Readings in Money and Banking Part 39

A few of the state banking and trust-company laws contain provisions limiting the amount which may be invested in real estate loans.

Not withstanding the disadvantages of real estate as a convertible a.s.set, the power to loan on the security of real estate is a valuable one to many of the state banks.[142] Many banks, particularly those in the smaller towns and cities, if restricted to loans on personal security, find it difficult to fully employ their funds. There are not sufficient local loans of this kind to employ all the funds of the bank; and the amount not so employed, if it is to yield a revenue, must either be invested in outside commercial paper or deposited with banks in the great commercial cities.

RESERVES

In most of the antebellum state banking laws reserves were required only against note issue. In Ohio, for example, the general banking law required a reserve of 30 per cent., against circulation, but none whatever against deposits. Several of the state banking laws which survived the destruction of the state bank-note issue contained, however, provisions requiring banks to hold a reserve against deposits; but in none of these States was the increase in the number of state banks important. In those States in which the state banks were organized under the "business incorporation laws" there were, of course, no reserve requirements. Until 1887 a reserve was required for state banks in only three States, Ohio, Minnesota, Connecticut, and in these the required reserves were small. Even since the revival of state bank regulation, which began in 1887, the requirement of a reserve has not been regarded in many of the States as an important part of the state banking law.

The most striking and important difference between the reserve required by the national-bank act and the reserves required by the state banking laws is that under the national-bank act the reserve is a percentage of "deposits"--_i. e._, of all deposits--while under the banking laws of a majority of the States either no reserve is required against time or savings deposits, or a smaller amount of reserve is required than against demand deposits.

None of the state banking laws require that the reserve of any cla.s.s of banks shall consist wholly of cash in bank. All the laws permit balances in other banks to be counted at least as a part of the reserve. There are great differences among the laws, however, with respect to the amount which may be so counted.

The laws in all the States leave the banks almost entirely free to deposit their funds in banks in the great commercial centres. The strong economic pressure toward concentration is thus left free to act toward drawing reserves into banks located in the reserve and central reserve cities.

In the greater number of States which incorporate both state banks and trust companies the reserve requirement is the same for both cla.s.ses of credit inst.i.tutions. Slight differences between the requirements for trust-company reserves and those for state-bank reserves are chiefly of two kinds. In the first place, the provisions for trust-company reserves more frequently permit the counting of bonds as a part of reserve; secondly, the provisions for differing amounts of reserve against time and demand deposits.

In recent years there has been much complaint in some States that the reserves required for trust companies are inadequate.

BRANCH BANKS

The most characteristic feature of American banking is the extent to which the banks and trust companies are independent inst.i.tutions. The national-bank act makes no provision for the establishment of branch banks except in cases of the conversion of state banks which already have branches. Such banks are allowed to retain their branches on condition that the capital is a.s.signed to the mother bank and the branches in definite proportions, but only a few national banks have branches. Under none of the state banking laws has there been built up an important system of branch banks. This has been partly due to the very general desire of each American community, no matter how small, to have its bank managed by its own citizens, and partly to the fact that in most of the States the establishment of branch banks is either explicitly forbidden or in no way provided for by law. In eight States--Colorado, Connecticut, Mississippi, Missouri, Nevada, Pennsylvania, Texas, and Wisconsin--the opening of branch offices is forbidden by specific enactment. In a large number of other States the banking laws make no provision for the establishment of branches, and it has been held in most of these States that the opening of branch offices is unlawful.

The States in which state banks and trust companies are definitely permitted to have branches are California, Delaware, Florida, Georgia, New York, Oregon, Rhode Island, Virginia, and Washington. In Louisiana, Maine, and Ma.s.sachusetts trust companies may have branches. In Maryland and North Carolina branches are operated by some banks and trust companies which were chartered by special act. There are in several of these States, however, restrictions on the opening of branch offices. In New York and Ma.s.sachusetts branches may be established only in the city in which the princ.i.p.al office of the bank or trust company is located.

In New York, moreover, only banks located in a city of 1,000,000 inhabitants or over may have branches; but any trust company may have branches. In Maine a trust company may establish branches only in the county in which it is located or in an adjoining county.

In nearly all the States which permit banks or trust companies to establish branches one or both of two conditions are imposed. In the first place, additional capital is required for each branch bank over and above the amount of the parent bank. Secondly, the establishment of a branch bank must be specifically authorized by some state official or officials.

