 228 in the next paragraph is probably
due to banks reopened without being handled by the Commission. The letter
figure is derived from information collected regarding the individual closed
banks, from the sources used in preparing Table 6.
-53Table 11. BANKS CLOSED IN NEBRASKA DURING THE LIFE OF THE GUARANTY FUND COMMISSION
Banks failed May 4, 1923# to May 1# 1929
Total number
2/
228
Operated as "going concerns"
For less them 6 months
6 to 11 months
12 to 17 months
18 to 23 months
24 to 29 months
30 to 35 months
Over 3 years
Other failed banks
4/
3/
192
IB
24
71
35
15
7
2
Number of banks operated as
"going concerns" l/
1925
1925
1926
1926
1927
1927
1928
1928
1929
-
midyear
year-end
midyear
year-end
midyear
year-end
midyear
year-end
Feb. 5
33
30
36
44
57
62
75
72
67
36
l/ For midyear 1925 and 1927 from reports of the Bureau of Banking for those
years; for year-ends 1927 and 1928 from United States Supreme Court records,
Transcripts of Records and File Copies of Briefs, 1930# Vol. 38, pp. 46 and 60;
Feb. 5, 1929# from Report of House Sub-Committee on Guarantee Fund Commission,
1929; for other dates, tabulated from information pertaining to the individual
banks.
2/ Tabulated from a list of the banks. The G u a r a n t e e j\md Commission took
over 227 banks, according to information in "Exhibit A# Statement by Governor
Weaver on Bank Situation," submitted with the message of Arthur J. Weaver,
Governor, to the Legislature, March 4, 1930, Nebraska Senate and House Journals,
Forty-sixth session (extraordinary), 1930, p. 2b.
3/ Tabulated from information relating to the individual banks, from the
sources used in preparing Tables 6 and 7# and lists of banks operated as "going
concerns" at various dates. The total number operated as“going concerns"for
various periods was 201, according to Governor -Weaver’s statement (see note 2).
4/ Includes 31 banks placed in receivership and 5 taken over, with no
evidence found in published reports or surviving records that they were operated
as "going concerns." However, five of those placed in receivership and four of
those taken over must have been operated as"going concerns" for a short period,
in view of the figures in Governor Weaver’s statement (see notes 2 and 3)*
-5 4 -
concerns on several dates.
Only ten of these were reopened, without being
placed in receivership, and those were banks that closed after the guaranty
fund was exhausted.
Operation of failed banks as "going concerns" resulted
in greater, rather than smaller, losses on deposits.
"Every bank so operated,"
according to the report of the special investigation ordered by the Legislature
when the Guaranty Fund Commission was abolished, "showed a continual monthly
operating loss and few reorganizations and sale of closed banks resulted from
this policy.”
1/
The total operating loss in
167
banks operated as "going
concerns", according to the Governor1s report to the 1930 special session
2/
of the Legislature, was $1,322,7287
Many of the banks taken over by the Commission and later placed
in receivership, particularly those taken over during the last two years
of the life of the Coinmission, after it became difficult or impossible
to sell receivers* certificates, were in fact in the process of liquidation
while they were officially operated as "going concerns".
The reason for
this procedure was to reduce the amount of interest on deposits to be paid
froni the guaranty fund.
In receivership cases the deposit claims approved
by the court became a jud©aent against the guaranty fund and bore interest
at the rate of 7 percent until paid.
In the banks operated by the Commission
no old deposits were paid and no time certificates renewed, and assets were
liquidated as rapidly as possible.
When most of the assets were sold, a
3/
dividend on the old deposits was paid and the bank placed in receivership.
l/ Final Report of the Banking Investigation, p. 9*
2/ As reported in Commercial West, Vol. 59 (March 22, 1930)»
3/ C. M. Skiles, general counsel of the Guarantee Fund Commission,
in an article, "How I Would Change Nebraska*s Guarantee Law," The Northwestern
Banker, Vol. 33 (March 1928), pp. 17-18 and 144-146.
-55For about four years after sale of receivers’ certificates was
authorized in 1923, such certificates were issued as the banks were placed in
receivership, and the depositors were paid at once.
y
$1.7 million and the next year $2.4 million.
In 1923 the amount was
The receivers’ certificates
were repaid from the proceeds of liquidation and from receipts of the guaranty
fund from the next assessment on participating banks. The receivers’ certifi
cates were issued at a rate of interest set by the court, usually for a tern
&
one year, and until 1927 it was possible to pay them before or when due.
By 1928, when there was more than a million dollars of such certificates out
standing, bearing 7 percent interest, it became impossible to sell any more to
3/
the banks that had been investing in them. Thereafter the depositors held
the judgments, and received dividends on them from the liquidation of the
assets of the bank.
With the assessments on participating banks subsequent
to 1928 withheld from use by court injunction and eventually declared
unconstitutional, additional payments from the guaranty fund were limited
to comparatively small amounts.
Such payments were made as partial dividends
to the depositors of 25 banks from the Depositors' Final Settlement Fund,
before its establishment was held unconstitutional by the State Supreme
Court, and to those of 3 banks upon final settlement of the affairs of the
fund.
~
IT Testimony of Payson D. Marshall, United States Supreme Court,
Transcripts of Records and File Copy of Briefs, 1930, Vol. 38, Case No. 63.
“
27 To 1926, receivers' certificates were issued with maturities of
one year or less, bore interest at 6 percent, and had always been paid before
maturity, according to statement by Kirk Griggs, Secretary of the Department
of Trade and Commerce and Chairman of the Guarantee Fund Commission, in The
Northwestern Banker, Vol. 31 (September 1926), p. 15• A report the next year
of a talk by the Governor also stated that receivers’ certificates had always
been paid before maturity, The Northwestern Banker, Vol. 32 (August 1927), p. 8l.
3/ C. M. Skiles, in statement as reported in the Wall Street
Journal, Feb. 7, 1928.
-56Relatively little use appears to have been made of the authority
given in
1923 to a receiver of a failed bank to sell all its assets to new
stockholders, with the approval of the Guarantee Fund Commission and the
court, with the receiver drawing on the guaranty fund to meet any dificiency
in the amount needed to meet depositors* claims payable from the guaranty
fund.
Only five banks placed in receivership during the life of the
Guarantee
Fund Commission were reported to have been reopened or taken over, with a
payment from the guaranty fund, after having been placed in receivership.
More use was made of the power given in 1923 to the Department of
Trade and Commerce to request the court with jurisdiction over a receivership
to sell its assets and to bid for the assets at such sale.
used in jh cases.
This process was
However, the amounts were comparatively small, representing
remaining assets after the receiver had liquidated most of the assets and
repaid as much as possible to the guaranty fund.
1-Jhen the Guarantee Fund Commission was abolished, existing
receiverships were transferred to the Department of Trade and Commerce, and
that Department took charge of the banks that were being operated by the
Commission.
The Department also took charge of other banks closed because
of financial difficulties prior to the termination, about ten months later,
of the applicability of the guaranty to future failures.
No payments were
made from the guaranty fund nor from the Depositors* Final Settlement Fund
in any of these banks, most of which were placed in receivership, with the
Secretary of the Department as receiver and the receivership process supervised
-57by the district court. However, some were reorganized, under a provision
of the 1929 law, with depositors reducing their claims in a sufficient
amount to absorb the losses.
FINANCIAL HISTORY OF TH3 GUARANTY FUND
Sources and adequacy of information. The balance of the depositors’
guaranty fund held by the participating banks at each call date, but very
little additional information regarding the operation of the depositors’
guaranty fund, is given in the periodic reports of the Bureau of Banking.
The amount held by the State Treasurer on June 30 of each year is given
in the reports of the Auditor of Public Accounts.
Considerable information
regarding the financial history of the fund is available from special
investigations ordered by the Nebraska legislature.
Early in 1929 the
House of Representatives requested its Banks and Banking Committee to make
a thorough investigation of the books and records of the Guarantee Fund
Commission. The report of this investigation, which was published as a
document of the Legislature, gives a statement of the guaranty fund and
£/
of each closed bank as of February 5, 1929*
April of the same year,
l/ In 1933, the judicialship procedure in handling bank
receiverships was terminated, and the Department of Banking became an
administrative receiver for future failures. However, former receiverships
not yet terminated, including some banks that had failed while the guaranty
fund system was in operation, and the records relating to closed receiver
ships, were retained by Mr. S. H. Luikart, the last Secretary of the
Department (and Superintendent of Banks for the next two years) until all
of such receiverships were finally closed. The records of these receiver
ships were removed from the Department of Banking (which had succeeded
the Department of Trade and Commerce), and eventually transferred to the
custody of the University of Nebraska. The author of this report was
provided access to Vne remaining records in November 1955 through the
courtesy of the library of the University.
2/ Legislature of Nebraska, Forty-fifth session, 1929, Report of
House Sub-Committee on Guarantee Fund Commission.
the Legislature ordered an examination and audit of failed banks and of
the departments charged with responsibility for the banking laws. This
was conducted from May 1929 to July 1930 by A. C* Shallenberger, who was
1/
appointed by the Governor as Chief Examiner for this purpose.
The reports
of this investigation give a summary of the assessments and disbursements
of the fund, and also the disbursements to depositors and recoveries from
assets of each of the failed banks, to January 2, 1930.
Annual data for
assessments, recoveries, and drafts on the guaranty fund were submitted
at the state Supreme Court hearings in 1929 on the constitutionality of
the December 1928 and subsequent assessments, and are available in the
United States Supreme Court record of the case.
In the case of guaranteed banks which failed subsequent to
January 1, 1921, payments to depositors by the guaranty fund and repayments
to the fund from the liquidation of assets, are given in schedules prepared
in 1931 for the Federal Reserve Committee on Branch, Group and Chain
Banking; these figures differ only slightly from those given in the reports
of the special investigation of the previous year. For most of the banks
that failed subsequent to April 1927, when payments from the fund ceased,
the percentages and amounts of dividends paid from the liquidation of
assets and small amounts in 25 cases from the Depositors* Pinal Settlement
Fund, have been obtained from surviving receivership records, or from
1/ The results of this' investigation are given in three documents
as follows!" (1) The Associated Certified Public Accountant of Nebraska,
"Report on Depositors’ Guaranty Fund," submitted to Mr. Shallenberger,
dated August 1, 1930; (2) A.C. Shallenberger, "Report of Bank Investigation,
dated March 3# 1930 (preliminary report submitted to the Governor); and
(3) A. C. Shallenberger, Chief Examiner, Final Report of the Banking In
vestigation.
-591/
schedules at the Department of Banking prepared from those records.
Very little additional information regarding the financial operation of
the Nebraska fund has been found in pamphlets on the history of the
Nebraska system or special surveys of deposit guaranty systems in operation
2/
in various States.
Income and obligations of the guaranty fund. A summary state
ment of the income and obligations of the Nebraska depositors' guaranty
fund, for the entire period of its existence, is given in Table 12.
The figures take into account receipts and disbursements subsequent to
the repeal of the applicability of the guaranty to future failures,
including
final disposition of the fund in 1934.
The estimates in
this table exclude indirect borrowings of the fund in the form of receivers'
certificates.
Payments to depositors in failed banks which were made
directly by receivers from the cash and immediately available assets of
the banks are also excluded.
The total receipts of the guaranty fund, excluding the assess
ments declared unconstituional by the State Supreme Court, are estimated
at $19.0 million, of which $16.5 million was derived from assessments
and $2.5 million from the liquidation of the banks in which depositors'
claims were paid by the guaranty fund.
The total obligations incurred by
the guaranty fund, after allowance for depositors' recoveries directly
or indirectly from liquidation of the assets of the failed banks, are
Ï] These records were examined by the writer of this report in
November and December 1955*
2/ No information about receipts or disbursements of the fund
were found"at the Department of Banking at the time of the writer's visit
in 1955*
-60Table 12. RECEIPTS, EXPENDITURES, AND DEFICIT OF THE NEBRASKA
DEPOSITORS' GUARANTY FUND
Receipts
Assessments levied (excluding those
revoked by court decision) 1/
Less: miscellaneous credits ($28,908)
and uncollected (estimated at $298,997) 2/
Assessments collected
~
Recoveries from liquidation of assets
of failed banks 3/
Total receipts 4/
Expenditures
Total payments by fund to receivers for
distribution to depositors 5/
Unpaid obligations '
To depositors of failed participating banks 6/
$16,832,432
327,905
fi5 ;534,527
2,455,589
$18 ,960,116
19 ,106,009
$23,305,772
l7 From Table 13 .
2/ Table 14, note 5«
3/ Tabulated from data for the individual "banks, including estimated interest
of $42,040 in two banks (Table 15, note 4). Of this recovery $2,211,259 'was
received by April 29, 1929, and deposited in the participating banks, Final Report
of the Banking Investigation, p. 33 (see Table 14); this amount, together with
the assessments collected, totals $18,715,786, which equals the drafts paid
(Table l4). Of the subsequent recoveries estimated at $244,330, $42,077 bad
been received between April 29, 1929, and January 2, 1930 (Final Report of the
Banking Investigation, p. 29). The remainder of approximately $200,000 represents
recoveries from s-_nbanks subsequent to January 2, 1930, the date to which the
Banking Investigation total refers, as indicated by data to June 30, 1930, shown
on schedules prepared for the Federal Reserve Committee, in Branch, Group and
Chain Banking.
4/ The difference of $145,893 between this figure for receipts and the
total expenditures of the fund presumably largely represents errors in the data
for individual banks (for which some estimation is involved in some cases),
either for payments or recoveries, but may in part represent collections on unpaid
assessments subsequent tc May 28, 1930, particularly from failed banks, or
interest on the remaining balance of the fund between that date and the final
settlement of the affairs of the fund in 1934.
5/ Tabulated from data for the individual banks (Table 15), including interest
(note-*4 to that Table). Of this amount, $18,717,021 was paid prior to January
2, 1930 (Final Report of the Banking Investigation, p. 30). The balance represents
payments from the Depositors' Final Settlement Fund between March 18 and June
30, 1930(given as ^243,995 in the Final Report o'f~the Banking Investigation, p.
16,)the final distribution of $134,OOB" from the fund upon settlement of its
afiairs in 1934 and a small difference between the sum of these amounts and the
total tabulated from information for^he individual banks.
6/ Tabulated from data for the\dividual banks (Table 15). The total losses
to depositors in banks that failed while the deposit guaranty was legally effective
was about $2.6 million larger than this figure (see note 5 to Table 15).
-61estimated at
million to the date of repeal of the law.
The final deficit
of -the fund, representing the loss to depositors, is estimated at approximately
$23 million.
Annual data for assessments levied are given in Table
ments were levied in 1916, and each year from
insurance in 1930*
1919 to the termination of the
The highest rate for the special assessments was eight-
tenths of 1 percent in 1921 and in
1922, which was less than the maximum of
1 percent permitted by the law until 1924.
special assessments in the latter part of
assessments in
13 . Special assess
As previously indicated, the
1928 and both the special and regular
1929 and 1930# amounting to nearly $3 million, were revoked by
the decision of the State Supreme Court on the ground that they no longer
served a public purpose and had become unconstitutional.
Excluding these, the
total assessments levied were $l6.8 million, of which $16.5 were collected.
Table 14 shows the annual receipts of the guaranty fund from assessments
and recoveries from failed banks, and the annual disbursements as measured by
the drafts drawn on the balances with the various banks and paid.
The table
also shows the balance in the fund each year as computed from the receipts and
disbursements, and as shown in the call reports of the participating banks.
The call report figures exclude balances due from banks that had failed, become
national banks, or gone into voluntary liquidation.
Table
15 gives the amount of insured obligations of the banks that failed
each year while participating in the insurance system, the recoveries from
liquidation of assets, the amounts paid from the guaranty fund and the
recoveries of the fund, and the losses to depositors in the banks for which
the fund was unable to meet its obligations.
The estimated loss to other
- 62 Table 1 3 .
RATES AND MOUNT OF ASSESSMENTS, NEBRASKA DEPOSITORS' GUARANTY FUND
Year
Assessment rate
(percent of deposits)
Special
Regular
Total levied l/
Total collectible 2/
I9II
I912
I9I3
1914
I915
1916
I917
1918
I919
I92O
I92I
I922
1923
1924
I925
1926
I927
1928
I929
.25
•50
•30
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.10
.05
__
---
---
.10
—
—
.20
1930
..
.05
.05
Amount of assessments
Regular
$4,943,343
$14,868,036
16,832,432
4,729,161
12,103,271
176,863
1(06,858
271,807
ito, 6^7
176,863
ìjo6,858
271,807
144,684
tèi, 472
219,904
318,029
802,477
318,029
290,869
—
511,608
346,781
2,015,115
1,743,235
1,800,979
755,601
1,334,357
1,382,095
1,367,389
639,244
292,463
302,693
1,971,580
2,046,320
l,oo4,86o
1 ,616,330
1 ,672,339
1 ,653,207
245,341
249,259
281,973
290,244
.25
—
.25
.50 )
.50 )
--
224,635
2 ,317,808
00
__
-
140,647
144,684
196,837
219,904
.80
.80
.70
.30
•50
.50
Special
$19,811,379
.20
Revoked by court 3/
1928
1929
Total
228,345
285,818
—
263,937
122,590
621,476
2,970,947
214,182
2,764,765
622,948
2,355,999
214,182
622,948
2,141,817
885,413
122,590
--
»
-63Footnotes to Table 13 .
l/ Total levied from Final Report of the Banking Investigation,
p. 17» Total regular and total special, sum of annual data: in the Final
Report of the Banking Investigation the former is shown as $4,680,337 and the
latter, as $15,131,042. A somewhat larger figure for total assessments levied,
$19,926,531> '
was given in Governor Weaver's message to the Legislature, March
4, 1930, Nebraska Senate and House Journals, Forty-sixth session (extraordinary)
1930, p. W*
2/ All assessments levied except those deemed unconstitutional by
decision of the State Supreme Court (Hubbell Bank v. Bryan, 1932). Data for
I9H-I 928 from Exhibit No. 44, received in evidence by District Court of
Lancester County (submitted by Secretary of the Department of Trade and
Commerce) in Abie State Bank v. Weaver, obtained from record at United States
Supreme Court, Abie State Bank v. Bryan, Transcripts of Records and File Copies
of Briefs, 1930, Vol. 38, Case Wo. 63; for 1929, assessment due Jan. 1, estimated
at one-fifth the special assessment of Dec. 15, 1928, on assumption that the
assessment base covered the same period.
3/ Assessments declared unconstitutional by State Supreme Court in
Hubbell Bank v. Bryan (1932). Rates from evidence in this case, obtained from
record at United States Supreme Court in Bryan v. Hubbell Bank of Hubbell, 1932,
Case 86l. Amount for special assessment in 1928 from transcript described in note
1 ; total for 1929 and 1930 estimated as residual from total levied, with l/ll
assumed to be the regular assessment, and the balance the special assessment.
-64Table 14. RECEIPTS, EXPENDITURES, AND BALANCE, NEBRASKA
DEPOSITORS* GUARANTY FUND, BY YEARS
Assessments
Recoveries
Drafts
1/
2/
2/
$16,832,432
$2,211,259
176,863
4o6, 858
271,807
1913
1914
1915
i4o,647
144,684
421,472
219,904
318,029
1916
1917
1918
802,477
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
639,244
2,317,808
1 ,971,580
2,046,320
1,004,860
1 ,616,330
1,672,339
1 ,653,207
885,413
122,590
M
—
„
--
-----
23,715
-----
35,550
370,927
182,659
193,287
533,700
427,283
157,220
257,717
29,201
—
3/
4/
$18,715,786
mm —
---
Balance at year-end
Computed
Reported
54,526
- -
79,052
--- -
737,709
2,697,222
2,172,766
2,061,962
1 ,010,026
3,586,093
2,625,757
2,270,436
1,256,910
142,210
21,117
$176,863 $176,646
583,721
573,275
814,228
855,528
941,649
889,552
1,086,333 1,020,104
1,428,753 1,193,924
1,648,657 1,601,375
1,990,401 1,841,125
2,792,878 2,174,257
2,694,413 2,230,769
2,350,549 1,990,818
2,520,290 2,015,587
2,687,307 2,082,915
2,875,428 2,529,729
1,439,365 1,238,402
913,230
621,95^
201,814
453,221
30,427
339, ^ 1
349,022
135,851
327,905 5/ 193,278
-65Footnotes to
l/
Table
14 .
See Table 13.
2/ Totals for 1911-1929 and amount of drafts paid in 1930 from
Final Report of the Banking Investigation, p. 17• Annual amounts for 1911l92S from transcript described in note 2 to Table 13j for 1929, difference
between total for those years and that for 1911-1929 (recoveries are described
in these sources as refunds). Under the 1919 law, amounts due the depositors’
guaranty fund by banks placed in voluntary liquidation (to cease business or
became national banks) were paid to the State Treasurer. The biennial reports
of the Auditor of Public Accounts show receipts for the depositors' guaranty
fund of $32,873 ¿Luring the years 1920-1929, and disbursements of the same
amount. No mention is made of these transactions in the Final Report of the
Banking Investigation, and it is assumed that the amount involved is included in
"drafts paid.*'
3/ Assessments plus recoveries minus drafts paid.
4/ In call reports of participating banks (prior to 1921 at last call
date in the year). The amount for 1930 is described as Depositors' Final
Settlement Fund.
5/ If miscellaneous credits of $28,908 (shown in Final Report of
the Banking Investigation, p. 17, are deducted , this balance is reduced to
4i£9b,997* That amount, plus the assessments revoked, as estimated in Table
13, totals $3,277,944. This is the amount shown as unpaid assessments
(S3,299,Ool on Jan. 2, 1930, less $21,117 of drafts paid in May 1930) in the
Final Report of the Banking Investigation, p. 7*
-
Year
Insured
deposits l/
56 -
Table 15 . TOTAL DilPOSITi, IF:SUR:]D DFPO 3IT u T ”) -ilG' ,"\lJ TO D F'OolTORo OF FAILED BANKS,
HFBFA FCA D^OsITOii
-TUF.FFTI :.0, BY Y FFF^
______
Insured deposit oblljaticur ¡paid 7 . 1 rjipai?^27~~
Paid directly
Urix-.id ^lcss to
Paid by Fund
Total 4/
recoverea
fran liquidation
¿•■ecoverea xr- >.
depositors 5/
of assets
liquidation eF
1 liquidation
Cl ,'J?o
u
and " '
assets (loss
to ,;?und)
Loss on general
claims (not
deposits) 3/
w
¿61,790,166
819,420, 427
219,063,969
.'2, 45^, 589
0O8,380
1914
122,021
67,495
54,526
35,670
18,656
1916
111,051
32,003
79,048
3 ? , 13I
43,917
230,079
2,076,241
1,282,993
4o4,480
276,342
737,620
4,227,168
3,633,235
2,243,890
1,194,155
Total
1920
1921
1922
987,09.'
6 ,303 , v '9
4, 916,.i.î>-j
1923
1924
2,61(8,370
1925
192b
1927
1928
1929
9,00 4,559
5,963,027
5 940,639
19 ,306,863
1 ,681,p4
2,942,2
1,054, >47
1 ,482,471
7,049,188
1930
1 ,162,011
644, 54;;.
l,470,li97
,
7,673,634
f ) O r -,, - "
uO;
dyj
1,244,204
412
175,' -3^
823,305,772
81,703,577
U'V, 3b5
3,220,991
278,087
59,821
72,803
.1,121,2 f2
90,945
134,157
3, 122, ¡ 6,)
3 ,020,[j,
295,127
2 ,827,636
579 ,06
153 , ^
12,535
17, Oc;4
83,902
2,982,964
2,066,0^2
2,937,236
567,3OI
153,964
17,024
31,383
74,479
47,977
4,30d, 450
6,237,199
12 ,244,651
779,976
517,^6
65,163
141,989
17 For '
1911-1920, and first failure in 1921, total deposits. For 1921-1930 (e;-cc*cpb iIrst Failure in 192lJ preferred claims as reported on
I includes banks reopened or taken over if
schedules prepared for Federal Reserve Coi:irdbtee on Branch, Group and Chain Banking, ’“or 1.^ L~
there m s a payment from the guaranty fund. The figure For total insured deposits sh-.-.r- he ■; is about one-half of I percent larger than that for
total deposits in the failed banks shown in Table J. DiFTerences between total deposits anF insured deposits arise from deposit claims allowed
that were not on the books or not included in those tabulated as of date of failure.
to Fiposits on the books for which claims were not filed
or which were disallowed on the ground that they were not deposit liabilities. In adlitio:. , an unknown amount of interest on deposit claims,
mostly accruals from the dates claims had been approved and judgment entered against t-.:e gi,sranty fund to their payment by the fund, may be included
in the figure for "preferred claims” on the schedules prepared for the Federal Reserve Comi. ctee. However, accumulated interest paid from the guaranty
fund to depositors of two banks at time of final settlement of the affairs of the fund (ser Fote k ) is not included.
2/ Tabulated from data for the individual banks from the following sources: (a) >diit Fn B,C, and D accompanying the Final Report of the Banking
Investigation, which are referred to on pages 29-31 of that report, and furnished to the Federal Deposit Insurance Corporation by Ashton C. Shallenberger,
who conducted the investigation (data from these exhibits are as of January 2, 193^); (b) s :h:>duies prepared For the Federal Reserve Committee on Branch,
.;tem; and (c) surviving receivership records at the library of
Group and Chain Banking, made available by the Board of Governors of the Federal Reserve
the University of Nebraska and schedules at the Department of Banking prejjared from receive •ship records {data from these records, which pertain chiefly
to banks closed in 1927 and subsequent years, are as of the closing of receiverships).
3/ For 191^ 1916, and 1920, negligible because the reported proved claims are ident ^1 For most of the banks with the reported deposits at time
L surviving receivership records mentioned in note 2 .
of failure. For 1921-193$, tabulated from data for the individual banks from the schedule
h / In addition, accumulated interest at 7 percent per year m s paid to depositors 01 ^ n banks in which the remaining deposits were paid in full
0 ;jA2,oto.
by the guaranty fund at final settlement of its affairs in 193^* This interest is estimat
5/ In addition to these losses, depositors of 33 banks that failed prior to IlarcF. 13, 'JO, and were reorganized under the law of April 30> 1929,
estimated at about F2.6 million. This is based on an
which"”are not covered by this table (see note 3 to Table 6 and note 2 to Table 7 )/ had lo^
estimate of a 30 percent loss in 22 of the banks (message of Governor v7eaver to the Legisio
March 4, 1930, Nebraska Senate and House Journals,
Forty-sixth session (extraordinary), ±93$> P* 27 .
-67creditors is also given in the table. Table 16 shows for each year the
insured obligations relative to the total deposits of the closed banks as
reported for the date placed in receivership, and the percentages of the
insured deposits recovered from liquidation of assets, paid by the guaranty
fund, or lost by the depositors.
For all the failed banks as a group, the insured obligations were
about one-half of 1 percent greater than the deposits of the banks when they
were placed in receivership. This is due in part to deposit claims allowed
that were not on the books or not included in those tabulated as of date
of receivership.
However, in part it may be due to interest on claims that
went to judgment when the guaranty fund was unable to pay depositors immediately.
But this does not include interest on receivers' certificates issued to
permit payment of depositors in advance of payments from the guaranty fund:
such interest was charged to the receivership as an expense item.
For the entire period, 35 percent of the insured obligations was
paid from the liquidation of assets. The remainder was paid from the fund,
for banks which were placed in receivership to May 1927, and lost to the
depositors for the remaining failures before the repeal of the guaranty as
of March 18, 1930*
If the deposits paid off by banks operated as going concerns
are included, as measured by the net change in their deposits while in the
hands of the
Guarantee
Fund Commission, and the deposits at time of closing,
rather than those shown in the receivership records, are used for all failed
banks, the amount realized from liquidation of assets is raised to 4l percent.
Comparison of assessments and losses. Table 17 compares the
assessments levied, including those revoked by court decision, with the
-6 8 -
Table l6. PERCENTAGE OF DEPOSITS INSURED, AND PERCENTAGE OF INSURED DEPOSITS
PAID BY GUARANTY FUND AND RECOVERED FROM LIQUIDATION OF ASSETS, BANK FAILURES
___________ UNDER THE NEBRASKA DEPOSITORS' GUARANTY FUND, BY YEARS_____________
___________ Percentage of insured deposits_______________
Year of
Percentage
Total
Paid directly Paid by guaranty fund
Unpaid
failure
of total
from liquidaRecovNot re*
(loss to
deposits
tion of assets
ered from covered;
depositors
insured
assets
i.e., loss
and on
to fund
Tfsale assets"
Total
100.5
100.0
31.4
4.0
26.9
37*7
1914
99.7
100.0
55.3
29.4
15.3
—
1916
100.7
100.0
28.8
31.6
39.5
—
1920
100.0
100.0
100.0
100.0
100.0
23.8
32 .y
26.1
15.3
9.1
19.7
18.8
5.0
67.1
47.3
65.5
78.1
76.3
—
1923
1924
94.3
104.3
103.3
109.5
95.1
1925
1926
1927
1928
1929
97.1
102.0
105.5
101.9
97.3
100.0
100.0
100.0
100.0
100.0
37.6
49.3
17.8
1.4
.2
1930
90.9
100.0
1921
1922
8.4
6.6
5.9
18.8
36.5
—
55.5
—
56.5
49.3
9.5
2.0
.1
- —
72.5
79.2
63.4
44.5
-69Table 17. ANNUAL ASSESSMENTS LEVIED, LIABILITY FOR DEPOSITS IN FAILED BANKS,
AND CUMULATIVE DEFICIENCY, NEBRASKA DEPOSITORS* GUARANTY FUND
Year
Total
1911
1912
1913
1914
Assessments
levied l/
$19,811,379
176,863
406,858
271,807
Deposit liability of the fund 2/
Assessments
levied
Deposit
liabil
ity of
the fund
Cumulative
Excess of
Deficiency
assessments (excess
levied
liability)
$39,914,152
__
-
176,863
-
176,863
583,721
855,528
977,519
__
583,721
855,528
996,175
18,656
l,lto,859
1,562,331
1,782,235
2,100,264
2,902,741
62,573
62,573
62,573
62,573
2,84o,i68
—
—
1,971,500
2,046,320
1,004,860
649,365
2,982,964
3 ,220,991
2 ,068,052
1 ,121,272
3,541,985
5,859,793
7,831,373
9,877,693
10,882,553
711,938
3,694,902
6,915,893
8,983,945
10,105,217
2,830,047
2,164,891
915,400
893,748
777,336
«__
—
—
—
—
1 ,616,330
2 ,827,638
1929
1,672,339
1 ,653,207
1 ,508,361
1,375,981
2,937,236
4,873,757
6,391,163
12,261,675
12,496,883
14,171,222
15,824,429
17,332,790
18,708,771
12,932,855
15 ,870,091
20,743,848
27,135,011
39,396,686
1930
1 ,102,606
517,^6
1915
I9I0
1917
19J-Ö
1919
140,64-7
144,684
318,029
802,477
639,244
2 ,317,808
1927
1928
43,917
219,904
1921
1922
1925
1926
_
421,472
1920
1923
1924
18,656
-
16,656 1 ,122,203
1 ,499,758
1 ,719,662
2,037,691
19,811,379 39,914,152
—
—
**
—
__
--
433,972
1 ,698,869
4,919,419
9,802,221
20,687,915
—
20,102,773"'
I/ From Table 13 with the revoked assessments for 1929 and 1930, estimated in
that table as a residual, divided between the two years on the basis of deposits in
participating banks at the beginning of the years.
2/ Deposits paid from the fund, adjusted for recoveries by the fund including
that "on "sale assets", and deposits unpaid (loss to depositors) in the banks placed
in receivership. Including the loss to depositors in banks reopened under the law
of April 30, 1929, the total deposit liability of the fund is estimated at $42.5 million.
3 / If the loss in reorganized banks is taken into consideration, and the deficiency
figure computed from assessments collected (instead of those levied), the final deficiency
figure becomes $25.7 million.
-7 0 -
liability of the fund on account of failures. The data are given for each
year, and cumulatively, with the cumulative excess or deficiency. This
excess or deficiency, it should be noted, is a different concept from
the accumulated surplus or deficit of the fund.
What the deficiency figures
show is the additional assessment that would have been necessary, in addition
to those levied, to have paid all the insured deposits, after taking account of
recoveries from the liquidation of the assets of the failed banks. It does
not include any allowance for interest or other expenses, or for funds
needed to pay depositors at once the amounts eventually recovered from
liquidation of assets.
By the end of 1919, with only two failures, the assessments levied
had accumulated to nearly $3 million, or about 1.0 percent of the deposits of
the participating banks.
This amount, together with the additional regular
and special assessments, provided a emulative excess of assessments for
another five year, or until 1925» During these years the fund was rapidly
declining, and though it fell far below 1 percent of deposits, the maximum
special assessment was not levied in any year. Had the maximum assessments
been levied, an additional $2.2 million would have been collected, extending
1
the net emulative excess of assessments for another two years.
/
During the
remainder of the period of applicability of the insurance, with the maximum
cxinual assessment reduced to three-fifths of 1 percent of deposits, assessment
receipts were far below the losses, and would, have been insufficient to meet
them had none of the assessments been revoked by court decision.
“
1/ According to testimony in the District Court in Abie State Bank
v. Bryan, levy of the maximum assessment would have yielded the following
additional amounts: $503,778 in 1921, $4-35,809 in 1922, $777,848 in 1923,
and $503,734 in 1924, or a total of $2,221,169 (from records of the United
States Supreme CovCrt, Transcripts of Records and File Copies of Briefs,
1930, Vol. 38, Case No.~63 p." 6J6 .)
-71For the entire period, aggregate assessments of $42.5 million
would have been necessary to have met the claims of depositors in excess
1
of the recovery from the assets of the failed banks.
The assessments
/
collected provided 39 percent of this amount, but had all the assessments
levied been collected, they would have provided
percent.
In Table 18 the rate of assessment each year, and the amount levied
per $100 of deposits in participating banks, and also per $100 of the banks*
total capital accounts, are compared with the rate that would have been
necessary to have met the eventual losses from the failures in that year.
For the entire period the assessments levied averaged one-half of 1 percent
per year of deposits in participating banks, while the losses in failed banks,
including those in the banks reorganized under the 1929 law, averaged over 1.1
percent of such deposits.
The maximum annual assessment under the original
law was 1.1 percent, or just enough to have covered the full net cost of
deposit guaranty during the time the insurance was applicable, had it been
possible to have levied this maximum each year throughout the period*
This
m s not possible during the first half of the period because failures were
few, and only the initial assessment and the very small regular assessment
could be levied.
It was not possible during the latter part of the period
because of the reduction of the maximum to six-tenths of 1 percent which was
iuade in
1923*
The assessments levied on the banks averaged about 3 percent per
if This includes the loss in banks reorganized under the law of
April 30, 1929*
- 7 2 -
Table 18. COMPARISON OF ANNUAL RATES OF ASSESSMENTS LEVIED WITH RATES RETIRED
TO MEET DEPOSIT OBLIGATIONS IN FAILED BANKS, NEBRASKA DEPOSITORS' GUARANTY FUND,
BY YEARS, 1911-1930
Year
Assessment
rate per
4^100 of deposits l/
1911-1930
average
__
Per $100 of deposits
Per $100 of total capital
in participating
accounts in participating
banks at "beginning of year banks at beginning of year
Assessments
Losses on
Assessments
Losses on
levied 2/
deposits
levied k/
deposits
in failed
in failed
banks 3/
banks k/
$0.50
$1.06 5/
$3*24
,$6.85
.05
1.33
4.71
.28
12.06
* —
.24
—
.65
1911
.25
.50
•30
.25
.55
.33
.15
1918
.10
.20
.10
.10
1919
•30
.14
•37
.13
.14
.31
1920
1921
1922
.30
.90
.90
.23
•91
.91
.23
1.17
1.49
.47
1912
1913
1914
1915
1916
1917
.10
1923
1924
.80
. t o
.42
1925
.60
.60
•59
1927
.50
.60
*60
1926
1928
1929
.60
.86
.60
•55
•55
1.67
-
.02
.04
—
—
.87
i.o4
i.o4
1.77
2.33
4.86
1.00
2.18
1.35
.67
.62
1.61
.77
.97
2.27
1.51
5.00
4.64
5.02
3.02
__
—
—
ON
O•
1911-1920
1921-1930
__
.17
—
—
—
1.53
6.44
7-59
5.08
3-37
4.85
5.18
5*16
4.81
20.38
4.92
43.87
8.49
9.10
15.23
Footnotes to Table 18.
l/ From Table 13 .
2/ From assessments levied (Tables 13 and 17), and deposits in partici
pating banks (Table 14).
3/ From deposit liability of the fund (Table 17), and deposits in
participating banks (Table 4).
4/ From assessments levied and deposit liability of the fund (Table
17), and capital accounts of State banks as given in call reports for dates
nearest the beginning of the year.
5/ If the losses in reorganized banks are included, this figure
becomes $1 .13 *
6/
Annual rate for failures to March 18.
-lkyear of their capital investment, as measured by their reported total
capital accounts.
5 percent.
During the 1921-193$ period, this average was nearly
Had assessments sufficient to cover losses been levied, they
would have averaged over 12 percent of total capital accounts during the
1921-1930 period, and nearly 7 percent for the entire period of the deposit
insurance system.
Bankers Conservation Fund.
Table
19 shows the amounts reported
each year by the participating bajaks as investments in the Bankers Conservation
Fund, authorized by the 1923 amendments to the deposit guaranty law.
Assess
ments for this fund, in the form of drafts by the Secretary of the Department
of Trade and Commerce, could be levied up to one-fourth of 1 percent of
the average daily deposits in the participating banks, with a maximum fund
at any time of one-third of 1 percent of such deposits.
The proceeds of these
assessments were used as “deposits" or loans to the banks operated by the
Guarantee Fund Commission.
The remittances by the banks on the drafts were
carried on their books as an asset until repaid or charged off.
In the case of liquidation of a bank with a loan or “deposit" from
the Bankers Conservation Fund, such deposit was given the same status as
other deposits.
It appears likely, therefore, that a part of these deposits
in the banks closed in
1927,
1928, and 1929, which had been operated by the
Guarantee Fund Commission, were lost.
Such losses were a cost of the guaranty
system to the State banks in Nebraska in addition to the assessments levied
for the guaranty fund.
However, no information is available regarding the
recoveries and losses by the participating banks on their assessments for
the Bankers Conservation Fund.
-75Table 19.
BALANCE, BANKERS CONSERVATION FUND, NEBRASKA,
MIDYEAR AND YEAR-END CALL DATES, 1923-1929
Date
Bankers Conservation Fund
Per $100 of deposits
on same date
1923-June 30
1923-Dec. 31
$76,776
533,393
$0.03
.22
1924-July 21
1924-Dec. 31
546,255
374,591
.22
.14
1925-June 30
1925-Dec. 31
375,613
628,945
•13
.22
192o-June 30
1926-Dec. 31
629,546
639,473
.22
•23
1927-June 30
1927-Dec. 31
634,009
613,656
.23
.22
1928-June 30
1926-Dec. 31
541,046
442,387
.21
.18
1929-June 30
none
_ -
-76Administrative cost of the depositors* guaranty fund» The
administrative cost of the depositors' guaranty fund is also excluded from
the figures of the fund given in preceding tables. From the beginning of
deposit guaranty to the creation of the Guarantee Fund Commission in 1923,
the fund was administered by the State Banking Board, and the cost of its
operation was not segregated from other expenses of the Board.
The expenses
of the State Banking Board were met by legislative appropriations, but
the State Treasury received the proceeds of the examination fees levied on
State banks.
From the time of establishment of the Guaranty Fund Commission
in 1923 to the end of 1929 the Guarantee Fund Commission and its successor,
the receivership division of the Department of Trade and Commerce, spent an
average of about $100,000 a year. The greater part of this was obtained from
assessments on the banks in charge of the Commission or the receivership
division, but some of it came from legislative appropriations, and a small
part from an assessment on the banks participating in deposit guaranty, interest,
and miscellaneous sources. The receipts from these sources during the period,
the expenses met therefrom and the unexpended balances at the end of 1929
are shown in Table 20. In addition, an appropriation of $150,000 was made
in 1929 to conduct the banking investigation, of which $99,000 had been
spent by August 1, 1930, when the investigation was completed.
Settlement of the affairs of the guaranty fund. Under the law of
March 18, 1930, which repealed the applicability of the guaranty to future
failures, the remaining assets of the guaranty fund, including claims for
unpaid assessments and further recoveries from the failed participating
banks, were transferred to the Depositors* Final Settlement Fund, administered
-7 7 Table 2 0 .
RECEIPTS AND EXPENSES FOR ADMINISTRATIVE PURPOSES, NEBRASKA
DEPOSITORS» GUARANTY FUND, May 1 , 1923 to Dec. 31, 1929
Receipts, expenses,
or balance
Total
Guarantee Fund
Commission —
May 4, 1923 to
April 30, 1929 1/
Legislative
appropriations
Department of
Trade and Commerce,
Receivership Div
ision — May 1 to
Dec. 31, 1929 1/
$190,000
$90,000
4,538
4,530
—
Assessments on banks
operated as going concerns
164,213
164,213
—
Assessments on banks
in receivership
267,464
212,040
55,424
7,701
7,5^7
154
633,916
633,916
478,338
- 23,829
454,509
155,578
/ 23,829
179,407
534,505
454,138
80,367
99,618
89,628
9,990
434,887
364,510
Assessments on part
icipating banks
Interest and
miscellaneous
Total receipts
Transferred 2/
Adjusted receipts
Administrative expense —
total
From appropriated funds
From assessments and
miscellaneous receipts
Unexpended funds
99,412
372 3/
$100,000
70,377
99,o 4o 4/
“
l7 From Final Report of the Banking Investigation^ Does hot include
appropriations for the Bureau of Banking which supervised operating banks, nor
for the office of the Secretary of the Department of Trade and Commerce.
2/ Fran the Commission to the Department.
3/ Returned.
"5/ Includes $90,010 unexpended legislature appropriation, and -$9,030
unexpended-other receipts. Available for expenditures in 1930.
-7 8 -
by the Department of Trade and Commerce. The previous priority of payment
of depositors' claims in order of the dates of receivership of the failed
banks was eliminated. All unpaid claims certified to the Department, including
unpaid deposits of banks reorganized under the law of April 30, 1929, and also
including unpaid claims for refund of assessments made to the Bankers
Conservation Fund, were given equal status, subject to the qualification
that payments should be made first to claimants whose claims had been
allowed and certified for at least a year and had been paid the smallest
percentage of their respective claims.
Under this act, the Department of Trade and Commerce paid dividends
on depositors1 claims ranging from 1 percent to 8 percent in 31 banks, in an
y
aggregate amount of approximately $271,000.
When the assessment and
settlement provisions of this act were challenged by the bankers and were
declared unconstitutional by the District Court, further payments were held
in abeyance until the decision of the State Supreme Court and denial of a
review, announced in May 1933, by the United States Supreme Court.
The result of the decision, which nullified the settlement provisions
of the 1930 act, was to restore the priority of payments to holders of receivers’
certificates under the law of 1923 and to prevent collection of the disputed
assessments.
