Resources

Liabilities

A good way to understand the nature of banking functions is to examine a bank statement and study the various items of assets and liabilities. Issuing a statement of condition is not left to the discretion of the bank; it is required by law. The national bank act provides that national banks shall publish their statements at least five times yearly, on the call of the Comptroller of the Currency. It may be said then, that banks issue their statements for two reasons; because their semi-public nature makes it legally necessary, and because it is useful as an advertisement. Few people, comparatively speaking, understand how to read a statement so that much of the value is lost both to the bank and to the public. Some banks are beginning to explain the meaning and force of the statement in their advertisements. More should do so.

For the purposes of illustration, the statement of a national bank may be said to be typical, since it includes more general items than the figures of a state or savings bank. All bank statements are similar, as will be seen by reference to the forms shown on page 22. There are two sides to a statement: the liabilities show what the bank owes, the resources what the bank owns, or rather what it has wherewith to pay its debts.

The creditors of the bank may be divided into three groups: (1) the stockholders, (2) the depositors, (3) the general public. The first group are inclined to examine the statement to determine if the bank is earning money, the second group satisfy themselves that the bank is safe, and the third group look to the government for protection since they have no voice in the management of the bank, nor any choice in accepting their relation to the bank. The resources may also be roughly divided into three kinds: (1) loans and investments having a fixed maturity, (2) amounts due from other banks usually payable on demand or subject to draft, (3) actual money or cash. There is also the bank building and with this item there is included the amount of money representing the vault, furniture and fixtures.

These various items all bear relation to each other, and the trained observer is able to base an intelligent opinion on the condition of the bank and the sagacity of its officers by a study of the proportion of one figure to another. A complete analysis, however, is not possible except by comparing a series of statements covering a long period. This enables one to tell if the bank is growing or doing a profitable business.

The first liability item of importance is the capital. This should be large enough to give strength to the bank and enable the institution to accommodate the needs of its customers. Many transactions are by law based on the amount of capital. For example, national banks can loan no more than 10% of the capital and surplus to one individual or interest, and no matter how large the surplus may be, no single loan larger than 30% of the capital can be made. Members of the Federal reserve system are required to subscribe 6% of their capital and surplus to the capital stock of the Federal Reserve Bank of their district. The total amount of mortgage loans is also restricted to a certain proportion of capital. Banks try to sell their stock as widely as possible because if it is held by a great number of people, more business is attracted to the bank and it is hard for anyone to get possession of the greater part of the stock and thus control the bank.

The surplus also belongs to the stockholders. This fund represents earnings that are set aside to give added strength. If "bad loans" are made, the loss may be charged to the surplus fund, thus securing the depositors. National banks are required to set aside 10% of net earnings as a surplus fund until such fund shall amount to 20% of the capital before a dividend may be declared.

Deposits are of several kinds. The term "individual deposits" is, by custom, applied to deposits that are subject to check, that is, payable on the order of the depositor this order being written on an instrument called a "check." Savings, or time, deposits are also due to individuals, but not subject to check, that is, the bank may require notice of withdrawal to be given. Certificates of deposits are written acknowledgments made by the bank that a deposit has been made and the bank will pay the amount named upon presentation of the certificate properly receipted on the back, or endorsed. Certificates of deposit may be payable either at sight or on a given date, and are known as demand or time certificates respectively. Deposits made by one bank in another are sometimes called bank deposits, but such accounts are officially reported as "due to banks." There are no restrictions as to the amount of deposits a bank may receive nor need they be limited by the amount of capital stock. It has been set down as a good banking principle, however, that the capital and surplus of a commercial bank should approximate 10% of the total deposits. This, however, is a statement of opinion, rather than of fact.

Certified checks and cashiers' checks are used when the holder or the maker of a check wishes to exchange his credit, which may have only a local value, with the credit of the bank, which has a general value. That is, the account of the depositor is charged the amount of the check, which then becomes a liability upon the bank, payable when properly endorsed. Note that the deposit obligation has not been discharged so far as the bank is concerned until the check is paid, hence in calculating reserve, certified checks and cashiers' checks are included as a part of the deposits. Except that they are payable to a named payee, they are practically the same as bank notes which are payable to bearer - they are obligations of the bank due the general public.

The circulation item, meaning the notes of the bank for use as money, is to be found only in the statement of the national bank, and in course of time all bank note issue will be the exclusive function of the Federal reserve banks.