This section is from the "Practical Banking" book, by Albert S. Bolles.
In many, but not all of the States, officers are appointed for the purpose of supervising and regulating Savings and other banks and their affairs. In New York State* no Savings bank can be organized hereafter without the assent of the Superintendent of the Banking Department, and there seems to be no appeal from his decision. During the existence of the Savings bank it is subject to his inspection by means of examinations and reports, as follows:—
A semi-annual report, as already described under the duties of the secretary.
A special report on any subject and at any time required by him.
An examination by himself or by deputies once in two years.
A special examination whenever, in his judgment, it shall be necessary.
The expenses of special examinations are borne by the corporation examined. Those of the regular examinations and other expenses of the department are borne by the corporations in proportion to their size, and, finally, the remedies in the hands of the Superintendent in case of improper action are, first, the publicity effected through his report to the Legislature, and, second, his power to make complaint through the Attorney-General in case of violation of law, or improper exercise of corporate powers; and the remedies which may be applied by the court upon this proceeding are: Removal of the board of trustees or any of their number; appointment of receiver and dissolution of the corporation, or the consolidating of the institution with a similar one which may be willing to accept the transfer. . . . The Superintendent has recently been given supervision over the receivers of failed Savings banks, who are now required to report to him, and he has been made the custodian of any unclaimed balances which the receiver may have on hand infavor of depositors at the termination of his receivership. Thus, during the existence of a Savings bank the Superintendent has no positive governing power over its acts, but is the head of a bureau of information. He himself has no power to remove trustees, or to annul any of their acts, but the moral power given by his authority for compelling information is probably beneficial.
* All institutions of the kind within the State are made subject to its control, and a penalty is imposed for any person receiving or offering to receive Savings deposits in any town where there is an organized Savings bank.
The problem of State supervision is a very difficult one. A supervising department like the one under consideration usually becomes, after a time, a mere bookkeeping department, and if the reports of the several institutions check off correctly on his summaries, as found by the clerks in his department, the Superintendent goes no further, but devotes his time to the more congenial and dignified pursuits of practical politics. This is without any evil consequences in peaceful times, when there is no financial embarrassment, and everything goes swimmingly, but usually the same let-alone policy is continued from the force of inertia, into a period when the times begin to grow shaky, and generally the superintendent awakes to find that his rose-colored reports, for some time past, have been delusive. Then there will be a reaction from King Log to King Stork, and the state of the most prudently managed institutions will be looked upon with suspicion, and very likely some unnecessary wrecks will be the consequence. This was the case in the period of financial reaction, which followed our Civil War and reconstruction period, and presumably its history will repeat itself.
There is one very important lack in the system of reports as now carried on. There is nothing corresponding to a profit and loss account. There is nothing to show, analytically, whether the dividend which has been paid to depositors has been earned during the period covered, or whether it is subtracted from the previous reserve; whether it is strictly from the income, or whether incidental gains have been relied upon to help it out. Such an account should be required from every Savings institution, and should be most carefully scrutinized. In doing so there is a very important element which may readily prove deceptive. It is the question of premiums on stock investments. Let us suppose that the normal rate of interest on money is about four per cent., and that it does not vary much from that figure on fair security, and let us suppose that a municipality has issued its bonds, bearing ten per cunt, interest, and payable in twenty years. Let us again suppose that another municipality has issued its bonds, bearing five per cent, interest, and payable in ten years, that another one has issued three-per-cent. bonds, payable in fifteen years. We are assuming that the security in all these cases is as good as anything human can be. In case of the ten-per-cent. bond running twenty years, it is evident that there is an extra interest of about six per cent., which is to be collected every year above the market rate. Therefore, the longer this thing continues the more valuable is the bond, and we shall indisputably find that it bears a proportionate premium. The value is not expressed by the par $ 100. It is the present worth of $100 due twenty years from now + the present worth of $10 due one year from now, + the present worth of $10 due two years, + the same at three years, + etc., and in order to be perfectly accurate these present worths must be computed at compound interest, and this computation must be semi-annual or annual, according to the terms of the bond. The five-per-cent. bond would not be worth so much, both because there is a smaller excess of interest over the market rate, and because this excess continues to run for a shorter time. The three-per-cent. bond would be worth still less. In this case there is a deficiency of interest which the buyer should be compensated for now, and the longer it has to run at three per cent, the worse off is the purchaser; therefore, this bond would be worth less than par. Now, it has been claimed that the true measure of the surplus of a Savings bank, as far as its stock investments are concerned, is the nominal or par value of those investments. That is to say, a bank having seven-per-cent. bonds to a certain amount is no better off than one having 3 65100 per-cent bonds. A bank whose seven-per-cent. bonds mature next year is no stronger than one where the seven per-cent bonds have twenty-five years to run.