The only remaining resources from which further payments to
depositors could be made were additional collections from liquidation of
assets of failed banks whose depositors had been paid from the fund or from
~
17 Tabulated from data for the individual banks, and included as
payments from the guaranty fund in Tables 12 and 15. The Final Report of the
Banking Investigation, p. 16, shows $24-3,995 as paid from the Depositors’ ”
Final- Settlement Fund to June 30, 1930.
-7 9 -
unpaid assessments on the participating banks other than those revoked by
the court decision, and any interest thereon while awaiting the final court
y
decision.
In 1934, the funds available from these sources, amounting
to $134,000, were used to complete payments to depositors holding receivers'
certificates in two banks that had been placed in receivership in 1927, with
accumulated interest at 7 percent per year, and to make a partial payment on
2/
the remaining deposit claims in another bank.
APPRAISAL OF TH3 NEBRASKA DEPOSITORS' GUARANTY SYSTEM
The deposit insurance system of Nebraska maintained full payment
of all the obligations falling upon it for nearly sixteen years, a longer
period than that of any of the other systems of deposit guaranty during the
1908-1930 period, except for Texas. The protection it afforded was greater
than that of Texas, covering all deposits in comparison with only noninterestbearing deposits in Texas, and the aggregate amount of deposits paid from the
fund, adjusted for recoveries from liquidation of the assets of failed banks,
was roughly 50 percent more than in Texas.
Its burden on the banks in terns of
the average annual rate of assessments paid, was substantially higher- than that
in any of the other systems. However, its unpaid obligations were very large,
though less than in South Dakota, as a consequence of a high failure rate and
a low rate of recovery on the assets of failed banks, relative to the other
States with deposit guaranty.
'
TJ The surviving receivership records of the banks that failed prior
to cessation in 1927 of payments to depositors from the guaranty fund show
dividends subsequent to mid-1930 of only $3,000. No record has been found of
any collection of unpaid assessments subsequent to January 2, 1930, except the
small amount in May of that year shown in Table 14.
2/ The American Banker, July 18, 1934, and The Northwestern Banker,
Vol. 39 (AUgust 1934), p. 42. The portion of this amount representing unpaid
deposits is included as payments from the guaranty fund in Tables 12 and 15 ,
and the interest is shown in note 4 to Table 15•
- 80-
The operations of the Nebraska deposit insurance system were
also subjected to a more searching investigation of its weaknesses, at
about the time it ceased to function, than any of the other systems.
The report of this investigation summarized the defects of the system as
follows:
Three sound banking principles were essential to the success
of the Guaranty Law, if the insurance plan was to prove sound and
safe.
First— Limitation of bank charters to the requirements of
business and safe credit of the community served.
Second--Bank earnings of sufficient amount to insure a fair
return and the charging out of losses that come in periods of
business depression. No bank that can honestly show a fair profit
ever fails.
Third— Competent and efficient supervision and examination by
the department in charge of the administration of banking laws and
requiring from all officers and managers of banks a state license
certifying as to their honesty, ability and character. Failure to
observe and enforce these essentials undermined and wrecked the
Guaranty Fund.
The Guaranty Law brought prosperity and strength to the state
banks and saved depositors from losses of millions of dollars. It
has been discredited and destroyed by those who should have been
its staunchest defenders. Betrayal of their trust by faithless
bankers and inefficient supervision nullified the law and destroyed
the confidence it had established.
The Department of Banking Administration is required by law
to close banks shown insolvent by its examiners. It is a felony
for officers of a bank to receive deposits after it is insolvent.
If an insolvent bank is permitted to operate, the depositor is
grossly deceived and his supposed security becomes a state swindle.
In case of failure stockholders are liable for an additional amount
equal to their capital investment. Under careful supervision the
double liability should insure liquidation with little loss to
depositors.
A former Governor stated in a message to the Legislature
that early in his administration his Banking Commissioner
-81-
report ed to him that there were 125 State banks hopelessly insol
vent* A Banking Commissioner of another administration stated to
me that a few months after he took office he made a written
report that 150 banks were at that date insolvent. Permitting
broken banks to run only delayed the deluge. Lax law enforcement
did not save the banks. It did cost depositors large losses and
piled up a mountain of bank failures when conditions could no
longer be concealed. The greatest blot on our State and national
governments is failure to enforce laws enacted for the protection
of property and the punishment of crime, l/
Mr. T. Bruce Robb, Chairman, Committee on Business Research,
University of Nebraska, has made the following comments on the facts
revealed by the banking investigation:
probably the most bitter complaint made by the auditors in
connection with the bank examination was that relating to the
enforcement of the bainking laws. In practically every bank
audited the accountants went out of their way to emphasize how
the depositors* money had been put in jeopardy through the lack
of enforcement of the banking laws. In preceding sections it
was pointed our how banks officers used the bankfs funds to finance
their own private ventures, how the law in respect to excess loans
and excess real estate was flagrantly violated, and how the embez
zlement of bank funds by officers was extensive and carried on
over long periods of time. Throughout this sordid story surely
the reader must have wondered about the matter of law enforcement.
In this section, however, a different aspect of this question
will be considered. Banks were examined periodically. It has
often been assumed that the weak: place in the supervision of State
banks was in the matter of bank examinations. The mushroom growth
of the State banking system in the decade preceding the banking
debacle naturally placed a heavy strain on the machinery for
exajiiining banks. Bank examiners were poorly paid, and as soon as
a young examiner of promise acquired proficiency he usually left
the service and went into banking. But a careful study of the audits
of the failed banks indicates that the trouble was not primarily
with the examinations. No doubt bank examinations were too infre
quent and often laade by men with little experience, yet the fact
remains that if the information disclosed by bank examinations had
been acted upon aggressively much loss to depositors would have
been avoided* 2/
T/
Final Report of the Banking Investigation, pp. 8-9*
2/ T. Bruce Robb, State Bank Failures In Hebraska, pp. ^2-^3.
-82-
An additional comment may be made on one of the problems mentioned
in these quotations, because it was much more serious than in most of the *
other States with deposit guaranty systems.
The excessive number of banks
operating in Nebraska is indicated by the fact that in 1920 a bank was in
operation for each 1,100 of the population.
The maximum average clientele,
computed by assuming that every family in the State had a bank account, was
thus about 275 families.
Since a considerable proportion of the banks must
have had fewer customers than the average, it is apparent that some of the
banks were dependent for their business upon a relatively small number of
families in agricultural areas populated by people in the low and medium
income groups.
The inability of the State Banking Board to check the birthrate
of banks was thus a serious deficiency in supervisory powers.
The excessive
number of banks was also doubtless one of the conditions conducive to the
making of illegal or unduly risky loans, and to the low general level of
competency among bankers.
A thousand good bankers cannot be found as
readily as a third of that number.
DEPOSIT INSURANCE IN EIGHT STATES DURING THE PERIOD, I9O8-I93O
By Clark Warburton
Mississippi; South Dakota; Washington; North Dakota; Concluding
Chapter; and Bibliography
DEPOSIT GUARANTY IN MISSISSIPPI
Prepared byClark Warburton, Chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
October 1955
DEPOSIT GUARANTY IN MISSISSIPPI
Page
Background of the guaranty legislation
1
1
Regulation of hanking prior to 1914
Bank failures
2
3
Character of the guaranty legislation
Banking department
Admission of banks to the guaranty system
Deposits covered by guaranty
Assessments
Administration and custody of fund
Method of paying deposits in failed banks
Liquidation of closed banks
3
k
7
8
10
11
12
Supervision and regulation of participating banks
13
Powers of banking department
Supervisory experience
Statutory limitations on bank operations
14
Insufficiency and closing of the guaranty fund
Inadequacy of the fund
Suspension of the guaranty in 1930
Depositors' protection fund
Repeal of the deposit guaranty law
Number, deposits, and failures of participating banks
Number and deposits of operating banks
Concentration of deposits
Number and rate of failures
Comparison with failures in other States
Causes of failure
Financial history of the guaranty fund
Income and obligations of the guaranty fund
Annual assessments and losses in failed banks
Appraisal of the Mississippi deposit guaranty system
17
19
2k
2k
26
29
30
31
31
31
3^
3^
38
hi
k2
47
52
LIST OF TABLES
Table
Page
1. Supervisory powers of the board of bank examiners or
superintendent of banks in Mississippi
15
2. Statutory limitations on bank operations in Mississippi
20
3- Number and deposits of state and national banks in
Mississippi, 1915-1929, by years
32
4. Number and deposits of state banks in Mississippi,
December 31, 1915, 1922, and 1929
33
5 . Number and deposits of state banks in Mississippi closed
because of financial difficulties, January 1, 1915 to
March 11, 1930
35
6 . Size distribution of failed banks in Mississippi compared
with average size distribution of active banks:
of operation of deposit guaranty system
period
7- Bank failure rates in Mississippi, 1916-1929, compared with
rates in contiguous states and in the United States
36
37
8 . Causes of bank failures in Mississippi, lg21-1930, reported
by the federal reserve committee on branch, group and
chain banking
9* Obligations, income, and deficit of the Mississippi depositors'
guaranty fund
40
44
10. Receipts, disbursements, and balance of the Mississippi
depositors' guaranty fund, by years, 1914-1934, and of its
successor funds, 1532-1953
45
11. Payment of deposit liabilities of Mississippi banks that
failed while participating in deposit guaranty
48
12. Annual assessment receipts, liability for deposits in failed
banks, and cumulative deficiency, Mississippi depositors'
guaranty fund
49
13. Comparison of annual rates of assessment with rates required
to meet deposit obligations in failed banks, Mississippi
depositors' guaranty fund, by years, 1914-1930
51
1 0 /1 8 /5 5
DEPOSIT GUARANTY IN MISSISSIPPI
The Mississippi law for guaranty cf bank deposits was
enacted March 9# 1914. At the time of its enactment deposit guaranty
plans were in operation in four States — Kansas, Nebraska, Oklahoma
and Texas. The Mississippi law remained in full operation for a period
of 16 years. By 1930 the liabilities of the guaranty fund far exceeded
the amounts which were or would become available to the fund for many
years, and on March 11 of that year the application of the fund to
future failures was postponed until existing obligations were cleared.
In 1934 the law was repealed.
BACKGROUND OF THE GUARANTY LEGISLATION
Regulation of banking prior to 1914. Prior to 1914 State
regulation of banking in Mississippi was limited to the enumeration
and limitation of powers embodied in bank charters, and to a few
statutory provisions.
The statutory provisions required reports of
condition four time6 a year, prohibited establishment of new branches,
limited the amount of loans to officers or directors and to single
persons or firms, exempted obligations of banks from the statute of
limitations, provided penalty for violation of the usury law, regulated
the use of the word "bank," and provided a penalty for receiving de
posits when insolvent. There was no examination of banks nor super
vision of their affairs.
Cases of charges against bank officials for
infraction of the statutory regulations were infrequent, and those that
came into the courts were usually disclosed as a result of bank failures.
- 2 -
Bank failures* During the forty years prior to the panic
and depression of 1907-08, only a few bank failures were reported in
¿/
2/
Mississippi. From 1907 to 1913, inclusive, there were more. The
increase in number of failures appears to have been due largely to
adverse conditions in agriculture, particularly because of the spread
of the cotton boll weevil across the State, though influenced also by
3/
the business depression with which the panic of 1907 was associated.
There had also been many new banks opened, the number of banks
other than national having increased in ten years from approximately 150
to about 300. A year after enactment of the new banking code, the pre
vious conditions were described as follows by one of the bank examiners:
"The mushroomy growth of new banks, and the rather loose
management of old banks, resulting in numbers of bank failures
and losses to depositors and stockholders, made the necessity
of adequate banking laws so imperatively evident that the last
Mississippi Legislature passed the law under which we are now
operating." V
1/ The special inquiry made by the Comptroller of the Currency
in 1896 showed 5 failures of nonnational banks during the period from
1863 to 1896; and Bradstreet's reports showed 4 during the next ten
years, but these figures may be incomplete. (Annual Reports of the
Comptroller of the Currency, 1896-1906: for the special study see the
1896 report, p. 54.)
2/ Estimates vary widely for the number of failures from 1907
to 1914. Bradstreet's reports show 10 from midyear 1907 to midyear 1913,
and 11 for the year ended June 30, 1914. (Annual Reports of the Comp
troller of the Currency.) Thornton Cooke states: "There is no official
list of the failures, but a list privately compiled showed 22 bank
failures in 1912 and 1913 and 7 more early in 1914." ("Deposit Guaranty
in Mississippi," Quarterly Journal of Economics, XXIV /February 1915/,
p. 419.) A Mississippi writer states: "Frcan 1907 to 1914 there were
no less than one hundred bank failures in Mississippi." (A. B. Butts,
"State Regulation of Banking by Guaranty of Deposits," Mississippi Lav
Journal, II /November 192sj, p. 213.) The Auditor's Reports, and the
1915 Report of the Mississippi banking department cited in support of
this statement, are not now available.
3/ See Thornton Cooke, oj>. clt.
4/ J. S. Love, "A Year of State Bank Supervision," Mississippi
Banker, May 1915, P* 57*
-3CHARACTEJR OF THE GUARANTY LEGISLATION
The Mississippi banking law of 1914 established a banking
department, revised and amplified the regulatory laws relating to
banks, and established the deposit guaranty system.
Banking department* Under the 1914 law the banking department,
including the deposit guaranty fund, was administered by a board of
bank examiners.
The law also provided for a board of bank commissioners*
The functions of this board were to examine applicants for the board of
bank examiners and license them as candidates for that board; to appoint
the first members of the board of examiners, and to appoint assistant
examiners, if needed, from among persons qualified as applicants for the
board of bank examiners.
The board of bank commissioners was composed
of one successful banker and businessman appointed by the governor of
the State, one experienced lawyer appointed by the attorney general, and
one experienced accountant by the State auditor.
The first appointments to the board of bank examiners, one
from each of the three supreme court districts of the State, to serve
until January 1916, were to be made by the board of bank commissioners
within a month after enactment of the law.
Thereafter, the members of
the board of bank examiners were to be elected, as in the case of other
State officers, one from each of the supreme court districts, to hold
office for four years or until successors should qualify.
To be a candi
date for bank examiner a person was required to be a practical accountant
and to thoroughly understand the theory and practice of banking, could
not have been in control of a banking institution or other business
enterprise that had failed, and must have been licensed to become a
candidate by the board of bank commissioners.
Though one of the members of the board of bank examiners
served as chairman, the examiners were of equal authority and the re
sulting difficulties of administration led to a change in the law in
1922. By this law, the board of bank commissioners was abolished, and
effective in January 192b, the board of bank examiners was replaced by
a Superintendent of Banks to be selected by a convention of delegates
appointed by the directors of State banks, to serve for a four-year
term. The Superintendent was required to be a man with five years'
experience as an executive of a respectable solvent bank in the State.
He was authorized to appoint bank examiners, not to exceed seven in
number, and office assistants.
The salary of bank examiners was at first $3>000 a year,
plus traveling expenses. This was raised to $3,600 in 1918, and to
$5,000 in 1920. Under the 1922 law, the salary of the Superintendent
of Banks was to be fixed by the convention of bankers that appointed
him.
This was first fixed at $7,500, and increased in 1928 to $12,000.
Mr. J. S. Love, who received the highest grade in the first examination
for bank examiners, became chairman of the board of examiners. With the
1922 change in the law he was elected Superintendent of Banks for the
term beginning in 1924, and reelected in 1928 and 1932. He thus re
mained the head of the banking department throughout the period of
operation of the deposit guaranty system.
Admission of banks to the guaranty system. Participation in
the deposit guaranty plan was made voluntary during its first year of
operation.
Each bank which applied for insurance was to be given a
rigid examination.
If found to be solvent, properly managed, and
conducting its business in strict accordance with the banking law, it
was eligible for admission; and when it had deposited the initial
assessment and the bonds or money required as security for future
assessments, it was certified as guaranteed. The law also provided
that within two weeks after May 15, 1915, all banks should apply for
guaranty of their deposits.
This included operating private banks which
were required to incorporate.
After a year in office, one of the bank examiners reported
that there had been 321 banks operating in the State when the examiners
5/
received their commissions.
This figure obviously includes 23 "branch
banks" which submitted separate asset and liability statements and were
therefore counted in tabulations published by the board of bank examiners
and previously by the auditor. Whether it includes private banks is un
known. At midyear, 191^> the number of State-chartered banks included
o ^
in the tabulations was 282.
It is not known how many of the banks
applied for insurance before participation became compulsory. During
the first 6ix months about 65 had been admitted to guaranty.
During their first year of operations, the board of bank
examiners endeavored to examine not only the banks which voluntarily
applied for guaranty, but also the other banks which were required to
participate after May 15, 1915* Under the law, banks which had been
examined twice during the twelve months preceding that date, and had
been found to be solvent, were to be admitted to guaranty without
further procedure. Banks which had not been examined twice during
5j Love, "A Year of State Bank Supervision," loc. cit. p. 60.
The first biennial report of the board of bank examiners to the Missis
sippi legislature is not available.
6/ This figure, and other figures throughout this report re
garding the number of State banks in Mississippi exclude the "branch
banks", and thus differ from those given in the semi-annual publication,
"Statements of Condition of ... State Banks and ... National Bank* In
Mississipp^, Migsissippi Banker, November 191^> P* 8*
- 6 -
that period were required to apply within
of insurance and to be examined.
15
days for the benefits
Such banks were required to be
found solvent, to be properly managed, and to be conducting their
business in strict accordance with the banking law.
In May 1915 one of the bank examiners reported that ail
but a few of the banks had been examined twice; and indicated that
this process would soon be completed.
qualified for admission.
Not all of the banks were found
In numerous cases stockholders and directors
contributed enough to enable their banks to qualify.
were consolidated or absorbed by other banks.
Several banks
By May 1915; thirty-
six banks had been placed in liquidation, half of these at the
suggestion of the board of bank examiners; and a few more, according
to the examiner, would have to be liquidated because of inability to
comply with the conditions of the law*
Four State banks had converted
2/
to national banks; but four national banks had become State banks.
One bank, operating under a special legislative charter
granted in 1&72, objected to examination and to payment of the assess
ment for support of the banking department on the ground that its
charter provisions made it exempt from further legislative regulation,
and filed a bill in the county chancery court to restrain the bank
examiners and to recover the first assessment paid.
The court ruled
against the bank, and this decision was affirmed by the Supreme Court
of Mississippi in June 1916, and upon appeal to the United States
9/
Supreme Court was affirmed by that court in November 1919* The
6/ Love, "A Year of State Bank Supervision,” loc. cit., p. 6l.
9/ Bank of Oxford v. Love et al., Ill Miss. 699# 72 So. 133J
Bank of Oxford et al. vf. Love et al.,Bank Examiners of the State of
Mississippi, 250 U. S. 603 .
-7 -
decisions upheld the applicability of the law on the ground that
such regulation was reasonable under the police power.
There was
no challenge to the constitutionality of the guaranty deposit pro
visions of the law:
this question had been settled by the United
States Supreme Court decisions regarding the deposit guaranty laws
of Oklahoma, Kansas, and Nebraska.
Deposits covered by guaranty*
The guaranty covered all
deposits not otherwise secured, excluding deposits bearing more than
k percent interest.
In effect, this amounted to coverage of all un
secured deposits, for the board of bank examiners was required to fix
a maximum rate of interest on each type of deposit (to be uniform
within each county) and the maximum was promptly placed at k percent
¿2/
except for existing contracts at a higher rate.
The provision in the law regarding coverage was as follows,
with the portion in brackets added in 1916:
"All deposits not otherwise secured /and all cashier's checks,
certified checks, or sight exchange issued by banks operating
under this lawJ shall be guaranteed by this act. The guaranty
as provided for in this act shall not apply to a bank's obliga
tions as endorser upon bills rediscounted, nor to bills pay
able, nor to money borrowed from its correspondents or others,
nor to deposits bearing a greater rate of interest than 4 per
cent per annum."
As in other States with deposit guaranty, differences of
opinion arose in the application of the deposit guaranty to particular
claims against failed banks.
Several such cases came before the Supreme
Court of Mississippi for determination.
In one early case.a depositor
had drawn a check for sight exchange but the sight exchange payment
10/ Mississippi Banker, November 191^, p. 9-
-8 -
had been refused on account of the insolvency and liquidation pro
ceedings against the bank. The court held that the depositor had a
claim for the full amount of his deposit undiminished by the check for
ii/
sight exchange.
It was uncertainty with respect to the status of
sight exchange and obligations in the form of cashier’s and certified
checks that led to the 1916 amendment of the coverage provision.
In
another case the applicability of the guaranty to a "special deposit",
made for a specific purpose, was questioned by a bank examiner in chsurge
of liquidation of a failed bank. The court decided that such deposits
12/
were covered by the guaranty.
Several cases arose regarding coverage of public funds.
Such
funds deposited in a bank that had not qualified as a depository under
the statute regarding such depositories were held to be covered by
±2/
the guaranty.
But public funds secured by a bond executed by a
surety without authority to become such, were held to be otherwise
ii±/
secured.
In another case the question arose whether secured deposits
for which the collateral, upon liquidation, proved to be insufficient,
15/
were guaranteed: the ruling was in the negative.
Assessments. Assessments for meeting the cost of deposit
guaranty were levied upon the banks on the basis of deposits covered
by the guaranty. The law provided that each guaranteed bank should
11/ Anderson et al., Bank Examiners v. Owen et al., 112 Miss.
476, 73 So. 286.
12/ Johnson, State Bank Examiner v. Johnson, 134 Miss. 729* 99
So. 369*
13/ Wardlaw, State Bank Examiner v. Planters Bank of Clarksdale
et al., 131 Miss. 93, 95 So. 135; Love, Supt. of Banks v. Murry, State
Treasurer, 135 Miss. 749* 100 So. 277*
14/ Love, Superintendent of Banks v. Citizens Bank and Trust
Co. of Marks, 140 Miss. 5^5» 105 So. 484.
15/ Board of Levee Com'rs. v. Love, Superintendent of Banks,
147 Miss. I83, 113 So. 335.
-9 -
certify at the date of each call statement the amount of money it had
on deposit not eligible to guaranty under the provisions of the act.
Such amounts were to be deducted from total deposits in making assess
ments for the guaranty fund.
The guaranty law provided for an assessment in January of
each year of l/20 of 1 percent of the average guaranteed deposits less
capital and surplus, with a minimum assessment of $20.00. The method
of computing average deposits was not specified in the law, but it
was assumed that the average was to be based on the four statements
of assets and liabilities submitted each year. The amounts assessed
were to be paid to the State Treasurer and held by the Treasurer sub
ject to the order of the Board of Bank Examiners (after 1922, the Super
intendent of Banks).
The annual assessments were to be continued until the de
positors' guaranty fund amounted to $500,000 over and above the
initial deposit with the State Treasurer. Additional „assessments of
l/20 of 1 percent each were authorized if the fund should become de
pleted, with five assessments at this rate the maximum in any calendar
year. Whether additional assessments, which were usually spread
throughout a calendar, were based on average deposits at call dates
during the preceding calendar year, or the preceding 12-month period
is not now known.
Each bank was required to deposit with the State Treasurer,
as an evidence of good faith and as a guaranty for the payment of
future assessments specified bonds (United States bonds or bonds of
the State of Mississippi or specified subdivisions) or cash amounting
-1 0 -
to $500 for every $100,000, or fraction thereof, of deposits eligible
to guaranty less capital and surplus (with a minimum deposit of $500).
Administration and custody of the fund. The assessments
were paid to the State Treasurer and held by him subject to the order
of the board of bank examiners (after 1922, the Superintendent of Banks)
which had administrative control over the guaranty fund. The State
Treasurer was required to credit the guaranty fund quarterly with its
proportionate share of interest on the average daily balance of the
guaranty fund at the minimum legal rate. He was authorized to deposit
the guaranty fund in depository banks in accordance with the law
covering State funds.
In 1916, the Treasurer was authorized to invest
the fund in excess of $10,000, upon order of the board of bank exam
iners, in bonds of the United States or of the State of Mississippi or
specified subdivisions. Two years later, authorization was given either
to sell or hypothecate the invested bonds if funds were needed to pay
the deposit claims in failed banks.
The bonds or cash deposited by the banks as surety for the
payment of assessments were also held by the State Treasurer. These
were carried by the banks, on their own books, as assets deposited
with the State Treasurer.
The law provided that in case of voluntary liquidation the
bonds or cash deposited as surety for payment of assessments, but not
any portion of assessments paid though remaining unused in the de
positors' guaranty fund, were to be returned to the bank.
In 1924,
after the obligations of the fund had become larger than the assessments
collected, the question arose as to whether the bonds or cash deposi
ted as surety should be withheld from return to a bank In voluntary
-1 1 -
liquidation as security for future assessments necessary to meet the
obligations of the fund at the time the bank went into liquidation.
The Supreme Court of the State ruled that the bank, having paid the
assessments levied to that date, was entitled to the return of the
¿6/
surety.
No special provision was made for the expenses of admin
istering the deposit guaranty fund separate from the other expenses
of the banking department.
Each bank was assessed one fortieth of one
percent of total assets per year (after 1916, minimum of $30) to be
used for the maintenance of the banking department.
In 1926, the mini
mum was made $60, with banks having deposits over $100,000 paying in
addition to the minimum $0.25 for each $1,000 of additional deposits.
Method of paying deposits in failed banks. When a bank
examiner found a bank to be insolvent he was required to take charge
and proceed to wind up its affairs. Each depositor, upon proof of
claim, was given interest bearing certificates for the amount of his
deposits.
The certificates carried 6 percent interest, reduced in 1926
to 4 percent, except with respect to deposits with a contract rate, in
which case the certificate bore interest at that rate. As the assets
of the failed bank were liquidated, dividends were paid on these cer
tificates. When all assets of a failed bank had been collected, in
cluding liability of stockholders, the officer in charge of the bank
certified to the board of bank examiners the amount of balances still
due on guaranteed deposits. These balances were then paid by the
board of examiners from the guaranty fund, with any claims or rights
of action of the depositors reverting to the board of bank examiners
16/ Mississippi Banking Department et al. v. Adams, 127 Miss.
122, 102 So. 70.
-1 2 -
for the benefit of the guaranty fund.
In 1924, the law was amended to
provide for certification of balances still due depositors, and payment
from the guaranty fund, whenever it should appear to the officer in
charge of the liquidation that the amount to be collected from the
assets and stockholders
1 liability
was likely to be insufficient to
pay depositors.
The law further provided that if the guaranty fund, after
levying the maximum number of assessments, was insufficient to pay
the depositors in a closed bank, they were to be paid pro rata, with
the remaining amount due to be paid from the next assessment upon
active banks for the guaranty fund.
When the law was amended in 1924,
pro rata was changed to "in the order of liquidation".
During the early years of the operation of the system, when
the fund made no payments on the certificates until the bank’s affairs
had been liquidated, other banks purchased the certificates thus giving
more prompt recovery to depositors who desired immediate payment.
Liquidation of closed banks*
Liquidation of failed banks,
or of a bank violating certain provisions of the banking code, was placed
in the banking department*
Under the 1914 law, as indicated above, a
bank examiner finding a bank to be insolvent was required to take charge
and wind up its affairs.
It was also the duty of the board of bank
examiners to liquidate a bank found to be doing business with less than
the minimum required capital, or a bank of which holders of two-thirds
of the stock had voted to liquidate or dissolve.
In 1922 these powers
were given to the Superintendent of Banks; and he was also empowered
to close and liquidate a bank if in his opinion the bank was unable to
-13meet its obligations in the ordinary course of business.
If a bank
felt itself aggrieved by an examiner taking possession, it could appeal
within ten days to the chancery court of the county, or to the chancellor
in vacation or other court of like jurisdiction; and the court, after a
hearing, could order the bank returned to its owners.
The examiner in charge of a closed bank was authorized to
appoint an agent to handle the liquidation process.
In 1922, this
power was transferred to the Superintendent of Banks; and the Super
intendent was also authorized to sell all the assets of a closed bank
to a purchaser who would assume all of the liabilities.
In one of the early liquidations under these provisions, the
examiner in charge maintained that the provisions of the law relating
to the issue of guaranty certificates to depositors gave priority to
holders of such certificates over other creditors of the bank. This
interpretation was not supported by the State Supreme Court, which
held that the general creditors were entitled to participate in the
distribution of the assets of an insolvent bank along with the de
positors, the depositors being protected by the guaranty provisions
±1 /
of the act.
SUPERVISION AND REGULATION OF PARTICIPATING BANKS
Previous to 1914, as has been noted at the beginning of
this report, Mississippi law provided no supervision of banking
institutions, and the statutory regulations of their operations were
very limited.
The 1914 law contained supervisory and regulatory pro
visions similar to those in force at that time in many other States;
17/ Anderson, State Bank Examiner v. Baskin & Wilbourn, 114
Miss. 81, 74 So. 682.
-1 4 -
and in later years, especially in 1922, some modifications of these
provisions were made.
Powers of banking department. A summary of the supervisory
powers given the board of bank examiners, and later, the Superintendent
of Banks, is shown in Table 1. Some of the items listed in this table
have been mentioned in the previous sections of this report.
-1 5 -
TABLE 1.
SUPERVISORY POWERS OF THE BOARD OF BANK EXAMINERS
OR SUPERINTENDENT OF BANKS IN MISSISSIPPI
Item
Powers granted
Opening of new banks
In 1914 no discretionary power. Certificate of
authorization to begin business to be issued
by Board of Examiners if capital stock is paid
up and the bank has complied with the legal
requirements. In 1924 law was amended to re
quire also a finding by the Superintendent of
Banks, the Governor, and the Attorney General,
or a majority of these three officers, that
the public interest required the organization
of such bank.
Amendment of bank
charter
Examination of bank, with certificate of condi
tion by examiner.
Examinations
Two examinations a year required. Additional
examinations to be made at any time deemed
necessary by the Board of Examiners and special
examinations when requested by the board of
directors of the bank. Amended in 1922 to pro
vide for examination at least twice a year at
irregular intervals without prior notice, and
with no bank to be examined by the same examiner
twice in succession except as ordered by the
Superintendent.
Scope of examinations
Examine cash, bills, collaterals and securities,
books of account, the condition and affairs of
the bank, the mode of conducting and managing
the affairs of the bank, the actions of its
directors, and the investment of the funds of
the bank.
Reports of condition
In I 91U banks required to submit at least three
reports of condition a year to the Board of
Examiners for the same dates as required by
the Comptroller of the Currency for national
banks. Form to be prescribed by the bank ex
aminer. Abstract to be published in form pre
scribed by the board of bank examiners.
Removal of undesirable
or illegal assets
No provision except that certain assets should be
charged off in evaluating the assets of the bank.
Impairment of capital
Shall require restoration of deficient capital
within 30 days, or (as amended in 1922) execution
of a bond in favor of the creditors of the bank.
-16Removal of officers,
employees, or di
rectors
No provision.
Taking possession or
closing a bank
Required to liquidate a bank:
If insolvent;
If attempting to do business with less than
required minimum capital or without full
capital paid-in;
If stockholders by two-thirds vote decide
to liquidate.
May liquidate a bank:
If dividends paid, or charges made to surplus,
contrary to law;
If capital remains impaired after 30 days' no
tice; or (after 1922) if impaired capital
is not restored or adequate bond furnished;
If reserve remains below legal limit for more
than 30 days after notice, or is persistently
allowed to go below legal limit;
After 1922, if Superintendent of Banks, as re
sult of examination, believes continuance of
bank will be hazardous to creditors, depos
itors, or the public; or that bank is unable
to meet its obligations in the ordinary course
of business.
In case of persistent violation of any other
provision of law.
Handling of closed
banks:
Return to owners
A bank, within ten days after an examiner has
taken possession, may apply to the county court
and may be returned to its officers by the court
if the bank shows cause to be aggrieved because
taken over.
Liquidation
Liquidation of closed banks to be carried out by
examiner, or agent appointed by examiner, with
assets remaining after payment cf depositors'
and creditors' claims and expenses of liquida
tion to be turned over to stockholders.
Sale cf assets or
capital stock
After 1922, superintendent authorized to sell
all assets of a closed bank, with purchaser
assuming all liabilities and giving bond to
guarantee payment of all creditors, with any
excess of purchase price over liabilities to
go to stockholders; if bank taken over because
of impaired capital, superintendent authorized
to sell enough capital stock to restore defi
ciency, calling in and cancelling pro rafts from
all stockholders an equivalent amount of stock.
-1 7 -
In addition to the items listed in the above table, mention
may also be made here of the principles of evaluation of bank assets,
in examinations, ^embodied in the law.
In appraising the assets of
banks the following assets were to be given no value--"no bank shall
be allowed credit”, the law stated--and the bank was required to charge
them off its books:
Any obligation or security the principal or inter-
I*est of which shall be more than 12 months past due; any bond or other
obligation upon which interest may be in default for 12 months; any
of its own stock held more than 12 months; and any unsecured over
drafts that had existed more than three months (amended in 1916 to more
than 30 days). In 1916 the provision was added that "only such over
drafts should be considered secured as those advanced against products
or actual existing values evidenced by warehouse receipts or bills of
lading, or against bills of exchange drawn in good faith against actual
existing values."
The law also provided that if an examiner found the
latest published statement of a bank to be materially wrong or the
condition of the bank to be changed materially since the last public
statement, he should order the bank to publish a new statement based
upon the findings of the examination.
Supervisory experience. The initial results of the inaugura
tion of bank examinations and supervision in Mississippi were to improve
banking practices, stimulate bank directors and officials to give more
attention to bank management, to bring about the rehabilitation of
weakened capital in some banks, and to close a number of banks with
seriously impaired capital.
The major weaknesses of the supervisory
provisions of the original law, as they appeared in practice, were in
adequate funds and authority for hiring legal staff and other needed
-1 8 -
assistants and especially the diffusion of administrative responsibility
among the members of the board of examiners-
Amendments to the lav, as
indicated in the table above, were made to remove these defects, es* pecially that in
1922
which abolished the board of bank examiners and
substituted a Superintendent of Banks, elected by the banks, and pro
vided for an enlarged examining and administrative staff*
This super
visory structure, which went into effect at the beginning of 1924, con-
tinued throughout the^peri6d of the deposit guaranty system with Mr. J.
S. Love holding the office of Superintendent of Banks until after the
repeal of the guaranty provisions of the law ten years later.
In the first biennial report of the banking department after
Mr. Love became Superintendent of Banks the following comments were
made on the strengthening of supervision.
"The supervision is more rigorous and thorough than it has
been before, due to the provisions in the 1922 laws, authorizing
the employment of a larger force and creating the office of
Superintendent of Banks. We are striving to eliminate dangers
due to one-man responsibility in banks; to require directors
to perform their duties as the law prescribes; to compel the
managers to observe the safeguards written into the law; to
keep the fidelity bonds of officers and employees in regular
form; to encourage efficiency and discourage loose and reckless
banking, basing our action upon the principle that banking is a
profession and should be so regarded and no one but experienced
bankers should be put in charge as active managers of banks."¿8/
Apart from this statement there is little information in the reports of
the banking department regarding the supervisory processes. However,
most of the amendments which were made to the banking code during the
entire period of the operation of the guaranty system were recommended
18/ Biennial Report of the Banking Department, 1924-1925,
pp. 7-8.
*
-1 9 -
by the board of examiners, or the Superintendent of Banks, and based
on their experience.
Statutory limitations on bank operations. The character of
statutory limitations on bank operations imposed by the banking code
of 1914 is shown in Table 2. While such limitations differ from State
to State, those in Mississippi were similar to those generally in force
in most of the States during the same period.
-2 0 -
TABLE 2*
STATUTORY LIMITATIONS ON BANK OPERATIONS IN MISSISSIPPI
Item
Provisions of law
Responsibility of officers, di
rectors, and stockholders:
Examination of bank
Board of directors, or executive board
or auditing committee, to "examine the
loans, paper and securities of the bank
and its liabilities and resources of
every kind” at least once every three
months.
Losses resulting from loans
made in violation of legal
limitations
1914, no provision. 1916, any director
made individually liable for losses re
sulting from loans to officers, direc
tors or employees which he has approved
knowing the same to be excessive or in
curring great risk.
Liability of stockholders
Usual double liability.
Bonding of active officers
and employees
No provision in 1914. In 1920 fidelity
bonds required, amount to be fixed by
directors of bank subject to approval
by state bank examiners.
Limitations on loans and in
vestments:
Loans to bank examiners
Prohibited.
Loans to officers and em
ployees
Must be approved by a majority of the
Board of Directors, or executive com
mittee thereof.
Loans to directors
Must be approved by a majority of the
Board of Directors or executive com
mittee thereof.
Loans to stockholders
Must be approved by a majority of the
Board of Directors or executive com
mittee thereof.
Maximum to single borrowers
(not applicable to discount
of commercial paper owned
by a person or firm)
25
percent of capital and surplus (with
exceptions for bills of exchange). In
1914, no limit on bills of exchange up
to 90 percent of value of goods in ware
house or in transit; in 1920, no more
- 2 1 -
than l/2 of paid-in and unimpaired
capital and surplus for drafts or bills
of exchange with not over six months to
run accompanied by shipping documents
or warehouse receipts or other title
documents for readily marketable stables
not subject to rapid deterioration, and
no more than l/lO of paid-in and unim
paired capital and surplus unless ac
companied by such documents.
Maximum secured by real
estate
capital stock
No provision.
Taking as collateral, or purchase, pro
hibited except when necessary to pre
vent loss on debt previously contracted,
and then not to be held over 12 months*
Limitations on ownership of
property:
Maximum value of banking
house
30
Time limit on real estate
acquired by collection
of debt
Five years
Ownership of other real
estate
percent of capital and surplus (50
percent in cities over 6,000 popula
tion with consent of bank examiners)
Forbidden
Ownership of corporate stocks:
Of banks
Stock in any other bank, except
reserve bank, operating in the
prohibited. In 1918 ownership
stock in Federal Reserve banks
membership authorized.
regional
State
of
with
Of other corporations
Presumably illegal because of lack of
enumeration in powers granted?
Limitations relating to de
posits:
Maximum amount of deposits
Ten times paid-up capital and surplus .
for a period longer than six monthsi/
(savings banks excepted); in 1926, 15
percent for any bank on written per
mission of Superintendent of Banks.
1/ In 1920, made 12 months for a period of two years.
-22Maximum rate of interest
on deposits
To be set by Board of Examiners, at a
uniform rate within each county.
Receipt of deposits when
insolvent
Prohibited.
Required reserve:
Total amount of required
reserves
In places under 50,000 population, 15
percent cf demand deposits and 7 per
cent of time and savings deposits; in
cities with more than 50»000 popula
tion, 25 percent of demand deposits
and 10 percent of time and savings
deposits. In 1918, bank becoming
member Federal Reserve system to sub
stitute Federal Reserve requirements
for such State requirements.
Proportion of reserve re
quired to be held in
actual cash
None
Permissible character of pro
portion of reserve not re
quired to be held in actual
cash
Due from solvent banks
Cash items
No provision regarding inclusion of
cash items in reserve
Limitation on borrowings:
Maximum
1914 no provision; 1928, three times
capital and surplus with additional
amounts permitted with written con
sent of Superintendent of Banks.
Power of supervising author
ity to require reduction
No provision.
Maximum value of assets which
may be pledged for borrow
ings
No provision.
Limitation on payment of
dividends:
Percentage of earnings to be
carried to surplus prior to
dividend payments
l/lO of earnings until surplus reaches
20 percent paid-in capital.
-23When losses equal or exceed
undivided profits
No specific provision but in effect
prohibited by requirements as to charges
to surplus account.
When reserve is impaired
No provision.
When hank is in danger of
insolvency
No provision.
When capital is impaired
No provision.
Minimum capital stock re
quirement (for new banks;
not applicable to banks
operating at effective
date of act)
Graduated by population of city, town,
or community:
10,000
6.000
2,500
1.000
1.000
or more population
to 10,000
"
to 6,000
"
to 2,500
"
or less
"
- $50,000
- $35,000
- $25,000
- $15,000
- $10,000
-2 k -
INSUFFICIENCY AND CLOSING OF THE DEPOSIT GUARANTY FUND
Inadequacy of the fund.
The care with which banks were examined
and the program of requiring the strengthening of weak capital structures,
before admission to insurance, obviated in Mississippi many of the initial
difficulties which occurred in Oklahoma, wh&re^tfie banks also had not pre
viously been subject to examination and supervision when the deposit guaranty
system was established.
The Board of Bank Examiners, in their first biennial report, recog
nized that the fund being accumulated from the assessment rate provided in
the deposit guaranty would be insufficient in event of "a failure or failures
of any aggregate proportions,” and suggested that the annual rate be raised
from one-twentieth to one-fifth of 1 percent of deposits.
However, an
article in the Mississippi Banker, organ of the State bankers1 association,
opposed such an increase, citing the experience up to that time of the de
posit guaranty fund in Kansas where the regular rate was l/20 of 1 percent
and no emergency assessment had been necessary, and of the fund in Nebraska,
where no obligations had yet fallen on the fund.
’’Similar results,” the
article stated, ’’are surely possible in Mississippi— their attainment de
pending largely upon efficiency of bank supervision, in which respect we
think the Mississippi examiners have just cause for pride in past achieve
ments and confidence in the future.
A good many bankers will probably feel
that the examiners have recommended that they cross a highly expensive
bridge which need not and may not be reached."
¿2/
No action to increase
the rate was taken by the Legislature.
19/ Mississippi Banker, January 1916, PP* 3-^*
For several years after 1Q14, economic conditions were
favorable to the banks because of wartime prosperity.
However, in
1916 and 1917 five banks failed, with liabilities in excess of amounts
realizable upon liquidation large enough so that additional assessments
were required.
The board of bank examiners made one such additional
assessment, at l/20 of 1 percent, in
1917, two in I91B, and three in
1919.
In the latter part of 1920 more extensive banking difficulties
appeared in Mississippi, resulting from agricultural conditions, chiefly
the postwar decline in the price of cotton and in farm land values.
Though for a few more years the fund was able to meet its obligations
when they became due, this was only because of the fact that until 1924
the fund was not liable until a bank had been liquidated for payment
of guaranty certificates issued when the bank closed.
It was apparent
that the obligations incurred in the banks already closed would absorb
the entire income of the fund from assessments for several years in
the future.
The Superintendent of Banks, in the biennial report of
the banking department for 1924 and
realistic manner.
1925, appraised the situation in a
He stated:
"In the first place it seems quite clear that the con
tributions to the Guaranty Fund now being made by the banks
are sufficient only to take care of the demands put upon it
under normal conditions. The fund thus supported will protect
the depositors of banks that fail on account of dishonest and
criminal conduct on the part of officers and managers and of
those banks that fail because of ordinary negligence and mis
management; meaning to include those that suffer from causes
peculiar to themselves and not from sudden occasional dis
turbances that may not be anticipated, conditions general in
-26-
their nature, affecting all banks operating under similar condi
tions. This condition would include seventeen of the thirty
failures in the eleven and cne-half years. In the second place
•it is equally clear that the fund is not sufficient to carry
the plan successfully thru periods of stress and panic. This
has been demonstrated. The conditions that broke the thirteen
banks mentioned as having succumbed to the 1920 disaster were
such as none but the banks that were above the average in prudence
and foresight could survive without serious loss. The Guaranty
Fund has been burdened with an extraordinary loss, so much so
,
that it will require years to liquidate under normal conditions.”^ /
The position of the deposit guaranty fund never improved.
