Publicity is an important safeguard against unsound banking, and it also assists banks in obtaining the confidence of the public. So important to a bank is it that the people generally should believe in its soundness and stability that it is probable that self-interest would lead them to publish their accounts or in some other way keep the community informed regarding the nature of their business. In most States, however, it has been found best to enforce publicity in one form or another, the most common method being to require the publication of banks' accounts. In the United States national banks are required annually to make to the Comptroller of the Currency at least five reports of their resources and liabilities. The dates for these are not specified in advance, the Comptroller being permitted to call for them whenever he sees fit. When submitted they must be published in a newspaper in the place where the banking association is established. In Germany banks of issue are required to make weekly reports which are published in the periodicals. The Bank of France is compelled by law to furnish to the government every six months a full statement of its operations, and a balance-sheet of the bank is published in the official journal every Friday. The accounts of the Bank of England are also regularly published in the financial journals of the kingdom.
In addition to the requirement that bank accounts must from time to time be submitted to public inspection, some provision for supervision and examination by public officials is common. The Comptroller of the Currency in the United States is authorized, and indeed directed by law, to inspect the national banks at frequent intervals. He has full authority to call for all books and securities, and to make as full and complete an examination as he desires. In the great State banks of Europe provisions for special inspection are rendered unnecessary by the appointment of public officials to the immediate control of these institutions. The governor and two sub-governors of the Bank of France are appointed by the ministry. The Imperial Bank of Germany is under the direct control of a board of curators composed of the Chancellor of the Empire, who is president, and four other members, one named by the Emperor and the other three by the federal council. This body meets every three months and examines reports regarding the bank's condition and the operations which are being carried on. The immediate administration of the Imperial Bank is confided to a board of directors appointed directly by the imperial government from a list nominated by the federal council. The Bank of England in form is a purely private institution, its directors being appointed by the stockholders, but on account of its intimate connection with the English government it is practically under the direct supervision of government officials.
The efficiency of the practice of publishing accounts as a safeguard against unsound banking depends largely upon the ability of the public to interpret these statements when they appear. It is desirable, therefore, that we should examine a typical bank account and note the manner in which the chief operations of banking are revealed in its items. The following has not been copied from any report, but contains the essential items, and may be regarded as typical: -
Bonds and stocks
The most important items in this account have already been explained. By capital is meant the funds originally contributed by the stockholders, and it stands here under the head of liabilities because the officers of the bank are responsible to them for its use and must distribute the dividends on the basis of it. It should be noted, however, that capital stock is not payable on demand, and is thus a very different sort of liability from deposits and notes. By surplus, often called reserve, is meant the profits which have been earned, but which are not distributed in the form of dividends, but left with the bank in order to strengthen its resources. The accumulation of a surplus amounts to an increase of the bank's capital. The undivided profits are the profits not yet completely earned, but which will be available for distribution to the stockholders when the outstanding loans have matured. The deposits, as was explained in a previous chapter, are the sum total of the credit accounts on the books of the bank in favour of its customers, some of which have originated in loans and others in the deposit of actual cash. Turning now to the resources, we note that the item loans is represented in the bank's safes and portfolios by the notes of business men and corporations, falling due, some perhaps in thirty, some in sixty, and some in ninety days, and by the bills of exchange it has purchased. The terms bonds and stocks and real estate are self-explanatory, the latter being represented chiefly by the building and grounds occupied by the bank. Under the head other assets are included the various items of miscellaneous property which in one way and another have come into the possession of the bank, possibly through the foreclosure of mortgages or other means not necessarily involved in the prosecution of the bank's peculiar business. The cash reserve is the cash on hand available for the payment of depositors and the meeting of other cash obligations.
As variations of this typical account it should be noted that banks of issue add to the items falling under the head Liabilities that of notes or issues; that instead of the term loans we often meet the term discounts; and that under the general head Deposits may be distinguished current accounts and time deposits, and sometimes deposits of other banks and private deposits. The Bank of England uses the term rest instead of surplus.
The relation between these various items may best be revealed by considering the effects upon this account of the most important daily operations of the bank. Suppose that new loans to the extent of $3000 are made, which are to mature on the average in sixty days and to bear interest at six per cent. Three items of the account must then be changed. The loans will be increased to $268,750, the deposits to $266,970 ($264,000 + $2970, which is $3000 - $30, the discount for sixty days), and the undivided profits to $2780. It should be noted that the cash reserve now bears a smaller proportion to the demand liabilities than before.
Suppose next that depositors draw upon their accounts to the extent of $10,000, receiving their pay in cash. The item deposits will then stand at $256,970 and the reserve at $78,000. This again reduces the proportion of the reserve to demand liabilities. If these depositors had accepted bank-notes instead of cash, the result would have been different. The reserve would have remained as before; the deposits would have been diminished to the extent of $10,000, and a new item of $10,000, namely notes, constituting also a demand liability, would have been introduced on the side of liabilities. In this case, the proportion between reserve and demand liabilities remains unchanged.
Let us suppose next that loans to the extent of $10,000 fall due and are paid in cash. The item loans will then stand at $258,750, having been reduced to the extent of $10,000, and the cash reserve will have been increased to the same extent. The payment of these loans might equally well have been accomplished by a corresponding diminution of the item deposits. If the persons whose notes have fallen due are also depositors, they may hand to the cashier of the bank their checks for the amount. It is noteworthy that in either case the proportion of the reserve to demand liabilities is increased.
A fourth supposition will enable us to appreciate the effect of investments in long-time securities. When the accounts of the bank were in the condition represented by the statement on p. 178, suppose that $50,000 had been invested in bonds and stocks. The cash reserve would have been reduced to $38,000, thus enormously diminishing its proportion to the demand liabilities, and in no respect increasing the bank's ability to command cash on short notice, except through the hazardous plan of throwing its bonds and stocks upon the market for sale. Such a procedure would be almost certain to excite the suspicion that the bank is not in a sound condition and might precipitate a run and eventually a failure. Moreover, a bank would have no motive for investment in such securities if it were reasonably certain that it must sell them in a short time to replenish its reserve. It would much prefer to invest in securities having a higher rate of interest and capable of automatically replenishing the reserve by maturing at short intervals.
It thus becomes evident that many of the essential features of the banking business are revealed in such simple statements of aggregated items as have been described. The proportion of the capital and the cash reserve to the other liabilities, the extent of the bank's ability to meet cash demands made upon it and the aggregate of such liabilities, the amount of the total resources invested in mercantile securities as distinguished from stocks, bonds, etc., the extent of liabilities to other banks as well as of the claims upon them, ought all to become clear upon the examination of such an account. Adequate provision for supervision and examination by public officials ought to guarantee the correctness of the accounts, and make bank officials careful regarding the character and soundness of the men whose paper they discount.