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B A N K I NG

M A R C H E S

ON

Address to Group 2, Pennsylvania Bankers Association
by Kr.rl R. Bopp
February 12, 19LA
Exactly two years ago Mr. Sienkiewicz addressed Group 2 of the Pennsylvania
Bankers Association on the topic "Banking Goes to War."

Since the discussion today

is a sequel to that address, I have entitled it "Banking Marches On."

When Allen

Glenn asked me to address you, he urged me to be practical and to avoid vague talk
couched in fluent but incomprehensible language.
In carrying out his directions I have encountered two difficulties.
first place, I run the dangers of being wrong and of reing misunderstood.

In the

I am will­

ing to assume these risks because I know you realize that bankers cannot make progress
by refusing to assume risks.

You also know that cny plcns we make, especially in

periods of rapid change, must be subject to constant revision as conditions change or
our knowledge becomes more definite.
The second difficulty is that the problems confronting individual banks are
not simple and uniform.

This lnck of uniformity has its compensations.

the traditional American unit brink.
to fit its own circumstances.

It justifies

But it means that each bank must devise policies

A universal, ready-made policy would fit individual

banks about os well as a standard G. I. uniform would fit each member of our armed
services.

This lack of uniformity merns that I cannot give you a standard policy,

applicable without adjustment to every bank.

The best I can do is to indicate some

of the specific factors that affect the policies of all banks.

The development of a

policy for your own bank requires a lot of hard work that no one can do as well as
you.

You alone have the background and knowledge needed to secure a clear picture of

every detail of your operations.



-

11

-

These difficulties can be ovorcomc if you consider this discussion as
suggestive only.

It is not copyrighted or final in any way.

Feel free to modify,

discard, or add.

N y purpose and hope is that you may find the discussion helpful in
i

meeting the difficult problems that you alone can solve.
Major factors that all banks have in common are that they secure the over­
whelming proportion of their funds from depositors and that they use these funds to
protect their depositors, to extend credit where justified, and to earn profits.
Specifically, this means that at the present time most banks are concerned with:

(l) the volume end ownership of deposits; (2) loan portfolio and opportunities;
(3) Government bond and investment policy.

Let us turn to these three items in

order.

1.
a.

The Volume and Ownership of Deposits

The relation of the individual bank to the banking system.

The chart on the next page shows relative changes in the total deposits of
all member banks in the United States, of all member banks in the Third Federal
Reserve District, and of five individual banks in Group 2 of the Pennsylvania Bankers
Association.

Member bank data are used for a number of reasons even though they con­

tain an upward bias.

The five individual banks were not chosen wholly at random.

None has been involved in a merger or a reorganization during the last thirty years.
Bank A illustrates the rapid changes that occur in a new bank.

Changes in deposits

at most banks in Group 2 are similar to those indicated by banks B and C.

Banks D

and E were selected specifically to indicate variations among established banks.
Bank E did not participate in the rapid expansion of deposits in the twenties, and
Bank D did not participate extensively in the reccnt expansion of deposits.
The general conclusion to be drawn from this chart and from more exhaustive
study of deposits of many individual banks is that changes in deposits at most benks







-

GROVTÎH

OF

1? .

-

B A N K

D E P O S I T S

-

13 -

are closely related to changes in total deposits in this district and in the country
as a whole.

This conclusion should be kept in mind in any analysis that an indivi­

dual bank may make of its own deposits*
Such on analysis may properly begin with the question«
ble future of total deposits?

What is the proba­

As you all know and as is shown in the chart, total

deposits have increased with few serious interruptions since the last war and very
rapidly since the outbreak of the present war.

Further expansion is in prospect

during the war to the extent that Government fiscal requirements are met through
direct absorption of Government securities by connerclal banks or indirectly by in­
creases in bank credit to facilitate the distribution of these securities to other
investors.

The trend of deposits after the war will depend largely on the extent to

which Government debt is in the hands of the banks.

Even a decline in gross debt

would not necessarily result in smaller holdings by banks since redemption of securi­
ties by the public might result in still larger bank portfolios with accoopaiylzK
increases in deposits*

It seems highly probable, therefore, that the country will

enter the post-war period with a very large volume of deposits, and there is little
likelihood that deposits will decline below present levels in the post«*ar period.
To facilitate your analysis of the position of your bank there appears on
the next page a table of total deposits in the United States and in the Third Federal
Reserve District annually for the past thirty years.