In 1926 agricultural conditions were again unfavorable, particularly
in the cotton-growing Delta of the Mississippi.
Additional failures
occurred in 1927> 1928, and 1929 as agricultural conditions in the State
remained unfavorable.
Suspension of the guaranty in 1930*
in full operation until March 11, 1930*
Tbe guaranty law remained
At that time its application to
further failures was suspended until all existing claims were paid in
full, with the provisions for assessments on the banks unchanged.
indebtedness of the fund in
1930,
The
represented by deposit certificates
and accumulated interest in excess of the liquidation value of remaining
assets of the failed banks in process of liquidation, amounted to $5
million.
It was estimated that retirement of these certificates would
absorb the proceeds of the assessments for twenty years.
On May
31
of the same year the legislature authorized a State
bond issue to provide funds for retirement of the outstanding certifi
cates, the bonds in turn to be retired out of future assessments which
20/ Biennial"Report of the Banking Department, 1924-1925,
pp. 6-7*
-2 7 -
were to be continued at the previous rate of 1/20 cf 1 percent not
more than five times a year*
The basis of the assessments, until the
bonds were retired, was changed from average guaranteed deposits to
average unsecured deposits.
The bonds were to be supported by the
11full faith and credit of the State of Mississippi", and were to bear
interest at the rate of k l/2 percent but were not to be issued until
the validity and constitutionality of the law suspending application
of the guaranty to future failures, with continuance of the assess
ments on the banks, had been declared valid and constitutional by a
superior court or the State Supreme Court.
A case involving this
question reached the Supreme Court nearly a year later, and resulted
in the law being upheld, by the court.
21/
In 1931* when the validity of the 1930 law had been estab
lished, bonds of the State could not be sold at the 4 l/2 percent rate,
and the law prohibited sale below par.
In October cf that year, a
revised law pertaining to the bonds was enacted by a special session
cf the Legislature, raising the permissible rate of interest to 5 l/2
percent.
The bonds were to mature in not more than twenty years and
could be issued serially.
The date of the issue was December 1, 1931*
Further difficulties were met before the depositors could
be paid.
These difficulties and the process of retiring the guaranty
fund certificates were described as follows by the Superintendent cf
Banks:
2l/ City of Jackson vT Deposit Guaranty Bank & Trust Co.,
133 So. 195, l60 Miss. 752 (March 23, 1931)•
-2 8 -
"During the period when the legality of the bonds was
being questioned the State of Mississippi had encountered
serious financial difficulties. The credit rating of the
State was so impaired that these bonds could not be marketed
even at a rate of 5
interest and it was illegal for the
bonds to be sold at a discount.
"The situation was met by the organization of a finance
company which set up a revolving fund of $100,000. The bonds
of this company could be sold below par.^ Its bonds were
slowly exchanged for certificates of deposit outstanding.
These certificates were then exchanged in payment for the
Mississippi State bond issue at par. In case of small de
posits one bondr
ond t\fas
wj
held in trust to cover a number of
small claims .-227
-In-the biennial report -of the Banking Department—erwui gf brief*dtJbcilp-*•
K
tion was given:
. , 1.\
I \ .
\
.1
"Depositors in all banks closing prior t^> March 11, 1930
were taken care of in full by the exchange of deposits for Bank-?
ing Department Bond/s. M^st of these bonds sold for an .average
price of eighty-fiVe to ninety cents on the dollar."±^/
1
\
\
\
I
It would appesar from the foregoing that the holders of the
outstanding guaranty fund certificates, who in many cases were probably
\
/
\
not the original depositors, lost from
1
\
'
10 to 15 percent of their claims.
\ the finance company
L
1 described Iin one of
. the
V above
Though
bonds were
quotations as "Banking Department Bonds" it is believed that they were
\
/
\
i
I
not obligations of the banking department; and it is presumed that the
finance company, or the persons who purchased its bonds, eventually
made a profit, when the State bonds it obtained were finally paid, from
1
\
/i
\ I
\/
If
the discount at which its own bonds had been, issued in exchange for the
gviaranty fond
22/ Interview with Mr. J. S. Love, October 22, 193^*
23/ Biennial Report of the Banking Department of the State of
Mississippi, 1931-3-933* P*
A description of the process of retirement of the guaranty fund certificates has been provided by Mr* E. 0* Spencer, president of the Mortgage Bond
& trust Coapany, Jackson, Mississippi*
A fire insurance company with which
Mr. Spencer was associated owned about $$0,000 of the guaranty fund certificates,
largely taken in for payment of Insurance premiums from policyholders who could
not pay In cash under the depressed business conditions of 1931* Mr* Spencer
had also learned that a few banks and other financial institutions held about
a million dollars of the certificates; and after a careful study of the lav
providing for a bond issue to retire the certificates, inquired of the legal
officials of the State whether It would be possible for this group of certifi
cate holders, or the Mortgage Bond & Trust Company acting as their agent, to
purchase with cash an amount of the bonds equalling their certificate hold
ings, with the State Treasurer then using that money to retire those certifi
cates. The bonds vould then be distributed to the certificate holders— in
effect, exchanged for the certificates. The Department of Banking and the
Attorney General agreed that this process might be followed, provided that
all holders of the certificates be given the tame privilege. The Mortgage
Bond & Trust Company then arranged to act as agent for all holders of the
certificates. The lowest denomination of the bonds was $500, and to provide
for "exchange" of certificates of smaller amovnts, bonds of that denomination
would be purchased, placed in trust and participating certificates Issued
to the certificate holders. The participating certificates were negotiable,
which made It possible for them to be collected In appropriate amounts and
then exchanged for the bonds* She Mortgage Bond & Trust Company, as agent
for the certificate holders In th« "exchange,* charged a handling fee of
Interview with Mr* I. 0* Spencer, January 16, 1956 .
3 percent (5 percent toward the end of the process) vhioh act moat of their
ooate.
It 1« impossible to determine how much the original depoaitora in the
failed banka may have lost. Many of the certificates that had been issued
before it became clear that the fund waa becoming hopelessly insolvent had
been taken by operating banka and had remained in their possession. If the
holders of the certificates, whether the original depoaitora or not, re
tained to maturity the State bonds which they received, or held them until
the market price for the bonds waa at or above par, they did not loae except
for the cooalssion charged for handling the "exchange." But those that sold
their bonds or participating certificates at prlcea prevailing in 1932 , or
aoon thereafter, lost just as they would have done by selling other State
bonds in the depressed market*
______
ixkua
The biennial report of the Banking Department for 1931-1933 stated
that jdk± depositors in all banks closing prior to March 11, 1930, were taken
care of in full by this exchange of deposits for bonds, adding that the
bonds sold for an average price of eighty-five or ninety cents on the dollar.-/
'XI/ Biennial Report of the Banking Department of the State of
Mississippi« 1931-1933, P> 6»
-2 9 -
Depositors1 Protection Fund.
In 1930, when application of
deposit guaranty to future failures was suspended until past obliga
tions were met, a very limited form of deposit insurance was provided
for depositors of banks that might fail during that interval.
Each
bank was to be exempt from taxation on its surplus, up to an amount
equal to its capital, and each bank was required to carry half of its
net profits to its surplus account until the surplus equalled the
capital.
At the end of the year 1930, and at the end of each successive
year, each bank was to be assessed
3
percent on its surplus exempt from
taxation, unless that would produce over $ 300,000 a year, in which case
the assessment rate was to be enough to provide that amount.
The amount collected for the Depositors
1 Protection
Fund at
the close of each year was to be applied toward the payment of de
positors in banks failing in that year, distributed in proportion to
the individual depositor’s losses after the liquidation of each of
the banks that failed in that year.
Should a surplus occur in the
Depositors 1 Protection Fund in any year, it was to be carried forward
to the next year, but no deficit would be carried into any succeeding
year.
The amounts available under this law, which remained in force
for four years, were small; and in view of the number and severity of
bank failures in the early
1930!s,
of depositors of failed banks.
added very little to the recoveries
-3 0 -
Repeal of the deposit guaranty law.
enacted a revised banking code replacing the
amendments.
In 193^ the Legislature
191^
code with all of its
This revised law, which become effective April 2 of that
year, repealed all of the provisions of the law relating to deposit
guaranty, in a section that read as follows:
'’That the State bank guaranty law is, in every
particular repealed, and the annual assessment of onefourth of one percent on the bank's average unsecured
deposits; the three percent annual assessment on the bank's
exempt surplus, and the requirement of depositing bonds with
the state treasurer for a full compliance with the guaranty
laws, are hereby repealed, and the state treasurer is au
thorized, empowered and directed to return to the several
banking corporations bonds and other collateral heretofore
deposited with said state treasurer."fiz/
The effect of this was to make the bonds that had been issued to retire
the deposit guaranty certificates simply a part of the State's bonded
indebtedness, with the burden of meeting them as they became due fall*
ing upon the taxpayers, except to the extent of recoveries from assets
of the failed banks that had not yet been liquidated.
Another feature of the 193^ law was the establishment on
January
1,
1935# of a Department of Bank Supervision, to be directed
by a State Comptroller appointed by the Governor, with a salary of
$7,500 a year, to replace the State Banking Department and the Super
intendent of Banks, who had been elected by the bankers and had received
an annual salary of $12,000.
The 193^ law also authorized banks in Mississippi to become
members of the Federal Deposit Insurance Corporation or any other
similar agency created by the laws of the United States to insure or
guarantee deposits in banks.
2^/ Laws of 193^ chapter lW>, section 116.
-31-
number,
DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number and deposits of operating banks*
The number and
deposits of State banks in Mississippi, which participated in deposit
guaranty, are shown for each year in Table 3; and for comparison the
number and deposits of national banks, which did net participate in
the system.
Information is not available regarding the amount of
secured deposits, and consequently it is not known by how much the
figures given in the table exceed the unsecured deposits to which the
guaranty applied.
For the 15-year period, the State banks comprised from
to
91
percent of all the banks, and held from
all the deposits.
67
to
79
88
percent of
During the first few years the State banks gained
slightly in number and deposits relative to national banks; and lost
slightly during the latter part of the period.
Ten banks changed from State to national charters during
the period; four in
192^,
and one in each of the years,
1925, 1927, 1929, and early 1930*
national to State charters:
1922, 1923>
A smaller number changed from
two in 1918, and two at the end of 1919*
Concentration of deposits»
Table 4 shows the amounts of
deposits held at the end of 191^* 1922, and 1929 by State banks in
Mississippi grouped according to their deposits.
These dates were,
respectively, close to the beginning, the middle, and the end of the
period of operation of deposit guaranty.
At the beginning and end of
the period, the largest bank held over 5 percent of the deposits, and
the largest 10 banks about 25 percent.
The concentration of deposits
was slightly less in the middle of the period.
-3 2 -
Table 3.
End of
year 1/
19lU
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
I929
NUMBER AND DEPOSITS OF STATE AND NATIONAL BANKS IN
MISSISSIPPI, I 915-I929, BY YEARS
Number of banks
Total
308
293
293
297
299
316
337
336
331
338
335
338
325
325
321
306
State 2/ National
273
258
258
263
266
284
306
306
300
306
299
301
289
288
285
271
35
35
35
34
33
32
31
30
31
32
36
37
36
37
36
35
3/
Deposits (in thousands)
Total
State 2/
National
62,943
74,977
103,124
45,493
55,006
78,531
140,639 106,601
159,072 119,986
237,097 187,850
160,359
154,460
186,583
199,519
210,981
123,164
116,724
138,558
147,990
145,954
17,450
19,971
24,593
34,038
39,086
49,247
37,195
37,736
48,025
51,529
65,027
State banks as
percentage of
total
Number Deposits
88.6
88.1
72.3
73-4
88.1
88.6
90.0
76.2
89.9
90.8
91 .I
90.6
90.5
246,036
226,597
255,097
167,102
78,934
89.3
89-1
151,365
171,615
250,132
168,305
239,056
160,849
75,232
83,482
81,827
79,007
68.9
88.6
88.8
88.6
75.8
75-4
79-2
76.8
75-6
74.3
74.2
69.2
67-9
66.8
67.3
67*3
67.1
l/ December 31, except for 1916 which is December 272/ From "Statements showing the condition of State banks and National
Banks” (published semiannually by Board of Bank Examiners or Superintendent of
Banks). The number of banks is adjusted to exclude branch banks (23 in 1915-1916,
and 22 in 1917 -1929); and deposits to exclude amounts "due branch banks" and "due
banks (overdrawn accounts)".
jJ Annual reports of the Comptroller of the Currency.
33
-31Table 4. NUMBER AND DEPOSITS OF STATE BANKS IN MISSISSIPPI,
DECEMBER 31, 1915, 1922, and I929 l/
Banks grouped by amount of deposits
Number of banks
All State banks
Deposits (thousands of dollars
1915______ 1922_____ 1929_____ 1915_____ 1922
1929
160,419
258
300
271
54,597
138,321
35
23
67
78
67
6,248
12,846
15,762
7,567
6,975
5,199
--
2,575
•17,465
28,945
44,111
18,913
15,197
11,115
2,886
8,960
5,710
20,117
Banks with deposits of-
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2 ,000,000
$2,000,000 to $5,000,000
More than $5,000,000
Largest bank
Largest 5 banks
Largest 10 banks
Percentages of total
111
82
46
11
6
2
—
100
82
62
13
6
2
28
5
3
1
1
l
5
5
5
1,588
11,738
28,676
45,768
37,500
12,390
22,775
10
10
10
13,865
30,088
8,859
28,141
38,976
100.0
100.0
100.0
100.0
100.0
100.0
43.0
11.7
33-3
27.3
20.7
4.3
8.5
1-9
1.0
28.8
11.4
23-5
—
0.7
1.1
0.4
0.3
1.7
3-3
0.4
Banks with deposits of-
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
$2 ,000,000 to $5 ,000,000
More than $5,000,000
Largest bank
Largest 5 banks
Largest 10 banks
31.8
17-8
4-3
2-3
0.8
1.9
3.9
2.0
24.7
24.7
10.3
1-9
1.8
3-7
28.9
13-9
12.8
9.5
--
5.3
16.4
25.4
12.6
20.9
31.9
13.7
11.0
8.0
7.3
17.9
28.5
23-4
7-7
14.2
4.1
14.5
5-5
17.5
24.3
21.8
l/ Tabulated from statements for individual banks published by the State Banking
Department. The figures for total deposits differ slightly from those given in Table 3,
chiefly because of omission of an item for unpaid dividends in the tabulations from
individual statements.
-3 * -
Nurnber and rate of failures. During the period of operation of
the Mississippi deposit guaranty fund, from its beginning to March 11*
1930, there were
63 failures of State banks*
The deposits of these
banks amounted to more than $lU million.
Failures occurred during every year that the fund was in opera
tion except
1915> 19iy> and 1919# with a maximum of ten in 1922 and also
in I929. The average annual rate of failure, computed as the number that
failed per 100 operating at the beginning of the ye*r, was
posits averaged $0.70 per year for each
banks*
1 .5 . The de
$100 of deposits in operating
The number of banks closed in each year, their deposit liabilities
at date of closing, and the failure rates in each year, are given in
Table 5 *
In Table
6 the
size distribution of failed State banks is com
pared with an average of the size distributions of operating banks.
The
smallest size group had the highest rate of failure, and there were no
failures among the banks in the largest size groups.
This direct rela
tionship between size of bank and failure rates is different from that in
some of the other States with deposit guaranty plans in operation during
the same decades.
Comparison with failures in other States* In Table 7 bank fail
ure rates in Mississippi for 1916-1929 are compared with those in contigu
ous States and the entire United States.
The average annual number of
failures of State banks in Mississippi, relative to the number of opera
ting banks, was similar to the rate for the four contiguous States, and
somewhat below that for the entire United States.
Failure rates in terms
of deposits were somewhat higher in Mississippi and in its contiguous
States than in the entire United States, with the Mississippi rate higher
than three "but lower than one, of the contiguous States.
-3 5 -
Table 5. NUMBER AND DEPOSITS OF STATE BANKS IN MISSISSIPPI CLOSED ±J
BECAUSE OF FINANCIAL DIFFICULTIES, JANUARY 1, 1915, TO MARCH 11, 1930
Year or size
group
Total or average
1916
1917
1918
1919
1920
Number of
banks
Deposits at
time of 0/.
closing ~i
Number sus
pended per
100 active
"banks
63
$14,156,093
1.5 3/
0.69 3/
1+
623,398
64,103
—
1.6
.4
1.13
.08
1
Deposits in
closed banks
per $100 of
deposits in
active banks
--
—
—
2
480,585
.7
.26
1921
1922
1923
1924
1925
k
10
2
3
4
1,466,819
1,168,957
1.3
1.19
1.00
.12
•39
.82
1926
1927
1928
6
6
--
--
5
10
1929
1930 (To March 11) 6
—
170,690
571,047
1,202,307
1,454,295
2,294,357
1,553,652
2,171,976
931,907
—
3-3
•7
1.0
1*3
2.0
2.1
1-7
3-5
11 *5 i/
•87
1*52
•91
1.29
3.02 ¿/
1/ Excludes banks which were closed prior to or upon first
examination and did not participate in the deposit guaranty system. There
were no failures of participating banks in 1915*
2/ Biennial Report of the Banking Department, State of Mississippi,
1931-1933, Exhibit F, pp. 28-29.
2/ Annual rate.
Table 6 . SIZE DISTRIBUTION OF FAILED BAMS IN MISSISSIPPI COMPARED WITH
AVERAGE SIZS DISTRIBUTION OF ACTIVE BANKS: PERIOD OF OPERATION OF DEPOSIT GUARANTY
SYSTEM
Size categories
Total number of banks
Number of banks with
deposits of$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to é,000,000
$2,000,000 to $5 ,000,000
Over $5,000,000
Operating
banks
(average)
(15 years)
Percentages of total
Operating Failed
banks
banks
63
100.0
100.0
1-5
43
86
77
52
21
22
14
5
15.1
3O .2
27.O
33.3
34.9
22.2
8.0
1.6
1.7
1.2
.6
20
5
2
1
--
--
18.2
7.0
1.8
—
3-3
•3
—
•7
$14,156
100.0
1C0.0
0.70
2,834
14,744
27,577
36,624
1,253
3,523
4,758
3,550
1,067
8.9
24.9
33.6
25.1
7.5
2.96
1.58
26,667
2.1
IO.9
2O .3
27.O
19.7
IO.3
13,954
13,188
--
--
9.7
l/ Averages of annual data for December 31, 1915 to 1929, inclusive.
2/ Annual average number of failures per 100 active banks, and annual
average deposits in failed banks per $100 of deposits in active banks.
Failure
rate pgr
year £'
285
Total deposits (in thousands) $135,588
In banks with deposits of$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 to $2,000,000
$2,000,000 to $5 ,000,000
Over $5,000,000
Failed
, banks
1.15
.65
.27
rf
Table ?. BAIIK FAILURE RATES IN MISSISSIPPI, 1916-1929, COMPARED
WITH RATES IN CONTIGUOUS STATES AND IN TIE UNITED STATES
Failures per 100 operating Deposits in failed banks
banks (annual average)
per $100 in operating banks
___________________________ (annual average)_________
All comState
TTation- All comState
Tiationmercial
batiks
al
mereiai
banks
al
banks
1/
banka
banks
1/
banks
Mississippi
1.29
1.34
.84
¿0.56
$0.75
Four contiguous States
Louisiana
Arkansas
Tennessee
Alabama
1.21
1-39
1-53
1 .751.13
•47
1-35
1.59
•93
1.18
.14
.64
0.43
•15
•95
•43
.44
0.66
.20
1.30
.80
.86
Entire United States
1.54
1.85
•72
•33
.47
1.02
1/ Data include private banks.
.22
.81
$0.08
0.09
.003
.31
•03
.11
.15
-3 8 -
Causes of failure. The biennial reports of the Superintendent
of Banks attribute most of the failures of Mississippi banks during the
1920's to two causes: the agricultural situation particularly with
respect to cotton, and dishonesty on the part of bank officials. Re
garding the failures during the years 1920-1925, he stated:
"In 1920 there was a sudden and decided falling off in
land values and in the market price of agricultural products.
There was a general disturbance of financial conditions but
the bank failures in this State that resulted were due mainly
to the violent changes in the land and cotton markets. This
change affected more adversely the banks in the Delta section
where a large percentage of the securities is based upon land
and cotton.'1
''It should be noted that in and subsequent to 1920 ... there
have been twenty-five bank failures and it is from these twentyfive that we have selected the thirteen failures in the Delta,
directly caused by the sudden change in that year. Of the re
maining twelve, eight have been weakened or ruined by irregular
acts of officers or managers of varying degrees of criminality
and the other four were the victims of inefficiency and
negligence.” 25/
The increase in guaranty certificates outstanding, that re
sulted from the 12 failures during 1926-1927, was attributed by the
Superintendent of Banks "mainly to the small returns on crops in the
year 1926, resulting from low production and low prices."
"That year,"
he said, "was as disastrous as the year 1920." He noted that the fail
ures in both years resulting from agricultural conditions were concen
trated in the one-crop section of the Delta region.
"The falling off
in values of agricultural products and the shortage in crops in 1920
and the extreme low prices in 1926 affected most decidedly the Delta
section, which is a single-crop section, and that is the territory
where banks have failed in such number as to deplete and create a
deficit in the guaranty Fund. That is the territory where the 'stress
25/ Biennial Report of the Banking Department, 1924-1925, p. 5*
-3 9 -
and panic* operated.
That territory includes about one-fourth of
Mississippi. 11 However* the majority of the failures were of banks
weakened by the 1920 situation* or by previous dealings.
the
Seven of
12 were traceable to transactions or business dene prior to 1920.
26/
One was due to criminal mismanagement.
The Superintendents comment about the causes of the fifteen
failures during
1928-1929 was brief.
MThe most of these failures were
due tc acts of dishonesty which the men in immediate charge kept con27/
cealed from our examiners*1' —
Adverse economic conditions and dishonesty on the part of bank
officials were also emphasized as causes of bank failures in schedules
prepared for the Federal Reserve Committee on Branch* Group* and Chain
Banking* regarding Mississippi bank suspensions during 1921-1930*
On
these schedules* there was also a large number of cases in which "heavy
withdrawals” was mentioned as a primary cause* but this was more impor
tant with respect to
1930 cases than for the earlier years; and in
addition is ambiguous because of lack of explanation of the circum
stances leading to heavy withdrawals.
A classification of the primary
and contributing causes reported on the Federal Reserve Committee
schedules is given in Table
8
*
26/ Biennial ^eport~of the Banking Department* 1926-1927* pp. 7-8.
27/ Biennial Report of the Banking Department* 1928-1929* p* k.
ao
- 36 -
Table 8. CAU3E3 OF BAIOC FAILURES IN MISSISSIPPI, 1021-1930,
REPORTED PY TIE FEDERAL RESERVE COMMITTEE ON BRANCH, GROUP
AITD CHAIN EAIOCTNG
Item
l/
Number of cases
Primary
Contributing
cause
cause
Adverse economic conditions in area:
Losses due to unforeseen agricultural or
industrial disasters, such as drought, flood
boll weevil, etc.
Decline in real estate values
30
2
Dishonesty of officials: defalcation
13
Poor management: insufficient diversification,
or incompetent management
Other causes:
Heavy withdrawals
Failure of affiliated institutions or of
correspondents
h6
11
8
13
50
6
6
l/ Specific items from schedules collected by the Federal
Reserve Committee on Branch, Group and Chain Banking; the grouping,
indicated by the underlined phrases, by the author of this report.
The tabulation was made by the author of this report from the schedules,
which were made available through the courtesy of the Board of Governors
of the Federal Reserve System.
-lnFINMCIAL HISTORY OF THE GUARANTY FUND
Detailed information is available regarding the operations
of the depositors1 guaranty fund in Mississippi.
However, information
is net available on total collections from liquidation of assets of the
failed banks* nor of the expenses of receivership paid from such col
lections.
Statements of the depositors1 guaranty fund in Mississippi*
and cf the amounts disbursed in each of the failed banks* were pub
lished in the biennial reports of the Banking Department.
In the re
port for 1931-1933* which covered the period when the State bond issue
was sold and the proceeds used to retire the outstanding certificates,
a statement was given of the annual receipts and disbursements of the
fund from its beginning.
Statements were also given for each of the
failed banks* as of December 1* 1933* showing its deposit liability
when closed, the amounts paid on the deposits from liquidation of the
bank’s assets* from the guaranty fund* and from the proceeds of the
bond issue, together with the remaining guaranty certificates outstand
ing* and the cash on hand and estimated value of realizable assets not yet
liquidated.
In 1935* the State Controller* who had succeeded the Super
intendent of Banks at the first of the year, had an audit made of the
remaining guaranty certificates outstanding; and in the biennial report
of the Department of Bank Supervision for 193^*1935 published revised
figures of the guaranty certificates paid from the bond issue to Decem
ber
1 * 1933> and outstanding as of that date* together with subsequent
payments by the Banking Department from that date to January 1* 1935>
-42and payments by the Department of Bank Supervision from the latter
28/
date to November 30, 1935*
Small amounts of such payments in
later years are given in subsequent reports. Transfers to the State
Treasurer of funds collected from assets of failed banks subsequent
to payment of their guaranty certificates from the proceeds of the
bond issue are given in the biennial reports of the Department of
Bank Supervision.
Biennial reports of the Auditor of Public Accounts also give
summary figures of the annual receipts and disbursements of the
guaranty fund, and of receipts and disbursements from the bond issue.
Because of differences in the dates to which the data pertain, and
because of outstanding warrants at year-ends, the data given in the reports
of the Auditor of Public Accounts are not precisely the same as those
in the reports of the Department of Banking and the successor Depart
ment of Bank Supervision.
Income and obligations of the guaranty fund. A summary state
ment of the income and obligations of the Mississippi depositors'
guaranty fund, for the entire period of its existence, is given in
Table 9* The figures in this table take into account receipts and
disbursements subsequent to repeal of the law.
They exclude payments
to depositors in failed banks which were made directly from proceeds of
liquidation of the assets of thoje banks. Adjustments are made for
receipts from the liquidation process at dates later than the retire
ment of the fund's indebtedness from the proceeds of the special State
bond issue. A more detailed table of the receipts and disbursements
of the fund and bond issue, by years, is given in Table 10.
20/ The revision in the amount paid from the bond issue to
December 1, 1933 was only $173*
-4 3 -
The assessments collected by the guaranty fund amounted to a
little more than $3,600,000.
About one-fifth of this amount was col- *
lected during the four years after the termination in 1930 of the
fund's liability for current failures, but before the repeal of the
law in 1934. The total obligations of the fund for payment of guaranty
certificates and interest on them, adjusted for recoveries from failed
banks after payment of the certificates, was very close to $8,000,000.
In addition, the fund incurred over $300,000 of expenses, including
payment of interest for the first year on the special bond issue.
The deficit of the deposit guaranty fund, which ultimately
fell on the taxpayers of the State, through provision of funds for
retirement of the bond issue, was about $4,700,000.
In addition,
over $4,700,000 of interest on the bond issue also ultimately fell
on the taxpayers.
The bonds were issued on December 31, 1931, with
$250,000 maturing in five years, an equal amount in ten years, $500,000
in fifteen years, and the remaining $4,000,000 in twenty years.
-44Table 9 -
OBLIGATIONS, INCOME, AND DEFICIT OF THE MISSISSIPPI
DEPOSITORS’ GUARANTY FUND
i/
Obligations :
Total guaranty certificates paid from fund
receipts and proceeds of bond issue, repre
senting deposits of failed banks in excess
of repayments directly from liquidation of
assets
Interest paid on guaranty certificates
Total certificates and interest
Deduct: adjustment for recoveries from
assets of failed banks (received by
fund or bond retirement account)
Net obligation of fund for guaranty certificates
and interest
Other interest ($9,207 on bills payable during
1920-26, and $228,¿06 on State bond issue in
1932-33)
Expenses (chiefly attorney and special agent)
Total obligations of guaranty fund
1/
Income:
Assessments on participating banks (adjusted for
refunds)
Interest received (including small amount of
miscellaneous receipts)
Total income (excluding receipts from liqui
dation of assets of failed banks)
Deficit (obligations less income)
Cost to taxpayers:
Principal of bond issue
Less: unused amount and collections available for
transfer to general fund of State 1/
Balance of bonds sold (equals deficit of fund)
Add: Interest on bonds 2/
Total net from general revenues of State
$ 7,655,3^9
967,657
8,623,006
642,097
7 ,980,909
237,813
110,596
$ 8,329,320
$ 3,604,165
____ 52,33*1
$ 3 ,656,^99
$ 4,672,821
$
5 ,0 0 0 ,0 0 0
327,179
$ 4,672,821
4,743,961
$ 9,416,782
1/ See Table 13, P* 51.
2/ Interest on bonds while outstanding of $5,018,750 (computed
from rate and time outstanding) less $46,383 accrued at time of sale
(reports of Auditor of Public Accounts) and less $228,406 paid by guaranty
fund.
Table 10. RECEIPTS, DISBURSEMENTS, AND BALANC
GUARANTY FUND, BY YEARS, 191I+-I93U, AND OF
1/
t
i
Year
Total
Receipts
Assessments 2/
I
i ............
Depositors'
Guaranty
Fund 7J
19-14
1915
4,598
14,353
1916
15,720
45,655
99,960
161,263
201,750
1917
1918
1919
1920
1921
1922
254,507
264,332
304,660
266,181
294,188
1923
1924
1925
192b
1927
192S
1929
1930
1931
1932
1933
1934
355,985
355,269
309,857
296,568
j
Total
$
Successor
Funds 9/
1932-1933
1934
1935
1936-1953
153,410
117,986
237,679
199,190
223,240
253,329
289,475
299,374
308,865
3,023
179,564
156,355
119,105
118,318
17,951
37,823
26,037
11,200
4,078,360
$ 3,604,165
5 ,220,236
$ 3,604,165
780
1,431
1,367
—
735
5,258
787
586
__
d*
421,861
91,475
49,252
25,190
54,319
—
-—
2,142
7,706
5,380
3,607
1,204
629
992
-—
201,158
; $ 9,293,596
5,556
201,943
25,190
54,319
]$
78*206
13,305
63,COO
68*71^
295,053
$
220,236
$ 642,097
—
--
7,873
7,472
39,574
65,306
55,266
251,007
Total
15
356
468
1,325
2,429
—
295,788
292,260
116,252
Other 3/
---
5,024,475
Total
Combined
Funds
Total
4,583
13,997
15,252
44,330
97,531
Assets of*
failed
banks
1
i
i
j
j
i
:
i
1
1
i
1
i
1
1
!
1
j
I
j
i
j
4,323
88,160
347,617
260,831
294,407
97,614
360,575
425,982
390,899
359,703
257,602
340,183
275,515
160,911
246 ,982
30,106
3,973
$ 52,334 j
! $ 3,945,383
10/
1
4,933,ooo i
---
4,940,907
24,463
14,337
46,327
5,000,000
$ 5,026,034
$ 5,052,334
$ 8,971,417
67,000
$
E OF THE MISSISSIPPI DEPOSITORS 1
ITS SUCCESSOR HJ1*DS, 1932-1953
y
Guaranty
certifi
cates paid
1
Di sbursement s
Interest on
Other
guaranty cer interest k j
tificates
Balance
(end of year
or period) 6/
Expenses 5/
4,598
„
-—
—
18,951
34,671
80,326
--
4,191
80,222
7 ,938
328,790
16,727
260,831
«...
132
—
2,100
83,650
351,155
¿(•09,190
2^9,679
277,696
203,299
269,161
239,99^
101,495
21,66l
394
—
$ 443,354
4,419,250
21,346
12,542
37,026
510,091
2,641
——
1,738
4,462
I
179,472
3,188
:
12,764
6,937
9,530
12,000
12,000
11,100
i
j
j
!
|
1
1
47,676
7,042
5
—
123
48,316
2,717
ill
-
$ 3,165,135
96,095
66,820
273,866
2,800
3,030
11,123
3,220
9,750
133,027
75,070
44,650
59,022
23,521
283,577
175,963
249,086
103,219
•—
17.952
12,150
11,650
--
3,973
210, ^
$ 237,812
I
j
I
1
|
I
1
I
i
b
I
!
$ 99,031
3,330
60,585
16,970
36,513
77,545
10,127
99,126
132,976
,
$ 132,977 “
10/
3,H7
1,795
9,300
$ 4,490,164
$ 524,303
$ 7,655,349
$ 967,657
.
—
-—m
m
$ 237,812
11,566
83,568
—
--
175,357
1
$
$
11,567
110,598
186,210
I
\\1
/
8/
194,202
W
[
1
I
I
i
I
i
1
$ 194,202
|
$ 327,179
Notes to Table
10
1/ Adjusted to exclude assessment refunds, principal of bonds purchased and sold and of borrowings and repayments, ana interest
accrued cn bonds purchased.
2/ Assessments were made at i/20 cf 1 percent of deposits, with the foil--wing number per year: x914-1916, one; 1917 and xfi20, two;
1918, three; 1Q19, four; 1921-1933, five; and 1934, one. Figures are adjusted for refunds. Bonds or cash deposited as security for payment
of assessments are not included.
3/ Guaranty fund receipts in this column consist of $46,359 interest frcn State Treasurer on cash balance arid from bond investments,
and $3,975 described as ''Transfer from Bank G. C. Int. Fund". Successor funds rec.-ipts are the p * ** <_'ls of the State bond issue.
4/ Guaranty fund disbursements in this column consist of $9,407 interest on bills payabj.
,223,405 interest on State of Mississippi
bond s .
5/ Mostly attorney fees and salary of special agent. For successor fund ' figure see Note 10.
T>_1 Computed from net receipts and disbursements. Represents cash balanc and investments (for .eoae years), adjusted for items men
tioned in Note 1.
J J Data from Biennial Report of the Banking Departraent, 1931-1933, Exhibits C and D, pp. 20-22; and Biennial Report of the Department
of Bank Supervision, 1934-1935, PP* 16-17. Figures may not add precisely to totals given because of rounding.
8/ This balance was transferred tc the general fund of the State, $60,000 in 1934, and $72,977 on February 3, 1937»
9/ Includes the following: proceeds of $5,000,000 bond issue (sales at par); cash on hand from liquidation of assets of failed banks,
December 1, 1933, not included In the guaranty fund receipts (see Note 10); guaranty bond retirement fund, to which additional proceeds from
liquidation of assets received by the Departraent of Bank Supervision, were credited; bank guaranty certificate fund, and bank guaranty certifi
cate fund-contingent depositors' claim account, both of which were set up from proceeds of the bond, issue to cover guaranty certificates out
standing (including some in litigation) at the end of 1934. Figures are adjusted to exclude items refunded or offset by contra entries, or
transferred from one of these funds to another. Data for proceeds of sale of bonds from Biennial Reports of Auditor of Public Accounts; for
cash on hand December 1, 1933, see Note 9, for guaranty certificates paid in 1932-1933, from Biennial Report of Banking Department, 1931-1933,
and for interest paid on those certificates and certificates and interest paid in 1934, from Biennial Report of Department of Bank Supervision
for 1934-1935, P* 22, for receipts from liquidation of assets, and guaranty certificates and interest paid in subsequent years, from Biennial
Report of Department of Bank Supervision for 1934-1935, PP* 16, 20, and 22, and subsequent biennial reports.
10/ $101,466 cash on hand, December 1, 1933, as given in Biennial Report of Banking Department for 1931-1933, Exhibit F, pp. 28-29,
minus amounts for some banks totalling $ 9,991, that could have and probably did constitute part of the $11,200 taken into the guaranty fund
account in 1934. The remaining $91,475 was apparently combined with the proceeds cf the bond issue for use in meeting guaranty certificates
and interest on them not paid by the guaranty fund. However, the amount so used may have been somewhat smaller. The $11,566 shown in this
table as an expense item is a residual derived from the other items shown here as 'successor funds”, and may have been absorbed by liquidation
expenses of some of the failed banks, or may represent unrecorded costs in connection with the sale of the $5 million issue of State bonds,
or in part may reflect revisions of the accounts.
11/ Of this amount, $92,680 was transferred to the general fund cf the St^te on February 6 , 1937- The remainder consists of balances
in the following funds on December 31 , 1953: guaranty bond, retirement fund, $35,430; guaranty certificate fund, $17,431; and guaranty
certificate contingent claims fund, $46,661 (Biennial Report of Department of Bank Supervision, 1951-1953, p. 10).
-V r-
Annual assessments and losses in failed banks. Table 11 gives
the deposit liabilities of the banks that failed each year while partici
pating in deposit guaranty, as reported for the date of failure, and as
indicated by the deposits eventually paid, together with the amounts
eventually met from liquidation of assets and the balance paid from the
guaranty fund or the proceeds of the bond issue.
paid were about
The deposits eventually
1 l/2 percent more than those reported at date of failure*
Of the deposits paid, a little over half were met directly or indirectly
from the assets of the banks.
There was considerable variation in these per
centages for the banks failing in the various years*
Table 12 compares, for each year, the amount of the assessments
collected with the deposit liability from failures that eventually fell
on the guaranty fund and were paid from the fund or the proceeds of the
bond issue.
The figures are shown for each year, and also cumulatively, with
the cumulative excess of receipts or deficiency.
Only at the beginning of
the fund, 191^ and 1915, and in 1919, was there an excess of receipts.
cumulative deficiency was continuous after
The
1920, and increased almost every
year, reaching nearly $¿1- million when the application of the guaranty to
current failures was suspended in 1930*
This deficiency, it should be
noted, is quite a different concept from the deficit of the fund.
It
does not take into account the interest on guaranty certificates during
the time they were outstanding, nor the fact that the fund did not become
obligated to pay the deposits of a failed bank until the assets of the
bank had been wholly or partly liquidated.
What this figure shows is the
additional assessment that would have been necessary to have paid all de
positors the amounts of their claims, without incurring interest costs be
cause of delayed payment.
-48Table 11.
PAYMENT OF DEPOSIT LIABILITIES OF MISSISSIPPI BANKS THAT
FAILED WHILE PARTICIPATING IN DEPOSIT GUARANTY 1/
Year of
failure
Deposit
liabilities
at date
of failure 2/
Total
Total
$1*1,156,093
$
3/
Deposit obligations paid
From
From
assets of
fund or
failed banks hj
bonas net
14 36 , 706
,
c
5/
$7 ,347,534
$7,013,252
390,859
232,539
Percentage of deposits
paid at date of failure
From
From fund
Total
assets
or bonds
101.4%
51.956
49.5$
100.0
100.0
62.7
50.3
37.3
49.7
100.0
36.9
32.9
47.9
61.7
67.0
77.5
63.1
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
623,390
64,103
480,585
1,468,819
1,168,957
1924
170,690
571,0^7
1925
1926
1 927
1928
1 929
1 930
1,202,307
1,454,295
2,294,357
1,553,652
2,171,976
931,907
623,398
64,102
480,535
1,465,397
1,149,239
166,472
571,408
1 ,581,760
1,333,447
2,176,377
L
,61^,038
2,170,540
964,069
■
32,238
177,464
483,603
560,181
105,334
382,336
931,220
697,504
678,568
677,206
1,562,455
648,565
3 1 , 8
6
4
303.071
981,794
589,058
61,138
189.072
650,540
635,943
1,497,809
936,832
568,085
315,504
99.8
98.3
97.5
100.1
131.6
91.7
94.9
103.9
99.9
103.5
4 8
. 0
29.6
4
3 . 6
72.9
69.6
66.8
5 0 . 4
3 5 - 8
33.1
5 4
. 1
43.7
65.3
60.3
27.0
33-9
1/ Does not include banks closed in 1914 that did not qualify for deposit insurance, nor banks
that failed subsequent to March 11, 1930, when deposit guaranty became inapplicable to future failures.
2/ Biennial Report of the Banking Department, 1931-1933, Exhibit F, pp. 28-29.
3/ Since all deposit obligations not otherwise secured were subject to guaranty and all guaranteed
deposits were payable from the proceeds of a State bond issue, the difference between the amounts in this column
and deposits at date of failure represent (a) deposits discovered during the process of liquidation, and (b) de
posits eventually unclaimed or disallowed.
kj Includes $7,095,058 reported as "liquidated by bank's assets"in the Biennial Report of the
Banking Department, 1931-1933, Exhibit F, pp. 28-29, an amount which includes $389,623 of recoveries by the
guaranty fund prior to 1930i $32,238 additional recoveries included in the guaranty fund accounts; and $220,236
of recoveries subsequent to closing of the guaranty fund accounts.
5/ Total guaranty certificates of $7,655,3^9 paid by fund or bonds less $642,097 recoveries by
the guaranty fund and successor funds. Tabulations of these payments and recoveries by year of failure made
from information for each bank in the reports of the Department of Banking and Department of Bank Supervision.
-4 5 -
Table 12. ANNUAL ASSESSMENT RECEIPTS, LIABILITY FOR DEPOSITS IN FAILED
BANKS, AND CUMULATIVE DEFICIENCY, MISSISSIPPI DEPOSITORS' GUARANTY FUND
Cumulative
Year
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
Assessments
collected l/
$ 4,583
13,997
15,252
44,330
97,531
Deposits *
liability
from bank
failures 2/
$
—
232,539
31,664
—
153,410
117,986
237,679
199,190
228,240
253,329
251,007
269,475
299,374
308,865
295,788
292,260
201,153
156,355
118,318
26,037
Assess
ment
receipts
jo3,07i
981,794
589,058
61,138
189,072
650,540
635,943
1 ,497,809
936,832
588,085
315,504
--
18,580
33,832
78,162
175,693
329,103
447,009
684,768
883,958
1 ,112,198
1,365,527
1,616,534
1 ,906,009
2,205,383
2,514,248
2,610,036
3,102,296
3,303,454
3,459,809
3,579,127
3,605,164
Deposits 1
liability
of fund
~—
232,539
264,403
264,403
264,403
567,474
1,549,268
2,138,326
2,199,464
2,388,536
3,039,076
3,675,019
5,172,828
6,109,660
6,697,745
7,013,249
7,013,249
7,013,249
7,013,249
7,013,249
Excess
of
receipts
Deficiency
(excess
liability)
$ 4,563
*•>mm
18,580
---
—
198,707
184,241
88,710
64,700
—
-—
—
—
--
—
—
—
—
—
—
—
--
__
90,385
864,500
1,254,366
1 ,087,266
1 ,023,009
1,422,542
1 ,769,010
2,967,445
3,595,412
3,887,709
3,910,953
3,709,795
3,553,440
3,434,122
3,408,085
See Table 10.
2/ Deposits eventually paid from the guaranty fund or bond issue, adjusted
for recoveries (from Table 11).
-5 0 -
In Table 13 the rates of assessment levied, and the collections
per
$100 of deposits in the participating banks, are compared with the rates
that would have been necessary to meet each year the eventual losses from
the failures in that year.
The assessments collected, computed as a per
centage of the total deposits in operating banks at the beginning of the
year, were about three-fourths of the rate levied.
This difference is due
primarily to the facts that secured deposits were not assessed and that
capital and surplus were deducted from the unsecured or guaranteed deposits.
