Most trust companies conduct a general banking business, the operation of which has little to distinguish it from that of the commercial bank. Their savings departments, too, are conducted in substantially the same way as the regular stock savings banks. In many of the states the laws define the kinds of banking activities in which trust companies may engage, and they generally require that the banking department and the trust department shall be kept separate. In Massachusetts, where there are no state commercial banks, most of the trust companies transact a strictly banking business, while in Illinois trust companies are forbidden to carry on a banking business. The California bank act of 1909 divides banks into commercial banks, savings banks and trust companies, and provides that any bank may carry on any or all of these three classes of business, but each kind of business must be kept separate and distinct.
Because of the wide scope of their powers trust companies, besides doing a regular banking business, carry on various financial activities, some of which are denied to commercial banks. Thus they loan money on both real estate and personal property, and deal in stocks, bonds, bills of exchange, mortgages and real estate. Not only can they loan upon a wider range of securities, but they are less restricted in other ways. They are usually not limited to any fixed proportion of their capital in making loans to a single borrower, and in some states they are not required to keep a legal cash reserve against deposits. Trust companies pay interest on deposits, thus paying in full for the use of the depositor's money and being free to lend to whoever offers the best security and the highest rate. The commercial bank must take care of its regular customers first and must divide its loanable funds equitably among all requiring discounts; this limits it to short-term paper and comparatively small loans. The trust company can make long-time loans on collateral or real estate and in large amounts. Trust companies, of course, cannot issue circulating notes as do the national banks, and in some states they cannot discount commercial paper. They buy it, however, which practically amounts to the same thing. Generally, trust companies are not admitted directly to the privileges of the clearing house, but in many cities they clear their local checks through some other bank which is a member of the clearing house association. In many parts of the country, however, there is slight difference between the business done by the commercial bank and that done by the banking department of the trust company. Both operate commercial and savings departments in much the same way and their loans and investments are substantially similar in character.
The operations of trust companies and national banks will be even less sharply distinguished under the Federal reserve system. The Federal Reserve Board has the power to grant by special permit to national banks "the right to act as trustee, executor, administrator, or registrar of stocks and bonds under such rules and regulations as the said Board may prescribe." Trust companies have steadily encroached upon the field of commercial banks; now national banks may compete for trust company business. Trust companies may become members of the Federal reserve system by conforming to the reserve and capital requirements and by submitting to the examination and regulations prescribed by the Federal Reserve Board.
The great variety of financial activities and services in which the trust company may engage owing to the liberality of its charter opens up many sources of profit which are closed to the bank. It has most of the sources of profit available to both the savings bank and the commercial bank, and many others besides. Charges for services vary with the laws of the different states, or, in the absence of specific regulation, with competition between different companies. The fees charged by trust companies acting as executor, administrator, or receiver are subject to the scrutiny of the courts. In former years some trust companies earned enormous profits through underwriting, stock investments and other financial activities. Trust companies have multiplied even more rapidly than banks, partly because they have not been subject to such rigid supervision as have national banks especially, but more largely, perhaps, because of the wide latitude allowed in the conduct of their business enables them to meet new financial needs as they arise. As Herrick remarks, "The trust company as an institution is still in the formative period," and it is too early to predict the exact form into which it will finally crystallize.
Herrick: Trust Companies.
Kirkbride and Sterrett: The Modern Trust Company.