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flfyrfj-^' 1 ''IM^^BANXIIicTAS A MEANS /pF PREVENTING BANK FAILURES '"\ A . ADDRESS TO BE DELIVERED BY EDMUND PLATT, VICE GOVERNOR OF T H E " ' FEDERAL RESERVE BOARD, BEFORE THE ROBERT MORRIS ASSOCIATES, JUNE 9, 1925. o , f[ Branch "banking has not "been in favor among American "bankers, as a rule, when from time to time they have found "branches appearing here and. there, af t e x*periods of financial depression, they have usually denounced them and bav ' sought through their associations to procure the passage of legislation suppress them, or to JLimit them to as narrow a territory as possible. a ^ionally the argument has assumed considerable heat and has "brought forth aSserti nn 4.1 "S that branch banking is un-American, and represents merely an effort the big banks to acquire a monopoly of banking and to gobble up all the country tanks. 0 n tne other hand a recent study of branch banking in the Onited States - the f i r s t comprehensive study ever made - has shown that in some sections of countryjPg^ ^r C o n c oranch banking has been in existence for a good many years. I think l u s i o n that it has been giving satisfactory service and extending itself " ovvl a s °° y to give rise to no serious apprehensions of monopoly, in spite of ^ general prejudice of bankers against it. Furthermore this study has it sil n e °wn that n country "banks engaging in branch banking far out-numoer the city ^anks - 3 q 7 , . n oanics located in cities of less than 100,000 maintaining branches, Spared with 284 in cities of more than 100,000. The preponderance of country "k^nks i n v ranch banking is much more strikingly shown if we compare only banks maintain branches outside the city of the home office - the banks against Which Sect'o n 9 of the recent McFadden Bill was directed. Of the 310 banks which have "branchn c s outside the home city 229, or almost seventy-five per cent are loCated i n cities of less than 25,000, and 129, or more than forty per cent are in XERO If] COP , "ct tj it Of lass than 2,500 inhabitants. The study, in fact, appears to me to that banks i n large cities have rarely sought to establish branches in smali G r out utside towns, save in one state where conditions are exceptional because of ito A ts great extent north and south, the great contrasts between its sections in ciimte, -i • in rainfall and in crops produced. A H this suggests that perhaps some of the prejudice among American banker and. Particularly among country bankers, is unwarranted. The facts seem to show nCil b a n k i n c °untry S as it has so far developed in this country to be chiefly a h^nv proposition. It is evident that branch banking comes forward after owQ r y ' financial depression, often modestly and unobtrusively so far as the number of hoanks i with branches is concerned, but enough to command some attention and to s Sgest that there may be some good reason for it, some reason related to economics and safer banking. The panic of 1593 brought a flood of small ^ank f a i lU r e s s n d was followed by the establishment of branches by a few institutions SmH Ui" maintaining branches. The panic of 1Q07 with its attendant bank failures of st not only brought to a focus the agitation that led to the establishment ^ atQs Qr tha a l Reserve System, but gave an iirpetus to branch banking in several 1Gd - to the enactment of several state laws relating to the subject - ' notably th ne California Bank Act of 1909 recognizing and regulating state-wide Ranches » ana the New Y:i<k Act of the same year recognizing and limiting rn h a s nch banking. "^cupht- Tho business depression that followed the great war & " tne question again to the front, with much more general discussion QJ n to ever o r e , so that there is prospect that the discussion may not only iea.d f bafo ^ t h e r State legislation but to federal legislation in the direction of tlla b r a n c h b a n k w "u.ng for national banks within limited territory. % subject is "Branch Banking as a Means of Preventing Bank Failures" and ^ must nnt • Sot too far afield. I am not going to state the arguments for or 'XERO COPY-[ a Ss.infet branch banking, excepting as they relate to the matter cf bank failures. Y U a r e a ° nui a ^oer C f bank failures during the past few years - ricre than 2,000 since 1920, * s -H familiar With the fact that we have had in this country a tremendous nd no l e s s than 753 last year, a year of plentiful credit supply and, generally PQsking} of business recovery. Furthermore these failures of banks are continu- e s this year at the rate of eight or ten a week - there were 295 of frorc the f i r s t January down to and including May 29th. The situation is highly discreditable a n d dis r S ^ceful to us as a commercial nation. We have had recurring periods of b a n k vV1 lures ever since the early days of our history, yet have been unable or Uing a t l 0 n t0 a d Q p t a r e m e d y > though the experience of every other commercial early shows that there is a remedy. We seem to regard bank failures as Cni0ohin S inevitable, an epidemic not to be avoided, and no adequate study of thei causes has ever been made. We ha.ve, it is true, adopted various palliatives e q a i r Q d reserves, pooling of reserves in Federal reserve banks, legal restric- i o n s of various kinds, particularly with reference to loans, ana governmental n s i o n - but they ha.ve not prevented bank failures, they ha.ve only made m l9s thsm 1 s excusable. UpQr The Federal baiik -f • T of Wer xa for February contained sn