In addition, there may have been, at least in the first year or two, a small
amount of deposits carrying a higher rate of interest than k percent because
of contracts made prior to 1915*
deposits.
Also, assessments were levied on average
Information is not available regarding the method of calculating
average deposits for this purpose.
For the first three years of operation of the guaranty plan, assess
ments were kept at the minimum rate of l/20 of 1 percent of deposits.
During
the next four years the rate ranged from l/lO to 2/10 of 1 percent of de
posits.
From 1921 to the repeal of the law in 193^> the maximum rate of
l/k of 1 percent of deposits--that is, five assessments of 1/20 of 1 percent
each were levied each year.
The average annual rate of assessments collected during the years
from 1914 to
1930 was about 1/7 of 1 percent of deposits of the operating
banks at the beginning of the year, and almost
capital accounts.
1 percent of the banks’
The average annual rate necessary to have met the
eventual losses on deposits--without consideration of interest— was k/lO of
1 percent of the deposits in participating banks, or about 2 l/k percent of
their capital accounts.
-5 1 -
Table 13. COMPARISON OF ANNUAL RATES OF ASSESSMENT WITH RATES REQUIRED TO MEET DEPOSIT
OBLIGATIONS IN FAILED BANKS, MISSISSIPPI DEPOSITORS' GUARANTY FUND, BY YEARS, 1914-1930
1914-1930
Per $100 of deposits
Per $100 of capital funds
in participating
in participating
banks at beginning of year
banks at beginning of year
Deposits in
Deposits in
Assessment
failed banks
failed banks
levied per
Assessments paid by fund 2/ Assessments
paid by fund
$100 of deposits collected 1/ or from bonds—' collected 3/ or from bonds'
average
$0.19
$0.15
$0.40
$0.99
1914
1915
.05
•05
.05
.01
•03
•03
-.45
.04
—
—
•03
.09
.11
.30
.85
.94
.62
.96
.91
1.07
1.23
1.28
1.45
1.50
1.56
1.57
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
.10
.06
•15
.09
•13
.20
.10
•25
•25
•25
•25
•25
•25
•25
•25
•25
.25
.06
.19
.17
.16
.17
•17
•17
.20
.18
.18
.18
.16
.80
•50
.04
•13
•45
.38
•99
•55
•35
.98
y
1-59
$2.23
- -
--
1.66
.22
—
- -
1.58
3-95
2.68
•29
•92
3-32
3-18
7-52
4.73
3-12
8.58
1/ Computed from assessment receipts (Table 10) and deposits in
participating (i.e., State) banks in Table 3*
2/ Computed from deposits in failed banks paid from fund or bond issue
(Table 10) and deposits in participating banks (Table 3)*
Zj Capital funds used in computing these ratios are the total of
capital, surplus, and undivided profits as given in the consolidated statements
of State banks fcr various dates in the June 30, 1931 issue of Statements Showing
the Condition of State and National Banks in Mississippi.
4/ Annual rates (i.e., five times the rate for failures occurring prior
to March 11, 1930.
y
-5 2 -
APPRAISAL OF THE MISSISSIPPI DEPOSIT GUARANTY SYSTEM
Of the eight States which established deposit guaranty systems
during the years 1909-1915, Mississippi was the only one located in the
eastern half of the United States.
The banking system of Mississippi
had been well developed for scores of years, and the area was net subject
to the pressures resulting from a rapid agricultural or industrial ex
pansion with its spirit of speculation and overoptimisra.
Nevertheless,
the circumstances that led to failure of the deposit guaranty system
were in many respects similar to those in other States.
As in the Great
Plains States from North Dakota to Texas, adverse conditions in agriculture
in the
1920fs resulted in an abnormally high rate of bank failures, com
pared with the preceding two decades, or compared with the nation as a
whole for the same period.
But as in the other States, there were de
fects in the system in addition to its operation under adverse circum
stances .
One of the most conspicuous defects in the Mississippi system, as
in several of the other States, was the lack of an initial fund, with a
regular rate of assessment too low to permit accumulation of more than a
small fund even in a period with no failures.
with an initial fund equal to
Had the system started
1 percent of deposits, and with regular
assessments sufficient to maintain this percentage, but not in excess of
l/b of 1 percent in any year (the maximum that was permitted), the system
would not have become insolvent with the first wave of failures in late
1 9 2 0
and
1 9 2 1
following the disastrous decline in cotton prices.
However,
-5 3 -
such an initial fund would have been dissipated by the middle 1920fs.
would have required a maximum assessment rate of l/2 of
It
1 percent a year,
with this maximum actually levied in most of the years, to have enabled
the fund to have met the depositors* losses throughout the
1920*s.
The assessment rate of 1fk of 1 percent per year, which the
Mississippi banks paid continuously from 1921 until the repeal of the
law in
funds.
193^, proved to be a heavy burden relative to the banks' capital
However, from a consideration of the nature of bank operating
costs, it would appear that the banks could have adjusted themselves to
the heavier rate needed for maintenance of the solvency of the guaranty
fund, through reduction of interest paid on deposits and an increase in
service charges on the active non-interest bearing accounts, thus throw
ing the cost of deposit insurance on the depositors.
But as in other
States, the presence of another class of banks not participating in the
insurance system, and the possibility of discarding State charters for
national charters, makes it likely that adoption of a sufficiently high
assessment rate would not have been feasible.
Another serious defect of the Mississippi deposit guaranty
system was its inadequate provisions for handling the liquidation of the
assets of closed banks.
Only about one-half of the deposits of failed
banks was recovered from the banks 1 assets.
It appears that efficient
liquidation procedures might have reduced considerably the loss falling
on the guaranty fund, or eventually met by the taxpayers of the State.
A further inadequacy of the Mississippi system as originally
adopted was the delay in payment of depositors until completion of
-5 4 -
liquidation of the assets of a failed bank.
This was relieved in part
by the readiness with which banks took over the guaranty certificates
29/
issued for deposits in failed banks.
It was remedied in 1924, as a
matter of law, by the amendment permitting earlier payments from the
fund.
But the deficiency of the fund then prevented prompt payments.
The inability to make payments promptly was a serious defect, not only
because deposit insurance does not adequately fulfil its purpose if
deposits are kept unavailable to their owners for a long period of time,
but also because the interest on them increases the ultimate cost.
In
Mississippi, the interest cost on the certificates and on the State bond
issue used to retire them was ultimately four-fifths as large as the
principal of the depositors* losses met from the fund and the bond issue.
It is probable that examination and supervision of the partici
pating banks was not as thorough, and that some of the regulatory restraints
on bank operations, such as limitations on loans to particular interests
were not as vigorous, as is desirable.
Most certainly, supervision
suffered, as in many other States, from lack of adequate financial sup
port.
However, it does not appear that unduly lax supervision or regu
latory restraints was a vital element in the failure of the system.
29j When the bond issue was authorized, about $2 million of the
$5 million outstanding guaranty certificates were held by Mississippi
banks. The Mississippi Banker, July 1931, P* 21.
DEPOSIT GUABAHTY
IN
SOUTH DAKOTA
Clark Warburton, Chief
Banking and Business Section
Division of Research and Statistics
August, 1958
DEPOSIT GUARANTY IN SOUTH DAKOTA
Page
Origin and constitutionality of the deposit guaranty lav
Background of tile guaranty legislation
Purpose and constitutionality of the South Dakota law
1
1
Character of the guaranty legislation
Admission of hanks
Deposits guaranteed
Assessments
Indebtedness of guaranty fund
Administration and custody of the fund
Expenses of administration
Method of paying depositors and of liquidating failed banks
6
6
7
3
9
10
10
11
11
Supervision and regulation of banks
Banking code and supervising authority
Powers of the Superintendent of Banks
Powers of the Depositors1 Guaranty Fund Commission
Supervisory experience
Statutory limitations on bank operations
12
12
13
14
17
l8
Insolvency and closing of the guaranty fund
Inadequacy of the fund
Statutory termination of the deposit insurance system
State Supreme Court decisions regarding assessments
State Supreme Court decisions regarding priority of payment of
certificates of indebtedness
l8
18
23
24
Number, deposits, and failures of participating banks
Number and deposits of participating banks
Failures of participating banks
Causes of bank failures
Procedures used in handling banks in financial difficulties
27
27
27
3^
Financial history of the guaranty fund
Sources and adequacy of information
Income and obligations of the guaranty fund
Administrative expenses of the depositors1 guaranty fund
Settlement of the affairs of the guaranty fund
4l
4l
42
48
50
Appraisal of the South Dakota depositors1 guaranty system
50
25
36
LIST OF TABL3S
Table
Page
1. Supervisory powers of the Superintendent of Banks in
South Dakota, 1915-1927
15
2. Statutory limitations on bank operations in South Dakota, 1916-1926 19
3-
Number of operating banks in South Dakota participating and not
participating in the deposit guaranty system, 1916-1926, by years
28
4.
Deposits of operating banks in South Dakota participating and not
participating in the deposit guaranty system, 1916-1926, by years
29
Number and deposits of banks participating in the South Dakota
deposit insurance system, June 30, 1916, and June 30, 1926
30
Number, disposition, and deposits of failed state banks in South
Dakota during period of operation of deposit guaranty system,
1916-1927
32
Size distribution of failed banks in South Dakota compared with
average size distribution of operating banks: Period of
operation of deposit guaranty system
33
Annual bank failure rates in South Dakota, 1916-1926, compared
with rates in contiguous states and in the United States
35
5.
.
6
7-
8.
9.
Causes of suspension of state banks, 1921-1930; &s reported on
schedules prepared by Superintendent of Banks in South Dakota
for the Federal Reserve Committee on Branch, Group and Chain
Banking
37
. Receipts,
10
.
11
.
expenditures, and deficit of the South Dakota depositors*
guaranty fund
Total deposits, insured deposits and obligations to depositors of
failed banks, South Dakota depositors* guaranty fund, by years
43
44
12
Percentage of deposits insured, and percentage of insured deposits
paid by guaranty fund and recovered from liquidation of assets, bank
failures under the South Dakota depositors* guaranty fund, by years 45
13-
Annual assessment receipts, liability for deposits in failed banks, and
cumulative deficiency, South Dakota depositors' guaranty fund
kj
l4 .
Comparison of annual rate of assessment levied with rates required to
meet deposit obligations in failed banks, South Dakota depositors*
guaranty fund, 1916-1927 .
49
DEPOSIT GUARANTY IN SOUTH DAKOTA
The South Dakota law for insurance of hank deposits was enacted
March 5, 1915, with the insurance becoming effective at the beginning of the
following year. At the time the law was enacted, five States had deposit
insurance plans in operation.
In 1923) the fund became unable to meet its obligations to the
depositors of failed banks. The system was discontinued as of July 1, 1927,
under a law dated March k of that year.
ORIGIN AND CONSTITUTIONALITY OF THE DEPOSIT GUARANTY LAW
Background of the guaranty legislation. A plan for deposit insurance
combined with a State guarantee was developed by a group of South Dakota bankers
in 1905* This proposal, on which the Legislature did not take action, was
described as follows:
A number of the leading bankers of South Dakota have taken
steps for the introduction of a bill in the state legislature pro
viding for the insurance by the state of the deposits in the various
banks within the state. Under this proposed law the state government
would guarantee the safety of deposits in all solvent banks. Such
guaranty would, of course be given only to banks which proved on
examination to be solvent and well managed, and the result would be
a much more rigid and frequent examination on the part of the state
examiners.
The plan is for the banks to pay a considerable tax proportioned
to their deposits, which would be held by the state treasurer and the
fund so raised would be managed as an insurance fund to pay the losses
of depositors in any insured bank which for any reason was compelled
to close its doors. Those behind the movement declare that under this
plan the state would risk nothing, as the banks themselves would pay
these losses. It is believed the solvent banks could well afford to
pay the losses of those which fail, for with all deposits secured by
the state the deposits of all banks would largely increase. The main
idea of the proposed law is to prevent the demoralization which results
In a community when a bank closes its doors and ties up the funds
of the business men and others# l/
In the election campaign of 1908, both the Democratic and Republican
parties favored a deposit guaranty law.
The opposition of bankers was
sufficient to prevent adoption of a compulsory law similar to that in operation
in Oklahoma, or under consideration in Nebraska.
A plan for deposit insurance
with voluntary participation, as in the Kansas plan also under consideration
at that time, was approved.
An initial membership fee of $100 to $170,
graduated according to capital stock, annual premiums of one-tenth of
percent of deposits, and an initial participation of
1
100 banks, were required.
Special assessments, if necessary, of not over four-tenths of 1 percent in any
year, could be levied.
All deposits were protected, and participating banks
could not pay over 5 percent per year on any of its deposits.
The plan never
2/
went into operation because of an insufficient number of initial participants.
During the next few years the deposit insurance systems of other
states were operated successfully, and in South Dakota proposals for deposit
insurance were discussed at each session of the Legislature and at the annual
meetings of the South Dakota Bankers Association.
At the Legislative session
which opened in January 1915, several bills, including one developed by
representatives of the state bankers association, were introduced;
3/
of these was developed the law enacted in March.
and out
17 The Northwestern Banker, Vol.~10 (January 1905)> P« 9» Whether
the bill was introduced has not been ascertained. The South Dakota Senate
Journal and House Journal for 1905 each list one bill for amendment of the
ha-nkfng code, which was referred to committee but not reported, without a
description of the nature of the proposed amendment.
2/ Session Laws of South Dakota, 1909; pp* ^91-96; Thornton Cooke,
"Insurance~of Bank Deposits in the West,” Quarterly Journal of Economics; XXIV
(November, 1909)> P* /
3/ Journal of the Senate and Journal of the House, South Dakota, 1915
Annual Reports of the South Dakota Bankers Association, 19II-I916, particularly
that for 1915í P* 60.
-3 -
Purpose and constitutionality of the South Dakota law.
The decisions
of the United States Supreme Court in the Oklahoma, Kansas, and Nebraska cases
had established the constitutionality of deposit insurance legislation as a
proper exercise of the police power of the State.
The South Dakota law rested
on the same foundation and was not challenged for a decade.
In 1925; after
the fund had been unable for more than two years to meet the claims arising
from failed banks, one of the participating banks applied to the State Supreme
Court for a writ of prohibition against collection of further assessments for
the guaranty fund, on the ground that the fund lfis so hopelessly insolvent
that it is now of no use or benefit to the solvent banks, affords no protection
to depositors therein, and that to levy and collect the assessment under
such circumstances” is in violation of the Fourteenth Amendment to the
Federal Constitution, and of similar clauses relating to taxation in the
Constitution of South Dakota.
as
y
follows:
The Court did not agree, stating its reasons
In this case the objection is not to the amount of the charge,
but to the purpose for which it is made. Changed conditions
have not changed the purpose. If the purpose of the law was
legitimate, and the act therefor constitutional at the time of
its enactment, perforce it must remain so, although because of
changed conditions its purpose is no longer useful or desirable.
Its uselessness may be a cogent reason for its repeal by the
lawmakers, but it can have no weight with the court in construing
it. If the law was constitutional when enacted, it now is..*
Statutes creating a depositors* guaranty fund have been enacted
in many states. Some of the earlier statutes required contribution
only from banks which should be chartered subsequent to the passage
of the act, or banks which should elect to take the benefit of the
fund and contribute to its establishment... Later statutes in many
states have made it compulsory upon the state banks to contribute
according to the amount of their deposits to such fund. These
statutes have been unanimously upheld by the state courts, and the
United States Supreme Court has declared that such statutes do
not violate the federal constitution...
1 7 First State Bank of Claremont vs. Smith (1926), 207 N.W. b&J,
h9 s.D. 518*
-4...we know of no case, and none has been called to our attention,
where a similar statute has been held unconstitutional on any ground.
Such provisions have been sanctioned, by eminent authority, as a
legitimate exercise of the police power.
The constitutionality of deposit guaranty legislation was again
l
reviewed by the State Supreme Court in 1931> in a case pertaining to the dis
position of the remainder in the fund after the insurance system had been
1/
terminated by legislation.
The Court retained its view that the South
Dakota deposit insurance legislation was constitutional, supported by the
same type of reasoning as that of the United States Supreme Court.
A portion
of the opinion is quoted below because of its detailed description of the
nature of banking, the difference between failure of a bank and that of
another kind of business, and the purpose of deposit insurance.
The situation between a bank and its creditors is entirely different
At the present
time, and as a result of the growth and development of banking and the
increase in the volume and complexity of commerce and business, the
chief function of the commercial bank is the manufacture and issuance
of credit, and that bank credit is the circulating medium of exchange
by means of which, according to the computations of different economists,
from seventy-five to ninety per cent, of the business transactions of
this country are conducted and accomplished. Actual money in the
sense of legal tender currency has become, as one economist puts it,
"merely the small change of the business world." This bank credit is
emitted in two forms: First, by note issues which circulate from
hand to hand. That form of bank credit is but a small fraction of
the total. By far the greater portion of bank credit is issued in
the form of a deposit credit which circulates throughout communities
in the form of checks, drafts, etc,, drawn against the deposits. This
deposit credit originates in two different ways: First, a man may
deposit his own money in a bank to the credit of his account, whereby
the bank becomes hi3 debtor and he acquires an equivalent amount of
usable bank credit. Second, a man "borrows money" of the bank by
which oransaction he becomes the debtor of the bank and the bank his
creditor. But, instead of taking the proceeds of his loan in money,
/from the relation of debtor and creditor generally/.
17 State v. Smith (1931), 234 N.W. 764, 58 S.D. 22. The finding
of the court with respect to disposition of the balance of the fund is
described in a later section of this report.
-5he takes it in the form of a deposit credit; and in that phase of the
dual transaction the bank becomes the debtor and he the creditor. By
such a transaction the relation of debtor and creditor arises twice—
the bank once creditor and once debtor, and the individual likewise—
and the net result is that the individual has exchanged his personal
credit for the credit of the bank, which is a usable, circulating
medium for the transaction of business.
The primary business of commercial banking is the properly
balanced building up and maintaining at all times of a vast number of
such relationships of debtor and creditor— of exchanging its own credit
either for the money or for the credit of its depositors, and the bank
deposit credit created in that fashion is today the exchange medium
whereby most business is transacted. It is divided and subdivided into
various amounts and passes from hand to hand and from bank to bank
through clearing house transactions, and comes into the ownership of a
vast number of people who acquire it in the ordinary course of the
transaction of business, and who could scarcely stay in business should
they refuse to receive it; and who have no knowledge of, or direct deal
ings with, the bank whence such deposit credit originally issued. If
that bank credit thus in general circulation is not stable, and is not
kept good in such fashion that the bank redeems it upon demand, the
whole community is adversely affected. The credit does not continue
to be a purely personal and private affair between the bank which
issued the credit and the depositor who originally acquired it- but it
has gone forth through the entire community and into a vast number
of channels as the medium for conducting the business of the community.
There is therefore a vital public interest in the maintenance of that
credit and the stabilization thereof. If the grocers of the
state do not maintain their credit and pay upon demand, comparatively
few persons are affected. If the banks of the state do not maintain
their credit and pay upon demand, all the business and economic interest
of the state are vitally and tremendously affected thereby. The
existence of this public interest is the fundamental and underlying
reason which justifies lawr regulating, supervising, and controlling
the operation of banks, which justifies such enactments as the
Bank Guaranty Law, and we know of no court which has ever attempted to
justify such statutes upon any other basis. The primary object of
guaranty fund legislation is not merely to guarantee the payment of
creditors of banks as such, and upon that basis merely such legislation
could not be validly enacted. The justification for its enactment
lies entirely in the fact that so many persons are interested in the
stability of bank credit, and that such credit travels so far beyond
the depositors to whom it is originally extended and enters to such an
extent into all the affairs and transactions of a whole community that
it becomes so iTaffected with a public interest" that in the exercise
of the police power for the public welfare the Legislature may take
steps which it deems requisite and adapted to the maintenance and
stabilization of such credit, even to the extent of in some degree
taking the money of one banker to pay the creditors of another, when
there is no connection between said bankers, excepting the fact that
they are engaged in the banking business in the same state.
-6CHARACTER OF THE GUARANTY LEGISLATION
Admission of banks. All banks engaged in the business of banking
under the laws of South Dakota, including private banks, were required to
participate in the deposit guaranty plan*
However, every bank was examined
before the insurance became effective; and the condition of each bank was
reviewed by the Depositors1 Guaranty Fund Commission, which administered
the deposit guaranty system.
The law provided that any bank which failed
to comply with conditions imposed by the Commission should be liquidated
as an insolvent bank*
The Depositors1 Guaranty Fund Commission held its first meeting in
May 1915*
Subsequent meetings to the end of the year were largely concerned
with reviewing the reports of examinations.
The majority of these were
tentatively accepted and approved, but many were approved only on specified
conditions such as collection or removal of certain assets, and a few were
disapproved.
In one case, for example, the following motion was adopted
by the Commission.
.•.that the report of this bank for the close of business April 19th,
1915, be not approved and that the public Examiner is directed to advise
the bank accordingly; and that such report has met the disapproval of
the Commission for the particular reasons as follows: That it does
not appear to the Commission that the interest of the bank as a Corporation
and the interest of the creditors are being properly conserved; that the
practice of accepting series of notes or companion notes, in the making
of large loans with the so-called "split" mortgages where a part of the
loan is sold and the mortgage assigned therewith, is objectionable; that
the practice of the officers of the said bank in borrowing large amounts
on their individual responsibility for the purpose of relieving said
bank of the necessity of showing rediscounts or Bills Payable in their
statement, incurs a moral responsibility upon the bank which is not
shown or reflected by the statement, and such a practice is not approved
of; that the excessive loans should be reduced to come within the limit
of the law, the practice of borrowing on the individual responsibility
of the officers for the benefit of the bank should be discontinued and the
line of obligations now in existence as the result of such practice
shall be reduced in the order of their maturity.
-7In another case the report of the examination was rejected and the bank
advised that an assessment of 100 percent on the capital stock must be
paid.
In other cases the Commission recommended a merger or liquidation.
By the end of December when the Commission took final action^ about five
hundred banks were operating; most of which had met the required conditions.
At that time the Commission rejected 19 banks unless specified conditions
were corrected.
A few weeks later these were approved*
No liquidations
i/
were necessary.
Of the banks approved and admitted, twelve were private
banks, and eight were trust companies which engaged in deposit banking.
Deposits guaranteed.
Deposit guaranty in South Dakota covered
all deposits not otherwise secured.
It did not apply to a bank’s obligation
as indorser upon bills rediscounted, nor to bills payable, nor to money
borrowed from its correspondents or others.
In 1917 the protection was
extended to holders of exchange in good faith, and in
1919 & rephrasing of
the law made the qualification "in good faith" applicable also to deposits.
In the original legislation banks complying in full with the deposit guaranty
law were not required to post securities or bonds to become depositories of
public funds.
In 1925 the required posting of security for State funds was
reimposed, and all State funds excluded from the protection of the guaranty
fund.
Several cases involving the definition of guaranteed deposits were
brought before the State Supreme Court, though the number of such cases was fewer
than in the States which had enacted legislation in earlier years.
The first
l/ Information derived from Report of the Public Examiner, 19l6,p.
39, and Minutes of the Depositors' Guaranty Fund Commission, in the office of
the Superintendent of Banks, which were examined by the author of this report
in September, 195^. The precise number of banks operating in South Dakota
on Jan. 1, 1916, j.i> unavailable; the number was 530 on Nov. 10, 1915, and
499 on March 7, 1916.
-8such case involved a certificate of deposit for United States Government
bonds, which were to be sent to a Minneapolis bank for safekeeping, repayable
in bonds of the same issue and with interest at the same rate as that on
the bonds.
use.
The bank, which had failed, had converted the bonds to its own
The State Supreme Court held that the transaction did not constitute
a deposit of money or its equivalent by the owner, and was neither a general
1/
nor special deposit within the protection of the deposit guaranty law.
Two
other cases involved certificates of deposit issued for United States Government
bonds sold to a bank at the par value of the bond.
certificate of deposit bore interest at
In one case, in which the
5 percent, the maximum permissible
rate, the Superintendent of Banks argued that the bank was really paying a
higher rate of interest, because such bonds were selling elsewhere slightly
less than par; but the State Supreme Court disagreed, holding that the prices
elsewhere were immaterial and purchase of the bonds at par from a customer was
a transaction in good faith.
In the other case, however, the bond had been
sold to the bank through an intermediary, who received a commission; and the
Court held that the recipient of the certificate of deposit had no intention
or desire to be a depositor in that bank and did not become a depositor in
£/
good faith, and therefore was not protected by the guaranty fund.
Three cases reaching the South Dakota Supreme Court and the decisions
respecting them were similar to cases arising in other States, namely, that
deposits bearing a higher rate of interest than the maximum permitted by law
or the ruling of the Depositors* Guaranty Fund Commission pursuant to the
law, and deposits that represented borrowings by the bank, were not covered
Spry v. Eiming (1923), 191 N.W. 833,
S.D. 237*
2/ Ahearn v. Smith (1926), 211 N.W. 448, 50 S.D. 633, Dockstader v.
Smith (1930), 229 N.W. 299, 56 S.D. 433.
l/
-9 -
by the guaranty fundT
But a claim that the real rate of interest on a
certificate of deposit was higher than the stated rate because of complicated
transactions prior to the last renewal of the certificate was not upheld:
the
2/
present certificates, said the Court, were not tainted by the past transactions.
Assessments.
Participating banks were assessed annually, on the
first of February, one-fourth of 1 percent of average daily deposits, excluding
deposits not eligible for guaranty, during the preceding calendar year.
Under
the law assessments were to cease when the guaranty fund reached lA percent of
the aggregate average daily deposits, to be resumed if the fund fell below
1 percent of such deposits.
No provision was made for additional assessments
if found necessary, nor was any requirement made for the posting of bonds
or cash as surety for the payment of assessments.
However, provision was
made for issuance of interest-bearing certificates of indebtedness in the
event the guaranty fund became depleted.
A bank organized after January 1, 1916, was required to pay into
the fund an amount equal to 4 percent of its capital stock, to be adjusted
subsequently on the basis of the bank's first annual statement.
The Depositors1
Guaranty Fund Commission was required to adjust subsequent assessments so
that the initial payment, plus the first two assessments on average deposits
would at least equal 1 percent of the bank*s average daily deposits shown on
its first annual statement*
This was modified in 1919 to a just and equitable
sum to place the bank on an equal basis with those previously admitted.
If a participating bank desired to liquidate or become a national
bank, it was entitled to a refund of such portion of assessments paid which
had not been used, provided that it should not be released from its proper
proportion of outstanding certificates of indebtedness of the fund issued
to depositors of failed banks.
1/
First National Bank v. Hirning (1925), 204 N.W. 901,
Mildenstein v. Hirning (1926). 207 N.W. 919., ^9 S.D. 558.
2/ Muckier v. Smith (1929), 22k N.W. 225, 5^ S.D. 6l8.
S.D. 417;
-1 0 -
Inaebtedness of guaranty fund«
In case of an insufficiency of the
guaranty fund, a certificate of indebtedness was to be issued in favor of the
bank.
This certificate drew interest at 5 percent per year and was payable
on the first day of March next succeeding the day of issut,
noney accruing to the depositors1 guaranty fund.
out of the first
In 1921, the law was
modified to state that the certificates were to be negotiable, to bear
interest not to exceed 7 percent per year, and to be salable or assignable
by the Superintendent of Banks with the proceeds used to pay the insured
depositors; or as an alternative, in the discretion of the Guaranty Fund
Commission, to be issued payable to the depositors with interest at 5
percent per year.
Administration and custody of the fund.
The Depositorsr Guaranty
Fund Commission, which administered the South Dakota deposit insurance system,
was composed of the Superintendent of Banks and three persons appointed by
the Governor, no one of whom could be an officer or director of a national
bank.
The three members other than the Public Examiner were appointed for
terms of two years.
Until 1919, they were chosen from among twelve persons
nominated by an Executive Council of the State Bankers Association, which
was composed of a member of the board of directors of each participating
banks, selected by that
board.
The Public Examiner was chairman and executive
officer of the Commission and was appointed for a period of four years.
The Commission was empowered to adopt necessary rules and regulations
for the management and administration of the fund, and selected one of its
members as treasurer.
Quarterly meetings of the Commission were to be held
in the office of the public Examiner.
Special meetings could be called by
the public Examiner, or by two of the members.
-1 1 -
The fund remained in the custody of the banks, each bank retaining
its contribution subject to payment on the demand of the Commission,
In case
of suspension or insolvency, the amount to the credit of the fund was a first
lien on the bank’s assets, except for priority of funds belonging to an
insolvent institution derjosited by the Superintendent.
Expenses of administration. Members of the Commission, other than
the Superintendent of Banks, were paid from the general fund of the State at
the rate of five dollars per day, increased in 1919 to seven and one-half
dollars, plus expenses for the time actually served.
Method of paying depositors and of liquidating failed banks.
When
any bank doing business under the provisions of the banking and guaranty law
of South Dakota suspended or became insolvent the Superintendent of Banks
took possession.
He proceeded immediately to detemine the amount necessary
to pay the insured depositors in full.
This amount was certified to the
Depositors* Guaranty Fund Commission which thereupon drew against the
depositors* guaranty fund in the several banks.
The treasurer of the Commission
transmitted the amount required to the Superintendent of Banks, who in turn
applied them to discharge the obligations due depositors in failed banl,.
The Superintendent of Banks was in charge of liquidation of all failed
banks*
He collected all debts and claims, and upon application to and order of
the circuit court, sold the real and personal property of the bank and sold
or compounded bad or doubtful debts.
In 1921, the Superintendent of Banks
was authorized, with the advice and consent of the Guaranty Fund Commission,
to take over and operate
as a going concern, by himself or his deputy or an
examiner, a bank that appeared to the Commission to be conducted in an unsafe
or unauthorized manner, or unsafe or inexpedient to continue business, or with
-1 2 -
reserve below the legal requirements*
was authorized to draw not over
15
The Depositors1 Guaranty Fund Commission
percent of the amount in the guaranty fund
to enable the Superintendent of Banks to make deposits in banks managed by
him.
The Superintendent could place any such bank in liquidation at any time,
or return it to the officers of tlie bank upon repayment of such deposit and
termination of the reasons for assuming its control.
In 1925 the Superintendent of Banks was authorized to approve the
reorganization of a failed bank according to a plan adopted by creditors
representing
60
percent of the bank’s deposits, with the plan binding on other
depositors.
SUPERVISION AND REGULATION OF BANKS
Banking code and supervising authority.
banking code, enacted in
1691,
South Dakota’s first
two years after adoption of the State constitution,
provided for the incorporation of banks and limited the right to engage in
banking to associations conforming to the provisions of the code.
The law was
declared unconstitutional on the ground that the power of the Legislature
over banking was limited to the issuing of bills or paper credit designed
to circulate as money.
A reference was made to this decision in the proceedings
of the State Supreme Court in 1931 regarding the constitutionality of the
deposit guaranty legislation and disposition of the balance in the depositors’
guaranty fund.
In IG92 the attitude of the Court was that the right of the individual
to engage in the business of banking was just as much a common prerogative
and an inalienable right as were his right to engage in merchandising,
blacksmithing or farming, and that the business of banking was not of
such a public character as would justify the state in invoking the
police power to regulate the same. This decision.*.illustrates...how
far we have traveled in the past forty years, and how radically we
have changed our views with reference to the powers of the state to
regulate and control business, which, while of a purely private character,
concerns and affects the public welfare. 1/
17
Brief oi Dependents and Intervenor, State v. Smith (1931), PP* 93-9^*
-1 3 -
In
1903 the Legislature enacted a hanking code which did not limit
the right of an individual to engage in banking, and thus avoided the issue
on which the earlier law had been declared unconstitutional.
The provisions
of the code regarding reports, examinations, and handling of insolvent banks,
applied both to incorporated and private banks#
It established a Department
of Banking, headed by a Public Examiner who was ex officio Superintendent of
Banks.
The code was rewritten in 1909, and again in
deposit guaranty legislation was enacted.
1915 at the time the
In the latter year, the Banking
Department was designated the Department of Banking and Finance.
In 1919,
the title of Public Examiner was dropped, the head of the Department being
entitled Superintendent of Banks.
Under the 1915 law, the Public Examiner was appointed by the
Governor for a term of four years, and with the approval of the Governor
was authorized to appoint a deputy examiner.
Both the public Examiner and
the deputy must have had three years acutal practical experience in the
general banking business, or served for a like period in the Banking Department
of South Dakota or in another State.
These requirements were continued when
the title of the head of the Department was changed in 1919*
1921
From 1917 to
provision was also made for a second deputy, who should be a person with
business ability and experience.
Powers of the Superintendent of Banks.
The duties of the Super
intendent of Banks were principally the examination of all State banks, the
liquidation of failed banks, and the management (with three other commissioners)
of the depositors* guaranty fund.
In 1921, as has been noted above, the
Superintendent of Banks, with the advice and consent of the Guaranty Fund
Commission, was authorized to take charge of a failing bank and manage it
-1 4 -
as a going concern, later placing it in liquidation or returning it to its
officers if the reasons for assuming control no longer existed and any deposits
of money of the guaranty fund were repaid.
The Superintendent of Banks was required to make at least two
examinations each year of each operating bank (except national banks) and
additional examinations if requested by a bank's board of directors.
He was
required to make the special examination of each bank prior to admission to
the deposit insurance system.
In
general, the examination fee was one
one-hundredth of one percent of the gross assets of the bank for each
examination.
The minimum charge was ten dollars*
The supervisory powers of the Superintendent of Banks during the
period of operation of the deposit insurance system are summarized in Table 1.
powers of the Depositors* Guaranty Fund Commission. There was no
specific requirement in the law that the Commission should examine or review
the condition of insured banks.
However, the law provided that the public
Examiner could require the advice and opinion of the Commission when conditions
in a bank which had been admitted to the guaranty system became such as to
cause him to doubt the advisability of permitting it to continue in business.
The minutes of the Commission show that as a matter of practice, it reviewed,
apparently each year, the examination reports of the Public Examiner or
Superintendent of Banks.
The Commission also requested the removal of certain
assets by specific banks and occasionally ordered stockholders1 assessments,
restoration of reserves, or other actions by a bank.
On one occasion, certain
1/
banks were ordered to make weekly reports to the Commission.
l/ Minutes of the Depositors' Guaranty Fund Commission, Dec. 5 and 6,
1923.
-1 5 -
Table 1 .
SUPERVISORY POWERS OF THE SUPERINTENDENT OF BANKS IN SOUTH DAKOTA,
1915-1927 1/
Item
Opening of new banks
Examinations and reports
of condition
Frequency of examinations
Powers 2/
Superintendent to issue certificate to commence
banking business if examination proves bank law
fully organized, if town warrants a new bank and
incorporators are not prompted by malicious,
speculative or any other than honorable motives#
At least twice a year; any additional examinations
to be at request of Board of Directors of bank or
when in judgment of Superintendent necessary or
advisable.
Scope of examination
To ascertain whether business conducted in manner
prescribed by law and at location designated in
Articles of Incorporation.
Reports of condition
At least five times a year, in form prescribed by
Superintendent, and any additional reports when
ever Superintendent deems it necessary to be
fully informed of bank's condition. In 1923,
three times a year.
Bank management
Removal of undesirable assets io specific provision,
or discontinuance of
undesirable practices
Impairment or deficiency
of capital or reserves
Superintendent to require impairment of capital
or reserves to be made good within 30 days.
Removal of bank officers,
directors, or employees
Superintendent may require removal of any officer
found on examination to be dishonest, reckless,
incompetent, or dilatory. In 1927, Depositors*
Guaranty Fund Commission authorized to pass on
qualifications and fitness of all officers.
Taking possession of a bank
To take possession of a bank:
If charter or any law of the state violated;
If conducting business in unsafe or unauthorized
manner;
If capital stock impaired, or bank fails to make
impairment good upon order of examiner;
If inspection of books, papers, or affairs is refused;
If officer refuses to be examined under oath;
If payment of obligations is suspended or refused;
-
16-
Table 1. SUPERVISORY POV/ERS OP THE SUPERINTENDENT OF BANKS IK SOUTH DAKOTA,
191^-1927 - continued
Item
Taking possession of
a bank - continued
Handling of closed banks
Return to owners
Powers
If from examination or report, Superintendent con
cludes bank is in unsafe or unsound condition,
or that it is unsafe or inexpedient for it to
continue business;
If bank fails to restore impaired reserves within
30 days after notice by Superintendent;
If directors fail for 30 days after demand to make
good any loss sustained by knowingly violating,
or knowingly permitting any officer, clerk, or
employee to violate any provision of the banking
code;
If bank places affairs in hands of Superintendent.
If bank deems itself aggrieved by action of Super
intendent may apply to circuit court of county
within ten days, and if court so orders, bank
to be returned to owners. In 1925, Superintendent
authorized to return bank if depositors represent
ing 80 percent of the deposits present in writing
an acceptable reorganization plan.
Operation as going concern
In 1921, with the advice and consent of the Guaranty
Fund Commission, authorized to take charge and
control a bank and operate it as going concern
if business is being conducted in an unsafe or
unauthorized manner, if unsafe or inexpedient to
continue business, or reserve below legal require
ments. To be returned to owners when reasons for
its possession no longer exist.
Liquidation
Unless returned to owners, closed bank to be
liquidated by Superintendent, or person designated
by him.
Sale of assets or
capital stock
Upon court order, bad or doubtful debts may be
sold or compounded, and real and personal property
may be sold at competitive bidding.
Consolidation of banks
Bank, with written notice to and after examination
by Superintendent, may consolidate with bank in
same town in order to liquidate.
l7 Until 1919, the Superintendentof Banks was officially designated
as Public Examiner.
2/ As at beginning of deposit guaranty law (i.e., as granted in 1915
law) with amendments until the 1927 law which terminated the deposit insurance
sys
-17The law prohibited payment of interest on deposits by any bank at
a rate higher than 5 percent per annum, unless authorized by the Depositors*
Guaranty Fund Commission.
The Commission could authorize not more than 5è
percent, to be uniform within any county.
In 1920, the rate which the
Commission could authorize was raised to 6 percent. At the first meeting of
the Commission in Kay, 1915, it ruled that no more than 5 percent per year be
permitted to be paid on deposits.
In November 1920, after the change in law,
the Commission authorized 6 percent interest on time deposits through the
following September, which was extended to October 1922, when the maximum
y
rate reverted to 5 percent.
The Depositors* Guaranty Fund Commission in South Dakota did not
have, as in Nebraska, any power to operate or to liquidate banks which had
failed. Those powers were held by the Superintendent of Banks.
Supervisory experience. There was more continuity in the headship
of the Banking Department in South Dakota than in some of the other States with
deposit insurance systems. The Public Examiner (Superintendent of Banks) when
the deposit guaranty law went into effect, J. L. Wingfield, resigned two
years later. His successor, John Himing, held the office for eight years;
and the next incumbent, F. R. Smith, remained until some time after the closing
of the deposit insurance system. There was also a high degree of continuity
in the membership of the Depositors* Guaranty Fund Commission, except for a
turnover of the entire membership in January 1925* Only one other change in
the membership occurred, though the terms of office of the members were
only two years.
As in other States with deposit insurance, the examining load was
heavy, though not so great as in some of the States.
In 1916 the examining
staff, in addition to the Public Examiner and his deputy, consisted of eight
l/ Minutes of the Depositors’ Guaranty Fund Commission, and Muckier
224 N.W. 225, 54 S.D. 6l8.
v. Smith (1929),
-18persons.
In subsequent years, while the deposit insurance system continued, the
number, as given in the biennial reports of the department, was nine, with
y
only seven on one occasion and ten at another time.
With two examinations
a year of each bank, each examiner was apparently required to make about 125
bank examinations a year during most of the period of operation of the law.
Toward the end of the period, the number of banks decreased substantially,
and the load per examiner was therefore lighter.
The salary of the Superintendent of Banks was $3,000 to 1921, when
it was raised to $4,500. Salary of examiners, estimated from the appropriations
provided, was $2,000 after 1920. Annual expenses of the Banking Department
ranged from $40,000 to $80,000 per year, equivalent to about $65 to $150 per
bank.
No appraisal of the quality of bank supervision in South Dakota during
the period of operation of deposit guaranty has been found in the various sources
providing information on the operation of the system.
Statutory limitations on bank operations. The principal statutory
limitations on banking operations, under the banking law in force at the
beginning of deposit insurance and amendments adopted while the law was in
operation, are summarized in Table 2.
INSOLVENCY AND CLOSING OF THE GUARANTY FUND
Inadequacy of the fund. In South Dakota, as in other States with
deposit insurance systems, the depression of 1921 and the adversities of
agriculture in the middle twenties brought numerous bank failures in their
wake, with a heavy accumulation of liabilities falling on the fund. However,
X] special examiners in charge ofsuspended banks are not included
in these figures.
-1 9 -
Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN SOUTH DAKOTA, 1916-1926-;
Item
Responsibility of officers,
directors, ajid stockholders
Examination of bank
Provisions of law l/
Board of directors, or committee of stockholders
appointed by the board, to make at least twice a
year a thorough examination of bank*s books, records,
funds, and securities.
Losses resulting from
violation of law
Directors, officers, and any other persons partici
pating in violation of law relating to banks or
banking liable for all damages.
Liability of stockholders
Double liability.
Bonding of officers and
employees
Required in a minimum amount of $5,000 for all
officers and employees having access to or care
of funds, subject to approval of Superintendent.
In 1925, amended to require bond for officers in
amount not less than 20 percent of capital stock
or $5,000, and for employees, $5,000.
Limitations on loans and
investments
Loans to bank examiners
No provision.
Loans to officers and employees
To be approved by all members of the board of
directors and secured with ample collateral or by
a responsible endorser, each such loan to be
immediately reported to the Superintendent.
Loans to directors
Resident directors, no specific provision; non-resi
dent directors, same as for officers and employees.
Loans to stockholders
Total, including to any firm or corporation in which
stockholder is interested, not to exceed 50 percent
of paid capital of bank.
Maximum to single borrowers
(not to apply to discounts of
bills of exchange or commercial
paper actually owned by person
negotiating the same)
20
Maximum secured by real estate
No provision.
Secured by own capital stock
(applicable also to purchase
of own stock)
Forbidden, unless acquired to prevent loss on debt
previously contracted, to be disposed of within
6 months of acquisition.
When reserve is deficient
Loans and discounts not to be increased except by
discounting or purchasing bills of exchange pay
able at sight or on demand.
percent of paid capital and surplus, with all
members of a corporation or firm treated as a
single borrower.
-2 0 Table 2 .
STATUTORY LIMITATIONS ON BANK OPERATIONS IN SOUTH DAKOTA, 1916-1926 - continued
Item.
Limitations on loans and
investments - continued
Maximum total loans and
investments
Limitations on ownership of
real estate and stocks
Maximum in banking house
and equipment
Provisions of law
No provision.
bO percent of capital and surplus; with holdings
at passage of act in excess of this to be reduced
by 5 percent of book value per year.
Other real estate
Prohibited, except for apartments included in bank
ing office which may be rented as a source of
income.
Corporate stocks
Forbidden, except Federal Reserve bank stock required
for membership.
