Reasons Why National Banks Would Dare to Become Members of a Regional Bank System
Title
Reasons Why National Banks Would Dare to Become Members of a Regional Bank System
Creator
Strong, Benjamin, 1872-1928
Identifier
WWP18849
Date
No date
Source
Benjamin Strong Jr. Papers, New York Federal Reserve Bank
Language
English
Text
Reasons why National Banks would not care to become membersof a regional bank system.
Page 2, Line 25. Districts may be readjusted in a manner that might materially affect the business interests of country bankers along the borders.
Page 3, Lines 17 - 23. Bankers cannot determine before agreeing to join the system whether it is going to be a success or a failure; what the capital of their regional bank is to be, or the capital of other regional banks or the assets of any of them; as they will be required to render their decision within sixty days of the enactment of the bill.Bankers must also give assent before knowing what district they are to be in, which might mean a serious matter in many cases.
Page 4, Lines 11-17. The liability of stockholders in National banks is to be increased from a double liability on the whole stock, to a triple liability on 6%, plus a further triple liability on such percentage of the stock as is represented by the proportion between the surplus and capital.Stock of a regional bank owned by a National bank cannot be sold, and, bearing a double liability, it might represent a real burden.If a National bank did not approve of the management of the regional bank, or such regional bank did not work out successfully, the National bank would have no means of disposing of its stock without relinguishing its charter.
Page 4, Lines 18 - 22. Outside of a central reserve city, a National bank cannot determine whether it is gloing to be able to retain, even for a time and while the regional system is being developed and its usefulness tested, its present banking relations with its reserve agent or not.
Page 5, Lines 14 - 20. Additional liabilities are placed upon directors of National banks that are unfair and that they should not be asked to assume.
Page 7, Lines 15 - 18. A voting trust is possible of organization that might outvote member banks in any regional bank.
Page 12, Lines 8 - 15. The reserve deposits of National banks would apparently have to be used to make loans to banks of questionable standing, which might result in disaster, as long as such banks kept within the law.The credit standing of member institutions who might borrow from the regional bank would seem to be secondary to that of the right to borrow.
Page 13, Lines 7 - 14. National banks in the central reserve and reserve cities would not have any power of electing any director of the regional bank in which they were obliged to take stock and place reserves made up of the money of their depositors.Under the group doivision of election outlined, only the small banks would have the power of election. For instance, on an average basis of eight regional banks, including as members all of the 7,488 National banks mentioned in the report of the Comptroller for 1913, we find that each group, for voting purposes, would comprise 312 member banks. In these groups, under the system outlined, banks having a capital of from $250,000. up would be placed in conjunction with banks having a capital of $100,000. to $250,000. in the ratio of 85 to 227. In the next group, banks with a capital of from $50,000. to $100,000. would have 284 votes out of 312. In the last group, banks having a capital of $25,000. would have 254 votes out of a total of 312. Figuring this in connection with the amount of stock that each institution would have to buy and the deposits that would have to be placed with regional banks, it shows that considerably over half of the entire capital stock in amount and of deposits would only have a voice in electing one director, and that a minority voice.
Page 18, Lines 9 - 15. The capital of a regional bank would be subject to reduction, and its standing in connection with the business of the country might be seriously curtailed, and member banks would have no power to prevent it or to leave the system and retain their charters if they desired to.
Page 19, Sec. 7. The insurance of deposits feature would unquestionably result in the establishment of banks by irresponsible parties, to compete with our present banks upon a false basis. The money to pay the depositors of such dishonest competitors would be earned from the use of the deposits of member banks in the regional bank.
Page 24, Sec. 10. The terms of office of the members of the Federal Reserve Board are such that political control would be possible, which might endanger the entire system.
Page 28, Par (b). National banks would not wish to be compelled to put the money of their depositors, or to take stock, in any bank whose assets could be used at will by some third party to make loans to another regional bank.