analysis of the 753 f ilures that occurred last year, 1°2U, showing that no less than 65 per cent txlem WQ Q bs Reserve Bulletin r e banks with a capital of $25,000 or less, and only 10 per cent of. them s with a capital of more than $100,000. One of the Federal Reserve Apr qyi n kwho has been making a study of his own, informs me that only \4 national "ba^i-g of about 2,000 with a capital of $250,000 or more have failed since 19£Q Th9 * c f i g u r e s i n t h e m s e l v e s present strong prima facie evidence of the gr9ate nr ' stability cf the larger banks, and it seems to me rather remarkable that Rioro c *f the larger banks have not been dragged down by the great number cf s m a l l ^•nv fAllures. Every bank failure has elements of tragedy for some cf the people - 4 - frequent! v ~eo r "the whole neighborhood, where it occurs, and every "bank a *" ilure IncV O C K S up a portion of the purchasing power of the people. I think t0 fx ° m c h to sa i t 7 that the hank failures of the past year and of the past " *onths have "been a factor of great importance in preventing the "business country from responding as it should have responded to the favorable inn pr ° GS t h a t h a v G ^con evident for the past ten months. question will doubtless be asked - doesn't the Federal Reserve System event banv *l a i lures? Of course it does. It prevents the failure of sound, .managed banks by preventing panics. Without it 20,000 banks instead of .000 mis-hf •' gnt have been forced to close their doors since 1920, and a large majority 0 f t h G m w ould have been sound bonks forced to close because of inabili ty to r eali 2 G o n good security in an emergency. But the Federal Reserve System 2 little for banks which have no good and eligible security, whether their °ft&ition h ocen tne result of bad management or of unavoidable involvement in n °ighborhood disaster. v Even when they have eligible security it is often more c u S ° 0d ^tful whether loaning money to an already over extended institution does does harm. The Federal reserve banks can't make the loans of the Member bank: a *id can't supply good management to banks which are not well managed, 01 * the 753 bank failures of the year 1924 no less than 78-1/2 per numbers and 66-1/2 per cent in capital were non-member state banks. The federal Rgnerve System cannot provide a remedy for bank failures in their case. ociit underl • S yste m a cb banking system must be sound in order to give the Federal Reserve -ance to render adequate service. Ure l y if there is a remedy for bank failures the credit men and particularly the ° Morris Associates .should be interested in advocating its a4 °PUon. Tt , •"•g "eems to me that the remedy is clearly suggested by the evidence must have larger banks, banks large enough to afford good manage- nient and i large enough to spread their risks over a variety of industries and over Con a n oiderablc territory. The larger "banks have a "better chance to weather finan- l storms "because they are able to secure, and generally do secure, good managcs and also because they are not under the same temptation to put all their e Sgs in one -basket. u The large bank serves, as a rule, a greater variety of industries 4--u nan a small bank and often spreads its loans so widely that it cannot be aff c c t e d by disaster to any one industry. I n fac s Pite of factu i~ r Car • rios ' b the largest banks of our great cities do a national business in n ° *act that they arc not allowed to have branches. Every largo manu•industry and every large mercantile establishment wherever located 5 account in New York, and frequently also in Chicago and Boston or 1 ^ila^el-n • " The big business of the big city banks has recently been augmented by the fformation of cooperative marketing associations in the great agricultural states associations so large that tliey cannot obtain banking accommodation f 111 iocal banking institutions but must go to the great banks of the great cities LU They t l e ^anks cannot go outside their own territory for business in this way. a r p neighborhood institutions and frequently are compelled by force of cirto pei»on tq moke all of their loans not only in a very narrow territory, but ns dependent upon one industry, or at most to persons depending upon a very f e industries. Such banks are seriously affected when the neighborhood in< iustrv a suffers depression, and if that industry is agriculture it frequently on happens ty,at the local bank fails and ties up the farmer's funds just when the industrv i + * iwsolf is recovering. That is what happened last year. Agriculture ^ d e a .. ., notaolo recovery, but 753 banks failed in the United States, nearly all of t5acm in a r agricultural states. With agricultural conditions exactly the some or n .anything °t quite so good - Canada had no bank failures. The large hank has another marked advantage over the small bank - it can \ - rarely- "beG of a Ver by a defalcation. 