Blank spaces are Included to

enable you to determine the position of your bank in the banking system year by year
over this period.

By analysing the proportions that you compute for your own bank

to insert in the last two columns, you can gain an idea of how much your own posi­
tion is influenced by developments in the district and country.




- H

-

OVER-ALL DEPOSIT ANALYSIS

(In millions of $)
»December 31

r
i 1914........

Total deposits-rnember banks Total deposits
Proportion your bank to
Your bank
United States 3rd District
United States 3rd District
8,305

897

| 1915........

10,636

844

1916........

12,661

967

1917........

18,628

1,283

1918........

21,457

1,400

1919........

26,139

1,568

1920........

24,220

1,606

i.921........

23,247

1,567

.922........

27,288

1,776

.923........

28,507

1,940

.924........

32,384

2,137

.925........

34,250

2,300

-926........

34,528

2,386

.927........

36,669

2,469

.928........

39,075

2,488

L929........

38,014

2,468

1930........

37,117

2,578

1931........

30,746

2,263

1932........

28,743

2,209

1933........

27,182

2,008

1934........

33,848

2,382

1935........

38,454

2,629

1936........

42,885

2,935

.1937........

40,839

2,750

-1938........

43,363

2,861

- 1939........

49,340

3,231

. 1940........

56,430

3,452

. 1941........

61,717

3,704

1942........

78,277

4,145

. Oct. 18, 1943

94,968

5,019




....

-

—

b.

Analysis of deposits at vour bank.

Although the outstanding factor in the volume of deposits at most indi­
vidual banks is the total deposits of the banking system, changes in deposits at
banks D and E indicate that local factors also are involved.

Just as the uneven

stimulation given by the development of war industries and military centers has re­
sulted in uneven distribution of deposits, so shifts of deposits after the war are
to be expected.

For the individual banker the important thing is to analyze the

position of his community in the post-war world.

His community will tend to gain

deposits as its businesses and individuals sell their products and services outside
and will tend to lose deposits as they buy elsewhere.

The community's net position

will be influenced by such factors as changes in population and working force, the
adaptability of local productive facilities to the satisfaction of post-war demands,
the expenditures of inhabitants, especially for durable consumer goods, and the needs
of business establishments for reconversion and placing operations on a peacetime
basis.
It is to assist you in analyzing such basic economic factors in this area
that we at the Federal Reserve Bank are undertaking an analyiis of the economy of
the Ihird Federal Reserve District.

I shall not take the time to indicate the re­

sults of this analysis which is appearing serially in our Monthly Review, beginning
last month.

As soon as we complete the analysis for the entire district, we shall

analyze the various industrial areas within the district.

We are anxious to secure

your criticisms of this work and to receive your suggestions as to how it may be im­
proved.
In addition to an analysis of the basic economic factors involved, you can
approach your own deposit problem directly through an analysis of the ownership of
your deposits.

lour own analysis will take on more meaning if you compare the




» i m ­

position of your bank with that of other br.nks of similar location end size. Through
the generous cooperation of 217 banks in the Third Federal Reserve District it has
been possible for us to analyze the ownership of deposits by area and by size of bank
in this district.

The results of this analysis were published in the December issue

of the Monthly Review,

The usefulness of that study to member banks has been such

that we plan to repeat the survey as of the end of this month,

A table that you can

use for analytical and comparative purposes appears on the next page.

Since a large

sample of banks all over the country will participate in the February 29 survey of
deposit ownership, that date may be taken as a bench mark.

We hope on a sample basis

to secure some estimate of the ownership of smaller accounts, since virtually nothing
is known as to the ownership of accounts under $3,000.
After you have analyzed the ownership of your own deposits and have com­
pared your bank with similar banks, taking account of the fact that total deposits
for the country are unlikely to decline, you will be able to make a tentative es­
timate of your future deposit position.

Obviously, your estimate will not be a

precise prediction and will be subject to revision, but it will be better than a mere
guess.

A careful estimate involves a lot of work, but the rewards for accuracy also

are great.

