JOINT-STOCK BANK BALANCE SHEETS
The object of a joint-stock bank is to pay a dividend on its share
capital at a rate as high as can be earned consistently with the
performance of the main obligations of such a bank, that is, the
safeguarding of moneys deposited with it by customers, and of capital
subscribed by shareholders.
With regard to moneys deposited, it must be borne in mind that the
relation of banker and customer is that of debtor and creditor; and
as the bulk of a banker’s liabilities is repayable in cash on demand,
without notice of any kind, it behoves him so to conduct his business
that he may be in a position to meet any demand, and that without delay
or hesitation—or ruin stares him in the face.
We have already seen that before banking—as we understand it—was
practised in England, moneys were deposited with the goldsmiths for
safe keeping only and that in course of time the goldsmiths realised
that they were never called upon, at any one time, to repay the whole
amount deposited with them; that an undemanded portion always remained
in their hands which they could safely use for their own profit. This
principle, indeed, constitutes the foundation of modern banking. But
the question of what demand _may_ be made on any particular day, or
during any given period, has to be considered and provided for by
each banker for himself. Experience teaches that on an average over
any lengthened period the payments are met in the aggregate, and more
than met, by new deposits. This is evidenced by the steady growth of
balances held by the banks.
The receipts for any one particular day, or during any short period,
however, may, and frequently do, fall short of the payments. At the
end of each week, for example, bankers lose a large amount of cash,
which is drawn for wage-paying purposes, and it is not for several days
that this cash gradually dribbles back through tradesmen paying in the
money they have received from the wage earners. A similar depletion of
cash takes place at the end of each month for the payment of salaries.
Again, about the middle of each month suburban and provincial banks
have their balances depleted owing to retail customers paying the
monthly accounts of their wholesale houses. (This latter demand is not
for cash, however, but is satisfied from the Bank of England balances,
which, of course, has the same ultimate effect as if actual cash were
drawn.) At the end of each quarter there is also a disturbance of
balances for rents then falling due; and finally, in the summer and
autumn months much actual cash is taken temporarily from the banks
for harvest and holiday requirements. Thus the banks lose a portion
of their cash or bank balance on certain days and at certain seasons
of the year. These demands are all _known demands_, and the banker is
prepared accordingly.
It is not sufficient, however, that a banker should be in a position
to meet _known_ demands; unforeseen demands may be sprung upon him
at any moment, and he must be prepared to meet them immediately they
arise. Mr. Bagehot, in his _Lombard Street_, writes as follows of these
unexpected demands:—
“Any sudden event which creates a great demand for actual
cash may cause, and will tend to cause, a panic in a
country where cash is much economised, and where debts
payable on demand are large. In such a country an immense
credit rests on a small cash reserve, and an unexpected
and large diminution of that reserve may easily break up
and shatter very much, if not the whole, of that credit.
Such accidental events are of the most various nature:
a bad harvest, an apprehension of foreign invasion, the
sudden failure of a great firm which everybody trusted,
and many other similar events have all caused a sudden
demand for cash.”
A banker therefore fortifies himself against any sudden or unexpected
call by keeping much more cash in his till than he is ever likely to
require in normal times; by maintaining a large balance with the Bank
of England—which to all intents and purposes is equivalent to “cash”
in the till; and by lending out large amounts to bill-brokers, which
advances are fully secured, and are repayable either on demand or at
short notice. He is able to arrange the amount advanced in this way
from day to day—by lending further sums or calling in loans—according
to the circumstances of the moment, so that he can maintain that amount
in “cash” or “bank balance” which he considers necessary for his safety.
So we see that “cash” and “balance” at the Bank of England together
constitute a banker’s first line of defence—they are, so to speak,
his “firing line”—and the money which he lends to the bill-brokers
constitutes the “supports” to the “firing line.”
The next defence which a banker maintains against possible pressure is
represented by the amount invested in securities. Investments yield on
an average a higher return than sums lent at short notice or call; but
it must be remembered that securities are not so easily realised, if
the necessity should arise.
