13
THE CHICAGO BANKER
September !8, 1909]
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James B. Forman on “The Efficacy and the Limitations of Bank Supervision by Examination and the Responsible Source of Bank Management”

The honored head of Chicago’s First National reads a paper before

b.	When it shall be dissolved and its franchises declared forfeited, or
c.	When a creditor obtains a judgment against it which remains unsatisfied thirty days, or
d.	When he shall be satisfied of its insolvency, or
e.	When its legal reserve is short and it fails to make it good within thirty days, or
f. When’its capital is impaired and it fails to pay it up after three months’ notice.
5. To appoint examiners who shall examine into all the affairs of the bank, examine officers and agents and make their reports to him.
The act gives him inquisitorial power as to amount of assets, but only inferentially as to character of assets. He is required to “examine into all the affairs of the bank" and is given discretionary power to decide when an impairment of capital takes place and to take summary action thereon. In order to do so he must, of course, investigate and pass upon the value of the assets. It is not generally speaking his function to exercise his judgment as to current credits so long as they are within legal limits as to amount. The exercise of such judgment would neither be desirable nor practicable. That responsibility rests on the bank’s officers and directors. The comptroller seems to be unnecessarily hampered by legal restriction in determining when losses have occurred. Under the terms of the act no obligation due a bank can be considered bad until interest is past due six months, and not then if it is secured or in process of collection. Such a narrow definition of a bad debt can only embarrass him and his examiners in arriving at a correct conclusion as to the impairment of a bank’s capital. Under his power to appoint a receiver he is given the power to decide when a bank is insolvent. He is again hampered here by the federal courts’ definition of insolvency, which is “inability to pay current debts as they mature,” and he could be enjoined in the district court for any abusive exercise of his discretion.
/ the American Bankers which will \
/ / become a text-book upon safe \
/	and sane banking	\
Second. By the clearing house committee in the interest of associated banks.
Third. By the directors in the interest of their stockholders and depositors.
As state supervision is modeled after that of the national government and serves the same purpose, we may confine our consideration of government supervision to that authorized by the national bank act and conducted by the comptroller of the currency.
The authority of the comptroller of the currency is of course statutory, which places limi-tions on his jurisdiction and restricts it to such powers as are conferred upon him by the national bank act. The powers thus conferred upon him, briefly stated, are as follows:
In connection with bank organization he is empowered
1.	To require a copy of the articles of association.
2.	To approve each bank’s name and its organization certificate.
3.	To authorize banks to begin business.
4.	To certify payment of stock.
5.	To compel oaths of directors.
And during bank operation
1.	To approve or disapprove increase or decrease of capital stock.
2.	To require reports from banks and to fine them for refusal.
3.	To designate or approve additional reserve cities and additional central reserve cities.
4.	To appoint a receiver
a. When a bank has refused to redeem its circulating notes, or
Bankers and their customers alike are deeply interested in this subject. For some years past this interest has manifested itself in a growing demand that bank supervision should be as thorough and bank examinations as efficient as it is possible to make them. In response to this demand there has been a steady development of method and a widening of scope in government examinations—both national and state; the clearing house associations of some of our large cities have organized examination bureaus; and private audits by chartered accountants have become of much more general and more frequent use. These developments have greatly enhanced the efficacy of bank supervision and improved the efficiency of bank examinations.
So marked have been these developments and improvements that there seems now some danger that the limitations of bank supervision by examination will be overlooked and that too much reliance will be placed in the efficacy of external supervision. The public must not be deluded into the belief that official examinations will relieve them of the fundamental duty of exercising their own discrimination in the selection of a bank. The entire credit system on which the business of the country is built up having its very basis in the exercise of such discrimination, any delusion which proposes to relieve the public of it would, morally and economically, be most injurious, tending to carelessness and general demoralization in business affairs as well as to a lowering of the standard of business sagacity and social efficiency.
There is a growing tendency on the part of the public to blame government or other authorities charged with the supervision of banks by examinations for failures when they occur. This tendency of public opinion I regard as unfortunate, untenable, and unjust. In considering these questions let me call your attention to three kinds of bank supervision:
First. By the government in the interest of the public.