7. Authority Of The President To Lend

The method of lending above described, applies to a bank in the city or the country in which the loans are made by the directors. In these days this method is too slow for many business men, and they wish to know at once whether they can be accommodated or not. They can not wait two of three days for a board to act on their applications. Consequently, the modern bank president of a city bank is clothed with the great power of lending the bank's money. Here and there a president is unwilling to assume so much responsibility, and there are daily meetings of the directors to act with him. There are not, however, many banks which thus act; in most of them the manager, who is the president, vice president, or other officer, assumes this grave responsibility. He does not in truth always lend on his own judgment; sometimes he consults with other officers, or with some of the directors, or with the board at a formal meeting. But many of them lend money without the assistance of the board. An applicant is told as soon as he applies whether the bank will lend him or not. When an applicant is told that his application will be referred to the board, this is another way of telling him it probably will not be granted. Many an applicant understands perfectly the significance of the answer, and will say, "I can not wait, I must apply somewhere else," withdraws, and the negotiation is ended.

Although a city-bank president is clothed with power to lend his bank's money, board meetings are held at least twice a week at which all, of his doings are faithfully reported and ratified. Suppose, however, a loan should be reported by him to which some members of the board objected, could it be annulled? No ordinary loan could be, for the reason that the president is acting within the scope of his authority, and therefore his conduct is binding on the bank, and it must submit. This is one of the risks taken when authorizing him to lend the bank's money. He may make a most unwise loan, which the directors would gladly recall, but they are powerless.

If, however, the president should go beyond the scope of his power, the case would be different. Thus a national bank has no right to lend a man more than one tenth of its capital on his own notes. If the president should violate this plain command, the directors could refuse to ratify the loan because the borrower is supposed to know as well as the president that such an act is a violation of the law. The borrower could not plead ignorance as an excuse. In truth, the directors could not ratify such a loan without making themselves also responsible. It would be manifestly an illegal act. Their true course would be to declare the loan void, and if the money had been paid, to bring an action to recover the amount.

8. Requiring Statements From Borrowers

Another radical departure in the mode of lending money is coming into vogue: the requiring of borrowers to make statements of their business before granting their application. The older and more common way in the United States is to lend on the strength of the names presented and the knowledge of their business, wealth, etc., possessed by the directors supplemented perhaps by other inquiries made by the president. It is true that for a longtime it has been a frequent practice for a bank after making a loan to make inquiries into the borrower's condition and prospects. This has sometimes been done through a bank, lawyer, or other agent; living in the same city as the borrower. Every bank that has been many years in business has a long row of books filled with replies to letters of inquiry relating to their borrowers. In most of these cases the inquiries have been undertaken alter the loans were made; perhaps the bank has heard some unfavorable report concerning a borrower which has given rise to inquiry. In other cases it is the regular practice of a bank to make careful inquiries through various sources concerning every borrower whose history is not fully known.

Are not such inquiries, though, rather late in the day? Suppose a bank finds that a borrower is unworthy of credit, what can it do? The money has been lent, it can not be demanded until the loan has expired, unless the borrower has made a false representation which was the basis of the loan. As this can can rarely be shown, a hank can do nothing. It is the old story of locking the stable door after the mischief has been done. What a bank ought to do is, not to part with its money until it is fully assured of the ability and worthiness of the applicant.

From the evil consequences of making unwise loans the practice is rapidly growing of requiring borrowers to make a full statement of their affairs; and some banks go a step further and require applicants to make oath to their statement; and then if the unwelcome fact appears that they intentionally made a wrong or false statement, they can be arrested criminally, and an action can be begun at once to recover the money.

Is this requirement unreasonable? It has long been required by banks in other countries, especially by banks in England. A borrower wishes a bank to put its funds for a time completely beyond its reach; surely he ought not to expect that this will be done unless assured that the money will be forthcoming at the time promised. Ought the bank to be satisfied with his promise that he will do so? We all know what a wide and impassable gulf there often is between intention and performance. The applicant may be perfectly honest and have the best intention, but a true disclosure ,of his affairs would at once lead the bank to decline his application. Does it deal harshly with him in insisting on such a statement as an indispensable preliminary to lending him anything? It should be put in possession of the fullest knowledge before deciding; and it is eminently proper that an applicant should tell the lender all about his affairs before receiving assistance. Then, if he afterward fails, he has a very different feeling from what he would have had he concealed important information.

Again, a bank is a kind of partner with a borrower; it henceforth has a real interest in his business, because the return of his loan depends on his success. Surely a man who seeks the alliance or aid of another ought to make known all the details of the business to him before inviting or drawing him into partnership. Ordinary honesty requires this. Should not the same course be followed in dealing with a bank? An English banker has written some wise words on this point that are worth adding: "The solid man of business," says Mr. Rae, "who from pride or prejudice hesitates to disclose the position of his business affairs to the confidential ears of his bankers, damnifies himself in two ways: on the one hand, he lessens the full measure of credit which he might obtain from them should he ever desire to borrow; on the other, he fails to furnish them with data whereon to speak of his position, with knowledge and decision, in reply to inquiries from without. A man lays bare the secrets of his constitution with candor to his physician, lest in the absence of an exact knowledge of the case inapt remedies might be applied. For a like reason, a man should be equally frank with his banker."1

In the Appendix will be found the forms of statement, a short and a long one, that are used by one of the banks in New York City. Some banks are now fully convinced of the wisdom of this method of lending their resources, and that the saving thereby, effected fully justifies the expense. 2