The number of branches of banks and trust companies cannot exceed a few hundred in the entire United States. Compared with the total number of banks and trust companies this is a small development. Moreover, the most important affiliations among banking inst.i.tutions are among those located in the same city. The "chains" of country banks possess, for the most part, little vitality, and in the total banking business of the country they play an insignificant role. The great ma.s.s of state banks and trust companies are independent inst.i.tutions. The most enduring affiliations at present existing among the banking inst.i.tutions are those between a national bank and a trust company or a state bank and a trust company. The comparatively limited powers of the national banks and in some States of the state banks have made it desirable for many of these inst.i.tutions to affiliate trust companies with themselves in order that desirable business may not be lost.

FURTHER REASON FOR THE LACK OF BRANCH BANKS IN THE UNITED STATES

[143]It would seem that there must be a reason for this peculiarity [the small number of branches] in the banking system of the United States. In searching for this reason, the first fact of importance seems to be that, although the organization of branches has been permitted to the non-note-issuing banks in some of the States, they have not been organized, while in other countries they have been established in nearly every case. by note-issuing banks. This seems at once to indicate that in places where notes are the most important medium of exchange a connection of some sort exists between the issue of notes and the establishment of branches.

The inducement to the establishment of branches by banks is, of course, the possibility of profit. But as has already been frequently pointed out, profit can be obtained only by making loans. These when greater than the amount of the capital, as it is necessary that they should be, can be made by the loan of funds left with banks by others or by the issue of circulating notes. It is also clear that, were the possibilities of loaning beyond the amount of the capital wholly or chiefly confined to one of these forms of liability--the other being unavailable, as in the case of the state bank notes whose issue is prohibited by the 10 per cent. tax--and were this other form distasteful or impossible of introduction among the community where the branch was to be established, the motive for the creation of the branch would be absent. This motive has been wanting in many parts of the United States.

By the laws of the United States, the issue of notes has been made impossible to all save national banks, and the capital of these banks has been limited to $50,000 as a minimum. Banks other than national must, therefore, be established under state laws, some of which have permitted the organization of such inst.i.tutions with capitals as low as $5,000 or $10,000. They can, however, make use only of deposits as a means of loaning beyond the amount of their capital. But deposits do not provide a desirable form of currency for use in country districts. It follows, therefore, that the state-bank systems supply the deficiencies of the national system only in so far as they furnish independent banks of smaller capital than $50,000 ($25,000 since 1900).

Nor would it have been of material a.s.sistance had the organization of national banks of capitals smaller than $50,000 been allowed. As the system has worked out, the issue function has been a useless one. The compulsory deposit of bonds to secure circulation has hampered the banks in exercising this function, since the requirement to deposit bonds now cuts off all profit arising from the issue of notes. Moreover, the rural communities are those where interest is highest, and hence where notes can least advantageously be issued under the present system of bond-deposit, owing to the high price of the bonds. These difficulties probably cannot be overcome by the establishment of banks of lower capitals than now exist.

[144]At the 1910 convention of the Alabama Bankers' a.s.sociation, held in Birmingham in May, one of the speakers, whose topic was "State Banks and Their Branches," closed a condemnatory address with the words: "We believe the days of the branch bank are numbered." Two months later, at Cooperstown, Hon. E. B. Vreeland told the bankers of New York State, at their convention: "No one will ever live to see the day when the branch banking system which prevails in Canada and in Germany and in England and in France will be tolerated by the people of the United States."...

"The economies of the branch banking system are such that no other system can live beside it. It is just as sure as the sun will rise to-morrow that the branch banking system, if taken up in the United States, would in the end drive out of existence all the banks in every city and town in the country outside of the great financial centres.

That is the experience of the world."

If this statement means anything it is a confession that the system of local single-office banks is wasteful in operation, and it seems to me that it sets forth one reason why branch banks are inevitable. When a banking system is wasteful it is the stockholders, borrowers, and depositors who suffer from the circ.u.mstance, and as soon as they realize the fact its doom is sealed.

It should be said here that it is not their economical operation alone that has enabled the branch banks to displace the small local banks in England, Germany, and France. The branch inst.i.tutions are cleaner, more efficient, and they provide better opportunities for the clerks and officers; they give a better and more complete service to the localities in which they work.... Another reason is found in their stability during crises....

THE NEW YORK STATE BANK ACT OF 1914[145]

In June, 1913, George C. Van Tuyl, Jr., superintendent of banks of the State of New York, appointed a commission to look into the banking conditions of the State and to make a thorough revision of the law relating to banks. This commission conducted many public hearings; sought information from banking experts in this State and in other States; made a careful study of private banking conditions, rural credits, and other special banking problems of the State; and, finally, on February 25, 1914, they presented their report in the form of a bill of some 500 pages. After a good many amendments had been made to appease conflicting interests, the bill was pa.s.sed and became law April 16, 1914.

