From time to time it is advanced in the public press and elsewhere that the banks should pay a higher rate on their deposits than three per cent, especially in view of the fact that they are getting six and seven per cent for their money. Tho nearly the whole of a bank's gross revenue is derived from interest on its loans, the net profit is necessarily governed by the difference between the deposit and loaning rates which, in Canada as in all other countries, bear a fixed ratio to each other, firmly established by both theory and experience. Any attempt to deviate from this fundamental rule of correlation, either by raising the deposit rate, or unduly lowering the loaning rate, can lead to but one end, as many banks have found to their cost. The average difference between the deposit and loaning rate of Canadian banks is three per cent, and any increase in the former must be accompanied by a corresponding increase in the latter.
That this is no arbitrary ruling can be conclusively proved by examining the profit-and-loss statement of any bank on a basis of giving a fair return to the shareholder for his investment, it being first conceded that every business should pay interest upon the capital actually invested in it at a rate determined by the risk or responsibility incurred in the business. This is a practice that no business man will question, and there is no reason why the banking business should be excepted from its application.
No man is willing to invest his money in an active business which involves responsibility and the meeting of keen competition, unless he thinks there is the probability of more than an ordinary return in interest. Banking business is certainly not free from such competition, risks and responsibilities, and unless a bank can make a reasonable profit upon its proprietors* investment, the shareholders might as well put the bank into liquidation and invest their capital where it will be free from risks of this nature. In making such an apportionment from banking profits for capital invested, six per cent should be considered a very reasonable rate to accord to shareholders for the use of their money, and after deducting that amount from the net profits of the bank the remainder represents the compensation for banking services and the like. The application of this principle to the annual profit and loss sheets of ten banks given on page 117 demonstrates very graphically how impossible it would be for any of these banks to pay a higher rate than three per cent on their deposits without increasing their loaning rate accordingly.
Column 4 in the table on page 117 shows the amount of profit remaining after deducting six per cent on the capital and reserve of the different banks. A comparison of these figures with those given in the second column will show that only one bank, the fourth, would have sufficient profit left to increase the rate on its interest deposits one per cent; the remaining banks would show a serious deficit. That bank No. 4 could increase its deposit rate to four per cent is due to several reasons, all more or less temporary. In the first place, the net profits for 1912 happen to be unusually large; secondly, the ratio of capital to total deposits is small (column No. 1) ; and, lastly, the interest-bearing deposits are only slightly over 50 per cent of the total assets (column No. 2). Similarly, only two of these banks could afford to increase their rate on deposits to 3/4 per cent, but would have practically nothing left for even ordinary appropriations for reserve, depreciation and the like.