Time limit on assets acquired
by collection of debt
Real estate, five years, with extension at discretion
of Superintendent, but to be sold or charged out
of bank's assets within one year; other assets,
six months.
Limitations relating to deposits
I/aximun aggregate deposits
Fifteen times capital and surplus to be determined
by six-month average of deposits.
Maximum rate of interest
payable on deposits
5
Receipt of deposit when
insolvent
Forbidden.
Required reserves
Total required
percent, or 5^ percent (in 1920, 6 rjercent) if
authorized by Guaranty Fund Commission for an
entire county.
20
percent of total deposits, 25 percent for banks
serving as reserve depositories; in 1917, 172
percent and 20 percent, respectively.
In actual cash in bank
To be determined by Board of Directors.
permissible character of
balance
On deposit in reserve depositories approved by
Superintendent. In 1925, up to 60 percent of
required reserves may be in U.S. bonds (at market
value of bonds).
- 2 1 -
Table 2.
STATUTORY LIMITATIONS ON BANK OPERATIONS IN SOUTH DAKOTA, 1916-1926 - continued
Item
Limitations on borrowing
Maximum amount
Maximum value of assets
pledgeable as security
Limitations on payment of
dividends
Earnings to be carried to
surplus prior to dividends
Provisions of law
Not specified. Borrowing for temporary purposes in
form of bills payable to be reported to Superinten
dent, who may require repayment if bank appears to
be borrowing habitually for reloaning (not applicable
to rediscounting commercial paper equal to one-half
of capital stock). In 1918, limitation on redis
counting commercial paper removed, with habitual
rediscounting for reloaning subject to required
repayment at order of Superintendent.
150 percent of amount borrowed; in 1925 not
150 percent of paid capital and surplus of
10
percent of net profit until surplus equal to
percent of capital stock.
When losses equal or exceed
undivided profits
Forbidden.
When reserve is impaired
No specific provision.
When insolvent or capital
impaired
Forbidden*
Minimum capital stock
New banks
Other banks
to exceed
bank.
Graduated by population of town:
1.500 or less population
- ¿15,000
1.500 to 2,500 population - 20,000
2.500 to 5*000 population - 25,000
5,000 or over population
50,000
Capital to be increased to $15,000 and such additional
amounts necessary to comply with above requirements
whenever average ratio of deposits to capital stock
and surplus is 15 to 1 for a six-month period.
17 As at beginning of the deposit guaranty system (i.e., as in the 1915
revision of the banking laws, with amendments prior to March 1927)*
20
-2 2 -
the failures did not begin as quickly as in some other States, though the
income of the people fell more precipitously than in any other State.
Only
three failures had occurred in South Dakota from the beginning of the insurance
1/
system until 1921, and there was only one in that year*
In 1922 there were
nine, but in the next three years there were many*
The South Dakota deposit insurance system 'was less able to withstand
a wave of failures than those of Texas, Nebraska, and Oklahoma in which
assessments of more than one-fourth of 1 percent per year were possible
when needed*
In March 1923, when sixteen failures had occurred with
deposits paid in full by the fund, the balance was insufficient to meet the
claims arising from the next failure*
About four months later, when the deposit
liabilities of the bank had been established, the Depositors1 Guaranty Fund
Commission ordered certificates of indebtedness, bearing 5 percent interest
per year and payable out of the first money accruing to the fund, to be issued
to the respective claimants for unsecured deposits and exchange in good faith.
In April 1924, after the assessment for that year had been made, the Commission
declared a 50 percent dividend on those certificates.
By that time certificates
of indebtedness had been issued in numerous other failures, and with additional
failures it was apparent that the outstanding obligations of the fund were
so large relative to the annual receipts from assessments that several years
would be required to catch up— regardless of future failures.
The insolvency of the South Dakota depositors1 guaranty fund led to
attempts to repeal or alter the law, and also to disputes which reached the
l7 According to the estimate's" of Maurice Leven, Income in the Various
States (National Bureau of Economic Research, 1925), p* 2^9, total income from
all sources by individuals in South Dakota in 1921 was 58 percent smaller than
in the previous year, and 65 percent smaller than in 1919- In only ten other
States was such income smaller in 1921 than in 1919, with percentages ranging
frcra 1 to 45.
-23State Supreme Court regarding assessments due from participating banks and
regarding priority of the claims of the depositors in various failed banks.
Statutory termination of the deposit insurance system. By the
middle of January 1925, less than two years after the fund began to issue
certificates of indebtedness because of insufficient funds to pay depositors’
claims in failed banks, such certificates had been issued to depositors of
banks, with the amount outstanding approximately $33 million.
133
This was a
hundred times the assessments on participating banks in 1924.
In March 1925 the Legislature passed a bill which would terminate
the deposit insurance system as of January 1, 1926, with banks paying the
assessment due early in 1926 on their average deposits during 1925»
A
Depositors’ Advisory Commission, as successor to the Depositors' Guaranty
Fund Commission, was to distribute the remaining balance in the fund, as soon
as the greater part of the assets of the failed banks had been collected, to the
1/
unpaid depositors in proportion to the amount of their original claims.
However,
the law was made subject to a referendum in November 1926 , and was then rejected
so that it never became effective.
Another law of the same date, which
was not subjected to a referendum, outlined a procedure for paying each year,
after the assessment on participating banks had been collected, a dividend on
the outstanding certificates of indebtedness*
The dividends were to be on a
pro rata basis, thus removing the priority accorded earlier issues under the
2/
original law.
Two years later, when the next session of the Legislature again
considered termination of the insurance system, about
T7
2/
60 more banks had failed,
Session Laws of South Dakota,1925, oh. 99*
Ibid., ch. 100.
-2 4 -
and the total outstanding certificates of indebtedness, without allowing for
dividends from liquidation of the assets of the failed banks, had increased to
about $44 million.
The total deposits of the participating banks had declined
by about one-third, with reduced receipts of the fund from assessments.
However,
there was continued popular opposition to an outright repeal of the law.
In
March 1927, an act was passed and approved which continued the Depositors'
Guaranty Fund Commission and the annual assessments on all State banks, but
required the Commission to collect the assessments and deposit them in the
State Treasury as a "guaranty*fund" to the credit of each of the banks individually.
This, of course, was in fact simply a very small reserve fund for each bank
deposited with the State Treasury, and terminated the deposit insurance system.
State Supreme Court decisions regarding assessments. The insolvency
of the guaranty fund and the large issues of certificates of indebtedness led
to an attempt by participating banks to offset certificates of indebtedness
which they held against their assessments, and to problems of interpretation
of the law regarding assessments on banks wishing to nationalize and on new batiks.
One of the participating banks brought suit to prevent collection
of the annual assessment due in February 1925» claiming the right of offset
against certificates of indebtedness of the guaranty fund, due in March 1925,
which it held.
The State Supreme Court decided that the assessment claim
against the bank and the certificate claim against the fund were not of the
same quality and character, and one could not be offset against the other.
y
17 Farmers' State Bank of Canton v. Smith (1926), 209 N.W. 358, 50
S .D . 2 5 0 .
-25In
1926, a bank that desired to nationalize offered to pay the regular
assessment that would become due the following year, but objected to payment of
a pro rata share of outstanding unpaid certificates of indebtedness of the fund
which was demanded by the Superintendent of Banks.
The State Supreme Court
ruled that the liability of the bank was limited to the assessment
y
to that year*
pertaining
In 1931, after the deposit insurance system had been abandoned, a
case reached the State Supreme Court regarding the adjustment to
equitable sum11 of the assessment on a bank organized in 1926.
a
11just and
The bank claimed
that inasmuch as the guaranty fund was insolvent at that time, with outstanding
certificates of indebtedness far exceeding the amount held by the fund, its
r,just and equitable sum” was zero and its initial $4,000 at 4 percent of capital
stock should all be refunded.
The Court sustained the Superintendent of Banks
in making the adjustment on the basis of the amount to the credit of the guaranty
fund on the books of the participating banks at the end of
2/
1927*
State Supreme Court decisions regarding priority of payment of
certificates of indebtedness. In April 1925, after the assessment for that
year had been made, a suit was brought to require the Depositors’ Guaranty
Fund Commission to pay the remaining 50 percent, and interest, on the certificates
of indebtedness on which a dividend of
50 percent had been paid the year before.
The lower court had directed such payment, this decision being appealed on the
ground that the law of March 1925 required pro rata payments to all certificate
holders.
The State Supreme Court rejected the appeal, on the ground that the
TJ Citizens State Bank at Garden City v. Smith (1926), 210 N.W. 990,
50 S.D. 579.
2/ Corn Exchange Savings Bank v. Smith (1931)» 239 N.W. 186, 59 S.D.
182, 78 A.L.R. 800.
- 26 -
law had not become effective until July 1, subsequent to the decision of the
lower court.
However, the State Supreme Court held that the 50 percent
dividend of 1924 had been illegally paid, on the ground that the original
law provided that all certificates issued during a given year were payable on
the next March 1, with no specification of priority among them for the
certificates pertaining to the first case during the year.
y
This had the
same effect as though the appeal had been upheld, inasmuch as no legal dividend
could thereafter be paid to the holders of certificates issued in connection
with that failure in preference to those of any other failures, and no attempt
was made to force repayment by the certificate holders of the 1924 dividend.
In October 1929, more than two years after enactment of the law
which terminated the deposit insurance system, but continued the assessments
as a "guaranty fund11 for each of the banks individually, an attempt was made by
a group of certificate holders to have that law declared unconstitutional, to
transfer the assessments under it to the old guaranty fund, and to require
distribution of the balance in the fund including such assessments to certificate
holders in the order of priority specified in the original law.
The State
Supreme Court, in a lengthy decision in 1931, reviewed the history and
constitutionality of the original law as well as of the act of
terminated the system.
1927 which
The Court reaffirmed its opinion as to the constitutionality
of the original law, and held that the law of 1927 was also constitutional.
It
also held that the remainder of the fund should be distributed promptly, in
accordance with the law of
T7
2/
1925» ratably among all the certificate holders.
State v. Smith (1925), 206 N.wV 233, 49 S.D. 106.
State v. Smith (1931)» 234 N.W. 764, 58 S.D. 22.
2/
-27NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number and deposits of participating banks* At the time deposit
insurance became effective in South Dakota, there were about five hundred
banks operating under the State banking code.
This figure includes private
banks and trust companies, which were required to participate along with
the State banks.
About one hundred twenty national banks, which could not
participate, were operating in the State.
The number of banks participating and not participating in the
system early in
1916 and at the end of each year during its operation are
given in Table 3*
For nearly a decade about four-fifths of the banks were
participants, with the proportion dropping to about three-fourths toward
the close of the system.
The deposits of participating and nonparticipating banks, for each
year, are shown in Table 4.
The proportion of all bank deposits in the State
which were held by the participating banks rose from
to
57 percent in early 1916
67 percent in 1922, then dropped to 55 percent at the end of 1926.
Table
5 shows a distribution of the participating banks and their
deposits, with the banks grouped by deposit sise, at midyear
1926,
In both years the ten largest banks held
The largest bank in
held
1916 and midyear
13 percent of the deposits.
1916 held 3*6 percent, while the largest bank in 1926
2.7 percent, of the deposits in all participating banks.
Failures of participating banks. During the eleven and one-half
years of operation of the South Dakota deposit insurance system, 324 banks
closed because of financial difficulties.
totalled more than $80 million.
The deposits of these banks
About one-fourth of the banks closed were
-28-
Table 3 . NUMBER OF OPERATING BANKS IN SOUTH DAKOTA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1916-1926, BY YEARS
Date
All banks
operating
in South Dakota
March 19l6
End of year
1916
1917
Participating
in deposit
guaranty l/
499
121
80.5
628
503
125
125
80.1
126
130
80.4
80.5
80.7
136
136
131
127
80.6
80.6
81.1
80.8
114
79.3
110
100
77-8
76.3
514
566
566
1923
1924
702
702
692
662
552
1925
495
1919
1920
1921
1922
1926
k2.2
521
543
561
535
438
385
322
T7 State banks, private banks, and trust companies.
2/ National banks.
Percentage
participating
620
639
647
673
1918
Not participating
in deposit
guaranty 2/
-2 9 -
Table 4. DEPOSITS OF OPERATING BAMS IN SOUTH DAKOTA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1916-1926, BY YEARS
(Amounts in thousands)
Date
March
All banks
operating in
South Dakota
1916 120,534
Banks part
icipating in
deposit guar
anty 1 /
Banks not
participating
in deposit
guaranty 2/
Percentage of
deposits in all
banks held by
participating
banks
68,636
51,898
56.9
83,596
122,535
150,706
184,098
57,080
72,887
87,944
96,875
59.4
62.7
63.1
65.5
End of year
1916
1917
1 *10,676
195,422
1919
280,973
1920
1921
1922
218,592
202,259
1916
238,650
1923
1924
226,4l4
199,116
145,156
134,721
149,516
151,298
122,297
1925
179,017
143,188
106,116
78,877
1926
222,324
66.6
75,116
76,819
66.8
61.4
72,901
64,311
59-3
55.1
72,808
~TJ State banks, private banks, and trust companies.
2/ National banks.
66.4
73,436
67,538
67.3
- 3 0 -
Table 5.
NUMBER AND DEPOSITS OF BANKS PARTICIPATING IN THE SOUTH DAKOTA
DEPOSIT INSURANCE SYSTEM, JUNE 30, 1916, AND JUNE 30, 1926
(Banks grouped by amount of deposits)
Amount of
Number
Percentage Percentage
of
deposits
of number of aggregate
banks
of sanks
(thousands
deposits
of dollars)
All participating banks
June 30, 1916 1/
Banks with deposits of $100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1,000,000 to $2,000,000
$2,000,000 and over
Largest bank
Largest 5 banks
Largest 10 banks
All participating banks
June 30, 1926 1/
Banks with deposit of $100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1,000,000 to $2,000,000
$2,000,000 and over
Largest bank
Largest 5 banks
Largest 10 banks
498
$71,899
100.0
100.0
241
14,557
32,295
15,448
48.4
40.2
9.2
20.2
1,260
2,621
5,718
1.8
0.2
0.2
8.0
1.8
2,621
6,102
9,0*t0
0.2
1.0
2.0
3.6
8.5
12.6
366
95,883
100.0
100.0
63
4,153
26,737
35,973
17.2
28.7
4.3
27.9
37-5
20,440
6,034
2,546
8.7
1.4
0.3
21.3
• •
2,546
7,564
12,118
2.7
7-9
• •
0.3
1.4
2.7
200
46
9
1
1
• •
• •
• •
160
105
32
5
1
• •
43.7
44.9
21.5
3.6
6.3
2.7
12.6
Report of the Public Examiner, 1916, and the Biennial Report of the Superintendent
of Banks, 1926. Totals for deposits differ slightly from those obtained from
summary for the same dates, which are $72,068,000 for June 30, 1916, and
$96,214,000 for June 30, 1926.
-3 1 -
reopened without any obligation falling on the depositors' guaranty fund.
Most of these were banks that closed subsequent to the law of 1925 permitting
the reorganization of a bank under a plan approved by owners of
the deposits.
80 percent of
It is probable that depositors in most of the reorganized banks
lost a part of their deposits, but no information is available regarding the
amount of such losses.
The number and deposits of the banks closed each year, with rates
per
100 operating banks and per $100 of deposits in operating banks, are shown
in Table
6 . During the first six years that the system operated, only four
banks closed because of financial difficulties.
In 1922 there were nine
failures, and with four more during the first three months of
1923, the
depositors' guaranty fund was exhausted, and it was necessary to issue
certificates of indebtedness for the deposits of the seventeenth failure.
The next year a 50 percent payment was made on these certificates.
From
April 1923 to midyear 1927, when the insurance of deposits ceased, over three
hundred banks failed.
This was about 40 percent of all the banks in the system
at the beginning of 1923.
No payments were made from the fund to depositors
of any of these banks until settlement of the fund's affairs after the term
ination of the system.
A size distribution of the failed banks is given in Table J.
Failure
rates were high among all size groups, but lowest among the banks with more
than
$1 million of deposits, and also lower among those with less than $100,000
of deposits than among those with deposits ranging from $100,000 to
$1 million.
However, the largest State-chartered bank in South Dakota, and therefore the
largest bank in the deposit insurance system, was among the failures.
This
was the Sioux Falls Trust and Savings Bank, which closed in January 1924 with
deposits of nearly
$5 million.
-3 2 -
Table
6 . NUMBER, DISPOSITION, AND DEPOSITS OF FAILED STATE BANKS IN SOUTH DAKOTA
DURING PERIOD OF OPERATION OF DEPOSIT GUARANTY SYSTEM, 1916-1927
Year
and
group
Total
Number of
Involving
payments
from
guaranty
fund
banks
Reorganized
with no
payment
from
guaranty
fund
Total
1916-
1921
324
242
Deposits(in thousands of dollars)
Banks with Banks with
Total
payments
no payment
from
from
guaranty
guaranty
fund l/
fund 2/
82
80,l60
56,585
23,575
4
4
320
238
82
1,016
1,016
79,144
55,569
1916
1
1919
l
1
1
_—
—
32
i4i
32
l4l
1920
1921
1922
1
1
527
316
1,991
527
316
1,991
10,173
27,751
__
1,020
6,1*01
7,889
4,363
16,184
2,008
19221927
1923
1924
9
39
99
1925
51
1926
103
1927 4/ 19
l
l
9
39
94
38
47
11
—
—
5
13
56
8
10,173
28,771
10,764
24,073
3,372
1,364
23,575
_
--
Annual failure rates
Number Deposits
per 100 per $100
active in active
banks
banks
5.6 3/ $5.52
3/
•! 3/
.14
3/
.2
.2
.09
12.1 3/ 11.25 3/
.2
.2
1.6
7.0
18.5
.05
.29
.22
1.48
6.80
19.02
11.6
8.80
26.8
22.69
11.8 5/ 8.55
.rrr"-*
' 4
.1__Biennial Reports
k« of
HP* 4
«Vi/ Supers
TJ From statements as of date of failure
in
the
the
intendent of Banks.
2/ From schedules prepared, for the Federal Reserve Committee on Branch, Group
and Chain Banking.
3/ Average annual rate.
5/ To July 1.
5/ Annual rate.
5/
-33Table 7.
SISE DISTRIBUTION OF FAILED BANKS IK SOUTH DAKOTA COMPARED
AVERAGE SIZE
DISTRIBUTION OF OPERATING BANKS: PERIOD OF OPERATION OF DEPOSIT GUARANTY SYSTEM
. ; I T H
Number of banks
Failed Average
Average
number
banks annual
of oper
number
ating
of failed
banks l/
banks per
100 active
banks
Total
Deposits
Average Of failed
deposits banks (in
of oper- thousands)
ating
banks
(in thou
sands) 1/
Average
annual
amount
of deposits
in failed
banks per
$100 deposits
in operating
banks
490
32 k
5-7
$119,856
$80,159
$5.82
120
202
121
72
139
83
6.0
6.0
5-2
7,835
33,552
42,200
4,816
22,767
27,971
5.35
5.90
5.76
39
28
2
6.2
2.2
25,056
11,213
18,700
5,905
6.49
4.58
Banks with deposits of $100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1 ,000,000
$1 ,000,000 and over
8
1/ Tabulated from individual bank data for June 30 of even numbered years,
1916-1926, published in the Biennial Reports of the Superintendent of Banks.
-3 4 -
In Table
8 the failure rates in South Dakota during the period, 1916-
1926, are compared with those for contiguous States and the entire United States.
The failure rate in South Dakota, both in terms of number of banks and amount
of deposits, was higher than in five of the contiguous States, but lower than
in Montana.
banks.
This was the case not only for State banks, but also for national
The failure rates in Soutli Dakota and most of the contiguous States,
both for number and deposits, were far higher than for the entire United States.
This was also true for both national and State banks.
Causes of bank failures. The biennial reports of the Superintendent
of Banks give the immediate cause of suspension of 134 banks that were closed
from 1919 to the middle of 1924*
This -was more than half of the banKs for
which the guaranty fund made payments or issued certificates of indebtedness
to depositors.
For nearly a hundred of these banks the immediate cause of
failure was given as worthless paper, impaired capital, and depleted reserves,
and for about thirty other banks two of these were mentioned.
cases the statement was identical, as follows:
In most of these
"The iimediate cause of
suspension of this bank was due to the total impairment of capital stock; on
account of worthless paper, and also complete depletion of the bankfs cash
reserve, which made it impossible to continue business.”
In a few cases
mention was also made of assets tnat were frozen or doubtful, or added
that the depleted reserve was the result of heavy withdrawals.
In only two
cases was mention made of mismanagement and in three cases of embezzlement,
shortages, or "irregularities" in the nature of defalcation.
In the Sixteenth
Biennial Report, for 1922-1924, in which the above information was given for
the majority of the banks, the Superintendent also discussed the causes of
bank failures in his letter of transmittal to the Governor.
-35Table 8. ANNUAL BANK FAILURE RATES IN SOUTH D/UCOTA, 1916-1926, COMPARED WITH RATES
IN CONTIGUOUS STATES AND IN THE UNITED STATES l/
Failures per year per 100 Deposits per year in failed banks
_____ operating banks_____
per $100 in operating banks
State and State
National State and State National
national
banks 2/ banks
national banks
banks
banks
banks
South Dakota
5-1
5-6
3-5
$4.36
$5.45
$2.1*6
Six contiguous States
2.4
2.6
1.8
1.39
1.94
.74
3.8
1.9
2.1
1.5
4.4
5-5
4.2
2.1
2.3
2.43
rrrTj
1.42
.41
I.50
1.84
1.6
.86
5.2
5.9
2.5
1.2
1.5
.9
2.5
4.7
3.23
3.27
4.45
2.06
2.06
1.4
1.7
jI
.32
.49
.14
North Dakota
Minnesota
Iowa
Nebraska
Wyoming
Montana
Entire United States
.86
1.00
2.47
1.47
1.52
.37
l7 Tabulated from data from the following sources: other tables in this volume;annual reports of the Comptroller of the Currency for 1931, pp. 478-611; Banking and
Monetary Statistics, pp. 284-292; Willis, Banking Inquiry of 1925; and Federal Reserve
revised tabulations of data for all operating banks by States.
2/ Private banks included.
- 36 -
The extraordinary deflation of prices in agricultural products
brought about the numerous bank failures above referred to. As a
result of the failures, there has been much agitation relative to the
revision of the state banking laws. It is my opinion that no law, no
matter how stringent, could have prevented the larger portion of
these failures, and that this was due largely to the economic conditions...
I would recommend, however, that the law should be amended in respect
to borrowing by bank officers from their own banks. Officers, or any
corporations or partnerships in which the bank's officers are interested,
should be prohibited from borrowing money from their own banks. Further,
that banks should be prohibited from selling any paper "without recourse"
on the officers' guarantee. This practice aided a great deal toward
inflation, and possibly was indirectly the cause of most of our bank
troubles, and if banks were prohibited from acting as brokerage agents,
which the sale of paper "without recourse" and the officers' guarantee
amounts to, it certainly would have a tendency of lessening further
inflations, l/
Reasons for bank failures in South Dakota during the years from
1921 to 1930, covering seven and one-half years prior and two and one-half
years subsequent to the effective date of repeal of the deposit guaranty law,
were also reported by the Superintendent of Banks on schedules prepared for
the Federal Reserve Committee on Branch, Group and Chain Banking. These are
summarized in Table 9» Here also the primary emphasis is on heavy withdrawals,
adverse conditions in agriculture, and decline in real estate values, with
defalcation or managerial incompetence mentioned in about a sixth of the
cases.
Procedures used in handling banks in financial difficulties. The
Superintendent of Banks was in charge of the affairs of banks closed because
of financial difficulties while the South Dakota deposit guaranty law was
in operation. Until 1925, very few suspended banks were reorganized. However,
the practice was developed of chartering new banks to replace those that
were closed in communities where there were no other banks. This practice,
17 l6th Biennial Report of the Superintendent of Banks, South Dakota,
1924, pp. 5-6.
-3 7 -
Table 9* CAUSES OF SUSPENSION OF STATE BANKS, 1921-1930, AS REPORTED ON
SCHEDULES PREPARED BY SUPERINTENDENT OF BANKS IN SOUTH DAKOTA FOR THE
FEDERAL RESERVE COMMITTEE ON BRANCH, GROUP, AND CHAIN BANKING
It era l/
Primary
cause
Total number of suspensions, 1921-193°
393
Dishonesty of officers or employees:
Defalcation
Contributing
cause
22
13
Excessive loans to management and collapse
of speculative booms
0
0
Regional economic disaster or adverse
conditions in specific industries:
Losses due to unforeseen agricultural
or industrial disasters, such as
flood, drought, boll weevil, etc.
Decline in real estate values
38
71
86
269
Managerial incompetence, inadequate earnings,
and excessive competition:
Incompetent management
Insufficient diversification
Causes not readily classified above:
Heavy withdrawals
Failure of affiliated institution
or correspondent
Other causes
2b
9
9
128
95
166
35
97
2b
94
l7 Tabulated "by the author from the schedules, which were made available
through the courtesy of the Board of Governors of the Federal Reserve System.
-36which was prevalent from
1919 to the early part of 1923 and again during most
of 192k, was described by the Superintendent of Banks as follows:
Organization of new and unencumbered state banks to replace
those which have suspended has become the definite policy of the
state banking department and is being fostered in preference to
reorganization of crippled institutions...
The plan, Mr. Hirning declares, is to provide an entirely new
foundation in communities left without banking facilities. All
sound assets of failed institutions may be turned over to new
banks, as also may be claims of creditors in similar proportion.
The portion of a failed bank's assets classed as "frozen"
or not readily convertible then will be retained by the state banking
department for gradual redemption. By this means, Mr. Hirning
says, new banks will be enabled to begin with live assets whereas
if old banks were reorganized there would still remain a large
element of the hazard which led to their suspension.
"Each new institution," the superintendent asserts, "must
answer the unequivocal requirement of $25,000 in capital stock,
a list of 100 per cent, responsible stockholders and officers who
have been approved by the state banking department." l/
A description of the method of paying depositors in a bank handled
in this way, prior to the insolvency of the deposit guaranty fund, is given
in a decision of the State Supreme Court in a case which became involved in
litigation.
The State Bank of Winfred closed on May 27, 1922. All admitted
deposit claims against said State Bank of Winfred were presently paid
in full by the guaranty fund commission in the following manner: Very
shortly after the closing of the State Bank of Winfred, a banking corp
oration was organized and chartered known as Bank of Winfred. By agree
ment between the newly organized Bank of Winfred and the guaranty fund
commission, the Bank of Winfred advanced upon draft of the guaranty fund
commission such moneys as were necessary to pay deposit claims against
the failed State Bank of Winfred upon the promise and understanding
that, when the amount so necessary to be expended for that purpose
was definitely determined and paid, the Bank of Winfred should be
reimbursed by taking over guaranteed good assets of the failed State
Bank of Winfred to the extent of $300,000, and that as to such amount
above $300,000 as it might have advanced to deposit creditors of the
failed State Bank of Winfred upon draft of the guaranty fund commission
the guaranty fund commission would repay the Bank of Winfred in cash. 2/
17 Commercial West, July 5, 1924, p . 37 .
2/ Ruden v. Ruden (1932), 2 kh N.W. 775, 60 S.D. kkj. This case
pertained io the amount due the Bank of Winfred by the guaranty fund commission
under this agreement.
-3 9 -
Use was also made to an unknown extent of the law of 1921 which
authorized the Superintendent, with the approval of the Guaranty Fund Commission,
to operate a closed bank as a going concern and to make deposits from the
guaranty fund in such banks.
The first authorization to do this was in March
1921 when $20,000 was authorized to be withdrawn so that the Superintendent
could take charge of a bank and its affairs.
In June of that year the
Commission authorized the withdrawal of 10 percent of the guaranty fund for
y
this purpose.
Wo information is available regarding the number of banks
operated by the Superintendent, nor how many of those so operated were
restored to solvency and returned to their owners or how many were later
placed in liquidation. A statement of the guaranty fund at midyear 1925 shows
$115,000 of "10$ fund" in open and closed banks, and this was only slightly
larger in subsequent statements.
In 1925> after appointment of a new Superintendent of Banks and
passage of the law permitting reorganization of a failed bank under a plan
approved by creditors representing
80 percent of the bank’s deposits and by
the Superintendent of Banks, many failed banks were reopened.
In such case,
assets not acceptable to the reorganized bank were turned over to trustees
or to a holding company for liquidation, with a reduction in the deposit
liability of the reorganized bank.
difficulties from the beginning of
at midyear
law.
Of the 173 banks closed because of financial
1925 to the repeal of the deposit guaranty
1927, more than one-half were reorganized under provisions of this
Wo information is available regarding the amount of deposits not
released nor of the eventual recoveries from the assets placed in trust.
Undoubtedly, there were substantial losses in some of these banks which are
not included in the available data for losses in suspended banks.
37
Minutes of the Depositors’ Guaranty Fund Commission.
-1(0-
w’ith respect to the procedure of paying depositors of failed banks
there were two distinct periods in the operation of the guaranty fund, with
one transitional case. The first period was from the beginning of the
system on January 1, 1916, to March 16, 1923, during which 16 banks
failed, with their depositors paid in full from the guaranty fund.
The
second period was from the latter date to the termination of the system on
June 30, 1927» during which 226 banks failed (excluding those reorganized
under the 1925 law) with the depositors receiving certificates of indebtedness
from the fund. Of these, one was the transitional case in which a 50 percent
dividend on the certificates of indebtedness was paid a year later; in the
other cases no payments were made from the guaranty fund until after the
termination of the system. The difference between the procedures was
described by the Superintendent of Banks, prior to the termination of the
system, as follows:
Subsequent to the enactment and adoption of the Depositors
Guaranty Law depositors of closed banks became creditors of the
Guaranty Fund, and during the period in which there were funds in
the Depositors Guaranty Fund depositors received payment in full
of their claims. The Depositors Guaranty Fund in turn became a
creditor of the insolvent bank, and was entitled to receive dividends
from the insolvent bank, which dividends were paid or to be paid
from the proceeds of liquidation of the insolvent bank assets.
The amount of the Depositors Guaranty Fund claim against the
insolvent bank equals the total amount paid by the Guaranty Fund to
the depositors. In the distribution of the proceeds of liquidation
of the bank’s assets the Guaranty Fund shared pro rata with all
other general or common creditors.
When the cash in the Guaranty Fund became depleted by reason
of payments to depositors of closed banks, the depositors of
banks closing subsequently received from the Guaranty Fund Commission
Certificates of Indebtedness in lieu of cash in payment of their claims.
Such Certificates of Indebtedness constituted a liability of the
Guaranty Fund but did not constitute payment to the depositors. The
proceeds of liquidation of the insolvent bank’s assets therefore, were
distributed directly to the creditors of the insolvent bank, and such
payment made to the depositors reduced the liability of the Guaranty
-4 1 -
Fund. The portion of the depositors' claims which could not or cannot
be paid out of the proceeds of liquidation remain a liability of the
G u a r a n t y Fund to be met when and ii' sufficient funds are ever secured
by the Depositors Guaranty Fund with which to liquidate its liability, l/
When the affairs of the fund were settled, holders of the
certificates of indebtedness, except those in the transitional case, received
two dividends from the fund, one of 3/4 of 1 percent and the other of 23/100
of 1 percent, on the amounts of such certificates less the dividends that had
been paid from the liquidation of assets of the respective banks.
V/ith the
dividends amounting to less than 1 percent of the principal of the certificates,
there was, of course, no payment on the interest, which had accumulated at
5 percent per year.
FINANCIAL HISTORY OF THE GUARANTY FUND
Sources and adequacy of information. No statement of receipts
and expenses of the Depositors' Guaranty Fund was published in the biennial
reports of the Superintendent of Banks while the system was in operation.
After the repeal of the law, statements of resources, liabilities, and deficits
were published in several of the biennial reports, with a final statement after
settlement of its affairs.
2/
Similar statements for three dates prior to
the repeal of the law are available in the minutes of the Depositors'
Guaranty Fund Commission, but no statements have been found prior to 1925.
The minutes of the Depositors' Guaranty Fund Commission provide
information regarding the assessments collected each year, and other records
in the office of the Bank Commissioner give detailed infonnation regarding
the deposits of failed banks, certificates of indebtedness issued, and
1/ Biennial Report of the Superintendent of Banks, 1926, p. 6.
2/ As of June 30, 194l, in the Biennial Report of the Superintendent
of Banks, 1942, p. 8.
-in
payments and recoveries by the guaranty fund.
Information regarding results
of liquidation of each of the closed banks, including the percentage and
amount of dividends paid, was published in the biennial reports of the
Superintendent of Banks.
Income and obligations of the guaranty fund. A summary statement
of the income and obligations of the South Dakota Depositors* Guaranty Fund
for the entire period of its existence is given in Table 10. The total receipts
of the fund were $4.3 million, of which $3*6 million was derived from
assessments, $0.7 million from liquidation of the assets of the banks in which
depositors* claims were paid by the fund, and a very small amount from interest
and other sources. The total obligations incurred by the fund on account of
bank failures, after allowance for all recoveries from liquidation of the
assets of the failed banks, are estimated at $37 million.
less than $4 million to depositors:
The fund paid
$3*4 million in the first 17 failures,
and $0.3 million as dividends on depositors* claims in the remaining 225 banks
that failed while the guaranty fund was in legal operation. The fund also
incurred losses of $0.5 million on funds deposited in banks that subsequently
failed, and $0.1 million in expenses and other advances to closed banks. The
final deficit of the fund representing the loss to depositors was nearly
$34 million.
Annual data for the amount of insured deposits, payments on such
deposits by the fund and from the liquidation of the assets, and losses to
depositors or certificate holders, are given in Table 11. The estimated
loss to other creditors is also given in the table. Table 12 shows for
each year the insured obligations relative to the total deposits of the
closed banks as reported for the date of closing and the percentages of
-43Table 10.
RECEIPTS, EXPENDITURES, AND DEFICIT OF THE SOUTH DAKOTA
DEPOSITORS1 GUARANTY FOND
Receipts
$3,584,541
Assessments collected l/
Recoveries from liquidation of 17 banks 2/
Interest and miscellaneous income l/
699,886
61,963
$^,3^,390
Total receipts
Expenditures
Payments to depositors:
In 17 banks 2/
Dividends on~depositorsf claims in 225 banks l/
Losses incurred in other deposit guaranty activities:
On funds deposited in banks later closed l/
On funds advanced to pay bills payable byclosed banks to rt o Finance Corporation l/
Expenses if
Balance paid to State Treasurer after
settlement of affairs of fund if
$3,384,307
338,665
528,112
17,377
77,887
42
$^,3^,390
Total expenditures
Unpaid obligations
To depositors of failed participating banks
3/
$33,729,298
Tf Statement of Depositors* Guaranty Fund, June 30, 1941, mimeo^apjiecly aùàd
Biennial Report of the Superintendent of Banks, 1942, p. 8.
2/ Tabulated from data for individual banks from records in the cffiËce q£ the
Superintendent of Banks (see Table 11).
3/ Certificates of indebtedness of the fund to depositors in excess of
recoveries from liquidation of assets and dividends from the guaranty fund.
The total losses to depositors in banks that failed while deposit guaranty
was legally effective were larger.
TOTAL DEPOSITS, INSURED DEPOSITS AND OBLIGATIONS 20 DEPOSITORS OF FAILED BANKS,
SOUTH DAKOTA DEPOSITORS’ GUARAIJTY FUND, BY Y3AR3
Table 11.
Year
Total
deposits l/
Insured
deposits
2/
Insured deposit obi. Lrjations paid and unpaid
Unpaid (loss
pai 1 }j j uid
Total”
Recov r nd
Not recovered’
to depositors)
from liquida
froiii liqui
5/
tion of assets
dation of
assets 4/
(loss to fund)
Paid directly
from liquida
tion of assets
3/
Loss on
genei’al
claims 4/
V
56,506,156
Total
Subtotals
T3nS-Mar7l923 4,202,625
Apr. 1923June 1927
52,383,531
1916
I 917
1918
I919
92
I
92
1922
1923
1 9
4
10 ,923,883
26,458
» .
l4i,n4
128,025
5
2
7 , 2
9
2
495,755
-
3
1
6
0
7
210,306
~m
, 3
ok
10,172,700
27,751,213
lr 9
9
1
, 0
6 100,759
1926
1927
7 ,888,823
,
mm
—
1925
~
44,737,125
3,722,858
- -
mm
I
2
10 ,923,883
3 ,638,913
32,1*30
O
I
40,376,038
+
1,364,4? 4
2
1
, 8
4
3
, 4
1
9
8
, 4
9
5
, 1
0
2
4
, 7
1
7
, 6
3
7
5
, 4
0
9
, 0
1
1
5,859,208
1,191,117
932 14
7 ,030,989
1 168,287
,
o
,
1,454,842
337,625
2, 858,888
699,886
2,684,421
254,606
105,828
33,474,692
2,673,060
338,550 6/
26,458
26,456
- -
M
M
• •
mm
M
M
M
M
- m
M
M
M
M
M
M
8
, 0
2
5
210,306
, 8
33 ,729,296
—
495,756
1
3,022,971
-
1 2
--
o99?806
4
3
, 4
1
9
7 4
5
, 9
6
7
177,249
4
2
, 1 6
53,130
123,345
i
270,4-2
141/v>4
(
—
4
44,970
8,544
74,895
372, 4 i o
1
1
, 5
2
7
, 4
2
9
, 9
4
?
, 363
177,249
6
o
4
—
—
5
2
4
2
, 1
6
4
44,970
8,544
28I
M
M
M
M
6
M
M
-M
6
, 8
1
6
1
, 9
9
5
17,509,399
4
, 1
9
6
,
56
O
4,359,396
844,940
, 0
3
4
25,638
,519
4
1
6
0
0
, 3 4
4
1
1
4
, 3
9
9
434,992
419,171
89,510
I/ Deposits at date of 'closing,' from statements for the individual' banks"puEfished in the biennial reports of the Superintendent
of Banks- (mostly from the 1934 report, pp. 105-359. but some from earlier reports).
2/ Amount of deposits paid by guaranty fund in 16 banks paid, in full; certifi.’ates of indebtedness issued in remaining cases.
Tabulated from data for the individual banks in records in the office of the Superint« a.lent of Banks (except certificates of indebtedness
for one case, which are from a decision of the State Supreme Court).
3/ Tabulated from data for the individual banks in records in the office of the Superintendent of Banks or published in Biennial
Reports of the Superintendent.
4/ Tabulated from data for the individual banks in the office of the Superint *ndent of Banks.
3/ Insured deposits (certificates of indebtedness issued) in excess of paymex 0 by fund and from proceeds of liquidation.
%J Dividend of June 10 , 1932 (3/4 of 1 percent), and final dividend of Mar. 4, 1939 (23/100 of 1 percent), to holders of certificates
of indebtedness of the fund. 'Tabulated from data for the individual banks. The final statement of the depositors’ guaranty fund gives
$338.665 as the total of these dividends (see Table 9)*
-4 5 -
Table 12. PERCENTAGE OF DEPOSITS INSURED, AND PERCENTAGE OF INSURED DEPOSITS PAID BY
GUARANTY FUND AND RECOVERED FROM LIQUIDATION OF ASSETS, BANK FAILURES UNDER THE
SOUTH DAKOTA DEPOSITORS' GUARANTY FUND, BY YEAR
Year of
failure
Percentage
of total
deposits
insured
Total
__________Percentage of insured deposits__________
Paid directly
Paid by guaranty fund
Unpaid
from liquidaRecovered
Not~~recovered,; (loss to
tion of assets
from assets
i.e., loss to depositors)
fund
Total
85.5
100.0
22.6
1916
81.6
100.0
—
1919
1920
1921
1922
1923
90.7
94.0
66.5
92.6
83.5
100.0
100.0
100.0
100.0
100.0
1924
1925
1926
1927
89.1
84.5
7^.3
87.3
100.0
100.0
100.0
100.0
_
- —
—
11.0
1.4
100.0
41.5
24.9
40.4
14.7
1.7
28.4
21.6
24.8
-----
28.3
-
6.2
—
58.5
75.1
59.6
85.3
7.1
.7
.8
.8
•7
69.7
—
_.
—
- -
—
80.2
70.8
77.6
74.4
70.9
-1*6-
the insured deposits recovered from liquidation of assets, paid by the guaranty
fund, or lost to the depositors.
insured obligations were about
group, the
85 percent of the deposits of the banks when
they were placed in receivership.
public funds after
For all the failed banks as a,
The difference is due to secured deposits,
1925, deposits that bore interest at a rate higher than
the maximum set by the Guaranty Fund Commission, deposits representing
rediscounts or money borrowed, and deposits on the banks1 books for which
claims were not filed.
Of the insured deposits, 2^ percent were recovered
directly or indirectly from liquidation of the assets of the banks,
6 percent
were paid from the guaranty fund, and JO percent remained unpaid and were lost
to the certificate holders.
Table 13 compares the annual assessment receipts with the liability
of the fund for deposits of failed banks.
Data are given for each year and
cumulatively, with the cumulative excess or deficiency.
This cumulative
deficiency or excess, it should be noted, is a different concept from the
accumulated surplus or deficit of the fund.
What the deficiency figures show
is the additional assessments that would have been necessary in addition to
those levied to have paid all the insured deposits after taking account of
recoveries frcm the liquidation of the assets of the failed banks.
It does
not include any allowance for interest or other expensed, nor for funds
needed to pay depositors at once the amount eventually recovered from the
liquidation of assets.
on
Because of the large amount of interest accumulated
the certificates of indebtedness of the fund, the actual final deficit
of the fund was more than the deficiency as shown in this table.
By the end of
1921, after six years of operation, the guaranty fund
showed a emulative excess of receipts of over a million dollars.
The failures
-4 7 Table 1 3 .
ANNUAL ASSESSMENT RECEIPTS, LIABILITY FOR DEPOSITS IN FAILED BANKS, AND
CUMULATIVE DEFICIENCY, SOUTH DAKOTA DEPOSITORS‘ GUARANTY FUND
Year
Assessments
collected l/
Total
$3,584,541
1916
1917
139.112
185,916
1918
255.010
1919
330,064
1920
426,856
1921
1922
442,028
335,j-87
349.696
1923
1924
1925
273,578
1926
263,852
1927
253,374
329.868
Deposit
liability
of the fund
2/
3fssessment
receipts
Cumulative
Deposit
Excess of
liability
receipts
of the fund
Deficiency
(excess
liability)
$36,752,269
_ _
----- -
$139,112
325,028
580,038
910,102
1 ,336,958
- _
----—
$139,112
325,026
580,038
$74,895
447,305
835,207
889,653
125,429
1,572,947
7,421,358
17,686,648
4,240,724
572,734
2,114,173 2,145,681
2,463,869 9,567,039
2,793,737 27.253.687
3,067,315 31,494,411
1 ,206,252
4,404,366
853,492
3,331,167 35,898,777
3,584,541 36,752,269
74,895
372,4i0
1 ,778,986
- - - -----
_ _
_ _
—
- —
¿31,508
7,103,170
24,459,950
28,427,096
32,567,610
33,167,728
1/ Total from Biennial Report of Superintendent of Banks, 193^, p. 8 . Annual
data: 1915-1926 from minutes of the Guaranty Fund Commission (amounts received less
later refunds); 1927, excess of total over sum for 1916-1926 (minutes of Commission
show $184,106 for 1927. and. it is assumed that the remainder was collected subsequent
to the entry in the minutes).
