The present Bank Act,1 which came into force on July 1, 1913, consists of one hundred and sixty sections or clauses. Its leading features may be briefly summarized as follows:
Interpretation and application
Incorporation of new banks
Purchase of the assets of a bank......
Insolvency and winding up, etc
Offences and penalties
Internal regulations as regards directors, shares, annual statements, audits, etc....................
Returns to government
Business and powers of a bank.......
It will be noted that the first five divisions deal with special conditions, such as the establishment of new banks, amalgamations, etc., and are only of occasional application. The last four, however, deal with matters of everyday banking and call for careful study. The last division, "Business and powers of a bank," wherein are defined the business relations of banks with the public, is therefore of particular interest to branch officers. The other three headings deal with matters more or less pertaining to, or under the direct control of the head office.
Two very important additions were made in the present act, namely: the sections providing for a shareholders' audit, and the creation of central gold reserves in connection with the issue of extra circulation when required. Authority was given to loan money to farmers on the security of threshed grain, and a number of minor changes were made, mostly of a routine or explanatory character, such as the opening up of registry offices in the different provinces, the printing of Section 125 on stock books, documents and the like, and the establishment of several new headings in the monthly and annual statements. The central gold reserves will be dealt with in the chapter on note issues.
A provision for the external supervision of banks is an entirely new feature of the Bank Act. No objection was advanced by any one as to the desirability or usefulness of the external audit itself, but the problem was how to effect an audit without evoking the aid of too cumbersome or too burdensome a mechanism and how to avoid placing too great a burden of responsibility on those assuming the work, without first ascertaining how far the physical limitations of any such examination, due to the branch system, would affect the value of its conclusions. Three forms of external supervision were given consideration, namely: examination by the Dominion government, by the Canadian Bankers' Association, and by competent accountants.
The idea of government supervision was advocated by those who were admirers of the system of national bank examinations obtaining in the United States. It is obvious, however, that even if these examinations were effective in the United States (which is very much open to question), the plan itself would not be feasible in Canada on account of the branch system. Furthermore, there is no doubt that the government inspection of a bank is taken by the public, in a way, as a guarantee of solvency. In the United States such a belief is of only local effect whereas in Canada it would be national in its influence, would practically put all banks on the same footing in the public eye, and would work a palpable injustice to those banks which have, by years of sound banking, established themselves firmly in the confidence of the public.
With such supervision, therefore, would go a great deal of responsibility for a bank failure, and this responsibility the government was naturally reluctant to assume. Another objection to government supervision would be the fact that the appointments of examiners would run the risk of being occasionally based on political expediency rather than on expert knowledge and fitness for the positions. The Canadian government was well advised in not allowing itself to be burdened with a new and unknown responsibility.
The Canadian Bankers' Association was also averse to assuming the responsibility of inspection, as such action would be considered tantamount to a guarantee by the associated banks of the solvency of the individual banks. Furthermore, no matter how impartially such a supervision was exercised by the Association, it would always be open to misconstruction, and any bank whose affairs called for criticism, would not be likely to neglect an opportunity of appealing to the public sympathy with a cry of persecution.
The system finally adopted promises to overcome the above objections and to be a satisfactory solution of the question. The act provides for the appointment of auditors by the shareholders of each bank from a panel of forty or more, selected by the general managers of all the banks, and approved by the Minister of Finance. These auditors check the cash and verify the securities of the head office and such branches as they may deem necessary to visit, and report to the shareholders annually upon the affairs of the bank.
Abstract of the Bank knowledge of the Bank Act is most necessary in the study of both the theory and the practice of Canadian banking, and in a volume of this nature a brief synopsis of the act will be found useful. The full text of the act should be consulted, of course, when the exact wording is desired.
The Act may be cited as the bank act. The intention of the Act in its use of certain words and expressions is clearly defined.