In general, the new law marks a decided improvement and shows a commendable spirit of progressiveness. Its framers believe that it is a law which may well become the model for other States, and there are some who say that it is without question the best balanced and most comprehensive state banking legislation which has ever been enacted.

The new law was the outgrowth of the general agitation for banking reform which had swept over this country following the panic of 1907.

The inciting cause, however, was the pa.s.sage of the Federal Reserve Act which made it necessary to revise the state law so that the state banks either might join the federal system or be in a position to compete successfully against the national banks of the State, whose powers had been considerably enlarged by this act. In part, the law is modelled after the federal act, and, in part, European experience has been drawn upon.

Under the new law the state banks will have even more importance in the compet.i.tion for banking business than in the past. From the point of view of banking power, the 278 banks of deposit and discount and trust companies have aggregate deposits in excess of those of the 479 national banks in the sum of $281,786,000.[146] Furthermore, it has been estimated that the total resources of the New York state banks are equivalent to 17 per cent. of the aggregate resources of all banks in the United States, both state and national. Superiority in banking power is one element in the strong compet.i.tive position of the state banks, and another element is the privileges granted to these banks under the new law which, in some respects, are superior to those granted the national banks under the federal law. In view of the fact that the state banks can enjoy either directly or indirectly most of the advantages of the federal system and also that in some particulars the state law gives them more liberal powers, it seems probable that these banks will continue to see an advantage in their state charters; and thus the amount of defection from the state system will be negligible.

More real power has been given to the banking department in the provisions of the law. Through investigation, authorization certificates, and regular uniform reports, the superintendent of banks has more direct control over the banks than ever before. Besides the extension of the supervisory powers, the penal provisions of the act have been strengthened and made more exacting.

1. _Features of the act relating to banks of deposit and discount and trust companies._ The reserves required against deposits were reduced substantially, and made nearly uniform with those required for national banks. The following table gives the percentage of reserve required and the percentage of reserve on hand which the new law specifies for these banks.

------------------------+---------------------+-------------------------- |Banks of deposit and | | discount | Trust companies |Per cent. of deposits| Per cent. of deposits ------------------------+----------+----------+----------+--------------- Population | Required | Reserve | Required | Reserve | reserve | on hand | reserve | on hand ------------------------+----------+----------+----------+--------------- 2,000,000 or over | 18 | 12 | 15 | 10 1,000,000-2,000,000 | 15 | 10 | 13 | 8 Elsewhere in the state | 12 | 4 | 10 | 4 or 3 ------------------------+----------+----------+----------+---------------

The reserve requirements are made still more definite by the fact that the law compels the banks to keep one-half at least of the reserve on hand in "gold, gold bullion, gold coin, United States gold certificates, or United States notes: and the remainder in any form of currency authorized by the law of the United States other than federal reserve notes."

Among the powers granted to these banks is the power "to accept for payment at a future date, drafts drawn upon its customers and to issue letters of credit authorizing the holders thereof to draw drafts upon it or its correspondents at sight or on time not exceeding one year." This clause gives a much wider power to the state banks in the important matter of acceptances than its counterpart in the Federal Reserve Act.

In the one case both domestic and foreign acceptances may be made and handled without stipulation as to aggregate amount and bearing maturities of one year or less, while in the other case the acceptances are limited to those arising out of the importation or exportation of goods with maturities not exceeding six months. Seemingly, the state banks have the advantage, and to this extent the state law is superior to the federal act.

One other important forward step was taken in relation to this group of banks. They are given the privilege of establishing branches outside the State of New York, either in the United States or in foreign countries. This privilege is qualified, however, by the provision that no bank can establish such branches unless it has a combined capital and surplus of $1,000,000 or over and the written approval of the superintendent of banks. Although the old law permitted trust companies to establish branches in the place where they were incorporated, the practical effect was to limit branch banking to the city of New York. In this particular also the state banks have the advantage over the banks in the federal reserve system which are allowed to establish branches only in foreign countries.

2. _Features relating to private banks and bankers._ The regulation of private banks and bankers is an entirely new departure in the law of this State. In the past the banking department had no authority to supervise that relatively large number of private bankers who receive deposits in small amounts from the wage-earning cla.s.ses while conducting in connection therewith a mercantile or some other kind of business.

Mercantile firms like the Siegel Company, by paying a higher rate of interest upon deposits than savings banks, were able to obtain the savings of many small depositors. This money was invested in the business and secured only by the capital stock of the mercantile establishments. In case the firm failed there was no security back of these deposits but these same shares of stock, and so depositors were fortunate if they received in settlement even 40 per cent. of their claims. Such firms were not doing a legitimate banking business inasmuch as they did not keep their a.s.sets in liquid form and carried no reserve against deposits.