Indeed, making the estimate is one of the half dozen

things that you can do.

most important

Clearly a bank cannot develop sound policies without an

opinion as to the future volume of its deposits.

I have tried to describe a sys­

tematic approach to this problem because such an approach should yield better re­
sults than a pure guess.

The important matter, however, is to make the best estimate

you can, not to follow any set formula.
cedure or develop one of your own.




You should feel free to modify the pro­

- 17 ANALYSIS OF DEPOSIT OWNERSHIP

(In thousands of dollars)

Classes of Deposits

1939

Feb. 29
19U

War
Peak

Post-War
Estimates

Demand Deposits of Individuals.
Partnerships and Corporations
Accounts of $3,000 and Over
1.
2.
3.

L.

Manufacturing and mining..........
Public utilities, transportation,
and communications................
Retail and wholesale trade and
dealers in commodities..........
All other nonfinancial business.
construction, and services......

5.

Financial business................

6.

................ .. — ......

Nonprofit associations, clubs,
churches, etc..«.«»••*••••••••••••

7.

Personal (including farmers)
a« Farmers.
b.

8.
9*
10.

....... .. —

-....

Other personal accounts......

Tptal - Accounts of $3,000 and over.
Accounts under $3»000........*.....
Total - All Demand Deposits of
Individuals» Partnerships and
Corporations••••••••••••••••••••••

11.

Time Det)Osits (Other than bank).•••••• ..... —

12.

U. S. Government Deposits

— .— .------

War Loan Deposit Accounts.........
------

Other Ü. S. Government Deposits....
13.
14.
15*

Total U. S. Government Deposits.... .-.. . — ... .
.
Deposits f f Stats art fc0*1
t
Deposits.......... ........ ..




-.. ..
.

------

- 18 -

2.

Loan Portfolio and Opportunities

One of the basic functions of c bank is to extend credit where justified.
One need only glance at balance sheets to see that banks have lost loan business to
other agencies for a considerable period of time.
about it?

The question is:

What can be done

In searching for an answer I think we must recognize frankly the general

principle that over a long period of time an institution must serve the needs of the
general public to justify its existence.
Bankers simply cannot afford to sit idly by but must adjust their credit
facilities to the requirements of the general public.
of revolutionary changes.

We are living through a period

It should not occasion surprise if the forms of credit in­

struments and traditional rules of thumb no longer are adequate.

At an A.I.B. seminar

held here last fall, Dr. Ralph Young, of the National Bureau of Economic Research,
suggested that in periods of rapid chenge the most progressive and forward-locking
institutions play the most vital part and that the quality of leadership exhibited by
commercial banks will determine their rSle in the post-war world.
The problem for the individual banker is tc see to it that his institution
furnishes as much of the financing accommcdations as is consistent with sound banking
principles.

Ycur immediate task in this area both as leaders in the community and as

bankers, is to stimulate preparation for the post-war period on the part of your cus­
tomers.

Such preparations will involve finances.

Here is a list of a wide variety

of fields from which loans may be expected if they are properly cultivated.
not compile it, but the list struck i. as imaginative and stimulating.
re

I did

You may wish

to prepare separate schedules of loan prospects for each of your major types of cus­
tomers, such as farmers, consumers, mercantile concerns, utilities, transportation
companies:




- 19 -

LOAN PORTFOLIO AND OPPORTUNITIES
1*

Agricultural loans: Home improvements, scil improvements, equipment purchases,
farm buildings (permanent), livestock production, crop production, community and
county groups, farm mortage loans, personal.

2.

Personal and instalment loans: Insurance loan, signature, co-maker, automobile
and truck, appliances, airplane, education, insurance premium, collateral, per­
sonal mortage.

3.

Merchant loans:
(a) Short term: Working capital, funds to carry increased volume of inventory,
accounts receivable financing, shift in terms of selling goods.
(b) Term and mortage loans: Expansion into new quarters, purchase of existing
building or new equipment, major alterations and improvements,
purchase or opening of new outlets or branches.

4.

Industrial loans:
(a) Short term: Inventory, receivable, equipment, conversion, cash working
capital, field warehousing, instalment.
(b) Intermediate or term: Equipment, security refinancing, stock refinancing,
capital retirement, construction.