Page 29, Lines 18 - 23. Banks in the reserve and central reserve cities are discriminated against in the amount of reserves that they are obliged to maintain, even though the reserves that they are at present carrying are to be taken away from them, which is the only reason that they are today obliged to maintain higher reserves than country banks.
Page 29, Lines 24 - 25. "30, "1 - 2. Officers of a regional bank might fear to exercise their full judgment in refusing dangerous loans, as politicians whom they refused might appeal over the heads of the directors of the bank to the Federal Board. This would of necessity weaken the safety and standing of a regional bank in which National banks might have to maintain deposits.
Page 34, Lines 21 - 22. Member banks might borrow of a regional bank to any number of times their capital if they could put up paper, which might result in limiting the ability of those who might not take out loans early in any particular season to obtain them; and, under this provision, it would be impossible for the directors of a regional bank to figure out any way of living up to the provision demanding, in effect, that they treat all banks alike.
Page 35, Lines 9 - 17. Regional banks are put into direct competition with National banks in the open market.
Page 35, Lines 18 - 25. A regional system of banks would not result in protecting the gold supply, under any system outlined in this section of the bill or any other. It is apparently implied that the regional banks will protect our gold supply, but its futility to do so is apparently recognized by those who created the bill, as they have made no attempt to give any powers of regulation to the Federal Board in this matter, probably knowing that they would not work.
Page 37, Sec. 15. The Secretary of the Treasury is empowerd to transfer Government funds in a way that would make it possible for him to force the suspension of any regional bank. The only possible way that the directors of a regional bank coulld protect themselves from the action of the Secretary of the Treasury, would be to let Government deposits lie in their vaults unusued The fact that the ordinary Secretary of the Treasury might not have used this privilege would be all the more dangerous in case some Secretary did so, for it would lead regional banks to invest the Government funds.This is only one of many powers given to the Secretary of the Treasury that altogether would make him a dictator in the financial affairs of this country, and would make him the most powerful individual in the world in money matters.
Page 37, Sec. 16. The government guarantee of notes is recognized by bankers as being unsound and unsafe, and they would prefer not to be a party in authorizing such a system by becoming members of a regional bank.
Page 44, Lines 7 - 13. The domestic exchange operations outlinesd are such that items might be in transit before presentation many days, and, if payment were refused, member banks might meet with unnecessary loss.
Page 48, Lines 3 - 25 "49, "1 - 21. This is an exact statement of the differences in reserve to be required between central reserve cities, reserve cities, and country banks, and is unfair if the two former classes are to be shorn of their powers as reserve cities.
Page 56, Sec. 25. Such banks as might be inetterested because of the authority given to open foreign branches could not make use of such authority, because of the division of capital required.In general,- If a National banker decided to have his institution become a member in a regional bank, he would in effect be turning over a portion of his deposits to be managed and controlled by those not interested in his bank, and who might exercise such control in a manner entirely foreign to his ideas of safe and conservative banking, and, further, be subjecting such deposits to the arbitrary opinions of another separate body of men with whom he might not have the slightest acquaintance, and who could, in effect, loan such funds to another set of bankers in distant parts of the country. A banker in joining the system, therefore, would be deliberately releasing the power of control over a certain percentage of his depositors’ money, which had been placed with him for safekeeping, largely because such depositors had confidence in his particular integrity and ability to guard their money safely. Has a banker any right to so dispose of responsibility entrusted to his care?Under our present system a banker can select his own reserve agent from many others, picking out the one where the interests of himself and his depositors would seem to be best served. As business continues, should he consider that he had made a mistake and finds the facilities offered or the security afforded were not satisfactory, he could change to some other reserve agent. He is free at all times to use his judgment to protect his customers. In addition to this, he can withdraw all funds with his reserve agent and place them in his own vaults. How different will be his position if he joins the regional system, and is obliged to tie up money in stock that he cannot sell, and is then obliged to put his reserve deposits in a bank from which they cannot be drawn, and under the control of men whose judgment may materially differ from his, and where he has absolutely no power of discretion.