2/ Insured deposits less amounts paid directly from liquidation of assets
or recovered by the fund from liquidation of assets (from Table 11).
_46-
of
1922 absorbed this excess of receipts together with the assessments for
that year.
The assessment of 1923 collected early in the year enabled the
fund to pay the depositors of three banks which failed early in that year,
but from that time on the fund was continuously inadequate, with a cumulative
deficiency of
million at the end of
1923. rising to $33 million when the
deposit guaranty became legally inoperative.
In Table 14, the annual rate of assessments of one-fourth of 1
percent of deposits is compared with the rate necessary to have met the losses
from failed banks.
The latter rate was over two and one-half percent, or ten
times the rate levied.
The assessments levied and collected averaged 1.6
percent per year of the total capital accounts of the banks.
Assessments
sufficient to have covered the losses from failed banks would have been more
than
16 percent per year of the total capital accounts of the banks.
In 1924,
which was the year with the largest number of bank failures and the largest
amount of deposits covered by the guaranty, the losses amounted to
of the deposits in active banks and nearly
12 percent
80 percent of their capital
accounts.
Administrative expenses of the Depositors' Guaranty Fund. The expenses
of the Guaranty Fund Commission were given in the biennial report of the
Superintendent of Banks.
For the eighteen years from 1916 to 1934, the total
figure was $54,000 or an average of $3,000 per year.
These expenses, which
consisted of per diem for the Commissioners, traveling expenses, and clerical
and miscellaneous expenses, were met from the appropriation for the Banking
Department.
The final statement of the Depositors* Guaranty Fund shows an
additional figure for expenses of $76,000.
These were the cost of handling
the guaranty fund, including distribution of dividends to certificate holders.
-4 9 -
Table l4. COMPARISON OF ANNUAL RATE OF ASSESSMENT LEVIED vJITH RATES REQUIRED TO MEET
DEPOSIT OBLIGATIONS IK FAILED BANKS, SOUTH DAKOTA DEPOSITORS' GUARANTY FUND,
1916-1927
Year
1916-1927
average
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
Assessment
rate per
Per $100 of deposits in participating banks at beginning of
per $100 of total capital
accounts in participating
$100 of
_________ year 2/_________ _____ banks at beginning of year 3/
deposits \j
Assessments
collected
jOSses on deposits in
failed banks
Assessments
collected
Losses on de
posits in
failed banks
0.25
0.25
2.52
1.60
l6.42
.25
.25
.25
.25
.25
.20
.22
.22
.21
.22
__
--•05
1.22
.20
1.88
__
-—
.42
1.64
.25
.25
•25
.25
.25
.23
•30
.25
.23
1.58
.45
1.42
.22
.09
1.17
4.96
11.69
3.47
.25
.25
.25
.32
1.08
4.15
1.31
1.60
1.85
1.30
6.67
27.52
1.47
1.45
78.57
22.44
1.70
28.42
1.98
6.69
17 Rate levied on average deposits of preceding year.
2/ From assessments collected (Table 13), deposit liability of the fund
(Table 13)7
deposits in participating banks (Table 4).
3/ From assessments collected (Table 13)> deposit liability of the fund
(Table 13)7 “ d capital accounts of participating banks for the same dates as the
deposits (from summary statements published in the biennial reports of the Superin
tendent of Banks).
-5 0 -
Settlement of the affairs of the guaranty fund. Upon termination
of the applicability of deposit guaranty at midyear 1927, settlement of the
affairs of the fund was delayed because of various matters in litigation. After
the State Supreme Court decision of 1931. the Guaranty Fund Commission proceeded
to distribute the remainder of the fund, in accordance with that decision,
pro rata among all holders of the certificates of indebtedness of the fund.
In June 1932, a dividend of three-fourths of 1 percent was paid to
the certificate holders, pro-rated according to the unpaid balance due on the
face of the certificate less dividends paid from the proceeds of liquidation of
failed banks. Nearly seven years later, in March 1939. & final dividend of
23/100 of 1 percent was paid on the same basis.
APPRAISAL OF THE SOUTH DAKOTA DEPOSITORS* GUARANTY SYSTEM
The South Dakota deposit insurance system was one of the least
successful— perhaps one should say, one of the worst failures— of the State
deposit insurance systems. Though all depositors of failed banks for a
period of six years were protected, the wave of failures in the middle
twenties was so overwhelming that the protection thereafter given to
depositors was negligible— they received nothing from the guaranty fund
until the affairs of the fund were settled several years later, and then
less than 1 percent of their deposits.
The severity of this debacle, in comparison with the deposit
insurance systems of States to the south of South Dakota, may be attributed
to two basic factors. First, the South Dakota deposit guaranty plan was
not equipped with as adequate financial resources; it had neither the power
to levy assessment rates higher than one-fourth of 1 percent per year, as
in Texas and Nebraska and in Oklahoma for several years, nor an initial
-5 1 -
contribution as security for payment of future assessments, as in Oklahoma
and Kansas,
Second, the impact of the agricultural depression of the
twenties was more sever, and the economy of the State more completely
dependent on agriculture, than in the States to the south.
Deficiencies
of the banking code and of bank supervision undoubtedly played a part in
the failure of the South Dakota system, but evidence is lacking that such
deficiencies were accountable for the higher bank failure rate and smaller
proportion of deposits in failed insured baiks met by the guaranty fund.
DEPOSIT GUARANTY IN WASHINGTON
Prepared "by
Clark Warburton, Chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
November 1958
TABLE OF CONTENTS
DEPOSIT GUARANTY IN WASHINGTON
Page
Background of the guaranty legislation
1
Character of the guaranty legislation
Admission of banks
Deposits guaranteed
Assessments
Administration and custody of the fund
Expenses of administration
Method of paying depositors
2
2
3
3
Supervision and regulation of guaranteed banks
Chartering and supervisory authority
Powers of the State bank examiner
Supervisory powers of the Guaranty Fund Board
Supervisory experience
Statutory limitations on bank operations
6
6
7
7
7
12
Number, deposits, and failures of participating banks
Number and deposits of participating and nonparticipating banks
Concentration of deposits
Failures of participating and nonparticipating banks
12
12
12
17
Financial history of the guaranty fund
Income and obligations of the guaranty fund
Settlement of the affairs of the guaranty fund
19
21
21
Weaknesses of the Washington deposit guaranty system
25
k
k
If
LIST OF TABLES
Page
Number
1. Supervisory powers of bank commissioner in Washington
2
.
Statutory limitations on bank operations in Washington
8
13
3* Number and deposits of operating banks in Washington participating
and not participating in the deposit guaranty plan, 1917-1920,
by years
l6
i*. Number and deposits of guaranteed banks in Washington, 1917-1920
18
5. Number and deposits of state banks in Washington closed because of
financial difficulties, 1918-1921
20
6. Receipts, expenditures, and deficit of the Washington depositors*
guaranty fund
22
DEPOSIT GUARANTY IN WASHINGTON
The Washington law providing for the guaranty of bank deposits was
enacted on March 10, 1917. The system began to operate at the middle of that
ll
year.
At the time of enactment, deposit guaranty plans were in operation in
six States.
The Washington lav remained in operation for four and one-half years.
Participation in the plan was voluntary, and toward the end of 1921, after the
failure of the Scandinavian-American Bank on June 30 of that year, all members
of the fund withdrew. The law was repealed on February 8, 1929# after being
inoperative for more than seven years.
BACKGROUND OF THE GUARANTY LEGISLATION
A proposal to establish a system of deposit guaranty in Washington
was introduced in both houses of the Legislature in 1909, but received no
action. Another proposal was made in the House in 1915 . The committee on
banking recommended indefinite postponement of action, but the House voted
by a small margin against postponement and then tabled a motion to pass the
2/
bill. During the last two weeks of January 1917, four bank failures occurred
in Seattle, arousing indignation and creating a demand for remedial action.
In the middle of February bills for deposit Insurance were introduced in both
houses of the Legislature. The House bill, modeled after the laws of other
States, was rewritten by the committee on banking, to make the system voluntary
l7 The first meeting of the Guaranty Fund Board was held on June 29,
1917, and by the end of the year 46 banks had been admitted to membership (Annual
reports of the State Bank Examiner, 1917, p. 6, and 1918, p. 8). The date of the
first admissions is unknown.
2/ Session Laws of Washington, 1909 and 1915»
-2instead of compulsory. With this issue resolved, the "bill was quickly enacted.
CHARACTER OF THE GUARANTY LEGISLATION
Admission of hanks» Participation in the deposit insurance plan was
made voluntary for commercial banks including trust companies. The plan did
not cover mutual savings banks. The law also provided that any national bank
could participate in the guaranty system. However, the ruling of the Attorney
General of the United States prohibited national bank participation in State
deposit guaranty systems.
Each bank which applied for insurance was to be given a complete and
rigid examination. The application was to be approved by the Guaranty Fund
Board if the bank was found to be in sound financial condition, properly managed,
and to have an unimpaired surplus equal to 10 percent of its capital. An
applicant bank must have been in business at least a year or located in a city
or town in which all the banks had failed to become participants within six
months after enactment of the law.
The law provided that a bank could withdraw if it were solvent by
giving notice in writing to the Secretary of the Guaranty Fund Board and by
displaying for six months a card in the bank announcing its intention to
withdraw from the guaranty plan. An amendment in 1921 provided that a bank
announcing its intention to withdraw would be liable for any assessments made
within a year thereafter, and requiring it to deposit with the Secretary of the
Guaranty Fund Board an amount equal to ^of 1 percent of deposits as a guaranty
of payment of such assessments. A bank's membership in the fund was required
to be cancelled, with forfeiture of its cash or bonds deposited as surety for
payment of assessments, if the bank violated the act and failed to comply within
-330 days after notice.
In March 1921 the Guaranty Fund Board was authorized to
cancel the membership of a bank that violated any law relating to banking or
any rule or regulation of the Guaranty Fund Board.
Deposits guaranteed. The guaranty covered all money deposit in a
bank subject to check or other form of withdrawal and not specifically secured.
The law provided that the guaranty should not apply to a bank's obligations as
an endorser on bills rediscounted, to bills payable, to money borrowed from
correspondents or others, nor. to deposits of public funds in excess of capital
and surplus.
Assessments. Banks admitted to the guaranty plan were required to pay
an initial assessment of one-half of 1 percent of average annual deposits eligible
for guaranty. They were also require to deposit, as collateral to insure pay
ment for future assessments, securities having a face value of 1 percent or
major fraction thereof of the eligible deposits. Annual assessments were to
be made, on or before the first of February, in amounts sufficient to maintain
or restore the fund to one-half of 1 percent, and the securities deposited to
1 percent, of average daily deposits of the preceding year.
If the fund was
reduced by more than 25 percent of the amount provided, the Guaranty Fund Board
was authorized to levy a special assessment amounting to not more than one-half
of 1 percent of the average guaranteed daily deposits for the preceding year.
In the March 1921 revision of the law the provision regarding the
deposit of securities was dropped and the assessments for the fund changed.
Two funds were established, known respectively as the guaranty fund and the
contingent fund. The guaranty fund was set at one percent of total annual
daily deposits, eligible for guaranty, to be adjusted each year. In case of
-4Impairraent of the fund special assessments could "be made amounting to not more
than one-half of 1 percent of average deposits in any one year. The contingent
fund was to consist of an annual assessment of l/lO of 1 percent of average
deposits until the total reached 3 percent of those deposits.
Administration and custody of the fund. The administration of the
guaranty fund was placed in a Guaranty Fund Board to be composed of the Governor
as chairman, the State Bank Examiner as secretary and executive officer, and
three members appointed by the Governor. The appointed members were to serve
for three years and except for the first members appointed, two of them were
required to be officers or directors of participating banks. None could be
an officer or director of a national bank.
The Board was required to deposit the securities paid by the banks
with the State Treasurer, and also was authorized to designate any guaranteed
bank as a depository for the cash in the fund. The Board permitted each bank
1/
to hold its assessment as a deposit to the credit of the Board.
When the
Contingent fund was established in 1921 the Board was given power to deposit
that fund in designated guaranteed banks or to invest it in securities eligible
for postal savings funds.
Expenses of administration. The expenses of administering the
guaranty fund were to be paid out of the receipts of the fund. After the
establishment of the contingent fund they were to be paid from that fund.
Method of paying depositors. The deposit guaranty plan in
Washington contemplated that depositors would be paid at once in cash.
5^1 .
l7 Spokane & Eastern Trust Co. v. Hart (1923), 221 Pac. 615, 127 Wash.
-5Warrents payable out of the fund were to be Issued by the State Bank Examiner
(Bank Corauissioner) to each holder of deposits under proof of claim. If the
guaranty fund was insufficient to pay them, interest at the rate of 5 percent
per year was to be paid until they were called.
The law provided that whenever warrants upon the guaranty fund were
issued in payment of depositors’ claims, those claims and all rights of action
and remedies of the depositors were transferred to the guaranty fund. Consequently,
the receivers' dividends on guaranteed deposits in a failed bank were paid to
the guaranty fund, and all payments to the depositors 6n such deposits made by
the guaranty fund. The March 1921 law provided that in paying depositors, the
contingent fund was to be used first, with the guaranty fund to be drawn on if
the contingent fund was insufficient.
In the report of the Supervisor t t Banking for the year 1920 an amend
ment was suggested to authorize the Guaranty Fund Board to employ the funds under
its control in such a manner that any bank needing temporary assistance might
receive it in the form of deposits. The following argument was presented in
favor of granting this power:
In as much as the Fund was created for the purpose of protecting
depositors in member banks, it seems to the writer that it would
be equally proper to use these funds for the purpose of preventing
the closing of a bank, as it would to pay off its depositors
after its doors had been closed. Deposits made by the Board in
this manner would of necessity be subject to the direction of
the Board and a bank receiving the benefit would be required to
operate its affairs in accordance with the directions of the
Board until such time as the special deposits were withdrawn. \j
This recommendation was not enacted into law.
37 Annual Report of the Bank Commissioner, 1920, p. 17»
-6-
SUPERVISION AKD REGULATION OF GUARAHEEED BANKS
Chartering and supervisory authority. State banks in Washington had
been subject to supervision for about ten years prior to the adoption of
deposit guaranty. However, according to a later statement of the Supervisor
of Banking, the law did not provide "real powers of supervision and correction
of improper banking methods, and the best the head of the department and his
assistants could do for the protection of the depositor was to bluff things
l!
through."
An entire new law relating to the regulation and supervision of banks
was adopted a few days prior to the enactment of the deposit guaranty law. The
banks were placed under the supervision of a State bank examiner appointed by
the Governor with the consent of the Senate. The examiner was required to have
had four years experience in banking.
In 1919 the title of the State bank examiner was changed to bank
commissioner and appointment of a deputy bank commissioner, with the same
qualifications as for commissioner, was authorized. Two years later
administration of the banking code was placed in a new department of taxation
and examination headed by a director of taxation and examination. The director
appointed a supervisor of banking to be in charge of the division of banking
with power to appoint and employ deputies, examiners, and other assistants
necessary to carry on the work of the division. The supervisor of banking
was required to have had practical experience in banking, trust company, or
building and loan company business, and could not be interested in any bank,
trust company, or building and loan association as a director, officer, or
stockholder.
l/ Fifteenth Annual Report of the Supervisor of Banking, Washington, 1921,
p. 5.
-7Powers of the State bank examiner. The supervisory powers of the
State bank examiner, bank commissioner, or supervisor of banking during the
period of operation of the deposit guaranty system are shown in Table 1. He
was required to make at least one examination of each bank a year, and also
to make a special examination of applicants for admission to the deposit
insurance system. His powers with respect to bank management appear to have
been stronger than those in most of the States with deposit guaranty systems.
He could require a bank to correct any violation of law or any method of
conducting the bank's business in an unsafe manner, or to remove from office
an officer of employee known to be dishonest, reckless, or incompetent.
Failed banks were liquidated by the examiner, commissioner, or supervisor,
or a special assistant appointed for that purpose.
Supervisory powers of the Guaranty Fund Board. Very limited supervisory
powers were given to the Guaranty Fund Board. The Board was required to approve
the condition of a bank, after examination by the State bank examiner, before
admission to the deposit guaranty System.
It was authorized to adopt, publish,
and enforce reasonable rules and regulations prescribing the duties of partici
pating banks, not inconsistent with the provisions of the banking code or the
deposit insurance law; and also, to prescribe the maximum rate of interest that
could be paid on deposits by participating banks in each county. No information
has been found regarding Board actions on such rules, regulations, or interest
rates.
Supervisory experience. During the short period that the deposit
guaranty law was in operation, there were four different persons in charge of
bank supervision. The State bank examiner at the time of enactment of the
law,continued in office only for the remainder of the year 1917« Bis successor
served for two years, and the next bank commissioner for only one year. 3be
-8Table 1 . SUPERVISORY POWERS OF BANK COMMISSIONER IN WASHINGTON l/
Item
Opening of new banks
Examinations and reports
of condition
Frequency of examinations
Powers 2/
Commissioner to issue certificate of authority
to transact business if examination reveals
compliance with banking laws and general
fitness and responsibility of incorporators.
In case of refusal, appeal may be made,
within 10 days of decision, to superior court
of county.
At least once a year, without previous notice,
by Commissioner or deputy, and oftener if
necessary.
Scope of examinations
A full investigation.
Reports of condition
Three each year on form prescribed and dates
designated by Commissioner (in 1919, amended
to dates coinciding with those for national
banks), and any special reports called for.
Bank management
N
Removal of undesirable assets
or discontinuance of undesir
able practices
Conmissioner may give notice to correct any
offense or delinquency (violation of law,
conduct of business in an unsafe manner,
failure to comply with authorized order of
examiner or submit affairs to lawful exam
ination) within thirty days, or such additional
time as he may allow.
Impairment or deficiency
of capital
Commissioner may require impairment of capital
to be made good by an assessment on stock
or in such manner and with such time as he
may specify.
Removal of bank officers,
directors, or employees
Commissioner shall notify in writing board
of directors of any officer or employee found
to be dishonest, reckless, incompetent, or
failing to perform any duty of his office;
board of directors to meet within twenty days
and to remove such persons if the objections
are well-founded.
Taking possession or closing
a bank
May take possession and close a bank:
If insolvent;
If bank fails to comply with Commissioner's
order to correct any offense or delinquency,
or to correct capital impairment;
If bank places affairs under control of
Conmissioner.
-9Item
Handling of closed bank
Return to owners
Powers
May be returned to owners if Commissioner
within 90 days after taking possession
determines all impairment and delinquencies
made good, and that it is safe and expedient
for bank to resume business. If bank deans
itself aggrieved by Commissioner's possession
may within 10 days thereafter appeal to
superior court of county vhich may order
bank returned if it finds possession taken
without cause.
Liquidation
Unless returned to owners, closed bank to
be liquidated, by Commissioner and any
assistants appointed by him. In case of
imminent necessity court may appoint
temporary receiver; however, Commissioner
to be immediately advised by court of such
action and receiver to surrender possession
on demand of Commissioner.
Sale of asset8 or capital
stock
Bad or doubtful debts may be sold, compounded,
or compromised by Commissioner, and real
estate and personal property sold on terms
approved by court.
Consolidation of banks
Commissioner may upon terms and. on conditions
prescribed, by him authorize in writing transfer
of assets to another bank for purposes of
consolidation or voluntary liquidation if
such action is approved by 2/3 vote of stock
holders.
l/ Until March 1919, designated State Bank Examiner, and after February 1921
Supervisor of Banking.
2/ As at beginning of the deposit guaranty system (ie., as granted in 1917 law)
with amendments until deposit guaranty became inoperative.
3/ In 1919, at discretion of Commissioner, examination made by Federal Reserve
of State member banks acceptable in lieu of State examination.
-10supervisor of banking when the system became inoperative at the end of 1921
had been in office only since the Spring of that year.
There was somewhat more continuity in the membership of the guaranty
fund board. Two of the three appointees in 1917 served until the end, or
near the end, of the system. The other one, the president of the ScandinavianAmerican Bank of Seattle, served for less than three years, resigning in
January of 1920.
The number of persons on the bank examining staff excluding special
deputies in one year ranged from four at the end of 1917 to seven at the end
of 1920. The examining load apparently ranged from about 75 examinations per
examiner per year in 1917 to about 45 in 1920.
The salary of the State bank examiner in 1917 was placed at $3600,
and of the bank commissioner in 1919 at $5000. In the 1921 law the salary of
the supervisor of banking was not specified but probably remained at the same
figure. The maximum salary of examiners was $3°00; their average salary in
1918 and 1919, estimated from appropriations, was $2i<0G. Total annual expenses
of the banking department ranged from $25,000 to about $50,000, equivalent to
1/
about $85 to $160 per bank per year.
At the end of 1921, after the failure of the Scandinavian-American
Bank had exhausted the fund and all the participating banks had withdrawn,
the supervisor of banking commented as follows on the inadequacy of supervision
during the period of operation of the fund.
In some quarters there has been an attempt to attach blame to my
precedessors in office and the banking department for the recent bank
failures. These criticisms generally come from those unfamiliar with
financial conditions and other matters entering into the failures of
the institutions in question, but others have joined in the criticisms
who are credited with intelligence and are in position to seek for
themselves the causes which have contributed to the regrettable failures.
l/ Expenses in 1917, 1910, and 1919 are given in the annual reports
of the State bank examiner, those for 1920 and 1921 are estimated from
appropriations provided.
-11If they would take the time to refer to statistics of last year they
would learn that hardly a state in the Union escaped bank failures
and the experience of this state compares very favorably with sane of
its neighbors. ...Under a system of extravagant economy fostered and
urged by the people, some of whom are now paying for their lack of
foresight, an appropriation intended to provide for supervision of
the 300 banks in the state was limited to a sum which would ordinarily
run a fair-sized country bank. Inadequate compensation was paid the
chief and his assistants; their work was continually handicapped by
lack of funds, and as soon as deputies had gained experience and
shown ability better positions were offered them. To illustrate the
extent of this embarrassment to the organization, I will point out
that at the time the administration of this office was taken over
by me last April only one deputy or examiner had served the department
more than one year. Examinations were limited both in frequency and
efficiency by the constant harping of economy. It is plain that
no organization, however able and conscientious the personnel might
be, with these handicaps, could be expected to obtain the best results.
At the last session of the legislature some of these difficulties were
remedied but the effects of former parsimony will be felt for some
time, l/
The conclusion of Professor Howard H. Preston of the University of
Washington, who studied the operation of the system, was similar.
In commenting
on the reckless banking which wrecked The Scandinavian-American Bank, he stated
that its bad administration began years before its admission to the guaranty
2/
fund.
It appears that the Guaranty Fund Board, of which the president of
that bank was a member, did not scrutinize with sufficient care the condition
of the banks admitted. Professor Preston also stated:
Lax supervision due to inadequate appropriations for the support of
the banking department and also to politics in connection therewith,
which extends back for years, account for the failure of the
supervisorial authorities to root out the evil /of bad banking/. 3/
17 Report of the Bank Commission for 1921, pp. 4-5.
<?/ Howard H. Preston, "A Crisis in Deposit Guaranty in the State of
Washington," Quarterly Journal of Economics, XXXVI (Feb. 1922), p. 355»
3/ Howard H. Preston, "Deposit Guaranty in Washington, " Journal of
the American Bankers Association, 15 (April 1923), P* 668.
-12Statutory limitations on bank operations. The character of
statutory limitations on bank operations imposed by the banking code in
operation in Washington at the time of adoption of deposit guaranty is shown
in Table 2.
NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number and deposits of participating and nonparticipating banks.
By
November 20, 1917, about six months after the Guaranty Fund Board began to receive
applications from banks, k6 of the 285 eligible banks had been admitted to
participation in the deposit guaranty plan. About the same number were
admitted the following year and a few more during the next two years. At the
maximum in November 1920, there were 116 member banks; this was 38 percent of
those eligible, and 29 percent of all banks operating in the State.
In 1921,
after the failure of the largest participating bank, all the remaining members
withdrew, so that the system became inoperative by the end of the year.
In 1920, at the time of maximum participation in the system, the
participating banks held hi percent of the deposits of all banks eligible
for participation, or 18 percent of the deposits of all banks operating in the
State. Table 3 shows for each year from 1917 to 1920 the number and deposits
of the participating banks, the eligible nonparticipating banks, and the
ineligible banks which included national and mutual savings banks.
Concentration of deposits. Most of the participating banks during the
four years of operation of the guaranty system were medium to small in size,
holding from $100,000 to $1,000,000 of deposits.
However, deposits were
concentrated primarily in two banks, which in 1917 held 66 percent, and in
1920 held 36 percent of all deposits in participating banks.
In November 1920,
-13Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN WASHINGTON
Item
Responsibility of officers,
directors, and stockholders
Examination of bank
Provisions of lav l/
No specific requirement.
Losses resulting from
violation of lav
Officers and directors liable for losses on loans
made to directors, officers, or employees in excess
ive amounts or in violation of law.
Liability of stockholders
Par value of shares (i.e., usual double liability).
Bonding of active officers
and employees
Board of Directors to require bond in amount determined
by them (subject to approval of Commissioner), of
active officers, and employees and such officers as
they shall designate.
Limitations on loans and
investments
Loans to bank examiners
Prohibited.
Loans to directors, officers
and employees
To be approved by majority of directors. Loans from
trust funds prohibited.
Loans to stockholders
No provision.
Maximum to single borrowers
(excluding discount of bills
of exchange and of commercial
or business paper owned by
negotiator).
20 percent of paid in and unimpaired capital and
Maximum sectired by real
estate
No provision (except for funds held in trust by trust
companies).
surplus, a fim or several members thereof considered
to be a single borrower (excluding loans collateralled by security of ascertained market value of at
least 115 percent of amount borrowed).
Secured by own capital stock Forbidden unless acquired to prevent loss on debt
(applicable also to purchase previously contracted and to be disposed of within
ninety days.
of own stock)
When reserves impaired
Limitations on ownership of
real-estate and stocki
Maximum in banking house
and equipment
No provision until 1919, when prohibited.
Not in excess of 30 percent of capital, surplus and
undivided profits, unless approval granted by
Commissioner.
-Ik-
Item
Provisions of law
Time limit on real estate
acquired by collection
of debt
Five years; extension may be granted by Commissioner.
Other real estate
Forbidden, except apartments included in banking
office which may be rented as a source of income.
Bank stocks
Forbidden, except for stock in Federal Reserve Bank
and not in excess of amount required for membership.
Other corporate stocks
Forbidden, except trust funds.
Limitations relating to
deposits
Maximum aggregate deposits
For guaranteed banks, 20 times capital and surplus;
if this amount exceeded for 90 days, capital to be
increased accordingly. For banks located outside
central business district (such district to be
determined by the Commissioner), in a city of
25,000 or more population and capital of $50,000,
limited to 10 times paid in and unimpaired capital
and surplus. No provision for other banks.
Maximum rate of interest
payable on deposits
For banks in guaranty fund, as approved by the Guaranty
Fund Board, from time to time (to be uniform within
each county). No provision for other banks.
Receipt of deposit when
insolvent
Forbidden.
Required reserves
15 percent of total deposits and 100 percent of un
invested trust funds, which may be balances with
banks approved by Commissioner, cash in bank, or
checks on solvent banks in same city.
Limitations on borrowing
Maximum amount
Maximum value of assets
pledgeable as security
Not to exceed paid in capital and surplus, for
temporary purposes only; any habitual borrowing for
reloaning to be paid off at request of Commissioner.
150 percent of amount borrowed.
Limitations on payment of dividends
Earnings to be carried to
10 percent until surplus equal to 20 percent of
surplus prior to dividends
capital stock.
When losses equal or exceed
undivided profits
Prohibited by limitation of dividends to net profits
after providing for expenses, interest and taxes,
accrued or due.
-15Item
Provisions of law
When reserve impaired
No provision.
When insolvent or capital
impaired
No provision.
Minimum capital stock
New tanks’2/
Graduated by population of city,
Less than 1,000 population
1.000 to 5,000 population
5.000 to 25,000 population
25.000 to 100,000 population 100.000 or more population
village, or community:
$15,000
25,000
50,000
100,000 3/
150,000 3/
New trust companies
Graduated by population of city, village, or community:
Less than 25,000 population - $50,000
25.000 to 100,000 population - 100,000
100.000 or more population - 200,000
Other banks
Banks in operation prior to 1917 may continue in
business and meet above capital requirements at
times and amounts prescribed by Commissioner.
l/ Provisions of law relating to banks of deposit and trust, except mutual savings
banks, excluding provisions relating to trust business.
2/ In addition to these requirements, an amount equal to 10 percent of required
capital be carried in undivided profit account to defray organization and operating
expenses of company with any unused portion to be transferred to surplus fund before
payment of dividends.
3/ In locations outside of central business district, $50,000 with limitation on
deposits.
-16Table 3. NUMBER AND DEPOSITS OF OPERATING BANKS IN WASHINGTON PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY PLAN, 1917-1920, BY YEARS
Year
end
Percentage of number
Total
Eligible to participate
Not eligible of or deposits in
operating Total ParticiNot partici- to partici participating banks
banks
l/
pating
pating 2/
Operating
Eligible
pate 3/
2/
banks
banks
Number
1917
1918
1919
1920
36If
364
381
liOl
285
46
282
85
295
104
306
116
239
197
191
190
79
82
86
95
12.6
23.4
27.3
l6.1
12.4
15.3
17.7
18.9
26.8
28.9
30.1
35.3
37.9
Deposits (in thousands of dollars)
1917
1918
322,232 148,756 39,823
363,597 168,211 55,663
1919
451,176 203,099 79,815
395,913 182,003 74,882
1920
108,933
112,548
123,284
107,121
173,476
195,386
248,077
213,910
33.1
39.3
4i.i
l/ State banks and trust' companies, from annual reports of the State Bank
Commissioner.
2/ Number of banks as of Dec.31; deposits as of call dates in November.
3/ Includes national banks (data from annual reports of Comptroller of the
Currency"}, and 1 mutual savings bank with deposits in each year as follows, in thousands:
1917 - $6,562; 1918 - $7 ,856; 1919 - $10,862; 1920 - $12,1*68 (data from annual reports
of the State Bank Commissioner).
-17the deposits of the two banks were $16 million and $11 million, respectively.
The amount of deposits held by the participating banks in each of the
four years, 1917-1920, with the banks grouped according to their deposits, are
shown in Table 4.
Failures of participating and nonparticipating banks« No failure among
participating banks occurred until June 30, 1921, when the largest bank in the
system, The Scandinavian-American Bank of Seattle, suspended. A few months
previously, the deposits of this bank had been $16 million, or approximately
one-fifth of the deposits of all the participating banks. At the date of
failure, after heavy withdrawals, it had deposits of $10,442,888. Of this
1/
amount, $8,452,103 was subject to the fund’s guaranty.
The causes of failure of the Scandinavian-American Bank of Seattle
were reported by Professor Howard H. Preston, of the University of Washington,
as overexpansion of loans, depreciation of assets due to shrinkage of property
values, failure of another bank previously affiliated with it, and the generally
adverse financial conditions prevailing at the time. For several years prior
to 1920, the bank's president, J. E. Chilberg, was interested in an Alaskan
mining project. Under his management the bank became over-expanded and involved
in heavy loans to the shipbuilding enterprises which collapsed with termination
of the war. The unsafisfactory condition of the bank was recognized by the
Federal Reserve Bank of San Francisco and the State banking department, and
under their direction a new administration was placed in control of the bank
T/ Deposits at date of failure are from the annual report of the
Supervisor of Banking for 1921, p. 4; those subject to guaranty from the final
statement of guaranteed claims approved.
-18Table 4 .
HUMBER AND DEPOSITS OF GUARANTEED BANKS IN WASHINGTON, 1917-1920
Number of banks l/
19l7
l9lB 1919 1920
All participating banks
Banks with deposits of 100,000 or less
100,000 to 250,000
250,000 to 500,000
500,000 to 1,000,000
1,000,000 to 2,000,000
2,000,000 to 5,000,000
5,000,000 and over
Banks with deposits of 100,000 or less
100,000 to 250,000
250,000 to 500,000
500,000 to 1,000,000
1,000,000 to 2,000,000
2,000,000 to 5,000,000
5,000,000 and over
46
85
104
116
$39,822
8
11
33
21
7
31
32
9
37
39
650
2,616
4,032
5,630
7,750
16
23
7
2
2
20
9
—
2
5,121
10,751
1,193
16
12
7
1
2
100.0#
2
-2
*1
•
8
H
Percentage of total
Deposits (in thousands) ¿7
I5T7
ISnr
1515
19"S5
--
$50,596 $79,812 $74,875
852
2,277
26,210
-23,336
100.0# 100.0# 100.0#
100.0#
17.4
34.8
26.1
12.9
38.8
24.7
6.7
29.8
30.8
7.8
31.9
33.6
1.6
6.6
10.1
15.2
18.8
12.9
2.4
—
2.4
22.1
6.8
1-9
1.9
17.2
2.2
-4.3
7.8
--
3.0
--
1.7
65.8
1.7
11.1
500
679
5,527 6,629
11,321 14,046
15,744 13,787
9,264 12,500
—
4,255
33,201 27,234
100.0# 100.0#
.6
6.9
15.3
14.2
21.3
4.5
19.7
—
k6.i
11.6
5.4
41.6
.9
8.9
18.7
18.4
16.7
m
m
itm
36.4
l/ Tabulated Trom statements for the individual “banks in the annual reports
of the StaEe Bank Commissioner. Totals for deposits differ, particularly for 1918, from
those in the consolidated statement for the same date used in Table 3* The figures
for the individual banks for 1918 apparently exclude, but for other years include, the
item "due to banks".
-19early in 1920 and a 100 percent stock assessment levied on the stockholders*
In January 1921, the Scandinavian-American Bank of Tacoma, which had formerly
been closely affiliated with the Seattle bank, but was never a member of the
guaranty system, failed. This resulted in immediate heavy withdrawal of deposits
from the Seattle bank , as many depositors assumed the two banks were still
affiliated. The Seattle bank, despite the efforts of its new administration,
was unable to withstand the drain.
1/
by bad banking.
"Fundamentally both failures were caused
During the period of operation of the deposit guaranty system there
were 12 failures among the commercial State banks which did not participate.
However, the deposits of these twelve banks were considerably less than those
of the one failure among the participating banks.
The number and deposits of the failed participating and nonparticipating
State banks are shown by year, together with failure rates, in Table 5» For
number of banks, the average annual failure rate for the nonparticipating
commercial banks was about five times that for the guaranteed banks. However,
in terms of deposits the average annual failure rate for the participating banks
was about three times that for the nonparticipating banks.
FINANCIAL HISTORY OF THE GUARANTY FUND
The annual reports of the Bank Commissioner give the amount credited
Tf Howard H. Preston, "A Crisis in Deposit Guaranty in the State of
Washington," loc. cit., pp. 350-56, and "Deposit Guaranty in Washington," loc. cit.,
pp. 665-68.
-20Table 5. NUMBER AND DEPOSITS OF STATE BANKS IN WASHINGTON
CLOSED BECAUSE OF FINANCIAL DIFFICULTIES, 1918-1921
Group and year
IT
Number
Deposits
(thousands
of dollars)
2/
~W
Annual failure rates
Number per
Deposits per
100 active
$100 in active
banks
banks
13
$16,609
1.11 4/
1
10,443
.28 y
4.17 y
12
6,l66
1.47 y
1.36 y
1918
1
1
44
91
.35
.35
0.03
1919
11
16,474
3.59
9.05
Total, 1918-1921
Participating in
deposit guaranty
Not participating in
deposit guaranty
1921 5/
$2.37
V
0.04
l/ There were no failures in 1917 subsequent to enactment of the deposit
guaranty law, and none in 1920.
2/ For failures in 1918 and 1919# as of last call date prior to failure;
for 1921, as of date of failure (data from annual reports of Bank Commissioner).
3/ Based on active bank data for call dates nearest January 1, which
were in November of the preceding year.
V Average annual rate for the 4 year period.
5/ One participating in deposit guaranty, and ten not participating.
-21by the participating banks to the guaranty fund, as shown by the books of
the banks at each call date; and also, for the first three years, the size of
the fund at the end of the calendar year. A statement of receipts and dis
bursements of the fund from its beginning to the end of 1921 is given in the
report for 1921. A final statement of the fund has been provided by the
department of banking.
Income and obligations of the guaranty fund. A summary statement of
the income and obligations of the Washington Depositors' Guaranty Fund for the
entire period of its existence,together with the assessments each year, is
given in Table 6. The total receipts of the fund were approximately $7 million
of which a little less than $1 million represented the assessments received
and more than $6 million the recovery from the liquidation of the assets of
the Scandinavian-American Bank.
Of the guaranteed deposits of over $8 million,
over $6 million was paid from the proceeds of the liquidation of assets of the
bank and less than $1 million from the assessment receipts of the guaranty fund.
Over $1 million of guaranteed deposits were never paid. The proceeds of liquid
ation of the bank were sufficient to repay 75 percent of the guaranteed deposits,
and the assessment receipts of the fund, after allowance for expenses, provided
10 percent, leaving 15 percent unpaid.
Settlement of the affairs of the guaranty fund. The affairs of the
Washington deposit guaranty system were not finally closed until the end of 1927
when the final dividend had been paid from liquidation of the assets of the
Scandinavian-American Bank and could be used by the guaranty fund to make a
final payment to depositors.
In connection with the liquidation of the affairs
of the Scandinavian-American Bank and of the deposit guaranty fund, two cases
affecting the fund reached the State Supreme Court.
One of these pertained
-22Table 6.
RECEIPTS, EXPENDITURES, AND DEFICIT OF THE WASHINGTON DEPOSITORS'
GUARANTY FUND
Receipts
Initial assessment on banks admitted in 1917.
at rate of $0.50 per $100 of deposits l/
Assessments on account of subsequent admissions
and increase in deposits: 2/
In 1918 3/
In 1919
In 1920 5/
Assessment in Spring of 1921 to increase guaranty
fund to $1.00 per $100 deposits (i.e., at rate of
$0.50 per $100 of deposits) 6/
Assessment for contingent fund in June 1923. at rate
of $0.10 per $100 of deposits 7 /
Special assessment in December T921 to meet loss in
failed bank, at rate of $0.50 per $100 of deposits 7 /
V
Total assessments
$139,043
73,685
39,426
85,702
323,705
70,857
280,255
1,012,673
Interest 8/
Liquidation of failed bank 8/
16,170
6,360,958
Total receipts
$7,389,801
Expenditures
Expenses and equipment 9/
Assessment receipts lost or uncollected:
On deposits in failed bank 8/
Uncollected under court decision 10/
Payments to depositors of failed bank 11/
Total expenditures
Unpaid obligations
To depositors of failed bank 12/
$59,531
25,873
91,983
7,212,4l4
$7 ,389,801
$1,239,089
l/ Amount to credit of guaranty fund at end of year (Report of State Bank
Examiner, 1917. P» 6).
2/ At same rate as initial assessment.
3/ Estimated as amount to credit of guaranty fund on Nov. 1, 1918 (shown as
$205,343 in Report of State Bank Examiner, 1918, p. 18) in excess of amount for
preceding year, plus $3385 shown in final statement as "assessment No. 1” (assumed
not included in Nov. 1 balance).
4/ Estimated as amount to credit of guaranty fund on Nov. 17, 1919 (shown as
$245,769 in Report of Bank Commissioner for 1919, P* 12) in excess of amount
for preceding year.
5/ Estimated as amount to credit of guaranty fund on Nov. 15, 1920 (shown as
-23Table 6. Notes - continued.
$322,082 in Report of Bank Commissioner for 1920, p. 19) in excess of amount for
preceding year, plus $12,389 shown in final statement as "assessment No. 2"
(assumed not included in Nov. 15 balance).
6/ Estimated as amount in guaranty fund in early 1922 (shown as $64-5,787 in
Report of the Supervisor of Banking for 1921, p. 15) in excess of amount for
Nov. 15, 1920).
7/ Report of the Supervisor of Banking for 1921, p. 15*
B/ Final statement of the guaranty fund.
9/ Final statement of the guaranty fund. Distribution by years not available
except for $4900 in 1919 (Report of Bank Commissioner for 1919, P* 7), and total
of $24,506 to early 1922 (Report of Supervisor of Banking for 1921, p. 15)»
10/ Estimated as difference between total assessments to end of 1921 (as
shown in this table and in Report of Supervisor of Banking for 1921, p. 15), and
"Total paid by member banks" (shown as $920,690 in final statement of fund).
The amount thus estimated is less than a figure (portion of assessments) shown
as "claims pending court decisions" in Report of Supervisor of Banking for 1921,
p. 15), but more than the $56,061 which the Supreme Court of Washington ruled
could not be collected from one bank that filed notice of withdrawal immediately
after the revision of the guaranty fund law in March 1921 (Spokane and Eastern
Trust Co. vBart( 1923), 221 Pac. 615, 127 Wash. 541).
11/ Final statement of the guaranty fund.
12/ Total guaranty fund warrants representing guaranteed deposits, amounting
to 15,452,103, less payments of $7 ,212,4l4 (final statement of the guaranty fund).
-24to a contention that the deposit guaranty fund had a prior lien on all the
assets of a bank. The Court held that the fund was subrogated only to the same
rights as were held by the owners of the guaranteed deposits, so that guaranteed
and nonguaranteed deposits and other general claims were entitled to the same
y
percentage payments from liquidation of the proceeds of the assets of the bank.
The other court case arose in connection with the assessments due the fund from
a bank, the largest in the system except the failed Scandinavian-American Bank,
which filed notice of withdrawal immediately after passage of the amendments
of 1921. That act was somewhat ambiguous as to the applicability of its pro
visions to a previously participating bank that declined to accede to the
terms of the new law. This bank refused to pay its assessment, claiming that
was not bound by any of the provisions of the original act, and was sustained by
the lower court. The final decision by the Supreme Court appears somewhat
curious. It held the bank liable for the additional assessment levied for
the particular purpose of meeting the loss in the Scandinavian-American Bank,
since that failure had occurred prior to the effective date of its withdrawal,
but held that it was not liable for the previous initial assessment of one-half
of 1 percent of its deposits to the credit of the guaranty fund, on the ground
that the 1921 amendments had changed the terms of the section of the law relating
thereto so drastically that neither the revised law nor the original law could
y
be held applicable to the bank in question.
1/ State v. Duke (1922), 20b Pac. 918, 120 W!a.sh. 13 .
5/ Spokane and Eastern Trust Co. v. Hart (1923), 221 Pac. 615, 127
Wash. ^41.
-25weaknesses
OF THE WASHINGTON DEPOSIT GUARANTY SYSTEM
An appraisal of the Washington guaranty system by Professor Preston
of the University of Washington summarizes very well the weaknesses of that
system.
The first lesson to be learned from the Washington experience
is undoubtedly that deposit guaranty is no panacea against bad banking.