6 - It is physically impossible for the officers y large hank to get their hands on enough of the bank's money to affect it olvency. Fraud isn't a major cause of bank failures today, but it is a rath~> important cause of the failure of small banks. Too many small banks arc nc or ° ~nan hank« • -° can having control of cash, sccuritics and even in some Cas C S of t | , i-cys to safe deposit boxes. Human nature is human nature and it isn't fair t 0 put too many temptations before the best iatentior.ed persons. If v ° Rtast have larger banks in order to afford good management and to give the m a r ^ nent a xair chance for success then wo must either subject many people livin g in "n n communities, or in rather thinly settled agricultural communities, Sreat i n c onveniences or we must provide them with banking accommodation ^-Fough hr nc.es - n o t necessarily on ar.y very large scale as in Canada, but on a s cal 0 ] a r e n o u ° S h to serve the people adccuately and safely. Probably in many CoiK ^ i t i e s ranch banking by counties would answer. County branch banking has to 111 V o g u e in T * • .Louisiana for a considerable number of years and appears to have been ^onably successful. Tennessee has recently adopted it not as an originheme "h ut as a limitation. Maine has branch, banking in the county of the Parent v oank "anriu adjoining county" which gives more latitude. Several other ate s perm-f state-wide branch banking, with results that appear to be Sc rccon ranc a v e ^ t l y made a visit to California and am convinced that state-wide * banking ^ . & j.n tnat state works well, ajid certainly mal.es for safety. There ^een vcrv v <y bank failures in California since 1909 and state banks have a better record in this matter than national banks - something which I think *°t be of, any other state. Several SouBn o r n states have had branch banking for many years and have not 0Ught * to r e -""let . , .o.t to s t r counties or localities. Most of the Southern branch an 'XERO' COPY COPY V » Banking in<,f * + , ib -".uaiiiLutions arc nevertheless small - averaging less than two branches to With the exception of a few such institutions as the Citizens and. Southn of Savannah, and the TTachovia Banking and Trust Company 0 f Winston-Salem the "banks with ho r a n c h G S in the South are distinctly country banks - in some cases of small banks consolidated under one corporate management. ' the In spite of °roparatively small size of these institutions there have been almost no faili n g them - so far as I know only one in 1924. Here again the evidence appears to tp that the additional spread of risk and the ability to pay for better nian 1 a n ageraent + So R I U C n f o r a small unit bank can afford make for safety. t h e U n i t fundamental safety of branch banking as compared with small "banking mv, 6. m o r e is more than this to be said in favor of "Branch Banking as a Baiik: Means of Proeventing Failures". I have heard a State Superintendent of Banking ^ l i o s ^oted as declaring that one of the great advantages of branch banking in the opportunities it affords for preventing failures through c o n s o l i d a - t i o n s , "R0 vu qusn ^ e Comptroller of the Currency and the State Superintendents fret l y advocito • . , over ^.te +i m e taking of a weak bank: by a strong one in order to preV G n t a failu r o . but obviously you can't consolidate two banks located at a distance f r each other, as a rule, unless you can keep them both open - one as a bra *ch of th ° °thcr. A considerable part of the recent growth of branch banking a s been due n °t so much to the desire of certain branch banking institutions to as to tVia-ej economic pressure of the times - in many cases to the direct quest of - banking , authorities. 1 Branch ban -as I have already said, has started to develop after every ^nciax re reverse, after 1893, after 1907 and now again after 1920. The estab, o f ranches is a natural, common law right, where no legal restriction e *iat a . ^ relating to branch banking in the states where they exist were P a s5L ^ ed after b ,. ranches had begun to appear, and wero passed for the Durposo of 14--' ^itinig or ta plating the establishment of branches as a rule, or in somo cases ll shmo n t . XERO ; COPY - Prohibit further branches. 8 - The prohibitions of branch banking have proven tunate and the states which have permitted branches under proper regulation supervision have fared better than those which have prohibited them - under similar conditions. 1 G V e x t i G unfortunate that the National Banking Act has been generally interpreted inking as not authorizing branch banks. It contains no prohibition of branch . in fact specifically authorizes branch banking through conversion of a n i state bank^ W l t h D r a n c h e s ° - Historically, it seems to me, the evidence is clear *hat the c engrosses which passed and revised the National Banking Act, from 1363 l86 6 , did ' no,1 m t e n d to prohibit branch banking. Ihey certainly did not intend 0 Prohibit br-a n C h t a n k i n £ within city limits, and it appears reasonably clear they d i d n 0 t i n t e n . ' ^ to prevent National banks from having the same privileges x ' -th relat' on to branches that State banks have. 7a C National b->: s ">h a v e Q f t h nade a much better showing than state banks in the matter < failures dnr i•n g iV are ,1 2 7 ? a s t f o u r years, but that again is in large measure because n-c> nerally larger banks. There were nevertheless 127 National bank failures b a n k 5 t h e n 19P4-» wnicn v, is* altogether too many. The proportion of failures of *Uh a C a p U a l l e s s ' than $50,000, was fairly large - 55 out of the total • The Na a f , i o n a l banking system would be much stronger if we could provide t nat ^ the • • . 6 futur<3 / no banks should be chartered with a capital less than $50,000 G 1 T a t l 0 n a l n a n a i n k i n g Act before 1900) or better $100,000, which is no more $50,000 re Presented in the early days of the National Banking Act. Where X o r tanks a r P necessary to accommodate the peonle branches should be fitted. j XERO COPY r--
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