Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-04-20
chain banking when not permitted

chain banking when not permitted
directly.
only eight of the chains listed by
the Reserve Board, with a total Of 40
units, existed in States allowing State
wide branch banking. The most ex-
tensive developments were reported for
agricultural States, such as Minnesota,
North Dakota, Iowa, Kansas and Ne
braska. Assuming that chain Of
banks was properly administered, from
the point of view of the community,
many Of the desirable results of branch
banking could be achieved. Much
could be accomplished by way Of lower
ing banking costs, transferring funds to
communities in need Of them, diversity
ing the risk, strengthening local units
and adopting sound investment policies.
In fact, in many sections depositors
would rather patronize a unit OF o
strong chain than an independent in
Stitution.
Friction in Distribution Noted.
There are limitations to the ability Of
a chain to prove a good substitute for
a branch system. There Is necessarily
some friction in the transference of
funds between the different units and
a very definite legal limitation on the
amount, which is not present In q
branch system. From public point OF
view very real dangers exist In the sur
reptitiouS character Of the organization
and in the difficulty of enforcing ade-
quate supervision, especially over those
chains that include both national and
State banks and that extend beyond
State boundaries. The corrective to
this evil lies not In more prohibitory
legislation, but in the liberalization Of
the branch banking provisions OF the
law, so that the economic forces bring
ing about the establishment Of such
credit systems may operate in q safe
fashion.
II economic forces are so strongly
working in this one direction 1t must
be because of the inherent economic
superiority of a branch system over a
unit independent type Of banking
system. The contributions Of the one
type, as compared with the other, to
the economic development Of a country
are impossible to measure quantitattvely
They may be set forth by contrasting
the nationwide branch banking system
of Canada with the unit Independent
type Of the United States. This COM
parison Is valid one by reason OF the
similarity in the economic life, re-
sources and people Of the two countries.
There are many tests Of the superb
Gritty or soundness of banking system
The first that may be applied Is that
Of safety. In this the American bank
ing system falls lamentably short. From
1921 through 1929 there have been
$500 bank failures in the United States
with total deposit liabilities of IL bill
lions of dollars, involving about 7,300,-
600 depositors. It Is the agricultural
Federal Reserve districts that have been
most affected by this epidemic. In
some Of the farming States half OF the
banks failed; in certain counties not
single bank survived.
Record without Parallel.
This IS a record of which no other
country could-or would-boaSt. There
seems to be no cessation in the tragedy.
In 1929 500 banks failed, with deposits
Of $256, 100000, a record which sur
passes that of the panic of 1907, when
the Federal Reserve act which was to
give staying power to the banking sys-
was as yet unborn in the minds Of the
legislators. The explanation OF this
failure record Is largely economic and
Is to be found in the agricultural de-
preston, the lack of diversification In
the portfolios Of the small banks and
in the revolution occurring In methods
of transportation and communication
in the rural sections. Local communities
are closer to the larger centers and
more ancillary to the business OF the
larger cities, making 1t increasingly
difficult for the country bank to secure
diversified portfolio.
The failed banks have been the
smaller institutionS-71 per cent pos
sessed a capital of less than $4,000,
and 90 per cent of the failures have
taken place In towns with less than
10000 population. In those States
particularly affected by bank failures
the average resources Of the failed bank
to $675, 200. In other words, the small
bank is about twice as likely to fail as
the institution of average size. Not q
single bank with a capital Of more than
$4,000, 900 has failed through this period.
Banking Costs Become Prohibitive.
While there are many well managed
small banks-and 1t takes a superior
type of banker to manage such an
institution-the majority are operated
at costs which soon become prohibitive.
If this does not result in receiverShip
the lack of opportunities for dtversifica-
ton may. To bring about some diversifi-
cation In their portfolios and to secure a
greater measure Of liquidity banks in
the West that have survived the period
Of storm and stress" have been obliged
to send a larger proportion Of their
assets to the New York money market
The unit system is largely responsible
for the concentration of funds in the
money market, to an extent unknown
in those countries with a branch type
Of banking system.
When the bank failure .ecord is COM
Continual 90 Fourth Page)