The new act corrects this situation by giving the banking department authority to conduct independent investigations into any violation of the banking law by a corporation or individual. In the future a corporation which is in any way engaged in the business of banking cannot hide under the wing of the general corporation law when the banking department sees fit to make an investigation of its affairs.

Some of the specifications of this part of the law are all securities, property, and the evidences of t.i.tle thereto in which the permanent capital and the deposits are invested are to be segregated and kept separate from all other property and a.s.sets of the private banker; depositors have a prior lien on the a.s.sets of the private banker, in case of insolvency or suspension of business; and, in addition, every private banker must maintain a reserve of 15 per cent. against deposits in cities of the first cla.s.s and a reserve of 10 per cent. in any other city, one-tenth of which shall consist of reserve on hand and the remainder may be kept on deposit subject to call with banks approved by the superintendent of banks. These requirements will go far toward preventing the recurrence of such disasters as the Siegel failure.

3. _Features relating to co-operative credit._ Within the last thirty years the agricultural methods of the State, in harmony with the agricultural methods throughout the United States, have undergone great changes. Scientific farming, improved machinery, and changed market conditions have brought new problems in the field of agricultural credit. To-day agriculture has come to be in a real sense capitalistic and has in consequence laid new requirements on the credit structure of the nation. Moreover, the period of large returns or satisfactory returns from an extensive and rather careless cultivation of the soil, which made possible an ignoring of unit cost, or, at least, brought the farmer to minimize the importance of such cost, has given way, so far as the successful farmer is concerned, to the careful estimates of cost and close calculations of profits on a narrow margin between unit cost and unit selling price.

In the field of cost, the rate at which capital or money may be borrowed is no small factor; and with the high rates prevailing in the United States in comparison with those current in Europe, the borrower in this country who pledges his land or agricultural products as security for a loan finds himself at a disadvantage. To meet this condition cheaper agricultural credit has been strongly urged. Europe furnishes the example in her well-organized land banks and co-operative credit unions.

Already Ma.s.sachusetts has a law authorizing co-operative organizations for furnishing cheaper credit facilities to the agriculturalist, and in Illinois there is a "credit foncier" which has been in successful operation a number of years. New York State has put itself in line with this growing movement to furnish ample and cheaper credit to the farmer and the purchasers of real estate by putting into the new law provisions for the establishment of a land bank and co-operative credit unions.

Sections 421-438 authorize ten or more savings and loan a.s.sociations, the aggregate resources of which shall not be less than $5,000,000, to form a Land Bank of the State of New York. This bank can "issue, sell and redeem debenture bonds secured by bonds and first mortgages made to or held by member a.s.sociations" and "invest its capital and other funds in bonds secured by first mortgages on real estate situated within the territory in which its members are authorized to make loans." The bank is not permitted to do a general deposit business or incur any indebtedness upon notes and bonds in excess of twenty times the amount of its capital. The debenture bonds authorized by the act are to be issued in series of not less than $50,000, and may be called on any interest day at 102-1/2 provided a sixty-day notice is given.

Amortization payments upon mortgages which are given as collateral security for the debentures of the land bank shall be sufficient to liquidate the debt in a period not exceeding forty years.

In Article XI the law provides for the establishment of credit unions. A credit union may be organized by any seven or more persons with a share capital the par value of which shall not exceed $25. The objects of the credit union are: (1) to loan money in small amounts on personal security or in larger amounts on endorsed notes at rates not exceeding 1 per cent. per month, inclusive of all charges incident to the making of such loans; (2) to receive the savings of its members in payment of shares on deposit; (3) to borrow money to an amount not to exceed 40 per cent. of its capital; (4) to pay dividends on its share capital. As to the method of making loans, the law prescribes that a credit committee shall pa.s.s upon all applications for loans which must be made in writing and must state the purpose for which the loan is desired and the security offered. No loan will be made unless it receives the unanimous approval of the members of the committee present at the meeting, provided always a majority of the committee is present.

With the land bank acting as a central clearing agency for the local savings and loan a.s.sociations and the organization of many rural credit unions the problem of agricultural credit will be largely solved for New York State. This, however, all hinges on the proper functioning of the land bank and the co-operation of the farmers in the establishment of local credit unions. Agriculturists as a cla.s.s are slow to adopt new methods and it may be only after prolonged education that all the possibilities of this new legislation will be realized.

FOOTNOTES:

[140] Adapted from George E. Barnett, _State Banks and Trust Companies since the Pa.s.sage of the National Bank-Act_, Publications of the National Monetary Commission. Senate Doc.u.ment No. 659, 61st Congress, _Second Session_.

[141] [At least one savings bank has gained admittance to the Federal Reserve System as a "state" bank.]