Page 2, Line 25. Districts may be readjusted in a manner that might materially affect the business interests of country bankers along the borders.
Page 3, Lines 17 - 23. Bankers cannot determine before agreeing to join the system whether it is going to be a success or a failure; what the capital of their regional bank is to be, or the capital of other regional banks or the assets of any of them; as they will be required to render their decision within sixty days of the enactment of the bill.Bankers must also give assent before knowing what district they are to be in, which might mean a serious matter in many cases.
Page 4, Lines 11-17. The liability of stockholders in National banks is to be increased from a double liability on the whole stock, to a triple liability on 6%, plus a further triple liability on such percentage of the stock as is represented by the proportion between the surplus and capital.Stock of a regional bank owned by a National bank cannot be sold, and, bearing a double liability, it might represent a real burden.If a National bank did not approve of the management of the regional bank, or such regional bank did not work out successfully, the National bank would have no means of disposing of its stock without relinguishing its charter.
Page 4, Lines 18 - 22. Outside of a central reserve city, a National bank cannot determine whether it is gloing to be able to retain, even for a time and while the regional system is being developed and its usefulness tested, its present banking relations with its reserve agent or not.
Page 5, Lines 14 - 20. Additional liabilities are placed upon directors of National banks that are unfair and that they should not be asked to assume.
Page 7, Lines 15 - 18. A voting trust is possible of organization that might outvote member banks in any regional bank.
Page 12, Lines 8 - 15. The reserve deposits of National banks would apparently have to be used to make loans to banks of questionable standing, which might result in disaster, as long as such banks kept within the law.The credit standing of member institutions who might borrow from the regional bank would seem to be secondary to that of the right to borrow.
Page 13, Lines 7 - 14. National banks in the central reserve and reserve cities would not have any power of electing any director of the regional bank in which they were obliged to take stock and place reserves made up of the money of their depositors.Under the group doivision of election outlined, only the small banks would have the power of election. For instance, on an average basis of eight regional banks, including as members all of the 7,488 National banks mentioned in the report of the Comptroller for 1913, we find that each group, for voting purposes, would comprise 312 member banks. In these groups, under the system outlined, banks having a capital of from $250,000. up would be placed in conjunction with banks having a capital of $100,000. to $250,000. in the ratio of 85 to 227. In the next group, banks with a capital of from $50,000. to $100,000. would have 284 votes out of 312. In the last group, banks having a capital of $25,000. would have 254 votes out of a total of 312. Figuring this in connection with the amount of stock that each institution would have to buy and the deposits that would have to be placed with regional banks, it shows that considerably over half of the entire capital stock in amount and of deposits would only have a voice in electing one director, and that a minority voice.
Page 18, Lines 9 - 15. The capital of a regional bank would be subject to reduction, and its standing in connection with the business of the country might be seriously curtailed, and member banks would have no power to prevent it or to leave the system and retain their charters if they desired to.
Page 19, Sec. 7. The insurance of deposits feature would unquestionably result in the establishment of banks by irresponsible parties, to compete with our present banks upon a false basis. The money to pay the depositors of such dishonest competitors would be earned from the use of the deposits of member banks in the regional bank.
Page 24, Sec. 10. The terms of office of the members of the Federal Reserve Board are such that political control would be possible, which might endanger the entire system.
Page 28, Par (b). National banks would not wish to be compelled to put the money of their depositors, or to take stock, in any bank whose assets could be used at will by some third party to make loans to another regional bank.
Page 29, Lines 18 - 23. Banks in the reserve and central reserve cities are discriminated against in the amount of reserves that they are obliged to maintain, even though the reserves that they are at present carrying are to be taken away from them, which is the only reason that they are today obliged to maintain higher reserves than country banks.