5.

Utility companies loans:
(a) Short term: Appliance sales, working capital, maintenance and improvement
to be paid within one year.
(b) Term loans: Conversion of or addition to existing facilities, replacement
of old equipment, refunding other obligations into a lower rate
obligation, finance purchase of other companies.
Consideration of post-war loan possibilities focuses attention upon one of

the most difficult problems confronting banks, namely that of capital adequacy.
wish I could offer you an easy yet adequate solution to this problem.

I

It arises

from the fact that increases in holdings of Government securities have created cor­
responding increases in deposits, without substantial increases in capital funds.
As a consequence the cushion of capital has grown thinner and thinner.
confronted with this dilemma:

Banks are

the thinner their capital protection the less risk

they can afford to take, but unless they take reasonable risks they cannot play a
very positive role in the development of the community.

The difficulty is not im­

mediate but will arise when opportunities arise to acquire assets carrying a higher
degree of risk than those now held.




- 20 -

The dilemma could be resolved if br.nks could increase their capital; but
this is easier seid than done.

In times like these earnings are not sufficient in

relation to the growth of deposits to maintain capital ratios even though all
earnings were retained.

On the other hand, a bank has no assurance that it will be

able to sell new stock even though it pays out a considerable proportion of its
er.rnings in dividends.
As I said, I wish I had an easy solution to this problem; but I don’t.
Some banks, of course, have been able to raise additional capital and others should
avail themselves of any opportunities that arise.
I can merely offer this suggestion.

In addition to this possibility,

The rate that a bank charges when it acquires

a risk asset should be adequate to cover both interest on thr funds and payment for
the risk assumed.

The rate on Government securities may be taken roughly as the

going rate of interest on riskless assets.

Most of the additional return on other

assets, therefore, should be considered payment for risks assumed.

That portion is

not really income and should not be treated as such; it should be treated as reserve
against losses that must be expected.

3.

Government Bond and Investment Policy

After you have completed your analyses of your deposit, loan, and capital
prospects you are well on the way to constructing tentative balance sheets showing
in a preliminary way what your position may be at specified times in the future.
blank schedule of such projected balance sheets is shown.

A

Rather than analyze all

of the remaining items on that form - which would have to be done very briefly - it
may be more helpful and practical if I concentrate on the most important item namely, Government securities.




- 21

SttAUBY ANALYSIS OF BANK’S POSITION
(in thousands of dollars)

1939

Feb. 29
1944

War
Peak

Poct-Var
Istiaates

Assets
Loans ..................

Investments ...........
U. S. Govern*ent .......

Other assets ..........
Liabilities

Deposits ..............
Bills payable .........
Capital accounts ......
Total liabilities.

Overwhelmingly the most important aspect of the Government security port­
folio, especially since the flooting supply of tax-exempts has all but disappeared,
is the question of moturities.

You might start your analysis by seeing how your

maturities on Governments, together with your cash, compare with prospective changes
in your deposits end loens.

Will your resources be adequate with or without assist­

ance to meet your needs if you expect to lose deposits or to expand loans or both?
Often forgotten but equally important to your future is the opposite question.

Are

you maintaining in highly liquid form resources in excess of your prospective needs
to meet withdrawsls and loan demands?

Heic is a schedule to assist you In taking

stock of your situation.
MATURITY DISTRIBUTION OF CASH AMD OOVEMMOff SECURITIES

1
Xaaediate - Cash, savings bonds* and




1944

FMt~var

22 -

The heart of the naturlty problon lies in the structure of interest rates
shown In the accompanying chsrt taken fro® the official bulletin of the United States
Treasury.

It shows the familiar patterns

one year, 2 per cent at 10 years.

3/8 por cent at 3 months, 7/8 per cent at

Plottings above the curve indicete issues that are

technically weak in the market} those below the line are issues that are exceptional­
ly strong.

General principles of purchase or sale of particular items in a general

market apply here also, and I neodn't go into the details.

