Montana labor news., 1932-07-21
PAD BANK ASSETS BY BILLIONS TO HIDE
WEAKNESS OF TRUE CONDITION

AMHERST, MASS-F. P)-The effort t. prevent the financial state
ments of banks from revealing the true seriousness of the current stua-
ton has been furthered by a ruling of the Comptroller of the Currency
governing the call for the condition of banks as of the close of business
on June 80 The results of this call the first this year, are nw being
compiled by banking authorities.
Security holding of reporting member banks of the Federal Reserve
System are reported as being s3,237OOO,OOO. The basis for this valuation
is not the prevailing market value but a newly-comed pharse, intrinsic
value" For bond issues with a B rating Or better-that is, bonds with
less than average risk-market value is ignored in favor, generally, of the
par quotations.
A rough idea of the extent of the overstatement is gained from the
average prices of 100 representative domestic bonds listed by Moody. The
depreciation in these issues in the last two years has been approximately
has been so per cent Railway bonds have dropped 45 per cent in value.
Applying the first of these estimates of the value decline to the security
holdings of reporting member banks would indicate book losses of 1872
100000. To this should be added the overstatements in the loans based
upon security collateral which are handled by bank accountants in the
same manner. Since loans on such security collateral total s4,745 100000,
It is probable that the loss of this item will mount large The third source
of great losses, many of which IRE still undiselosed, is to be found in the
item of "other loans" Reporting member banks carry this figure at &c.
5lsOoo,OOO. One would be optimistic to hold that 80 per cent of this total
is, under present market conditions, genuinely colectihle.
Altogether then, me could say that on the face of the figures given to
the public in the call of June &c, 1882 the padding" amounts eonserva-
lively to two billion dollars and possibly to twice that figure, for the
reporting member banks alone. In other words, state and federal agencies
have felt inclined deliberately to fasty the accounting of u financial
system, in order that confidence might be restored.
Objections may be made to this policy both in that it tends toward
sel-defeat rs he pubic becomes aware OF It's application m because
it is based upon the assumption that current market values are artficiany
and temporarily depressed. 1t may be true that the security market is
lower than business conditions would justify; still. for a bank depositor a
accurate balance sheet is of vital personal interest in allowing him to
know whether Oh not his deposit has been impaired by unwise decisions
on the part of bank executives. To follow a course of misinformaton,
sanctioned by governmental authority, is unwise and unehcal. In the
end it is likely that it will have an accumulative effect in augmenting the
volume of financial disaster.
Conservative bankers now fully appreciate that the Reconstruction Fl
nance Corporation cannot for long sustain the banking situation unless
marked business improvement appears. The loans which they have thus
far made necesstates a substantial interest loading for the borrowing
banks. Moreover, good collateral must back such loans if the R. F. c.
ii to be sound. The corporation is indeed in a position only to postpone the
thoroughgoing breakdown Of W financial system if help fails to come from
other quarters. That the situation is far more serious than has been
acknowledged in official circles is revealed both by the squat of bank fail
ues in Chicago in recent weeks and by the steady withdrawal of deposits
which has taken place over the past year-a contraction which places fl
nancal institutions in the ever more difficult position of paying dividends
on lowered earning assets.
Worried depostos have increasingly sought the Postal Savings System.
1t is probable that before the current summer is over, that system will.
pass the billion dollar mark in deposits. Undoubtedly its volume would
be greatly increased yer amendments of the act passed which would
permit individuals to deposit up to $4,000 as well rs to enter checking
accounts with the Postal Savings System.
Another factor which may prove of significance in the whole situation
is the 2cent charge OIL bank checks. While it is still too early to predict
the outcome of this tax, it seems reasonable to suppose that, for the
small depostor, at least, it will mean the withdrawal early in the month
of the funds for many household expenses. It is possible, nevertheless,
significance.