Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-02-08
Banking Expert Calls Atten-
ton to "Frozen Asset" of
Business World.
TOO MANY INSTITUTIONS
MENACE, HE BELIEVES
Cites Other Causes for Numerous
Failures During Last
Year.
BY JOHN F. SINCLAIR.


Special Dispatch to The Star.
NEW YORK, February THE 1926
banks which closed their doors in 1880
tied up 5000, 100000 in deposits. 1t was
a record bank-closing year. Since 1920
there have been 6,4O0 banks closed
which have tied up deposits of over
/ $4,000 ,000O 900.
why do banks fail?" I asked George
H. Salmon of Pomeroy g. Salmon of
New York City, a man who has given
the past five years of his life to an
exhaustive study of the problem. Mr..
Salmon has visited banks and bankers
in Europe, Canada, and in IS Amer
lean States for the purpose Of finding
the answer.
Causes of Failures.
why do banks fail?" replied Mr..
Salmon, principally for four reasons:
Too many banks; Impractical and
dangerous capital structures; 3-ExceS-
sive real estate holdings, and invest
mentS in exCrava2ant banking build
| ingsi 4-Frozen assets. Nei.IIer 0ils-
| honesty nor mIsmanagemenG have
| pIayeo Large parC III GIlcSe Ianures.
| Let's dig mo the tnlng a little, "
| continued tIIls rev York BANKER. "rnefe
| ale 1900 American communities, with
an average population OIL less than 1000
people, tIIat nave two banks eacn. There
| are 24,I66 banks IN the UnlGeu STATES
| and OF these 9,Oz0 panKS nave deposits
or U,00U 70 $EUU,0uU each. There are
$685. BANKS WIN uepoSlCs OF $2UU,UOO 10
! SI,UU0,UUU each. 1Aere are AID DanKS
Wn4cn nave from $I,0U0,Uu0 10 $J,UJU,-
| OU0 In deposits. Anu Only !, 46U panKS
J N the UmCeo States wan uepoSlJS "a
$o,UUU,0UJ ana over. 1nnK o. tna.!
| .DuL let's 60 1urCher. EIglICy banks
| have CAPITA Ga DuL SJ,0UU each; 1910
nave capital or ouC $IU,UUU eacn; 1910
OF them a capILai Ga Slo,OUU eacn; ], Z4I
a capital OF pLU,0UO eacn, ana D, loo a
| CapaUaI OF $&J,UUU eacn. NOW listen!
| 1IIeIe are lY,oUU BANKS in the OnICeQ
StaCeS out o. Inc CoCaI Oh 2q,166, WITH
less IMAM $lU0,UUU capItaI.'
WHAT apouC oanK surplus?" asked
Importance Of Surplus.
There are 1924 banks which have
less rnan $5,O0v surplus ana unuiymed
ptofltS eaen, sa1u Mr. SaImon. Anu
5,204 banks have between $4,000 ana
SIU,U0U eacn, 1902 panKS between $IU,-
UUU and $zC,U0U each, Wnlle 1882 banks
nave $20,UUU to $J0,U0U each. So there
you have two reasons for bank failures
too many BANKS and dangerous capl-
tai structures"
| 4IAC afCAa BC OdA4h 1OOAo PIOopCIOuS.
Nearly all possess tine banking bulld-
ings," / commented.
loo fine, in many cases." said Mr.
| Salmon. THOUSANDS OF BANKS have in
vested large sums of money in build
| ingS suitapIe solely for banking quar-
tels. Sucn buildings frequently absorb
the major portion or the banks capital.
And what is 1t? Nothing but dead
| investment! Such buildings are entirely
l 1fsa tNIn for fEnV.
| banking quarters. In case Oh llquida-
| ton, the physical building itself be-
| comes not an asset, but a liability
Many banks, too, have erected sky
scraper office buildings which often are
operated at loss. us a mistake.
The fourth big reason-and the one
most frequently mentioned in connec-
ton with failures throughout the coun-
! try--is frozen assets" continued Mr..
! Salmon. " Frozen assets are those as
| sets possessed by the banks which can
not be sold, hquidated or rediscounted
| When the depoSitorS want their money,
banks cannot turn these frozen assets
into cash fast enough to give the de-
| poSitorS their money. Then the sign
on the bank door, Closed by order of
the superintendent of banks"
Frozen Assets"
But the Federal Reserve system was
organized as a protective measure
against frozen assets was it not?"
said.
People do not seem to understand
| that only about 40 per cent of the
| banks are members OF the Federal Re-
serve system. Only those banks that
| are members can avail themselves of
rediscounting facilities. And even those
banks can only redlScount with the
4 E1adarol RaSprVp cllrh c ic r.
| ceptable. This constitutes a minor por-
ton of the banks portfolio, leaving a
large percentage Of the member banks
paper outside the fold"
what portion of the average men,
Der banks assets Is eligible for redis-
count at the Federal Reserve Bank?"
Not over 80 per cent, in my opinion"
replied Mr.. Salmon. But let's go fur
Their. About so per cent of the banks
| in the entire country have to rely on
rediscounting facilities outside of the
Federal Reserved So they must deal
with their correspondent banks. want
to show you the extraordinary fallacy
of the present situation. Banks are
permitted to loan money on real estate
mortgages and notes secured by real
estate collateral. They may also own
real estate bonds and bank and office
buildings. Now such securities are not
LIQUID. Federal Reserve banks will not
rediscount such securities. Neither will
correspondent banks. The one excep-
ton is farm loans. These may be
financed through the Federal Land
Bank.
But all other real estate, direct or
indirect obligations, real estate bonds
and real estate holdings constitute
frozen assets-dead stock in trade.
They may be good and sound, but still
they are N'frozen assets and they con-
4 stitute q very large per cent OF the
:. average banks portfolio"
Need for Liquid Assets.
But why. can't they be rediscounted
and made liquid?" asked.
why? Because no vehicle has been
provided in which any bank may, in
case of necessity, borrow at least por-
ton of the amount so invested in such
securities. They may be excellent. high
grade. legal securities. But they cannot
be liulidated or converted into cash.
Now this Is an inexcusable, intolera-
bile situation. It must be remedied. II
the law permits banks to loan de-
positors' money on real estate security
there should be provided medium to
convert such loans into immediate cash
in case Of necessity. If medium does
! not exist, and cannot be made TO exist,
then the banks must be prohibited from
CCohttTtued' on Third Rasea s..