ON THE CHOICE OF A BANKER
There is an opinion which is very prevalent to the effect that,
provided one’s account be an overdrawn one, it does not matter where
it is kept; and, of course, if it were possible to find a nice,
philanthropic banker who would allow one a big overdraft without even
hinting at security, there would be much truth in the assertion; but in
view of the existing relations between banker and client, the idea is
both unfortunate and fallacious. We have seen how the large joint-stock
banks, by developing their system of branches, literally smothered
the private banker; and the smaller companies, which possess but few
branches, are now being forced to amalgamate with the larger for the
same reason. If, therefore, a man has a large advance from a small
provincial banking company, it may occur that, just when he is anxious
to discount more bills or to increase his overdraft, the bank will be
unable to accommodate him; and it therefore follows that a large bank,
whose resources are abundant, is as essential to the really great
borrower as it is safer for the depositor.
A person whose account is in credit or who leaves money with a banker
at interest naturally attaches the greater importance to the safety
of his balance or principal; and, secondly, he endeavours to obtain
as high a rate as possible; but he would not be so foolish as to
sacrifice security to a high rate of interest; though, where the banks
are equally well managed, he would select the one that offered him the
higher rate or the cheaper facilities. Conversely, the person whose
account is overdrawn would, other things being equal, choose the bank
that offered to work his account the cheapest.
Now, a banker’s liabilities to the public are due on demand, and at
short notice; and they would consist principally of “deposit and
current accounts, and notes and drafts in circulation.” These, of
course, will be found on the left-hand side of the balance-sheet.
As the banker’s deposits may be demanded from him at any unlucky
moment, it follows that he is compelled to hold a certain sum of cash
(legal tender) in reserve; and the larger that sum, the safer are the
customers’ balances. A person, therefore, who is looking for a safe
banker, should see that the firm or company which he selects possesses
at least from £12 to £18 in coin, bank-notes and cash with the Bank
of England against each £100 it owes to the public. He will find the
public liabilities on the left-hand side of the balance-sheet and the
cash in hand on the right; and a proportion sum will soon give him his
answer.
But a really strong, well-managed bank only advances to, and discounts
bills of exchange for, its customers to such an extent as will enable
it to hold from £45 to £50 in cash, money at call and investments to
every £100 of its public indebtedness. Cash, of course, is its vital
asset; and after cash comes Consols and other British Government
securities in which, except at the very height of a panic, there is
always a market. These are a bank’s so-called liquid assets; and it
may just be added that when a bank mixes its cash and money at call
and notice together, and an accommodating auditor declares that such a
medley “exhibits a true and correct view of the state of the company’s
affairs,” the bank is probably so weak in actual cash as to deem it
wise not to publish the figures.
Money at call and short notice would represent advances to the
bill-brokers and to the Stock Exchange; and though such loans could
doubtless be easily called in during normal times, they would be
difficult to collect when the money-market was in a turmoil. A greater
part of the advances made to the Stock Exchange, though classed as
liquid assets, are in reality loans in disguise; for if the banks were
to suddenly ask the stockbrokers to redeem their pledged stocks and
shares, those gentlemen would be hammered in clusters; and the shares,
when flung upon the market to be sold at what they would fetch, would
rapidly depreciate. It would certainly be interesting were the banks
to specify the amount of their so-called short loans to the Stock
Exchange; and, with a lively recollection of 1890, it is to be hoped
that they are kept within bounds, as, upon that occasion, this class of
advance hung like a mill-stone round their necks. Such liquid assets,
it is to be feared, are more likely to sink the good ship than to save
her in a storm.
Having ascertained the ratio per cent. of a bank’s cash in hand to
its public liabilities, and glanced at the call-money, the list of
investments should be carefully criticized. When a banking company
describes its list thus: “Consols and other securities,” it may be
taken for granted that its holding of Consols is a small one. This
description, in fact, is taken from the balance-sheet of an English
provincial banking company, which holds about £19 in cash, call-money
and securities to each £100 it owes to its customers; and yet it
can find people who are foolish enough to do business with it.
Considered as a financial institution, it is practically bankrupt;
yet its deposits amount to over £4,000,000. Fortunately, however,
this institution is one of the few exceptions which are best avoided.
Another very weak joint-stock bank describes its investments as
consisting of “English Government and railway stocks.” Its cash and
call-money are consolidated into one total; but, more remarkable still,
an auditor actually has the impudence to declare that the balance-sheet
“exhibits a true and correct view of the company’s affairs,” when, of
course, it is not worth the paper upon which it is printed.
A well-managed bank, as a rule, states its holding of Consols
distinctly, and, sometimes, the figures at which they have been taken.
If it do not, then the value of its British Government securities is
given separately. Next, it usually specifies its India Government
Stock, and so on; and, finally, “other securities,” which, assumably,
are of a non-liquid nature, are given last because they are of the
least value from a banker’s point of view. Naturally, if a bank possess
a gilt-edged list, it advertises the fact in its balance-sheet; and
those companies which indulge in ambiguity are, in nine cases out of
ten, the banks to avoid. For instance, you will not find any evasions
of this nature in the balance-sheets of such powerful companies as
the London and County Bank, the Union and Smiths, the London City and
Midland, and other really first-rate institutions, for the simple
reason that there is no occasion for them. As a rule, the clearer the
balance-sheet, the stronger is the bank; and the sinners, consequently,
are the smaller banks, which, situated in a manufacturing centre,
are unable to collect sufficient working resources to finance their
customers. Their ultimate fate, it need not be said, is amalgamation
with a more powerful rival.
When choosing a banker, therefore, one should first ascertain that
he has an abundant reserve of cash in hand, and, secondly, that
his so-called liquid assets (his cash, call-money and securities)
amount to from £45 to £50 against each £100 to which he is indebted
to the public. And as to those private bankers who do not issue a
balance-sheet, they are, in the first place, guilty of the sin of
omission; and, in these days, when faith is not the predominant note,
there seems but little inducement to buy a pig in a poke when a large
banker’s balance-sheet may be had for the asking.