The second is that it is no substitute for good banking laws rigidly
and adequately enforced without fear or favor. In the third place it
shows the danger of unscientific distribution of risk through allowing
such a large percentage of the guaranteed deposits to be concentrated
in a single institution. The Scandinavian-American failure was the
largest ever experienced in Washington. The reserve accumulated was
hopelessly inadequate to meet such a loss and its total loss would
have been an almost intolerable burden for 120 small banks to bear.
The guaranty principle is insurance and as such demands scientific
distribution of risk. If it be thought worth while to devise such
a system in other states the number of member banks must be large and
a feasible plan of underwriting exceptionally large risks must be
worked out. l/
1/ Howard H. Preston, ^Deposit Guaranty in Washington," loc. cit., p. 668.
DEPOSIT GUARANTY IN NORTH DAKOTA
Prepared by
Clark Warburton, Chief
Banking and Business Section
Division of Research and Statistics
Federal Deposit Insurance Corporation
Division of Research and Statistics
Federal Deposit Insurance Corporation
January 1959
TABLE OF CONTENTS
DEPOSIT GUARANTY IK NORTH DAKOTA
Page
Background of the guaranty legislation
1
Character of the guaranty legislation
Administration of the deposit guaranty system
Admission of banks to the guaranty system
Deposits covered by guaranty
Assessments
Custody of fund and expenses of administration
Method of paying depositors of failed banks
Liquidation of closed banks
Special deposits and extension of time for reorganization
Deposits in and control of banks in difficulty
2
2
3
5
6
7
8
9
10
11
Supervision and regulation of guaranteed banks
Banking code and supervising authority
Bank supervisory powers of the State ¿Examiner
Supervisory powers of the Depositors1 Guaranty Fund Commission
Supervisory experience
Statutory limitations on bank operations
11
11
12
12
Insolvency and closing of the guaranty fund
Inadequacy of the fund
2^
2k
Number, deposits, and failures of parti coating banks
Number and deposits of operating banks
Concentration of bank deposits
Failures of participating banks
Procedures used in handling banks in financial difficulties
27
16
19
27
27
31
37
Financial history of the guaranty fund
Gources and adequacy of informâtion
Income and obligations of the guaranty fund
Comparison of assessments and losses
43
Appraisal of the North Dakota depositors* guaranty fund
55
^3
kk
52
LIST OF TABLES
Page
1.
Supervisory powers of State banking board, and of State
examiner, in North Dakota
13
2.
Statutory limitations on bank operations in North Dakota
20
3*
Number of operating oanks in North Dakota participating and not
participating in the deposit guaranty system, 1918-1928, by years
28
Deposits of operating banks in North Dakota participating and not
participating in the deposit guaranty system, 1918-1928, by years
29
Number and deposits of State banks and trust companies in North
Dakota December 31; 1918, 1923* an& 1926
30
Number and deposits of State banks in North Dakota closed because
of financial difficulties, July 1, 1918, to July 1, 1929
32
Size distribution of failed banks entailing obligations on the
North Dakota depositors1 guaranty fund
33
Annual bank failure rates in North Dakota, 1919-1928, compared with
rates in contiguous States and in the United States
3^
Causes of suspensions of State banks in North Dakota, 1921-1930, as
reported on schedules prepared by the State examiner in North
Dakota for the Federal Reserve Committee on Branch, Group, and
Chain Banking
36
Receipts, expenditures, and deficit of the North Dakota depositors1
guaranty fund
45
Assessments and other receipts of the North Dakota depositors*
guaranty fund, by years, 1918-1929
U6
Expenditures and balance of the North Dakota depositors1 guaranty
fund and appropriated administrative expenses, by years, 1918-1932
kj
Insured deposits and obligations to depositors of failed banks,
N.rth Dakota depositors1 guaranty fund, by years
50
h*
'5*
6*
7.
8.
9.
10.
11.
12*
13.
±k. percentage of deposits insured and percentage of insured deposits
paid by the guaranty fund and recovered from liquidation of assets
bank failures under the North Dakota depositors1 guaranty fund,
by years
15.
16 .
51
Annual assessment receipts, liability for deposits in failed banks,
and cumulative deficiency, North Dakota depositors* guaranty fund
p3
Comparison of annual rate of assessment levied with rates required to
meet deposit obligations in failed banks, North Dakota depositors*
guaranty fund, 1918-1929
54
DEPOSIT GUARANTY IN NORTH DAKOTA
The North Dakota law providing for the guaranty of bank deposits
was enacted on March 10, 1917, the same day as the Washington law. At that
time deposit insurance systems were in operation in the five States directly
south of North Dakota and also in Mississippi. The North Dakota law went
into force on July 1, 1917, and assessments for the system began later in
that year. However, because of the time required to examine banks for
admission, the insurance provided by the system did not become effective
1/
until July 1, 1918.
The North Dakota law remained in operation for twelve years.
It
was revised and rewritten at the 1923 session of the Legislature« Under an
act passed by the Legislature in torch 1929 and. then submitted to a referendum
and approved June 30, 1930, the law was repealed as of July 1, 1929«
BACKGROUND OF THE GUARANTY LEGISLATION
Bills for deposit guaranty were introduced into the North Dakota
House of Representatives, but not acted upon favorably, in 1907 and 1909, and
2/
again in 1915*
At the 1907 Annual Convention of the North Dakota Bankers*
Association, the president of the association recommended guaranty of bank
deposits on a national scale; and a member of the United States House of
Representatives from North Dakota, who had introduced a bill for deposit
1/ Commercial West, June 15, 1918, p. 3^ and July 6, 1918, p. 3^;
The Northwestern Banker, A u g u s t 1918, p. 66*
2/ 1907, House Bill no. 258; 1909, House Bill no. 47; 1915» House
Bill no. 224.
-2-
y
guaranty in the Federal Congress, spoke in its favor.
At the next
convention the association appointed a standing committee of three persons
on insurance of bank deposits to report the next year» In 1909 the association
adopted a resolution opposing deposit insurance and congratulating the Legis2/
lature for declining to pass any bills introduced for that purpose.
In
the convention of 1915, the legislative committee of the association reported
that "as usual, the Legislature had a tussle with the bank guaranty bill", and
that the association's committee had worked against it. The next year, however,
the president in his address at the convention referred to the South Dakota
law, saying:
"It looks to me that now is the time for the bankers of the
State to investigate this matter and see if it would not be advisable to
3/
have a bill presented to the Legislature".
The bankers participated in the
drafting of the legislation of 1917, which was largely an adaptation of the
South Dakota law.
CHARACTER OF THE GUARANTY LEGISIATION
Administration of the deposit guaranty system. Administration of
the deposit guaranty system was placed in a Depositors' Guaranty Fund
Commission to be composed of the Governor as chairman, the State Examiner
as secretary, and three members appointed by the Governor from a list of nine
nominations submitted by the North Dakota Bankers' Association. The appointed
members were required to have had at least five years' experience in bank
17 Proceedings of the Fifth Annual Convention of the North Dakota
Bankers' Association, 1907, p* 18. Representative Gronna's bill was introduced
in March 1906, and again in December 1907 (Annual Report of the Federal Deposit
Insurance Corporation for 1950, pp. 82 and 84).
2/ Proceedings of the Sixth Annual Convention of the North Dakota
Bankers* Association; and of the Seventh Annual Convention, pp. 80-81.
3/ North Dakota Banker, July 1915, P* 8; and July 1916, p. 2.
-3management in North Dakota. An amendment in 1919 provided, that an appointed
member must also "be an official of some bank directly affected by the guaranty
law, and emitted the requirement regarding nominations by the North Dakota
Bankers* Association.
Two years later, the requirement that an appointed
member must be a bank official was dropped, and appointments were required
to be made from a list of nine nominees submitted by the participating banks.
In 1923 the State Examiner was replaced as a member of the Commission by the
Manager of the Bank of North Dakota, with the Commission to appoint its
secretary and authorized to select the State Examiner for that position.
The Commission was authorized in 1923 to appoint two inspectors,
with the same qualifications as deputy State examiners, and if necessary
two assistant inspectors, as a means of augmenting the examining staff of the
State Examiner.
Admission of banks to the guaranty system. Participation in the
deposit guaranty plan was made compulsory for every corporation, except
national banks, engaged in the business of taking deposits or buying or
selling exchange. This included trust companies doing a general banking
business, and building and loan associations receiving savings deposits.
The four trust companies operating in the State appear to have been engaged
y
in deposit banking and to have become participants in the system.
None of
the building and loan associations qualified as participants in the system.
The law provided for the examination of all banks within six months
after passage of the deposit guaranty act. The examinations were to be made
l/ statements are not given for trust companies, nor for the trust
companies taken together, but they are included in the consolidated statements
for state banks. Individual statements for the building and loan associations,
which are given in the annual reports of the State Examiner, do not show any
category of savings deposits.
-4by the State Examiner and his deputies or by examiners appointed by the
Depositors’ Guaranty Fund Commission.
The Depositors’ Guaranty Fund
Commission was then to pass upon the qualifications of each bank. The
decision reached by the Commission was to be final, both as to immediate
admission and with respect to requirements necessary for later admission.
If a bank failed to comply with those requirements within three months,
or within an additional six months at the discretion of the Commission, the
bank was to be closed.
The first meeting of the Depositors’ Guaranty Fund Commission was
held on July 13, 1917» The Commission at that meeting adopted a resolution
noting that banks would not be under its supervision until they had been
examined and admitted, and forbidding the banks to so advertise until admitted.
In October the Commission requested the State Examiner’s office to make a list
of weak banks and have them examined at once, with the reports of examination
to be reviewed by the Commission and the banks to be informed of requirements
for admission under the Guaranty Act. At a meeting on December 27, the examiner’s
reports showed that scane banks could not be admitted, and the Commission
adopted a resolution giving all banks an additional ninety days to clean up
y
irregularities.
Most of the banks appear to have been approved at the close
of that period.
However, as late as June 28, 1918, the Commission adopted a
2/
motion that ninety banks be notified that they were disapproved.
Apparently
all but a few of these banks met the necessary conditions.
In October five
banks were reported as having failed to qualify and as closed or still under
l/ Minutes of the Depositors* Guaranty Fund Commission of North Dakota.
These minutes were examined by the author of this report in September 1956.
2/ Ibid.
investigation.
The records of the Commission show that four banks were
closed in the third quarter of 1918, without having been admitted to the
deposit guaranty system.
Deposits covered by guaranty. Deposit guaranty in North Dakota applied
to all deposits not otherwise secured and included public funds. The act
provided that the guaranty should not apply to a bank’s obli^Ltion as endorser
upon bills rediscounted, bills payable, or money borrowed from its correspondents
or others.
The provision regarding public funds stated that such funds should
thereafter be secured in the same manner as private funds and repealed previous
requirements regarding the posting of security for the purpose of becoming a
depository for public funds. In 1919, upon establishment of the Bank of
2/
North Dakota, all public funds were required to be deposited in that bank.
This provision
was modified by an initiative act adopted by the voters in
November 1920, pemitting municipal subdivisions of the State to deposit
3/
their public funds in depositories of their own choice.
This initiative
act was replaced in the Spring of 1921 by a legislative act designating all
State and national banks as well as the Bank of North Dakota as legal deposit
ories of public funds of municipal subdivisions and prescribing procedures
required for furnishing of bond.
In 1923 the revised law provided that deposits upon which compen
sation in excess of the prescribed rate of interest was paid in any manner
T7 Commercial West, October 19, 1918, p. 3^. The annual report of
the State Examiner for 1917-18 states that two banks were closed by the
department with receivers to be appointed.
2/ The Bank of North Dakota is owned, controlled, and operated by
the State,“and its deposits are guaranteed by the. State. It was not required
nor authorized to participate in the'deposit guaranty syatem.
3/ Sargent County v. Stk&ir(J.9£l), •1&2
270^47'.li.D. 561.
-6 -
whatsoever were to be excluded from guaranty. A decision of the State Supreme
Court applied the same principle to a deposit ir & bank that failed prior to
enactment of that law, though the excessive interest was in the form of a
y
bonus.
Fewer cases of controversy regarding deposits eligible for coverage
by the guaranty fund were carried to the courts in Worth Dakota than in the
States which had previously established deposit insurance systems. This resulted
from the provision in the 1923 law stating that the decision of the Commission
should be final with respect to any deposit guaranteed by the fund, with the
owner of any claim rejected by the Commission entitled to appeal within ninety
days. The Commission was authorized to make rules and regulations prescribing
the manner by which claims should be allowed and to provide for hearing upon
rejected claims either before the Commission or any member thereof or a referee
appointed by the Commission. After suchahearing the Commission was required
to review the rejected claims and make a final determination. Under a decision
of the State Supreme Court in 1924 the procedures of the 1923 law for determining
and paying depositors’ claims were applicable not only to banks that failed
subsequent to the 1923 law, but also to those that had failed prior to that
2/
time and were in process of liquidation.
The finality of the Commission’s
3/
review of rejected claims was upheld in later decisions of the Supreme Court.
Assessments. Assessments for meeting the cost of deposit guaranty
were levied upon banks on the basis of total average daily deposits.
The law
provided for an initial assessment in 1917, and. annual assessments thereafter
I/ McQ,uerry v. State (1923), 195 N.W. 432, 50 N.D. 229.
2/ Wirtz v. Nestor (1924), 200 N.W. 524, 51 N.D. 603.
3/ Standard Oil Co. of Indiana v. Engel (1927), 212 N.W. 822, 55 N.D.
163; Bishop v. Depositors’ Guaranty Fund Commission (1927), 212 N.W. 828, 55 N.D.
178; and State v. Sorlie (1927), 212 N.W. 829, 55 N.D. 182.
of l/20 of 1 percent of such deposits until the fund should reach a maximum
of 1 percent of average daily deposits. Additional assessments of l/20 of
1 percent each, with not more than four in any one^year, were authorized if
the fund fell below 3/4 of 1 percent of the total average deposits of the
banks. The 1923 revision provided that assessments should continue at the
regular rate until the fund reached 2 percent of the total average daily
deposits, and then were to be omitted until the fund was depleted below
1-g- percent.
New banks admitted to the system were to pay an amount equal to 2
percent (increased to 3 percent in 1923) of their capital stock.
The annual
assessments on such banks were to be so adjusted that the first two assessments,
together with the initial payment, would equal at least one-half of 1 percent
of the average daily deposits as shown by the first annual statement.
A bank entering voluntary liquidation or changing to a national bank
was to be refunded the portion of assessments it had paid which had not been
used.
However, the bank was not to be relieved of paying the current assess
ment due to the fund, nor of any liability to become due on account of losses
in banks closed at that time.
Under a decision of the State Supreme Court
the latter requirement did not authorize or permit the levy of assessments
y
on a bank which had converted to a national bank.
Custody of fund and expenses of administration.
participating banks were given custody of the fund.
Individual
Bach bank was notified
as to the amount of its assessment and this amount was credited by the bank
to the Depositors* Guaranty Fund and made payable to the Depositors' Guaranty
Fund Commission upon demand. No bonds or cash were required to be deposited
as surety for payment of assessments. Failure to credit the assessed amount
~TJ State v. tfirst National Bank of Whitman (1929), 224 N.W. l6l,
57 N.D. 5f4.
-8made a bank liable to a daily fine of ten dollars for the first twenty days,
and after thirty days the State bank examiner was empowered to deem the bank
insolvent and liquidate it.
The Commission was authorized to deposit money collected or received
from time to time in one or more banks or trust companies operating under the
provisions of the Act.
The expenses of administering the guaranty fund were to be paid
by the State from its general funds. The 1923 law appropriated $20,000 a
year from the guaranty fund to meet the salaries of inspectors appointed by
the Commission and other expenses, with any unused amounts to be returned
to the fund. Under that law inspectors appointed by the Commission were
to receive the salary of deputy examiners from the State Examiner1s funds,
with the Commission authorized to pay an additional salary from the guaranty
fund if necessary to procure competent services.
Salaries of assistant
inspectors were to be paid from the guaranty fund.
Method of paying depositors of failed banks.
When a bank became
insolvent the State Examiner was to certify to the Depositors' Guaranty Fund
Commission the net amounts due unsecured depositors.
The Treasurer of the
Commission was then to draw on the fund in the various banks, prorated among
them in accordance with the amounts held by such banks, and transmit the
required amounts to the depositors.
If the Depositors* Guaranty Fund was
insufficient the Commission was to issue a negotiable certificate of indebted
ness, with interest at 5 percent per year in favor of the insolvent banks.
These certificates were to be due and payable out of the first money accruing
to the Depositors* Guaranty Fund, on March 1 following the date of issue. The
Commission was subrogated to all rights of depositors paid from the guaranty
fund.
-9 -
The amendments of 1923 substantially altered the procedure used in
paying the claims of depositors covered by the guaranty. Under the new
procedure, the Commission was to have each deposit in a closed bank examined
and audited and to determine the amount qualified for guaranty under the act,
certifying the acceptance or rejection of each deposit to the Secretary of
the Commission who then gave notice to persons whose deposits had been
rejected. The Secretary of the Commission issued a certificate of
indebtedness upon the Treasurer of the Commission to each owner of a deposit
accepted as guaranteed.
If there were insufficient funds available in the
fund to pay the certificates, the Treasurer was required to endorse the
same as "presented for payment", and the certificate was thereafter payable
out of the guaranty fund upon order of the Commission for a pro rata payment
on all outstanding certificates of indebtedness.
Liquidation of closed banks. Under the law in force when the
deposit guaranty law was enacted, insolvent banks were liquidated by a
receiver appointed by the State Examiner with the approval of the State
Banking Board.
In 1921 the Depositors' Guaranty Fund Commission was given the
power to supervise the liquidation of insolvent banks and authorized to appoint
a supervisor of receivers with expenses to be paid from the guaranty fund.
In 1923, the Legislative Assembly transferred jurisdiction over
the affairs of insolvent banks to the State Supreme Court. At first this
was for a three-year period, but this time limitation was later removed. The
State Supreme Court was to appoint a reciver, or two joint receivers, for all
insolvent banks to supplant or supersede any receiver previously appointed,
and to appoint the same receiver or receivers for any other bank which became
insolvent.
The receiver, or receivers, was to act under the guidance of a
Court Commissioner appointed by the Supreme Court.
-10The Depositors1 Guaranty Fund Commission was given power in 1923
to permit a bank which had suspended to reopen, provided the hank complied
with conditions, prescribed by the Commission, deemed necessary to make the
bank solvent. The Depositors* Guaranty Fund Commission was also authorized
to prescribe the conditons under which a bank in receivership could be
reorganized and readmitted to the guaranty system.
With the approval of the
Court, such a reorganization could be made at any time prior to final dis
position of liquidation proceedings.
In 1927 an amendment provided for reorganization of a failed bank and
readmission to the guaranty system, without placing it in receivership, according
to a plan agreed to by 80 percent of the depositors, and approved by the State
Examiner and the Guaranty Fund Commission. A bank in receivership could be
reorganized by the same procedure, with the additional approval of the Court.
Special deposits and extension of time for reorganization. The 1923
amendment to the deposit guaranty law also authorized the Commission or an
inspector to require a bank when under examination to set aside all deposits
received thereafter and to be held intact as "special deposits".
Such special
deposits were to be kept separate and apart from the general fund of the bank,
to be held in cash or placed in another bank as a special trust fund, and were
not to be devoted to any purpose other than return on demand to the depositor.
Such an order when first issued was to apply to deposits received during a
bank examination, but if the Commissioner or inspector found the bank to be
insolvent he could extend the order for such further period, not to exceed
thirty days, as was necessary to enable the Commission to meet and take action
regarding the bank. The Commission could institute proceedings to have the
bank closed or, in its discretion, could give the bank a prescribed time to
-11comply with conditions the Commissioner deemed necessary to make it a solvent
institution, with the bank consenting by resoltuion of its Board of Directors
to the limitation on receipt of deposits and continued supervision of its
affairs by the Commission.
Deposits in and control of banks in difficulty. Under the 1923
act the Depositors’ Guaranty Fund Commission was authorized, for the next
four years, to deposit funds in participating banks, "temporarily in aid of
open banks, in such amounts, and under such terms and conditions, and upon
such security as it may determine and designate.” A bank receiving such aid
was required to conduct its affairs in accordance with and under the direction
of the Commission until the temporary aid was withdrawn.
SUPERVISION AND REGULATION OF GUARANTEED BANKS
Banking code and supervising authority, state banks in North Dakota
had been subject to supervision for about 25 years prior to passage of the
deposit insurance legislation.
The banking code had been revised in 1913 and
was not significantly changed at the time of enactment of the deposit guaranty
law in 1917»
Examination and supervision of the banks was in the hands of a
Department of Banking under the management and control of a State Banking
Board with a state Examiner as chief officer.
The State Banking Board con-
sisted of the Governor, Secretary of State, Attorney General (ex officio),
and the president and secretary of the North Dakota Bankers' Association.
The
Governor was chairman and the State Examiner secretary of the State Banking
Board. These provisions remained unchanged throughout the duration of the
deposit guaranty system, though some changes were made in the supervisory
powers of the State Banking Board and the State Examiner.
-12The duties of the State Examiner were not confined to bank super
vision. He was also responsible for examining the books and accounts of the
various State offices, and those of counties, and cities, and school boards,
and also for examining the affairs of financial corporations other than banks
operating under State law.
Bank supervisory powers of the State Examiner. The duties of the
State Examiner pertaining to batiks were principally examination of all State
banks, closing of insolvent banks, and supervision over their reorganization
or initiation of the process of liquidation. He was required to make at
least two examinations each year of each State bank . Also, he was required
to make the special examination of each bank applying for admission to the
deposit insurance system.
In 1923, when the Depositors' Guaranty Fund
Commission was authorized to appoint inspectors, the State Examiner was given
authority to accept an examination by such inspectors in lieu of an examination
by one of his own deputies.
The supervisory powers of the State Examiner during the period of
operation of the deposit guaranty system are summarized in Table 1.
Supervisory powers of the Depositors' Guaranty Fund Commission.
Some of the bank supervisory powers of the State Examiner were shared with the
Depositors' Guaranty Fund Commission. The Commission could refuse admission
of a bank to the guaranty system, in which case the bank was required to be
liquidated as an insolvent bank. Under the 1923 act, the Commission was
required to take necessary steps to become and keep informed as to the
financial condition and management of all participating banks.
To enable the
Commission to do this, it was given full access to all the records and files
-13Table 1. SUPERVISORY POWERS OP STATE BANKING BOARD,
AND OF STATE EXAMINER, IN NORTH DAKOTA
Item
Opening of new banks
Powers 1/
Until 1927, State Banking Board to transmit from
Secretary of State to State Examiner certificate
of authority; such certificate to be held by him
until examination reveals strict compliance with
all conditions of banking law. After 1927, State
Banking Board to hold open hearings and to dili
gently inquire whether community needs additional
banking facilities and, if so, whether proposed
bank fills this need; and whether incorporators
are of such character, integrity, reputation and
financial standing that bank will not be detri
mental to welfare of the community. If State
Banking Board in unanimous agreement as to estab
lishment of bank to request Secretary of State to
issue certificate of authority which is forwarded
to State Examiner and held by him until examina
tion reveals strict compliance with banking laws.
Examinations and reports
of condition
Frequency of examinations At least twice a year by State Examiner or deputies,
under direction of State Banking Board. In 1923,
duty of Guaranty Fund Commission to investigate
a bank if its information indicates the bank is
being irregularly, inefficiently, or dishonestly
conducted or is insolvent, with results to be
accepted by State Examiner, at his discretion,
in lieu of a required examination.
Scope of examinations
To ascertain that bank is operated in accordance
with law and sound banking practices; specifically,
the character and value of assets, the method of
operating and conducting the bank, and the systems
of accounting.
Reports of condition
At least five a year (amended in 1925 to three or
more), and any additional reports deemed necessary
by State Banking Board to obtain full and complete
knowledge of condition of the bank; form of reports
to conform as nearly as possible to that used by
national banks (amended in 1927 to include dates
similar to those for national banks).
- 1 4 -
Table 1. SUPERVISORY POWERS OF STATE BANKING BOARD,
AND OF STATE EXAMINER, IN NORTH DAKOTA (continued)
Item
Powers
Bank management
State Banking Board to institute action deemed
Removal of undesirable
assets or discontinuance necessary to cause bank to dispose of bad
of undesirable practices debts or to convert same into good assets.
Impairment or deficiency
of capital
State Banking Board to order any impairment of
capital to be made good.
Impairment of reserve
State Banking Board to order restoration of
impaired reserve within thirty days.
Removal of bank officers,
directors, or employees
No provision other than instituting legal pro
ceedings for infractions of law.
Taking possession or closing State Banking Board to close and take possession
of a bank found to be insolvent, with following
a bank
conditions determining insolvency: When actual
cash market value of assets insufficient to
pay liabilities; When unable to meet demands of
creditors in usual and customary manner; When fails
to make good reserve as required by law; When fails
to comply with any lawful order of State Banking
Board within time specified by law or the Board.
If Guaranty Fund Commission does not approve a bank
for admission and corrections requested not made
within three months of notice (may be extended by
Commission an additional six months), to be closed
for liquidation as an insolvent bank.
In 1923, Guaranty Fund Commission authorized to
request appointment of receiver for a bank found
insolvent upon investigation.
Handling of closed banks
Until 1923, may be returned to owners to be opera
Return to owners
ted under conditions specified by State Examiner
if on examination bank is found able to pay in
full from assets all creditors except stockholders.
In 1923, Guaranty Fund Commission given authority
to return to owners and establish conditions of
operation, prescribing (in 1927) conditions as
to assets, payment of liabilities, and character
and competency of managing officers. In 1927,
owners may appeal for return upon presentation by
25 depositors of plan of operation endorsed by
deposit creditors having 80 $ of deposits and
acceptable to the State Examiner and Commission.
-15Table 1. SUPERVISORY POWERS OF STATE BANKING BOARD,
AND OF STATE EXAMINER, IN NORTH nAKOTA (continued)
Item
Powers
Liquidation
Unless returned to owners, closed bank to be liqui
dated as follows: (l) By State Banking Board,
after allowing reasonable time for examination,
through appointment of temporary receiver pending
court action; (2) By State Examiner through
appointment of receiver subject to approval of
State Banking Board; (3) By District Court through
appointment of receiver who may enter liquidation
proceedings at any time and assume all responsibility
for same. In 1921, liquidation proceedings '
to be supervised by Guaranty Fund Commission through
appointment, if deemed necessary, of a supervisor
of receivers. In 1923, Supreme Court of North Dakota
given and required to exercise original jurisdiction
of liquidation proceedings, with authority to
appoint a receiver or two joint receivers for all
closed banks, such appointees subject to instruction
from a Court Commissioner empowered to act on behalf
of the Court, and superceding any receiver appointed
by District Court, State Examiner, or State Banking
Board.
Sale of assets or
capital stock
Until 1921, receiver may dispose of corporate pro
perty on terms set by State Examiner. Thereafter,
authority to dispose of assets in general provisions
applying to liquidation responsibilities of
Guaranty Fund Commission and the Courts.
Consolidation of banks
In 1923, merger or consolidation permitted by 2/3
vote of stockholders after thorough examination
by and approval of State Examiner with view to
determining whether conditions such that proposed
action would result in a sound and efficient
banking association adapted to the needs of the
community; final appeal resting with the State
Banking Board. Amended in 1927 hy emergency action
to permit merger if agreed to by majority of Board
of Directors and 2/3 of stockholders, with require
ment that merging bank remain a body corporate for
at least three years after merger and not dissolve
without approval of State Examiner.
l/ As at beginning of deposit guaranty system (i.e., as granted in the
1913 banking law, or as amended in 1915 and 1917) with amendments until the repeal
of the deposit guaranty law as of July 1, 1929 (approved by referendum on June
25, 1930). Provisions applying only to trust companies are omitted.
-l 6-
of the Banking Department, and. full power and authority to take charge of the
assets, papers, documents and records of any hank, and to examine any officer,
stockholder, employee, creditor, or debtor of the bank. If any member of the
Commission had information leading him to believe that an immediate examination
of a bank should be made, he had authority to order an inspector or an
assistant inspector to make such an examination, and if necessary, to call
upon the State Examiner to furnish a deputy to work with the inspector, with
the two officers required to co-operate so far as practicable in the examination
of the bank. The Commission also had substantial powers, which have been
described above, with respect to the handling of banks found upon examination
to be insolvent.
The Commission was authorized to prescribe a maximum rate of interest,
to be uniform in any county and not to exceed 6 percent per year, that could be
paid by participating banks on their deposits.
Without such permission the
banks were limited by law to a maximum of 5 percent, which was reduced to 4
percent in 1923« At the first meeting of the Commission, the maximum rate was
set at 6 percent, which was maintained until 1925* The rate was then reduced
1
to 5 percent, and to 4 percent in 1927»
/
Supervisory experience. The State Examiner at the time the deposit
guaranty law was enacted remained in office for about two years thereafter.
His successor also held office for about two years.
In 1921, Gilbert Semingson,
who had been a bank examiner for several years, was appointed State Examiner
and remained in this office throughout the remaining period of operation of
17
Minutes of the Depositors' Guaranty Fund Commission.
-17the deposit guaranty system. There was also a considerable continuity in the
membership of the Depositors* Guaranty Fund Commission, though two of the
original members served only until 1921.
The number of bank examiners, as shown in the annual reports of the
State Examiner, ranged from nine during the early years of the deposit guaranty
system to five at the end.
However, this examining force was supplemented
in 1923 by an inspector appointed by the Depositors* Guaranty Fund Commission.
With two examinations a year of each bank, each examiner was apparently required
to make about a hundred and fifty bank examinations a year during the early
years of the system. Toward the end of the period, the number of banks
decreased at about one-half the number at the beginning, substantially reducing
the load per examiner.
The salary of the State Examiner was $3,000 per year. In 1923, when
the State Examiner was replaced on the Commission by the Manager of the Bank
of North Dakota, the State Examiner was appointed secretary of the Commission,
and paid $2,000 a year for this service.
In 1927, an amendment to the law
placed the salary of the State Examiner for all services rendered in any
capacity at $5,000 per year. The salary of bank examiners was $2,000 per year
until 1927, when a range of $1,500 to $3,000 was provided.
Early in 1923, when
a special deputy examiner was appointed by the State Banking Board, on recommend
ation of the Depositors* Guaranty Fund Commission, to work under the direction
of the Commission, his salary was placed at $4,000 per year, of which one-half
was paid from the funds of the State Examiner and one-half from the Depositors*
1/
Guaranty Fund.
Later in the year, after enactment of the revised deposit
l/ Minutes of the Depositors* Guaranty Fund Commission, Jan. 20, 1923«
-1 8 -
guaranty law, this position was replaced by an inspector appointed by the
y
Commission, with his salary paid in full from the guaranty fund#
The total
appropriations for the State Examiner*s office ranged from $48,000 to $128,000
per year during the period of operation of the deposit guaranty system.
Compar
ison of the number of bank examiners with the number of examiners concerned with
other duties suggests that about two-fifths of the appropriations for the
State Examiner*s office were for bank examination and supervision#
Appropriations
for the Depositors* Guaranty Fund Commission ranged from small amounts in the
early years to a maximum of $25,000*
The total appropriations for bank
examination and supervision and administration of the guaranty fund are
estimated at about $30,000 a year to
after#
1921, and about $55,000 to $65,000 there
This is about $to per bank in the earlier years, and $80 to $150 per
bank in the later years of the period of operation of the deposit guaranty
system#
The State .Examiner at the time the deposit guaranty law was enacted
discussed in his report for
1917 the load of work falling upon his office.
The work of this department has more than doubled in the last
five years, and only two additional examiners have been provided
to take care of the increased volume of business, and for examining
the large number of banks which have opened and are now doing business...
In addition to the above, the Guaranty Law has been added to
this department.
It does not appear that comments are necessary, as it goes with
out saying that it is a physical impossibility for this office with
its present force, to carry on the work as should be done.
I therefore recommend that this office be divided into two
departments, one in charge of the bank work exclusively, and the
balance to be under the supervision of an Executive Accountant.
1/ Audit reports of the guaranty fund.
-19In conclusion, it appears fitting and proper that this report be
carefully considered by the members of the next Legislative body and
if possible that ways and means be provided whereby the present
congestion of work be eliminated* l/
Three years later the State Examiner again referred to the need for
more examiners.
Owing to the increase in size and number of the banks of the
State and extra work entailed by the Industrial Program, it will
be necessary to have several additional examiners, in order that
the work may be kept up according to law. 2/
Commentators on the causes of bank failures while the guaranty system
was in operation attributed those failures in part to inadequate supervision.
The report of 1922 of a special committee of the North Dakota Bankers
Association, which had been appointed the previous year, included the following:
We believe that the real underlying reason why such conditions
should develop is inadequate laws and lax supervision on the part of
the state banking department. True, there were many contributing
causes— questionable practices, dishonesty, inexperience, zeal to
make money, too many banks in many places, banks owned by those who
only looked to dividends, and political banks, but were there strict
and intelligent supervision, backed up by proper laws, the dishonest,
inexperienced, greedy or partisan ownership would not find the field
available nor profitable. 3 /
Thornton Cooke, writing in the Quarterly Journal of Economics two years later,
commented that lax supervision by the State Banking Department in times past
is blamed for many of the recent failures.
y
Statutory limitations on bank operations.
Statutory limitations on
bank operations under the banking code in operation in North Dakota at the time
of adoption of deposit guaranty are shown in Table 2.
17 Report of the State Examiner, 1917, PP* 5-7»
«■/ Report of the State Examiner, 1920, p. 5»
3/ Commercial West, Vol. 42 (July 1, 1922), p. 19«
%J "'fhp flrvitapst» n-f Bank Deposit Guaranty in Oklahoma and its Position
in Other States", Quarterly Journal of Economics, XXXVIII (Nov. 1923), p* 128.
20Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN NORTH DAKOTA
Item
Responsibility of officers,
directors, and stockholders
Examination of bank
Provisions of lav 1/
Directors to make a careful and thorough examination
of bank each January and July, furnishing report to
State Banking Board on form prescribed by Board.
Officers and employees not to falsify any records
or information on bank's condition.
Losses resulting from
violations of law
Officers and employees personally liable for any
overdraft honored; directors, for losses on loans
made to any officers, directors, or employees in
excess of law, in dishonest manner or in manner
incurring great risk or loss to bank. Any officer
guaranteeing collection or payment of loans secured
by real estate which are sold or disposed of per
sonally liable for guaranty.
Liability to stockholders
Par value of shares (i.e., usual double liability).
Bonding of active officers
and employees
Limitations on loans and
investments
Maximum amount
Officers and employees to furnish good and sufficient
bond in such sum and upon such conditions as may be
required by board of directors, subject to approval
of State Banking Board.
No provision for commercial banks.
Loans to bank examiners
To be approved by a majority of the board of directors,
or by a committee of the board.
Loans to officers and
employees
To be approved by a majority of the board of directors,
or by a committee of the board.
Loans to directors
No provision.
Loans to stockholders
No provision.
M&ximum to single borrowers
(not to apply to discount
of bills of exchange drawn
against actual existing
values nor to loans collateralled by agricultural
produce in transit or storage)
15 percent of capital and surplus. Amended in 1927
to 15 percent of capital and surplus when surplus
does not exceed 20 percent of capital; 12 l/2 per
cent when surplus over 20 percent of capital but
under 50 percent; 10 percent when surplus over 50
percent of capital.
-21Table 2. STATUTORY LIMITATIONS ON BAMK OPERATIONS IN NORTH DAKOTA - continued
Item
Provisions of law
Maximum secured by real
estate
25 percent of total loans and discounts, on first
mortgages, and amount of loan not in excess of kO
percent of actual cash value of property.
Secured by own capital
stock
Prohibited, unless acquired to prevent loss on debt
previously contracted and to be disposed of within
six months.
Limitations on ownership of real
estate and stocks
Maximum in banking house,
30 to to percent of capital and unimpaired surplus,
equipment and land
according to capital stock.
Time limit on real estate
acquired by collection of
debt
Five years.
Other real estate
Prohibited.
Bank stocks
Prohibited, except that necessary to become member
of Federal Reserve bank in district.
Other corporate stocks
Prohibited.
Limitations relating to deposits
Maximum aggregate deposits
No provision.
Maximum rate of interest
payable on deposits
5 percent (amended in 1923 to 4 percent), or 6 percent
if authorized by Guaranty Fund Commission, to be
uniform throughout county.
Receipt of deposit when in
solvent or in failing cir
cumstances
Prohibited.
Required reserves
Total required
20 percent of demand deposits and 10 percent of time
deposits; reduced in 1919 to 10 and 7 percent res
pectively; increased in 1925 to 15 and 10 percent
effective Jan. 1, 1926, and to 20 and 10 percent
effective Jan. 1, 1927.
In actual cash in bank
1(0 percent of above specified percentages.
Character of balance
On deposit in good solvent State or national banks
or trust companies qualified to act as depositories
approved by the StateBanking Board, or, in 1919,
in Bank of North Dakota. 2/
Table 2. STATUTORY LIMITATIONS ON BANK OPERATIONS IN NORTH DAKOTA - continued
Item
Limitations on borrowing
Maximum amount
Maximum value of assets
pledgeable as security
Limitations on payment of
dividends
Earnings to be carried to
surplus prior to dividends
Provisions of law
No provision prior to 1925i thereafter, 20 percent
of deposits, and any amount in excess thereof with
approval of State Examiner, subject to regulations
of State Banking Board, for specific purposes J/;
and in addition 10 percent of deposits on endorse
ment of notes and bills rediscounted, or any amount
with approval of State Examiner under regulations
of State Banking Board (excludes discount of bills
of exchange drawn against agricultural and other
commodities in transit or storage).
No provision until 1925, thereafter 150 percent of
amount borrowed without approval of State Examiner,
and amount fixed by State Examiner on borrowings
authorized by him.
10 percent until surplus equal to 20 percent of
capital stock; amended in 1927 to 50 percent until
surplus equal to 100 percent of capital stock, and
sufficient to restore surplus to highest point
previously attained.
When losses equal or exceed
undivided profits
Prohibited.
When reserve is impaired
Prohibited.
When insolvent or capital
impaired
Prohibited.
Maximum
Net profits on hand after deducting losses and bad
debts.
Minimum capital stock
New banks
Other banks
Graduated by population of town or city:
$15,000 where population under 1,000;
$20,000 where population over 1,000 but
$30,000 where population over 2,000 but
$35,000 where population over 3,000 but
$40,000 where population over 4,000 but
$50,000 where population over 5,000.
under
under
under
under
2,000;
3,000;
4,000;
5,000;
Corporate existence to be renewed only with capital
increase sufficient to meet requirement for new
banks.
-2 3 -
Table 2. STATUTORY LIMITATIONS OK BANK OPERATIONS IN NORTH DAKOTA - notes
l/ Provisions relating to all commercial and savings banks and trust companies
accepting deposits or buying or selling exchange (excluding National banks). Pro
visions applicable to trust companies or savings banks only are omitted.
2/ In 1925, with permission of State Banking Board, 25 percent of required,
reserve could be in United States certificates of indebtedness, U. S. bonds,
North Dakota land series bonds, Bank of North Dakota bonds, and North Dakota mill
and elevator bonds.
3/ To restore depleted reserve or in anticipation of such depletion within 30
days; to protect assets of bank; to avert any actual or pending emergency which in
judgment of State Examiner would be dangerous to interests of bank, depositors, and
other creditors.
-2 4 -
INSOLVENCY AND CLOSING OF THE GUARANTY FUND
Inadequacy of the fund. During the first two years after insurance
of deposits became effective in North Dakota, there were two failures.
The
deposits of these banks were paid promptly from the guaranty fund.
Beginning in the middle of November 1920, bank failures in North Dakota
became numerous.
Between that date and the end of 1921, more than fifty banks
closed because of financial difficulties.
which closed again.
A few of these were reopened, part of
At a meeting of the Depositors* Guaranty Fund Commission
in January 1921, it was noted that the fund was inadequate to meet the depositors*
claims, and the maximum number of assessments which could be levied during the
year was ordered to be paid as of the 15th of February, March, April, and May,
respectively.
In April, the secretary of the Commission was instructed to pay
depositors of the closed banks out of funds collected from assessments, in the
order of their failure.
In July the Commission authorized payment in full of
the depositors in the Tolley State Bank, the first of the failures in 1920,
upon completion and audit of the claims.
That action was rescinded in November,
and the funds assembled for payment of depositors in that bank were ordered
y
redistributed among the State banks.
This was due to the absence of any
provision in the 1917 law regarding priority of payments of depositors in closed
banks.
The law merely provided that if the funds were insufficient the Commission
was to issue certificates of indebtedness to the receivers of the various banks
due the following March 1, which were to be paid from the forthcoming receipts
of the fund; that is to say, it was not specified whether those becoming due
TJ
Minutes of the Depositors' Guaranty Fund Commission.
-25on March 1 of any year were to be paid in the order of the failure of the banks
concerned, or whether a prc»rata payment might be made at that time. It is
probable that law suits were being developed regarding this point.
As a consequence of the confused situation regarding the priority
of payments to depositors, the Depositors* Guaranty Fund Commission took no
further action to make such payments until after the 1923 revision of the law.
That revision specified pro rata payment on all claims approved by the Commission,
without regard to the priority of the closing of the bank. Further delay in
making payments occurred pending the consideration by the State Supreme Court
of a claim that the 1923 law did not apply to the banks that had failed prior
to its enactment.
The Supreme Court, in September 1924, ruled that the new
1/
law applied to all failed banks whose depositors had not been paid*
In October 1924 the Commission adopted a resolution noting that its
audit of all banks closed prior to July 1, 1923 had. been completed and it was
therefore practicable to begin paying depositors in those banks*
The Commission
further resolved that certificates of indebtedness be issued as promptly as
possible to all depositors of banks closed prior to July 1, 1923* and that a
dividend of 10 percent be paid on admitted guaranteed claims in such banks.
From
time to time thereafter the Commission authorized payments of 10 percent of the
deposits approved in banks closed at various later dates.
Failures continued in large numbers through the middle twenties and
it was soon apparent that the guaranty fund was hopelessly insolvent.
In 1928
an attempt was made to obtain approval of a Constitutional amendment under which
T/
Wertz v. Nestos, 200 N.W. 52k, 51 N.D. 603
-26the system would be terminated and a State bond issue not exceeding $25
million would be sold and the proceeds used to pay the claims of depositors
in banks closed to May 15, 1928. This proposal was defeated at the referendum
on November 6 of that year.
In March 1929 an act was approved which provided
for the discontinuance of further assessments for the guaranty fund after
July 1, 1929, and for the disbursement of the remaining balance of the fund
by the Commission on or before the first day of December 1930, with the
dissolution of the Commission as of that date. A referendum petition was
filed in regard to this bill, requesting that it be submitted to the electors
on June 25, 1930* It was approved by the electorate at that time.
When the repeal became effective, the Commission had paid a 10 percent
dividend to depositors of all participating banks that had failed prior to
April 30, 1925, and in so doing had nearly exhausted the funds collected on
assessments to the termination date of July 1, 1929»
In August of 1930 the
Commission resolved that no further dividends be declared and the funds available
for payment of such dividends be held intact to await the further direction of
the Legislature.
