19
THE CHICAGO BANKER
July 18, iço8\
draft. Many states hold the official or employee permitting overdrafts personally liable therefor. Bad loans are frequently assumed in the settlement of an overdraft. Again it is frequently the case that when a customer has borrowed the full limit, he then is allowed to overdraw to keep the note case from showing an excess. The law in California which makes it a felony for one to give a check and have no money to meet it, is good, but it does not prevent overdrafts. It should go farther and lay a penalty on the official permitting overdrafts. California bankers can stop doing a lot of things they are now doing if they have to.
Whenever the customer begins to dictate to the banker how his business shall be run, it is time for the banker to engage in another line of work, for if he does not watch out his position will be keeping books in some penitentiary, for public sentiment is getting so aroused that whenever a bank fails somebody is going to jail whether guilty or not. Section 562 relating to the receiving of deposits when insolvent can be used to the confinement of the banker in nearly all cases of closed banks. Only recently a financial journal stated that there were twenty-one in the bankers' colony in the federal penitentiary, at Leavenworth, Kansas.
The character and business record of managing officers should be carefully investigated, both in the chartering of new institutions and in the examinations of old. It is a great thing to be a banker and with the bankers stand, ride in big touring cars, live in oriental pomp and splendor off the depositors’ money, then when the exposure comes of the rottenness of the institution, commit suicide and let relatives and depositors bear the disgrace and loss, or compromise with justice and get a short sentence.
Section 19 of the banking code, provides that every bank “must have at all times actually paid-in capital equal to at least ten per centum of the total amount owing to depositors and creditors,” and wisely requires a minimum capital of $25,000. The national bank act was amended a few years ago to permit the organization of national banks with a similar minimum, but many states permit a smaller minimum. Section 322 of the banking code provides that “each stockholder is individually and personally liable for such proportion of all its debts and liabilities contracted during the time he was a stockholder as the amount of stock owned by him bears to the whole of the subscribed capital.” California is the only state I know of having this provision.
The two provisions are excellent, but should there not be some investigation made of the financial worth of those who are the stockholders? If a bank fails and it is found the stockholder has no tangible property, where is the intended protection to the depositor?
Reports to the commission should be published in a newspaper, and the present form which is of such wording as to be seldom understood should be made so plain that an ordinary being can understand the import. The reports made by national banks to the comptroller require many items in detail not furnished to the commission of this state, which by the way, is more elaborate than that of many states. These details should be incorporated in the published report.
You say it will create distrust to disclose these details? Xot if they are legitimate transactions. Has not the depositor the right to know how much the directors have borrowed individually and how secured? It is the depositor’s money and has he not the right to know? The tendency in the past has been too much to ignore the depositor. Has he not the right to know who overdraws or who is (Continued on page 25)
bare story, but I wonder if there is not a deal of truth in the advice which has been given, and if the solution of the problem of safety in management does not lie in the direction of directors.
Who is the director.׳׳ He is the man in the community who has amassed a competency, or who has at least a reputation for wealth, and who is interested in the various enterprises of the town.
Two or three years ago large financial corporations in the East advertised their strong list of directors, setting forth in detail their varied interests. But an insurance investigation or two, a few bank failures, and our eyes were opened as to the position of the director, too frequently he was a director who did direct —everything his own way.
If the directors can be made to direct a bank, and the banking department to direct the director, we might soon approach the ideal.
Ex-Comptroller Ridgely has been quoted as saving—that if the directors would honestly co-operate with the bank examiners, that it would make the failure of a bank practically, if not absolutely impossible ; and further, that no national bank has ever failed whose officers have observed the laws governing them. The law is called too strict by many, but its observance has never caused a bank failure.
We hardly see how the plan of deposit insurance will lay the burden of directing upon the directors any more than at present, unless some penalty is attached to their failure to direct. A law holding directors personally responsible in case of a loss of which they might have had knowledge had they been true to their duties, might have a good effect, and as a matter of justice it looks as if directors should be held responsible when they have been selected by the shareholders to represent then! in the management. If it were required that directors should accept their election and same be made a matter of record, and they would be held personally responsible for the bank, then will they direct and we will not need insurance of deposits.