Page 29, Lines 24 - 25. "30, "1 - 2. Officers of a regional bank might fear to exercise their full judgment in refusing dangerous loans, as politicians whom they refused might appeal over the heads of the directors of the bank to the Federal Board. This would of necessity weaken the safety and standing of a regional bank in which National banks might have to maintain deposits.
Page 34, Lines 21 - 22. Member banks might borrow of a regional bank to any number of times their capital if they could put up paper, which might result in limiting the ability of those who might not take out loans early in any particular season to obtain them; and, under this provision, it would be impossible for the directors of a regional bank to figure out any way of living up to the provision demanding, in effect, that they treat all banks alike.
Page 35, Lines 9 - 17. Regional banks are put into direct competition with National banks in the open market.
Page 35, Lines 18 - 25. A regional system of banks would not result in protecting the gold supply, under any system outlined in this section of the bill or any other. It is apparently implied that the regional banks will protect our gold supply, but its futility to do so is apparently recognized by those who created the bill, as they have made no attempt to give any powers of regulation to the Federal Board in this matter, probably knowing that they would not work.
Page 37, Sec. 15. The Secretary of the Treasury is empowerd to transfer Government funds in a way that would make it possible for him to force the suspension of any regional bank. The only possible way that the directors of a regional bank coulld protect themselves from the action of the Secretary of the Treasury, would be to let Government deposits lie in their vaults unusued The fact that the ordinary Secretary of the Treasury might not have used this privilege would be all the more dangerous in case some Secretary did so, for it would lead regional banks to invest the Government funds.This is only one of many powers given to the Secretary of the Treasury that altogether would make him a dictator in the financial affairs of this country, and would make him the most powerful individual in the world in money matters.
Page 37, Sec. 16. The government guarantee of notes is recognized by bankers as being unsound and unsafe, and they would prefer not to be a party in authorizing such a system by becoming members of a regional bank.
Page 44, Lines 7 - 13. The domestic exchange operations outlinesd are such that items might be in transit before presentation many days, and, if payment were refused, member banks might meet with unnecessary loss.
Page 48, Lines 3 - 25 "49, "1 - 21. This is an exact statement of the differences in reserve to be required between central reserve cities, reserve cities, and country banks, and is unfair if the two former classes are to be shorn of their powers as reserve cities.
Page 56, Sec. 25. Such banks as might be inetterested because of the authority given to open foreign branches could not make use of such authority, because of the division of capital required.In general,- If a National banker decided to have his institution become a member in a regional bank, he would in effect be turning over a portion of his deposits to be managed and controlled by those not interested in his bank, and who might exercise such control in a manner entirely foreign to his ideas of safe and conservative banking, and, further, be subjecting such deposits to the arbitrary opinions of another separate body of men with whom he might not have the slightest acquaintance, and who could, in effect, loan such funds to another set of bankers in distant parts of the country. A banker in joining the system, therefore, would be deliberately releasing the power of control over a certain percentage of his depositors’ money, which had been placed with him for safekeeping, largely because such depositors had confidence in his particular integrity and ability to guard their money safely. Has a banker any right to so dispose of responsibility entrusted to his care?Under our present system a banker can select his own reserve agent from many others, picking out the one where the interests of himself and his depositors would seem to be best served. As business continues, should he consider that he had made a mistake and finds the facilities offered or the security afforded were not satisfactory, he could change to some other reserve agent. He is free at all times to use his judgment to protect his customers. In addition to this, he can withdraw all funds with his reserve agent and place them in his own vaults. How different will be his position if he joins the regional system, and is obliged to tie up money in stock that he cannot sell, and is then obliged to put his reserve deposits in a bank from which they cannot be drawn, and under the control of men whose judgment may materially differ from his, and where he has absolutely no power of discretion.
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Strong, Benjamin, 1872-1928
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Citation
Strong, Benjamin, 1872-1928, “Reasons Why National Banks Would Dare to Become Members of a Regional Bank System,” No date, WWP18849, Benjamin Strong Jr. Papers, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.