23
THE CHICAGO BANKER
October 10, 1908]
instance, no loan exceeding one-tenth of the capital stock of the trust company can be made to any director or officer of the company, and no loan without the consent of a majority of the directors, as further explained. Also no loan shall exceed 10 per cent of the capital and surplus unless secured by collateral worth at least 15 per cent more than the amount of the loan, in which case it may be 25 per cent of the capital and surplus, but the total liability of any such individual, corporation, or firm, secured or unsecured, may not exceed 25 per cent of the capital and surplus. Furthermore, the trust company may not loan upon the “securities of one or more corporations, the payment of which is undertaken in whole or in part severally, but not jointly, by two or more parties’’ unless the borrowers “shall have paid on account of the purchase of such securities an amount—equal to at least 25 per cent—of the amounts for which they remain obligated in completing the purchases for such securities,” or if the trust company is liable directly or indirectly for the repayment of any part of the loan, or if the loan including any right of renewal exceed the period of one year. No loan shall be made, secured by the capital stock of another moneyed corporation, if by the making of such loan the total stock of such other moneyed corporation held by it as collateral shall exceed in the aggregate 10 per cent of the capital stock of such other moneyed corporation. Many restrictions are also placed around the conduct of the officers of trust companies intended to further safeguard the institutions. Where the matter concerns the depositing funds of the company in other institutions, or making discounts or loans for his or any other director’s personal benefit all such loans must have the approval of the majority of the directors, and a knowing-violation of such rule makes officers or directors liable under the penal code. In addition, all loans of over $1,000 must be reported to the directors or a committee of them at the next following meeting, and statements under oath of the officers of the institutions filed showing that the loans have been thus submitted.
In addition, at least once in every three months the superintendent designates a day on which a very full report is made to him concerning the affairs of the company and examinations are made by the banking department at least twice a year, investigating the conditions and resources of the company, its mode of conducting and managing its affairs, the action of its directors, the investment of its funds, the safety and prudence of its management, and the security afforded by those by whom its engagements are held, and such other matters as the superintendent may prescribe.
It is obvious that the laws with regard to trust companies in New York, where they do not deal with the amount of strength in capital, surplus, and reserves which they must maintain in order to be trusted to invite the deposits of the community, are directed to prevent abuses and to frustrate efforts on the part of those having control to use their resources for purposes not tending to strengthen the security of depositors, and further to restrain investment in ways clearly unwise. These laws, good and salutary and well thought out as they are, and in every way fit models for other communities intending to develop their trust company and banking legislation to follow, are, after all, of prime importance chiefly to the weaker brethren. Good banking cannot be created by law, bad banking may in many ways be thus prevented. When we study the laws of New York on this subject we are apt to have our attention drawn away from the real state of affairs as they exist in the conservative and well governed institutions of the city, which are the almost universal rule. These institutions have weathered every storm, and for many decades have protected and wisely managed the many estates and trusts in their hands and have been the safe repository of huge volumes of funds; on January 1, 1906, exceeding
deferred part payment, and paying in full on demand to such as did not consent.
Following on the heels of the panic in November, 1907, Governor Flughes appointed a committee for the purpose of recommending legislation and suggesting changes in the state banking laws. The committee consisted of six heads of representative institutions, national banks, state banks, trust companies and savings banks, and lost no time in the formation of a report, the main features of which have since been incorporated in the New York state banking laws by the state legislature.
In order to fully understand the present legislation with reference to trust companies in New York, it will be necessary briefly to trace the history of their corporate existence. They arose first by special charter and many companies now exist claiming special privileges then granted them, and not now generally given to trust companies by the banking law of the state, and their reports were variously forwarded, in some cases, to the controller of the state, and in others to the supreme court. By the law of 1874 they were first placed under the supervision of the superintendent of the banking department and required to make semiannual reports in writing in such form, and containing such information as to the affairs, business conditions and resources of the corporation as he might require. From that time until and including the present, the authority of the state banking superintendent has been great and increasing. In 1887 a law for the general incorporation of trust companies was passed, and in 1893 their powers were very fully enumerated and their restrictions increased. In April, 190b, the first statute with direct reference to a reserve was enacted calling for a reserve of at least 15 per cent of the aggregate deposits. The whole might and at least one-third must be kept in cash, one-third might consist of government bonds, state or officially authorized bonds, and the balance might be on deposit subject to call in a banking institution approved by the superintendent of banks.