If directors had not been found a necessity the fashion of electing them would have passed long ago, but they have been found a necessity in all properly managed corporations, and vitally necessary to the proper conduct of a conservative bank.
If directors were held personally responsible to the extent of their individual fortunes for losses to depositors, it might be hazardous for a man to become a director and to fail to attend the meetings of the board, and keep himself posted as to the affairs of the bank.
Directors should make at least a semiannual examination of all the affairs of a bank. If unable to do so themselves, under the modern system of public accountants they could have an examination made at a small expense. A banker at the head of a banking department could easily devise a set of uniform blanks suitable for the use of directors in their examinations, the blanks to be similar to those in use by regular examiners. A copy of this report should be transmitted to the banking department, and would mean three examinations yearly.
The small country bank should have at least a regular monthly meeting; the larger city banks perhaps weekly, with even a more frequent meeting of a finance committee to pass on loans and other important matters.
The director should be paid a fee for attendance, if his services are not worth the payment of a small fee, he is of no value to thé board, and a change should be made.
Should not overdrafts be prohibited absolutely? The man or firm wdiose note is not good* enough to go into your note case is not good enough to be allowed to overdraw, and if he is good enough to be allowed to overdraw, then insist on a note instead of an over-
would preside, and at this meeting go over the result of the examination with them.
His position would be that a sort of advisory official, to build up, not to destroy, but to be effective the examiner would have to be a practical banker and not a politician.
The state of Kansas has recently made a complete change in its method of examining state banks. The territory has been so divided as to give each examiner, of which there are eight, from seventy-two to one hundred twenty-one banks per year to be examined, and the present commissioner has expressed himself as being in favor of changing the territory of examiners each year, so that no examiner would twice in succession be in charge of the same district.
To carry out this plan would necessitate dividing a state up into small districts, so as to give each examiner such a number of banks that the time required under this plan would average about the same. It would take time to work out the details. It might be deemed wise to make the visit semiannual instead of annual, especially so if some bank w;as weak, or if it had overstepped the law.
It would cost the banks more money than under the present system, but would you not, bankers of California, willingly pay more than you do now if you could get something to show for it? Would it not be worth more? The present svstero has not prevented bank failures, and it is impossible to estimate the loss of business through loss of confidence. Deposit insurance will cost a deal more, and deposit insurance is an ax now hanging over our heads.
What does the examiner know about your loans, after he has listed them, picked out the names of the big borrowers, and asked you a few questions? If he be given several days or a week, and an opportunity to meet the directors, he will have a more certain knowledge. What would you, Mr. Banker, located in the Southern part of California know about the loans of a bank in Shasta or Mendocino County in a visit of a day? Absolutely nothing. Then what can you expect of a politician who is not a banker?
It would be a good plan to change territories annually, as suggested by the commissioner of Kansas, to give the banks the benefit of the experience of other examiners.
An objection to this would be that different men have different ideas, and it would be hard for the banker to adjust himself once each year to new ideas. On the other hand, the head of the department should so organize his force of examiners that they would all w׳ork on similar lines. Occasionally they could be called together for comparison of notes and interchange of ideas, and advice.
Many an examiner having found rottenness in management, has reported it to the head of the department, who in turn has written the managing official the requirements of the department, and the work has been for nothing, for many managing officials do not show the bad reports to the directors, and then when failure comes the directors exclaim “we did not know.”
The head of the department should transmit a copy of the result of an examination to each director, and require an acknowledgement of its receipt, and I have sometimes wondered if it was required that a copy be posted publicly in the banking house convenient to all, if it would not have the effect of making officers more careful in management. Publicity often acts as a brake, when information withheld encourages laxness. It is too often the case that the result of examinations is known only between the managing officer and the department.
For }׳׳ears past we have had countless advice passed up to us about "directors who do not direct,” until it has become an old thread-