LflUHT 8KUB1TUB. B O V M P 30, 1343
Based

an Mean of Closing Bid and Askad QMtnftloes
H r oast

Per oeat

3.80

2.60
*

2,40

<

>

3.40

2.20

3.30

2.00

3.00

1.80

1.80

1.80

1,80

•

1.40

/

1*40
>

r

1.20
/

1.00
.80
.60

1.30

HT

1.00

raatorai
x fixed weturity iLssaee
t1
1 a diaoount)
kft
♦ Votes at a dleooont
* Callable tsauM

J

/

.80
.60

7

rn — i r n l i l bankst
+ Callable bands

.40

.40
.30

.20

!
_______L - 1
—

I

0
*44

*46

■O
S

eaiaiBLriJte. Trunin




*6*

'M

ITiiiirtiitnl

'56

'56

*60

«3

1943• »• M-

•84 «8

'88

0

- 23 These deviations fro« the pettern are too M i l to be significant to one
who can make a long-term commitment; but they are too large to warrant investment in
the long-term market if the owner knows that he will need the funds for another pur­
pose in short order«

For example, an increase in yield of 1/20 of 1 per cent on a

ten-year 2 per cent bond would result in e decline of more than 3/6 per cent in the
price of the bond - end there is alwsys the difference between the bid and the asked
price.

On the other hand, there does not seem to be any sound reason for keeping ex­

cess funds completely idle even temporarily in the face of the present Treasury bill
and discount policies of the Federal Reserve.
The problem of the individual bank is to adjust its portfolio to suit Its
particular needs.
needs.

That is one of the reaeons why it is so important to anticipate

I do not think it is sound advice to urge all bonks to build and maintain a

portfolio of Governments more or less equally distributed among maturities up to 20
years.

Nor do I think it is wise policy for banks to keep all of their Increase la

deposits in idle cash, Trecsuiy bills, or certificates of indebtedness*

Thoee who

recommend this policy apparently bsse their case either on the defeatist attitude
that since nobody oan tell precisely whet is going to happen we had better assume the
worst or on the assumption that Interest rates are going to rise and that funds should
not be invested until they do.
Many bankers, I am told, hove maintained cn extremely liquid position on
the expectation or In the hope that higher Interest rates were "just around the ear­
ner."

I should like to point out that even though this assumption turns out to be

correct it moy be very expensive to follow the advice presumably based upon it.

The

mere possibility that Interest rttes may rise is not sufficient ground to defer In*
vestment, In say, tcn-yecr bonds.

The «racial questions ares

(1)

How ffcst sad hoe

for most they rise to justify the delayt and (2) lhat is the likelihood that thqr w m




rise sufficiently?

The answer to the second question involves judgment.

preciate why I shall neke no effort to answer it.

You «111 ap*

The first question, however, Is

purely technical and the chart on the next prge has been constructed to answer it. It
shows how far interest rates Bust rise to enable a benk to retain liquid funds and
still not lose money over the next ten years.
It should be mentioned, incidentally, that it is not the ten-yeer rats that
must rise in the way indicated in the chart; it is shorter term rates.

As an illus­

tration, the one-year rate must rise from 7/8 per cant to almost 22 per cent at the
end of nine years to warrant retention of funds for nine years as excess reserves. In
other words, even though the hope of some for a rise in rates materialises, thsy «111
still lose earnings unless the rise comcs soon and is comparatively large.

Of oourse,

no one Intends to keep funds idle for two yerrs, five yecrs, or ten years.

Many have

not intended to for ten years - ten years over which 20 per cent was not earned always in the hope far the rise that was "just around the corner* but never osme.

Conclusion
In summary, I should like to repest whst I said at tbs beginning.

In try­

ing to carry out the injunction of Allen Glenn I have tried to suggest In half an
hour a few items that you may find helpful in developing a practical approach to the
difficult problems that confront all of us.

If In trying to be clear and definite I

have appeared dogmatic at times, it was unintentional.
The American banking system consists of msny units; the system is strong
only ss each of these units Is strong.
weakness of another.
function properly.

The strength of one bonk cannot offset the

There Is no grand, simple plan by which they eon be M d e to
lour future lies In your tends.

And the sum of sll your futures

Is the future of American banking and of such more besides.




