Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-08-15
HIGH SURETY RATES
HIT BONDING FIRMS
Companies Oppose Required
Increases for Fear of Loss
of Business.
BY RoLLIN NJ. CLARK.

Rate increases Just announced fer
public depository bonds guaranteeing
the safety of public funds deposited in
banks are meeting opposition, strangely
enough, from some of the bonding ccm-
panies. The reason is that the new
rates are likely to discourage bank off,
Gals from seeking this protection, caus-
ing the sureties to lose many q desirable
risk
When the results Of last years bust
ness became known, it was inevitable
that rates would have to go up. Losses
ON depository bonds in 1880 were more
than double the premium income, due
chiefly to the unusually large number Of
bank failures.
The new-rates are based on the
banks capital and surplus, disregarding
undivided profits The smaller the
hank the greater is the premium charge.
For example. on public depository bonds
for banks whose combined capital and
surplus is less than $50 900 the rate is
81 per $1,000. For the largest banks,
those with a capital and surplus exceed
ing 100000, the rate is IS.
Failures Fix Scale.
The fact that most bank failures
occur among the smaller institutions
accounts for the sliding scale which has
been used in promulgating the new
rates. Now that the small banks will
be forced to pay 2 per cent of their
public deposits as premium charge on
their bonds. it is obvious that they are
not going to make much profit out of
this business unless they reduce the rate
OF interest paid on the deposited funds
The Towner Rating Bureau, sponsor
OF the new rate schedule, is of the opin-
ion that there should be a fair division
OF the earning power OF a public de-
post between the surety and the public
treasury, which, after all, is the real
insured. In the past. the bureau states,
the division Of earnings has been un-
balanced, with the public treasury get
ting by far the major share.
The new Tennessee statute, to be-
come effective September /, is cited as
equitable to all parties. It provides that
the rate Of interest on deposited State
funds shall be IL per cent below the
current rediScount rate Of the Federal
Reserve Bank in that district. less half
OF the premium paid by the bank on the
public depository bond. If a deposit of
State funds is to be made in Nashville
which is in the Sixth Federal Reserve
District, where the discount rate Is now
8 per cent, the interest return would be
e per cent. In addition the bank would
be entitled to deduct half of the bond
premium, which would range from /
per cent to " Of l per cent, depending
on the size Of the bank, so that the net
interest received by the State would be
from Il Of to Ia per cent.
States Limit Rate.
In some States minimum interest
rate On public moneys is prescribed
Nebraska requires the payment of at
least per cent. but under a recent law
public treaSurers are permitted to nav
as much as per cent service charge on
their deposits. The attorney general of
the State has just ruled that service
charge may be paid without violating
the depository law. II this is upheld. il
means that Nebraska banks can use the
service charge for at least a part of
tneir bond premiums
In some sections OF the country small
banks viii probably forego accepting
pubic deposits by refusing to furnish
| ponds at the new rates If the officials
are then unable to find repositories
for public funds, the sureties on their
ofhcial bends will be forced to assume
without extra charge the added LIABILITY
OF possible loss Of this money.
tCopyright. 1eSl)