It was stated that there remained $9 million in claims in
banks in which no dividend had been declared and the available funds would pro
vide a dividend of only 3/100 of 1 percent. The cost of paying such a dividend
would be out of proportion to the dividend and in addition many holders had not
perfected their claims and with no limitation on time for presentation, it would
be impossible for the Commission to complete payment of such dividends before
the end of the year.
The final law regarding disposition of the remainder of the guaranty
fund was enacted in March 1931»
This act provided that all claims must be
presented within six months, and authorized the State Examiner to pass upon
all claims and to pay such dividends as he could to remaining claimants. Under
this law a final dividend of 1 percent was paid to the depositors who had
previously received no dividend from the fund.
NUMBER, DEPOSITS, AND FAILURES OF PARTICIPATING BANKS
Number and deposits of operating banks. The number of banks partici
pating each year in the deposit guaranty plan in North Dakota is given in Table
3, together with the number of banks operating in the State which were not
eligible for participation.
The latter group includes only national banks
and the Bank of North Dakota. There was a slight increase in the number of
State banks during the first two years of the guaranty system. However, after
1919, and particularly after 1922, the number declined.
Because of a relatively
small decline in the number of national banks, the percentage of all banks in
the State participating in the insurance system was reduced from 8l percent in
1917 to 71 percent in 1928.
The deposits of the banks participating and not participating in the
system, for each year, are given in Table 4. In 1917 the deposits of the parti
cipating banks were 6l percent, but In 192S only 3^ percent, of the deposits of
all banks in the State.
Concentration of bank deposits. Table 5 shows the deposits in the
participating banks at the end of 1918, 1923, and 1928, grouped by amount of
deposits, for the purpose of showing how large a proportion of the risk tinderwritten by the guaranty fund was concentrated in a few institutions.
Deposits
of the participating banks were not heavily concentrated in a few banks.
During
the entire period that the fund was in operation the largest bank held less than
-28-
Table 3. NUMBER OF OPERATING BANKS IN NORTH DAKOTA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1918-1928, BY YEARS
End of
year
All “banks
operating
in North Dakota
Participating
in deposit
guaranty l/
Not participating
in deposit
guaranty 2/
Percentage
participating
709
168
80.8#
723
694
176
181
850
661
665
183
80.4
79.3
78.3
1927
744
679
643
556
513
569
513
482
409
371
1928
471
337
1918
1919
1920
1921
1922
877
899
875
844
1923
1924
1925
1926
185
78.2
175
l6l
147
142
76.5
75.6
75.0
73.6
72.3
134
71.5
166
17 State banks and trust companies.
—
2/ National banks and the Bank of North Dakota after its establishment
in 1919.
-2 9 -
Table 4.
DEPOSITS OP OPERATING BANKS IN NORTH DAKOTA PARTICIPATING AND NOT
PARTICIPATING IN THE DEPOSIT GUARANTY SYSTEM, 1918-1928, BY YEARS
(Amounts in thousands)
End of
year
All banks
operating
in North Dakota
1918
$210,361
Banks parti
cipating in
deposit guar
anty l/
Banks not participating Percentage of
in
deposits in all
deposit guaranty
banks held by
National
Bank of
participating
banks 2/ North Dakota 3/f
banks
$122,882
130,837
103,955
85,489
95,499
$87,479
83,421
58.1$
57.0
55.7
53.8
53.0
1921
1922
229,712
186,769
158,999
180,123
1923
1924
1925
1926
1927
162,868
196,818
197,749
175,182
175,896
80,006
88,078
75,741
7,121
96,058
12,682
86,351
69,613
65,159
95,154
83,853
84,051
16,244
21,716
26,686
49.1
44.8
43.7
39.7
37.0
1928
174,184
59,773
83,886
30,525
3^.3
1919
1920
69,703
66,895
77,503
$15,454
13,111
6,615
7,121
17
State banks and trust companies from Annual Reports of the State
2/
3/
Annual Reports of Comptroller of the Currency.
Bankers directories.
Sxarainer.
-3 0 -
Table 5*
NUMBER AND DEPOSITS OF STATE BANKS AND TRUST COMPANIES
IN NORTH DAKOTA DECEMBER 31, 1918, 1923, AND 1928
______________ Banks grouped by amount of deposits
Number of banks 1 J
Deposits (thousands of dollars) l/
___________________ 1916
' 1923
192Ö
I91Ö
1923
^20
All State banks and trust
companies
Banks with deposits of:
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1,000,000 to $2,000,000
$2,000,000 to $5,000,000
Largest bank
Largest 5 banks
Largest 10 banks
Percentages of total
Banks with deposits of:
$100,000 or less
$100,000 to $250,000
$250,000 to $500,000
$500,000 to $1,000,000
$1,000,000 to $2,000,000
$2,000,000 to $5,000,000
Largest bank
Largest 5 banks
Largest 10 banks
TO 4
566
334
123,154
85,601
6k,6k6
202
390
99
10
2
1
212
279
15,068
67
89
172
54
8
19
6,449
27,534
18,424
12,239
—
--
14,113
64,601
33,407
6, tol
2,430
—
—
2,202
---
1
5
10
1
5
10
1
5
10
2,202
6,285
9,385
942
3,573
6,105
7,228
100.0
100.0
100.0
100.0
100.0
100.0
28.7
55.4
37.5
49.3
11.4
17.6
50.9
10.0
42.6
14.1
1.4
.3
11.8
1.4
26.0
51.5
16.2
5.7
—
--
.1
—
*1
.2
.9
1.8
• 7
1.4
52.5
27.1
5.2
*6,552
21,870
5,111
__
25.5
6.0
—
2.0
1.8
__
—
.3
1.5
3.0
1.8
5.1
7.6
1.1
4.2
7 .1
—
982
4,039
28.5
18.9
...
---
1.5
6.2
11.2
l/ Tabulated from data for individual banks in bankers directories. Totals
differ slightly from those in the annual reports of the State Examiner. Those reports
do not contain data for individual banks.
-312 percent of deposits of all participating "banks.
The largest ten banks held
between 7 and 8 percent at the beginning and middle of the period and a little
over 11 percent at the end of the period.
Failures of participating banks. During the eleven years of the
North Dakota deposit insurance system, 372 banks were closed because of
financial difficulties.
This was more than one-half of the largest number of
banks participating in the system at any time.
reopened with no obligations on the fund.
obligations of the fund amounted to nearly
Of the closed banks, 32 were
The deposits of 3^0 which entailed
million.
The number and deposits of the banks closed each year, with rates
per 100 operating banks and per $100 of deposits in operating banks, are shown
in Table 6.
The highest failure rate occurred in 1923, when the 12 percent
of the banks holding 10 percent of the deposits of all participating banks,
were closed.
The average annual failure rate was over 5 banks per 100 with
deposits of $4 per $100 of deposits in operating banks.
A size distribution of the failed banks is given in Table 7»
The
failure rates were substantially higher among the small banks than among the
larger banks.
However, the largest bank among the failures, with nearly $700,000
in deposits, was the third largest bank in the system.
In Table 8, the failure rates in North Dakota during the period
1918-1926 are compared with those in contiguous States and in the entire United
States.
Failure rates in North Dakota, both in terms of number of banks and
amount of deposits, were higher than in Minnesota, but lower than in South
Dakota and Montana.
Failure rates in North Dakota and in all of the contiguous
States were far higher than for the entire United States.
both national and State banks.
This was true for
-3 2 Table 6 .
NUMBER AND DEPOSITS OF STATE BANKS IN NORTH DAKOTA CLOSED BECAUSE
OF FINANCIAL DIFFICULTIES, JULY 1 , 1918, TO JULY 1 , 1929
Number of banks
Year
Total
Total
371
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929 4/
Deposits
340
31
$43,114,623
$38,998,941
$4,115,682
rates
Number
Deposits
per 100
per $100
active
in actbanks
ive
banks
5.5 2/
105,006
105,006
3,478,251
4,062,017
1,071,203
9,135,514
6,744,868
2,394,923
4,383,171
3,691,402
2,160,270
784,097
3
6,985,184
2,394,923
5,167,268
3,691,402
2,794,583
1
2,031,402
1,772,316
259,086 10.7 2/
1
18
---
35
9
85
27
7
77
8
2
8
65
33
33
61 3/
25
43
33
30
19
18
IS
Banks witii
no payment
from the
guaranty
fund
3,478,251
4,921,568
1 ,278,223
10,266,813
1
18
25
Annual failure
Banks with
payments
from the
guaranty
fund l/
Involving Reopened Total
with no
payments
from the obligation
on the
guaranty
fund l/
fund 1/
4
—
5
--
859,551
207,020
1 ,131,299
.1
2.5
3.9
1.1
11.6
240,316
10.7
__
--
—
634,313
$3.95 2/
.09
2.66
3.91
1.25
9.57
8.9
8.43
2.72
5.08
8.1
8.1
5.30
3.32
4.9
5.93 2/
sion. There was no failure among participating banks prior to 1919» Four banks which
did not become participants in the guaranty system, and were placed in receivership
during the third quarter of 1918, are omitted from this table. Deposits of those banks,
as shown in bank directories for the last date prior to closing, totalled $791 thousand.
2/ Annual rates.
3/ Includes 1 bank with deposits at closing of $4,859 for which no guaranteed
claims were allowed.
4/ To July 1, 1929.
-3 3 -
Table 7 .
SIZE DISTRIBUTION OF FAILED BANKS ENTAILING OBLIGATIONS ON THE
NORTH DAKOTA DEPOSITORSf GUARANTY FUND
Number of banks
Average Failed Average
number
banks
annual
of oper
number
ating
of failed
banks l/
banks per
100 active
banks
Deposits
Average
J?aiJLea
deposits
banks
of oper
(in
ating
thou
sands)
banks
(in thou
sands) 1/
Average
annual
amount of
deposits
in failed
banks per
$100 depo
sits in oper
ating banks
27
Participating "banks-total
556
340
6.1
$95,663
$38,998
$4.08
Banks with
$100,000
$100,000
$250,000
169
1T9
135
23
10.6
11,963
4.6
2.9
26,696
4T,4l9
10,262
19,600
1,182
8.58
294
T9
3
——
2.3
——
8,3^1
1,244
1,95^
"*—
2.34
deposits of or less
to $250,000
to $500,000
$500,000 to $1 ,000,000
$1,000,000 or more
13
1
4.13
2.69
—-
to 1928, as shown in bankers directories. Data for individual banks were not
published in the annual reports of the State Examiner.
2/ Failure rates for the entire period differ slightly from those in
Table 6 because of the difference in source of data for operating banks.
-3 4 -
Table
8 . ANNUAL BANK FAILURE RATES IN NORTH DAKOTA, 1919-1928, COMPARED WITH
RATES IN CONTIGUOUS STATES AND IN THE UNITED STATES l/
Failures per year per 100
_____operating banks______
State and
State National
national
banks
banks
banks
Deposits per year in failed
banks per $100 in operating banks
State and State
National
national
banks
banks
banks
North Dakota
5*6
6.3
3.4
$3.17
$4.01
$2.03
Three contiguous States
4.4
4.8
3.1
2.04
3.28
.97
6.7
6.7
2.9
7.4
7.2
3.3
5.4
4.4
1.8
3.52
5.11
1.12
5.05
6.44
1.91
2.17
2.81
1.9
2.3
.9
.37
.53
CO
H
Montana
South Dakota
Minnesota
•
Entire United States
.54
1/ Tabulated from data from the following sources: other tables in this
volume; Banking and Monetary Statistics, pp. 286-292; Willis, Banking Inquiry of 1925;
annual report of the Comptroller of the Currency for 1931; and Federal Reserve revised
tabulations of data for all operating banks by States.
-3 5 -
The annual reports of the State Examiner contain no information
or discussion of the causes of bank failures.
However, for bank suspensions
during the years 1921 to 1930* the State Examiner listed such causes on
schedules submitted in 1931 to the Federal Reserve Committee on Branch, Group,
and Chain Banking.
These are summarized in Table 9*
It will be noted that
emphasis is placed on incompetent management, and none on adverse economic
conditions.
It should also be noted that the State Examiner assigned no specific
cause for many of the failures; and it seems clear that there were important
elements in the situation that he did not stress, ^n observer of banking con
ditions in North Dakota, in an address at the North Dakota State Banking
Association in 1926, placed much emphasis upon deflation of agricultural
values and excessive competition in his discussion of the causes of bank
failure.
...I do not think that corrupt conduct or dishonesty played
any material part in bringing about the catastrophe. It is true
that the failure of some of the banks was hastened and, perhaps,
actually caused, by embezzlements and dishonesty, but such
instances are rare; though there were many laws subsequently
violated in perhaps mistaken attempts to protect the depositors
by keeping the banks from closing.
...Beyond controversy, the chief cause was the deflation in
values which began during the summer of 1920 and which within the
next three years reduced such values at least 50$, bringing finan
cial distress to the agricultural interests and to all activities
and business dependent thereon.
.. .At high water mark, in December 1920, there were 7^3 "banks
and trust companies to a population of 646,000, or an average of
one bank for each 800 people, men, women and children,in the State.
Assuming the normal average of one bread winner to each five
inhabitants, there was one bank for every 160 bread winners; in
other words, each group of l60j men or women of earning capacity,
was required to support one bank, if the banking business was to
prosper; obviously, this was impossible, l/
T / George A. Bangs, address at the North Dakota State Bankers
Association, June 22, 1926.
-3 6 -
Table 9. CAUSES OF SUSPENSIONS OF STATE BANKS IK NORTH DAKOTA, 1921-1930, AS
REPORTED ON SCHEDULES PREPARED BY THE STATE EXAMINER IN NORTH DAKOTA
FOR THE FEDERAL RESERVE COMMITTEE OH BRANCH, GROUP, AND CHAIN BANKING
Primary
cause
Total number of suspensions, 1921-1930
Dishonesty of officers or employees:
Defalcation
Contributing
cause
k iS
9
8
Excessive loans to management and
collapse of s£>eculativc booms
-0-
-0-
Regional economic disaster or adverse
conditions in specific industries:
Losses due to unforeseen agricultural
or industrial disasters, such as
floods, drought, boll weevil, etc.
Decline in real estate values
-03
-033
209
-0-
27
-0-
59
79
l
121
2
25
Managerial incompetence, inadequate
earnings, and excessive competition:
Incompetent management
Insufficient diversification
Causes not readily classified above:
Heavy withdrawals
Failure of affiliated institution or
correspondent
Other causes
-3 7 -
Procedures used in handling banks in financial difficulties.
The
State Examiner, the Depositors* Guaranty Fund Commission, and the State Supreme
Court all participated in the handling of banks in financial difficulties while
the North Dakota deposit guaranty law was in effect.
placed in receivership, prior to the
were appointed by the State Examiner.
1923
In the case of banks
revision of the law, the receivers
In 1921, under the act of that year,
the Depositors1 Guaranty Fund Commission appointed one of its members, B. J.
Schoregge, as supervisor of receivers with his salary paid in part from the
guaranty fund and in part from the legislative appropriation for expenses of
the Commission.
Under the 1923 law, the Supreme Court appointed L. R. Baird
as receiver for all failed banks; and he remained in charge of the receiverships
of all banks closed while the deposit guaranty law was in operation, until their
i/
liquidation was completed.
Efforts to prevent the closing of banks found to be in financial
difficulties, or to reorganize banks closed without placing them in receivership,
remained with the State Examiner and the Depositors* Guaranty Fund Commission
throughout the entire period of the deposit guaranty system.
The Depositors’
Guaranty Fund Commission made considerable use of the "special deposits" feature
of the
1923
law, the purpose and operation of which were described as follows:
One of the unique features of the law, which was placed on the
statute books during the 1923 legislature...provided that where a
bank was temporarily embarrassed, and probably could make recovery,
it might be placed on "special deposit*~-permitted to remain open,
handle existing business and receive new deposits which, however,
should be placed in a special trust fund and exempted from the
receiver*s assets should the bank again be forced to close. The
method was invoked to make possible reorganization and strengthening
17 Mr. Baird was in charge of liquidation of all closed banks until
when~appointment of receivers for future bank failures was vested in the
State Banking Board. He remained in charge of those which had failed prior
to that time until completion of liquidation.
1933,
-38of banks in financial straits, with the view of avoiding receivership
which, experience had shown, usually proved costly to depositors in
the dissipation of assets, lj
ICarly in 192k the Commission announced that banks would not be closed when
business was first suspended, but would be placed under control of the Commission,
permitted to do business only in liquidating their obligations, without paying
money to old depositors, but accepting new deposits and placing them in a
2/
trust fund.
The records of the Commission show that this procedure had
already been used for several months, that in November the Commission had
adopted a set of rules for operation of banks that had been placed under the
special deposit order, and that in January it had ordered such banks to make
3/
weekly reports to the Commission.
had been placed under this order.
By the Spring of 1925,
V
least oO banks
Though the Commission, in its Minutes,
referred to these banks as "so-called suspended banks" they do not appear to
have been included, unless they were subsequently placed in receivership, in
tabulations of suspended banks prepared at a later time from the records of
the State Examiner.
The Commission also made some use of the provision of the 1923 law
which permitted it to make a deposit of its own funds ir. banks in difficulty.
A resolution of the Commission in July 1923 provided that banks in which special
deposits had been made "for the purpose of aiding such banks" should pay interest
at the rate of four percent per year.
It does not appear, however, that the
Commercial West, March 25, 192
p. 2 k .
The Northwestern Banker, Feb. 1924, p. 8l.
3/ Minutes of the Depositará* Guaranty Fund Commission.
"5/ In March 1925, it was reported that Commission auditors had examined
oO special^deposit banks, and that 2 6 of these had been reopened for regular
operation. Commercial West, op. cit.
5/ The annual reports of the State Examiner from 1923 to the time of
repeal of the deposit guaranty law do not give any information regarding the
number of banks that failed, suspended, or were placed in receivership. Statistics
of bank suspensions for this period were collected from his office in 1931 hy the
Federal Reserve Committee on Branch, Group, and Chain Banking.
17
2/
-3 9 -
number of banks in which deposits were made was large nor that the amounts
deposited were large.
An audit of the fund as of October 31* 192k, shows that
special deposits aggregating $193*000 had been made in 21 banks, the amounts
for the individual banks ranging from $1,000 to $25*000.
deposits ¿ere made in open banks.
Only a part of these
In several of the cases, the deposits were
made to aid in the liquidation of particular types of assets and were collateraled by such assets
As has been noted in describing the character of the guaranty
legislation the process of determining the deposits subject to guaranty and
payment of th^m from the fund was separated from the receivership process.
The process was described by Mr. L. R. Baird, receiver under the Supreme Court,
as follows:
A receiver was appointed for the banks. He accepted claims,
and after the same were duly checked over, they were either allowed
or disallowed. Of course, any claim as shown by the books of the
bank as a liability was ordinarily allowed and a receiver*s cert
ificate issued therefor. When the receiver*s certificates were
issued, then these were used as the basis of a claim against the
Depositors Guaranty Fund, and the Commission made it a general rule
not to consider any claim until the same had been passed upon by
the receiver. The receiver, however, did not undertake to pass
upon the question of whether or not such claims were bona fide de
posits coming under the provision of the Guaranty Fund law. He sim
ply accepted them as liabilities against the bank. The Depositors
Guaranty Fund Commission, through its auditors, then went through
the books of the bank and determined whether or not each cj_aim
was a bona fide deposit or whether it was in the nature of an
exchange of credit, secured deposit, bills payable, or some other
liability. 2/
Rejections of depositors* claims by the Depositors* Guaranty Fund
Commission were numerous.
Under the law and the procedures of the Commission,
no claim was considered for payment from the guaranty fund until it had been
allowed by the receiver of the bank or established by final judgment of a
competent court.
T f
"]£/
The Commission, in prescribing a form for proof of claim
Audit report of the Depositors* Guaranty Fund, October 31* 1924.
Letter from Mr. L. R. Baird, dated January 29* 1935*
-4 0 -
required an affidavit that no offset or counter claims existed* that there m s
no agreement of any kind for interest in excess of that fixed by the Commission*
that the depositor had received no security in any manner* and that no part
of the claim was for an obligation to the bank as endorser on bills payable
or bills discounted or incurred by the bank for notes or evidence of debt.
In addition to excluding claims without such affidavits, the Commission rejected
many other claims.
At a meeting of the Commission in March 1925* it was noted
that about a thousand rejected claims would be subject to hearings by the
Commission.
A referee was appointed to hear those claims* a set of rules
adopted for che hearings and re-hearings, and counsel appointed to represent
the fund at such hearings.
1/
The record of the hearings shows that several
thousand rejected claims were appealed, most of which were still rejected
after hearings.
Three principal reasons for rejection of claims appear in the
records of the hearings:
that the deposits represented transfers of funds;
that they represented an exchange of credit; and thac they bore a rate of
2/
interest in excess of that authorized by the Commission.
An example of a
claim rejected as being a transfer of funds and not a bona fide deposit
was that of a large oil company whose agents placed receipts in local banks
and obtained certificates of deposit which were then sent to the head office
of the oil company elsewhere for deposit.
One case of a claim rejected as
an exchange of credit was that of a life insurance company which had placed in
the bank notes taken from applicants for insurance in payment of premiums and
had received certificates of deposit therefor.
Another case was that of an
individual who sold notes to the bank and discounted them, receiving a certificate
l/~ Minutes of the Depositors* Guaranty Fund Commission.
2/ As indicated by a sampling, by the author of this report, of the
cases in the records of the hearings.
-4l-
of deposit.
These were rejected on the gound that they were not a deposit of
cash or its equivalent*
Cases rejected because of an excessive rate of interest
included not only those where a rate higher than that prescribed by the Commis
sion was stated on the certificate but also where such a higher rate was given
through a separate credit to the deposicor’s account or in some other manner*
Another type of case noted in the records was that of county funds which had
not been deposited in accordance with the law.
Mr. L* R. Baird* who was receiver of most of the failed banks, stated
that a large part of the claims rejected by the Depositors1 Guaranty Fund
Commission were those deemed to be an exchange of credit.
...a large portion of the rejected claims are accounted for by a
practice which seemed to have grown up in this country. Where
insurance companies, or other concerns who had something to sell
in the community, would take its customers notes, and then take
them to the bank and turn them over to the bank and receive in
lieu thereof the bank’s certificates of deposits. Such trans
actions the Depositors Guaranty Fund listed as an "exchange of
credit." Personally it is my opinion that if a claimant could
have shown that the bank had its legal reserve, there was absolutely
no reason why the bank could not have x^urchased such notes, or
other obligations, and either paid up the same in cash or issued
certificates of deposit, thus making the claim a bona fide deposit, l/
Another controversial set of claims were those of the Bank of North
Dakota.
In January 1922, the Depositors1 Guaranty Fund Commission resolved
that deposits of thj Bank of North Dakota in the closed banks "be not included
under the Guaranty Deposit Law.” Controversy regarding these claims continued
for several years; and after hearings by the referee of the Commission they were
reviewed by the Commission in November 1927*
The claims were against about
75 closed banks, ranging in amounts up to $231*000 and totaling nearly $1.5
million.
The reason for the confusion and the basis of the Commission’s decision
are described in the minutes of the Commission as follows*.
TJ
Letter fron Mr* Baird dated January 29* 1935*
- t e -
IT IS ORDERED AND DETiSRMIWiCD, That the money on deposit in
the several banks standing to the credit of the State of North
Dakota and its various political subdivisions at the time of the
organization of the Bank of North Dakota and subsequently trans
ferred upon the books of such banks to the credit of the Bank of
North Dakota are deemed to be bona fide deposits, except where
such deposits have been converted into loans by taking of direct
collateral security therefor.
...The moneys otherwise placed in
the several banks by the Bank of North Dakota appear to have been
so placed at the solicitation of the several banks and are deemed
to be loans and not deposits...
The moneys representing deposits and those representing loans
having been carried in one account, the withdrawals made by the
Bank of North Dakota from such account have been pro-rated in
accordance with the ratio existing between the amounts of such
deposits and loans at the time of such withdrawals and the amounts
set forth in the attached schedule represent the balances remaining
in the several banks...
The amounts of the several deposits specified in the second
column of the attached schedule...are therefore allowed as "guaranteed”
claims, subject to a re-check of interest and the application by the
Receiver of paper offsets. The remainder of the claim of the Bank
of North Dakota against the several banks...are rejected, l/
Under this decision about $811,000 was assumed to have represented genuine
deposits and to have been guaranteed by the fund except for a small amount
which was collateraled, and about $665*000 to represent advances and therefore
not guaranteed.
One further item of procedure in handling the affairs of closed banks
may be mentioned here.
1927,
The 1923 law gave the Commission power, until July 1,
to pay from the guaranty fund the claims of bills payable holders in
closed banks "whenever in its judgment and sound discretion the security behind
such Bills Payable is sufficient to pay the same in full, and leave a substantial
amount of security of the kind and character that could reasonably be expected
to be collected upon and liquidated within one year from the expiration of the
time limit of this section. 11 Under this provision, the Commission paid bills
T7
Minutes of Depositors* Guaranty Fund Commission* Nov.
21* 1927*
-im
payable in a number of closed banks, taking title to the collateral therefor,
in order to expedite the handling of the affairs of the banks.
FINANCIAL HISTORY OF THE GUARANTY FUND
Sources and adequacy of information.
No information regarding the
receipts and expenses of the depositors guaranty fund, nor regarding the results
of liquidation of closed banks, was published in the annual reports of the
State Examiner.
However, detailed information regarding the operations of
the fund is available in the records of the Commission which remain at the
office of the State Examiner.
These records include:
the minutes of the
Guaranty Fund Commission in two large volumes totaling about 1900 pages;
a smaller volume with some statements of the fund and miscellaneous material;
reports of four audits of the fund covering respectively, the period from
the beginning of the fund to mid-year 192 b, 1924-1926, 1926-1926, and
1928-1930;
several volumes which record the Commission*s review of decisions on depositors*
claims that had been rejected by the examiners of the Commission; and a record
book showing the
and the
1
10
percent dividend paid to depositors of many closed banks,
percent dividend paid later to those banks not participating in the
10 percent dividend.
Information regarding the liquidation of closed banks is
available in a summary report by L. R. Baird, Receiver, dated January 8, 1937*
in the files of the North Dakota Supreme Court; and in Mr. Baird*s receivership
files for the individual banks which remain in the office of the State Examiner.
l/ Both the Commission "and the receivership records were examined
by the autEor of this report in September 1956. Copies of the audit reports
of the fund were borrowed from the State Examiner, and used in the preparation
of this report.
1/
-kkIncome and obligations of the guaranty fund. A summary statement of
the income and obligations of the North Dakota Depositors1 Guaranty Fund for
the entire period of its existence is given in Table 10.
The total receipts
of the fund were ¿2.1 million, of which $2.0 million was derived from assess
ments.
The remainder was divided between receipts from liquidation of assets
of failed banks, interest, and fees.
The total amount of obligations incurred
by the fund on account of bank failures, after allowance for all recoveries
from liquidation of the assets of the failed banks, is estimated at
The fund paid less than $2 million to depositors:
10
depositors of
million.
$0.2 million to the depositors
of the two banks paid in full, $1.6 million to the depositors of
were paid a
$20
201
banks who
percent dividend on insured deposits, and $0.1 million to the
137
banks who were paid a
1
percent dividend on insured deposits.
The final deficit of the fund, representing the loss to depositors on insured
deposits, was over
$18
million.
Annual data for assessments and other receipts of the guaranty fund
are given in Table 11.
Until 1921 only the annual assessment of one-twentieth
of 1 percent of deposits was levied.
In that year and each of the succeeding
years to the termination of the system as of June 30, 1929* four additional
assessments, the maximum number, were levied.
The additional assessments were
levied for years ending on June 30, and because of a change in the dates on
which they were payable, five became due in each of the calendar years
and 1925.
The total assessment rate was therefore three-tenths of I percent
in those years, and one-fourth of
to
1928,
192 4
1
percent from
1921
to
1923
and from
1926
inclusive.
Annual data for disbursements and the balance of the fund and for
administrative expenses paid from legislative appropriations are given in
Table 12.
Because of delay in making payments to depositors, after the first
- 4 5 -
Table 10.
RECEIPTS, EXPENDITURES, AND DEFICIT OF THE NORTH DAKOTA
DEPOSITORS* GUARANTY FUND
Receipts l/
Assessments on banks
Assets of failed banks
Interest received
Fees received
Total receipts
Expenditures 2/
Paid to depositors of failed banks:
In two banks paid in full
10 percent dividend in 201 banks
1 percent dividend in 137 banks
Total to depositors
Administrative expenses
Uncollectable accounts charged off
Total disbursements
Unpaid obligations 3/
To depositors of failed participating banks
$2,002,031
26,041
32,978
19,463
$2,080,533
$107,192
1,577,795
73,359
$1,638,346
183,376
56,811
$2,o8o,533
$18,281,634
X/ Fran Table 11.
2/ From Table 12.
3/ On claims approved for payment from the guaranty fund (see Table
13 ). The total losses to depositors in the failed banks was much larger.
-4 6 Table 1 1 .
ASSESSMENTS AND OTHER RECEIPTS OF THE NORTH DAKOTA DEPOSITORS'
GUARANTY FUND, BY YEARS, 1918-1929 l /
Assessment income
Other receipts
Calen
Net income
Assets Interest
Assessments levied
Credits,
Fees
dar
from
year
Additional
of
Regular
refunds, asses sment s
6/
7/
failed
and
3/
2/
adjust
banks
ments
5/
Total
receipts
v
Total
1918
1919
$513,285
90,491
58,953
$1,414,699
8/
$74,047
$2 ,002,031
12,692
103,183
74,692
284,766
249,315
6,000
6,471
1920
1921
1922
63,269
50,764
42,939
240,149
205,347
15,939
-1,260
-6,147
1,029
1923
1924
1925
40,121
34,283
36,981
-1,490
3,316
44,919
5,666
5,327
204,546
222,314
255,497
185,501
167,907
4,417
-10,355
—
147,699
44,k02
—
__
1926
36,201
1927
31,259
165,921
184,715
173,597
143,634
131,321
115,258
1928
28,024
1929
-----
1930
-----
54,757
--
62,009
—
$26,041
----
5,565
----
-----
97
—
- -
- -
7,906
$32,978
$19,483
$2 ,080,533
___
103,183
—
-----
531
4,954
39
----
74,892
68,105
295,720
249,354
64
- -
1,124
8,174
4,153
212,205
10,239
5,560
2,9^
2,490
1,131
1,936
189,572
172,333
625
149,988
1,316
824
11,502
1,464
1,927
2,770
240,727
265,307
47,645
1
/ Compiled from audit reports of the guaranty fund, trial balances and
ments of condition of the fund in the minutes of the Depositors* Guaranty Fund Commission,
and other records of the fund in the office of the State Examiner,
2/ At l/20 of 1 percent of deposits in participating banks.
3/ Four assessments per year of l/20 of 1 percent each (five in 1924 and 1925
because of change in timing of date d.ue).
4/ Includes assessiaents on capital stock of new banks, later adjustments in
such assessments, additional assessments levied on banks after closing, refunds of over
payments, refunds and cancellations to nationalizing banks, and other adjustments.
5/ Amounts for 1920-1925 are the recoveries from two banks, the deposits of
which were~paid in full by the fund. The receipts for 1930 are described in an audit
report of the fund as follows: nIn making payment of the 10 percent general dividend
the Conmission made payment of all deposits under twelve dollars in full. As the
receiver of closed banks subsequently paid his dividend on these claims the amount
applying to deposits paid in full was turned into the Guaranty Fund."
6/ Chiefly interest on assessment receipts which had been withdrawn from parti
cipating banks and deposited in the Bank of North Dakota for use in making payments to
depositors in failed banks, but in 1924 includes $5*915 interest on special deposits in
banks in difficulty.
7/ imagination fees and other charges which the Commission was authorized to
levy under"the amended act of 1923*
8/ Includes $42,973 for 1917* and ¿47*518 for 1918* both of which were collect
ed in 19187 as indicated by the audit report of the fund to October 31* 1924.
-4 7 -
Table 12.
Year
EXPENDITURES AND BALANCE OF THE NORTH DAKOTA DEPOSITORS' GUARANTY
FUTD AND APPROPRIATED ADMINISTRATIVE EXPENSES, BY YEARS, 1918-1932 l/
Disbursements and balance of the guaranty fund
Disbursements
Balance
Total
Payments on Administrative at end
deposits of and other exof year
failed banks senses 3/
2/
Adminis
trative
expenses
paid from
general
fund of
the State
Total
adminis
trative
expenses
5/
y
Total
1916
1919
1920
1921
1922
$2, 080,533
--
$1,636,346
$242,187
751
6,516
$42,973
103,184
178,075
75,673
359,813
600,959
560,538
252,699
451,266
12,986
28,674
22,925
17,382
20,071
796,015
1 , 007,867
689,711
609,002
309,995
210,998
62,639
29,485
63,327
18,912
16,973
73,997
20,800
230,073
196,105
104,127
----
170,507
11,580
0,209
170,507
10,629
1,693
1923
1924
1925
1926
1927
17,149
26,874
563, 4o3
270,281
471,339
4,163
1928
1929
1930
1931-1932
229,910
8l,6l2
103,462
104,127
--
-—
--
--
$147,756
5,029
$331,132
qj
2,313 6/
S15,680 6/
16,022 7?
28,563 *
17,792
17,519
88,171
12,596
14,526
31,508
33,499
21,701
32,000 8/
J
6,516
11,200 6/
51,469
35, 17 ^
37,590
TJ Compiled from audit reports of the guaranty fund,'trial balances and. state
ments of condition in the minutes of the Depositors' Guaranty Fund Commission, and other
records of the fund in the office of the State Examiner.
2/ Payments during 1920-1923, totaling $187,192, were to depositors of two
banks the deposits of which were paid in full from the fund. Payments in the years
1925-1930 and a portion of the amount for 1931-1932, totaling $577,795, were the 10
percent dividend on guaranteed claims paid depositors of banks that failed prior to
April 30, 1925; $73,359 of the payments in 1931-1932 are the 1 percent dividend upon
final closing of fund paid to depositors of banks that failed from May 1, 1925 to June
30, 1929.
3/ Administrative expenses, and $56,811 of uncollectable accounts charged off
in 193°*
4/ Paid from appropriations by the Legislature for the Depositors' Guaranty
Fund Commission.
5/ From the fund and from legislative appropriations. Does not include the
uncollectable accounts charged off in 1930*
6/ Fiscal biennium ended June 30»
7/ From July 1, 1923, to Dec. 31, 1924.
B/ The records in the State Examiner's office show approximately $32,000 of
expenses subsequent to the dissolution of the Depositors' Guaranty Fund Commission on
Dec. 31, 1930* The portion attributed in this table to expenses of the guaranty fund
is a balancing amount for that fund, with the remainder assumed to have been met from
appropriations from the general fund. A very small unused balance from those appropri
ations remained on the books of the fund when those books were examined by the author
of this
report in September 1956.
-48-
two failures* the balance of the fund continued to increase each year until
1925-
The 10 percent dividend on approved claims was then paid to the depositors
of the banks closed prior to July 1, 1923* Later in 1925 the Commission
authorized a similar dividend to depositors of banks closed to November 15*
1923; in 1926, to depositors of banks closed to December 31* 1923; in 1927*
to depositors of banks closed from January 1 to September 30* 1924; and in
1928, to depositors of banks closed from October 1, 1924* to April 30* 1925*
By the last of these dates 201 banks had closed, in addition to the first
two failures.
However, in five cases the receivers had paid depositors in
full and in one case no claims were approved for guaranty so the 10 percent
dividend was paid to the depositors of 195 banks.
These payments nearly
exhausted the total assessment receipts of the fund* and in August 1930 the
Depositors' Guaranty Fund Commission resolved that no further dividends be
declared because most of the remaining balance would be needed to pay approved
claims entitled to the 10 percent dividend that had not yet been presented.
The final law of 1931* under which the State ¿examiner settled the affairs of
the fund, provided that such claims must be filed within six months* with
the reserve to pay those claims to be cancelled at the end of that time.
V/ith
the additional remaining balance of the fund, it was possible to pay* in 1932*
a 1 percent dividend to depositors of banks that had closed from April 30* 1925,
to June 30* 1929*
There were 137 of these banks, with five cases in which the
receivers had paid depositors in full and two in which other settlements had been
made, so the 1 percent dividend was paid to the depositors of 130 banks.
The total administrative expenses of the North Dakota depositors1 guaranty
system amounted to $331*000, of which about $183*000 was paid from the guaranty
fund.
The remainder was met from annual appropriations of the Legislature to
-4 9 -
meet the expenses of the Commission,
Administrative expenses were greatly
increased in 1923 in comparison with the preceding years, because of the
provisions of the law of that year authorizing the Commission to hire inspectors
and to participate in the process of examining banks, and appropriating money
from the fund to pay the salaries of inspectors or to increase the salaries
of banks examiners in the office of the State Examiner.
Table 13 gives the amount of insured obligations of the banks that failed
each year while participating in the insurance system, recoveries from liquida
tion of assets, the amounts paid from the guaranty fund, and the losses to de
positors in the banks for which the fund was unable to meet its obligations.
The estimated loss on other deposits and common claims is also given in the
table.
Table 14 shows for each year the insured obligations relative to the total
deposits of the closed banks, and percentages of the insured deposits recovered
from liquidation of assets, paid by the fund, or lost by depositors.
For all
the failed banks as a group, the insured obligations were only a little over
three-fifths of the total deposits.
This is due to the exclusion of many claims
as described in an earlier part of this report.
For the entire period 17 percent
of the insured deposits were paid from the liquidation of assets, less than 8
percent were paid from the fund, and 75 percent were lost to the depositors.
The losses on noninsured deposits, including other common claims, were about
¿14 million for the period of operation of the deposit guaranty system. The
amount of this loss, which was about three-fourths of the total loss on insured
deposits, reflects the large proportion of deposits excluded from protection of
the guaranty fund under the rulings of the Depositors* Guaranty Fund Commission.
-50-
Table 13*
Banks
failed
in-
Total
1919
1920
1921
1922
1923
1924
1925
INSURED DEPOSITS AND
NORTH DAKOTA
Insured
deposits
$24,273,647
86, yo1
2,098,466
2 ,616,860
590,650
5,668,423
4,721,076
1 ,618,536
Insured
Paid dir
ectly from
liaui elation
of assets
deposit obligations paid and unpaid
Paid by guaranty fund
Unpaid (loss
Recovered Not recovered to deposit
from liquida
ors)
from l i
quidation tion of assets
of assets
(loss to fund)
$4,153,667
$26,041
*. _
220,551
366,659
20,422
588,789
1,165,312
278,941
1920-192? 2/
1926
2 ,276,120
1927
2,326,464
1,333,692
934,681
1928
1929
OBLIGATIONS TO DEPOSITORS OF FAILED BANKS,
DEPOSITORS1 GUARANTY FUND, BY YEARS l/
416,119
556,078
251*536
279*260
6,568
11,565
$1 ,012,305
79,993
----
284,624
244,112
57,557
549,730
438,246
99,013
7,906
-7,908
__
---——
22,152
--
22,981
12,450
9,3^7
$18,201,634
1 ,581,726
2,008,097
512,671
4,529,904
3 ,117,518
Loss on
noninsurec
deposits
and other
common
claims
$13,732,043
9,971
1 ,269,306
1 ,116,662
985,646
3 ,636,422
1,747,025
1,240,682
696,249
1,837,857
1,737,405
1,725,453
1 , 069,700
646,074
1 , 156,892
743,433
644,984
17 Tabulated from data__for the individual failed banks from the records
of the Depositors1 Guaranty Fund Commission and of L. R. Baird, Receiver, in the
office of the State JScaminer, and schedules prepared for the Federal Reserve Committee
on Branch, Group, and Chain Banking.
2/ Not allocable by years.
-51Table 14.
Year of
failure
Total
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
PERCENTAGE OF DEPOSITS INSURED AND PERCENTAGE OF INSURED DEPOSITS
PAID BY TIE GUARANTY FUND AND RECOVERED FROM LIQUIDATION OF ASSETS, BANK
FAILURES UNDER THE NORTH DAKOTA DEPOSITORS* GUARANTY FUND, BY YEARS l/
Percentage
of total
deposits
insured
Total
62.2
100.0
Percentage of insured deposits
paid directly
Paid by guaranty fujjd11 Unpaid
from liquida Recover•ed Hot recovered; (loss to
tion of assets from ass.ets i.e., loss to depositors)
fund 3/
3/
.1
17*1
7.5
__
__
82.4
60.3
64. p
55.1
62.0
70.0
67.6
51.9
63.0
61.7
52.7
100. c
100.0
.100.0
100.0
- -
10.5
i4.o
3*5
7.6
.6
—
10.4
24.7
___
17.2
—
75.3
92.4
----
13.6
9.3
9.7
75-4
76.7
86.8
9.7
9-3
79.9
0 0 .0
100.0
100.0
100.0
100.0
100.0
24.3
„
1.0
76.6
60.7
74.7
100.0
100.0
18.9
29.9
——
1.0
1.0
80.2
69.1
—
6.1
l.o
lc.3
~TJ Frdffi total deposits in Table 6 and insured deposits in Table 13 .
2/ Froni data in Table 13*
3 / Percentages for the various years are computed without consideration
of the recovery not allocable by years, shown in Table 13 . The percentages are
not much affected by this omission.
-52Comparison of assessments and losses.
Table 15 compares the assess
ments levied with the liability of the fund on account of failure*
The data
are given for each year, and cumulatively, with the cumulative excess or
deficiency.
This cumulative excess or deficiency, it should be noted, is a
different concept from the accumulated surplus or deficit of the fund.
V/hat
the deficiency figures show is the additional assessments that would have been
necessary, in addition to those levied, to have paid all insured deposits after
taking account of recoveries from the liquidation of the assets of failed banks.
It does not include any allowance for other receipts or expenses of the fund.
The guaranty fund had an excess of receipts only for its first two years.
With
the failures of 1920, the deposit liability of the fund exceeded assessment
receipts, and the deficiency mounted each year until the repeal of the law.
In Table 16 the annual rate of assessment, which for most of the
years was one-fourth of
1
percent of the deposits of participating banks, is
compared with the rate of assessments that would have been necessary to have
met the eventual losses on insured deposits from failures in that year.
latter rate averaged
1.8
assessment collected.
The
percent per year or ten times the average rate of
Because of the large proportion of deposits in failed
banks that were excluded from coverage, the table also shows the rate which
would have been necessary to pay all deposits in the failed ban);s.
over
$3
per
$100
cf deposits in participating banks, or seventeen times the
average annual rate actually levied.
Assessments sufficient to have covered
the losses on insured deposits would have had to average
on the total capital accounts of the banks; or
losses on all deposits.
This was
20
12
percent per year
percent to have covered
-53Table 15.
Year
Total
ANNUAL ASSESSMENT RECEIFTS, LIABILITY FOR DEPOSITS IN FAILED BANKS*
AND CUhtJLATIVE DEFICIENCY, NORTH DAKOTA DEPOSITORS1 GUARANTY FUND
Assessments
collected 1/
$2,002,031
Deposit
liability
of the fund
103,183
1919
1920
1921
1922
74,892
62,009
284,766
249,315
79,993
1 ,860,350
2,252,209
570,228
@FedFRASER