- 25 Gonmaar intim i am u m « p * T f f T i m i T r

F«r

om à
i

33

so
18

16
1«
13
10

8
$
4
3

This chart thorn «I tho boglaaiag of «aob ywar tbo n l N a* « M A "« n iU k lt * t e l l
would h m to bo lavootod to yiold as auoh la 10 yoaro as 3 por eont boado, ooafooadod» «111 ylold«
assualng
Lino 1 « that tbo ftaads aro boli M io until thagr aro iavostod.
Liao 3 - that tbo fendo oro "plaood" la ftrsaaury bills at 3/8 por osat oatll thagr aro
"lavootod” ter tho m atador of tbo porloA.
Liao 3 • that tho t e d i oro "plaood" la oortlfloatoo of ladobtodaoos at f/8 for M l
natll thagr aro "lavostod" for tbs roaalador of tho forlad.
Illustrations!
4.

Zf a bonk lavoots $100.00 la 3 for eon! 10-ysar bonds aft for, It «111 bai«« «Ith
oonfomdlag, #131.90 at tho sad of 10 ywors.

B.

Xf a bonk luido tho 8100*00 idle fbr 6 yoars, It «111 boo« to Unroot It al 4.1 for
oont ooapoondod to ha*o 1131,90 at tho ond of 10 yoaro.

C.

Xf a bank flam s tho $100,00 la Troaoorjr b U ls at 5/8 for ooat oo ondad ter 6
npo
yoars. It «111 h m "avaUrtlo" $101.89 «hloh aast bo lavootod at 3.Î for osat ter
tho Tsaolador of tho forlod to havo $131.90 at tho sad of 10 yw r».

D.

Xf a bonk plaooo $100.00 la aortlflootoo of ladaibtodaooo at ? /8 fsr osai aaa fw iiod
ter 5 yoars, It «111 havw "avaUablo” $104.46 «hloh «ost bo lavootod «i 3.1 for
OM * for tho roaalaloa a f tho psrtod to havw $131*00 at tho sad of 10 f a n *

Xf tho portai prior to »iarooteaat» la 8 yoars laotoad of St tho otitospondlag
lnvostasnt rateo «oold boi ter ooah, 10.4 for ooati ter blllo, 8*8 por osa*» ter
aortlflaatoa« 8 .6 for aoal*




- 26 We still have a war to «la.
in financing the war.

Bankers have provided such of the leadership

You «ill continue to push successive war loan drives through

to brilliant records, and as Cas said two years ago*
"When this omergency has passed «e shall again hove to provide
business with funds for noraal operations. It is highly desirable
that our system of private finance provide these funds and sustain
the recuperative power of trade and industry.
"The transition froa a period of esployaent for war to a
poriod of employment for peace cannot be easy; it aust be dons la
a statesmanlike aanner. It is in the interest of our econosgr that
the shift be aadc ns saoothly as possible. But If private enter*
prise fails to offect such a transition without another crisis,
the Government would step into the breech upon the laperlous doaand
of the people. This would aoan a resuaption of large public ex­
penditures, the funds for which would have to c o m primarily froa
banking sources. The consequence of such a development aight be a
fundaaental cIteration in our qystca of private enterprise."
If we hr.ve vision and courage, we can prevent a aajar post-war sluap.

In­

dustry already is preparing and acny companies ere aaking bold plans to do what thagr
cr.n to maintain productive employment and incoae at high levels.

Even as you psrfora

the countless services thrt a nation "t war exacts of its cj— unity leaders, yon can­
not afford to lose that touch with the future which you aust cultivate and ass to
survive.
We are unsure and uncertain os to what lies ahsad, and as aust reoopiis*
that we aay be wrong.

But we dare not adopt a defeatist attitude. Abrahea Lincoln,

whose birth we celebrate today, expressed this necessity for positive action in sccord with our best Judgment, even when assailed by doubt when in 1660 he saidt *I*t
us have fhith that right ackss aightj and in thct ftsith 1st us to the end, dare to
do our duty as we understand it."
His war inaugural address on Mrrch

1665, Is particularly applicable todays

•With aclicc toward none, with charity for all, with firaness
in the right, as God gives us to see the right, let us strive on to
finish the work we are in, to bind up the nation's wontnds, to oare
for his who shall have borne the battle, and f w his widow and his
orphan, to do all which ray achieve and cherish a Just and lasting
peaoe aaong ourselves and with ell nations."