The salient points in the law governing trust companies in New York City, as amended by the new legislation, are that capital must be at least $500,000 paid in in cash, and dividends to the full extent of the earnings cannot be paid until at least 20 per cent of the capital has been accumulated in surplus. Its capital must be invested in bonds and mortgages on unincumbered real property within the state not exceeding 60 per cent of the value thereof, or in the stocks and bonds of the state, or of the United States, or of any county, or incorporated city of the state, especially authorized, and of this capital 10 per cent, but not less than $100,000, must be registered in the name of the superintendent of banks and held by him in trust as security for the depositors and creditors of the institution. It must carry a reserve of 15 per cent entirely in cash against demand deposits, and in the case of trust funds and time certificates of deposit commencing 30 days before the date of maturity of the obligation. Each certificate of deposit must show the date of issue and the date of maturity. It may not hold stock in any private corporation to an amount in excess of 10 per cent of its own capital and surplus, nor in any moneyed corporation, the par value of which is in excess of 10 per cent of the total amount of the stock of such other moneyed corporation issued and outstanding. This restricted investment of capital is quite an important item and is often lost sight of in the consideration of the safeguards of a trust company as compared with a bank, which may use its capital in its regular business. There is also, as with banks, a stockholders’ liability for anv default in payment of a debt or obligation to an amount not exceeding the par value of the stock. An enumeration of authorizations to do business would be tedious and unnecessary as they are general and pretty well understood, but some of the restrictions embodied in the recent enactments are not so well understood. For
ber 19, 1907. In other words these trust companies paid out to their depositors during this period the enormous sum of $430,753,000, or 42 per cent of their total deposits.
Abnormal conditions thus created in the money market, it must not be lost sight of, were not peculiar to this country ■alone, for the last week in October London advanced its bank rate from 4^2 to 5J4 per cent and on Monday, November 4th advanced it again to 6 per cent and the following Thursday to 7 per cent, the highest record since 1873, at which figure it was maintained until January 2, 1908. The Imperial Bank of Berlin also advanced its rate by successive moves until it reached 7V2 per cent, its previous maximum having been 7 per cent, on December 15, 1906.
In spite of these phenomenal rates of interest at home, there was exported from Europe to the United States on November 30th nearly $100,000,000. A little late to do much good except to help in the restoration of confidence, the United States government increased its deposits in the national banks of the country, as follows :
August 3d, at New York, $27,798,600, in other cities, $128,058,598, and in the whole country, $155,857,415. These balances were gradually increased until November 16th, when they were $72,362,300, $154,388,598, and $226,750,898.
In order to demonstrate further the shock which was given to business by the financial, commercial and monetary panic of 1907, we have only to look at the record of the clearings for 1907 showing a reduction of $15,000,060,000 over the preceding year.
It must not be supposed, however, that such an extraordinary movement and strain passed without classification of the strong from the w׳-eak and without disclosing some conditions which prosperous times had protected from view. After the financial storm had passed the danger points were left bare to observation just as jagged rocks appear on the beach after an ocean storm has washed back the sand which had covered them. The deposits of trust companies had thus receded and in some cases had left bare methods and practices, perhaps not wholly reconcilable with good principles of banking or trust company business. These conditions did not rest alone with such trust companies as developed weakness, but were present also in some of the national and state banks.
These practices may be stated briefly as:
First. The controlling of a so-called “chain” of financial institutions by a single interest, or group of interests by means of reciprocal loans secured in each of the institutions involved. This could he carried on almost ad infinitum there being required merely a nominal margin to make the loan appear sound.
Secondly. The promotion or financing of speculative enterprises by financial institutions where the object was quick returns of hoped for profits and remunerative commissions for services rendered.
Thirdly. The promotion of new syndicates requiring large outlays of cash with possible further obligations for new and competitive enterprises having their earning capacity yet to be demonstrated and their success calculated on successes of previously similar enterprises leaving the failures of other similar enterprise out of the calculation. These syndicate operations differed essentially from those of the preceding era which, while new as a rule, were consolidations and extensions, with known earnings and ascertainable savings through reduced costs of united operation. At the present time, of the institutions which, suffered from these or any other causes, all have resumed without loss to any depositors, except in the case of two national banks. Only one trust company closed its doors to its depositors, and this company has since resumed business, strengthened by additional capital from its stockholders, and anticipating payments to such of its depositors as consented to