Of these investments a large portion is represented by Consols, as, in
case of need, these can always be sold for cash at very short notice,
or in case of great pressure doubtless the Bank of England would be
willing to make advances on the security of this stock. Of securities
guaranteed by the British Government, other than Consols, there will
probably be a large holding, although these securities might not in
time of panic be so readily realisable as Consols. Yet it is probable
that the Bank of England would, in order to avert disaster, accept such
stocks as security against advances. Other high-class securities which
yield a somewhat higher return will also probably be held to a large
amount. A banker, however, should not rely too much on these securities
for purposes of realisation in time of monetary pressure, it being
quite possible that at such times there would be no buyers of any class
of securities with the probable exception of Consols.
After making due allowance for “cash,” “bank balances,” “call money,”
and “investments,” a banker employs the balance of his funds in
discounting bills, buying bills from the market, and making advances to
customers.
As the dates when bills fall due for payment are fixed, if for any
reason a banker deems it prudent to increase his “cash” and “bank
balance,” he can readily do so by letting his bills in hand mature, and
not taking up new bills in their place. It is open to the banker to
sell the bills he holds, that is, to rediscount them, if he choose to
do so; but this course is not practised at the present day, except by a
few country banks. Moreover, in the event of a panic, probably no one
can be found to buy bills, so that they are not in practice realisable
before the maturity dates. As an illustration of this, it may be
mentioned that on one occasion during the crisis of 1847, it was found
to be impossible in the city of London to discount even an Exchequer
Bill of the English Government.
Of the various investments of a banker, “advances to customers” are the
most difficult to realise in time of pressure, as the wherewithal for
the customers to repay their advances is then wanting, and in their
efforts to obtain necessary funds the danger would only be aggravated.
In such times, indeed, the commercial world requires extra assistance
to avert an actual crash.
“Premises” is an item appearing among the assets in balance sheets
of joint-stock banks. It is probable that in many cases the value
of the premises largely exceeds the figure at which they are put in
the accounts, and hence they constitute a hidden reserve; but the
investment, by its nature, is one that cannot readily be made available
to meet sudden demands.
We see, therefore, that a banker’s assets usually consist of the
following six classes of investments:—
I. Cash in the till and balance with Bank of England
(or London agent).
II. Money lent at call or short notice.
III. Investments—
(_a_) Consols;
(_b_) securities guaranteed by the British Government;
(_c_) other securities.
IV. Bills under discount.
V. Advances to customers.
VI. Premises and sundries.
The first three of these classes constitute what is known as a banker’s
“liquid assets.”
TABLE SHOWING, IN THE CASE OF NINE REPRESENTATIVE JOINT-STOCK
BANKS, THE PERCENTAGES OF THE VARIOUS CLASSES OF ASSETS
RESPECTIVELY TO THE AMOUNT OF LIABILITIES TO THE PUBLIC.
-----+--------+-------+------------+-----------+-----------+-------
| | | | | Bills, |
| Cash | Call | | | Advances, |
| and | and | | Total of | Premises, | Total
Bank.| Bank | Short |Investments.| “Liquid | and |Assets.
|Balance.| Money.| | Assets.” | Sundries. |
-----+--------+-------+------------+-----------+-----------+-------
A | 14·9 | 13·4 | 20·4 | 48·7 | 60 | 109
B | 16·4 | 8·7 | 16·8 | 41·9 | 66 | 108
C | 18·3 | 6·5 | 22·0 | 46·8 | 59 | 106
D | 13·8 | 5·4 | 30·3 | 49·5 | 68 | 117
E | 14·6 | 5·6 | 26·6 | 46·8 | 66 | 113
F | 17·0 | 23·0 | 16·0 | 56·0 | 60 | 116
G | 12·4 | 25·0 | 17·1 | 54·5 | 60 | 114
H | 14·4 | 8·7 | 31·5 | 54·6 | 50 | 105
I | 16·5 | 16·1 | 11·0 | 43·6 | 66 | 110
-----+--------+-------+------------+-----------+-----------+-------
The averages of these percentages[2] respectively are as follows:—15·3,
12·6, 21·3, 49·2, 61·6, and 111.
[Footnote 2: These averages are not the percentages which would be
shown by a _combined_ account of the nine banks.]
On examining this table it will be noted that the proportions of funds
invested in “liquid assets” do not vary materially with the different
banks. When we examine, however, the separate classes of investments
making up the total of “liquid assets,” we see that the case is
different, and a wide divergence is shown. This is especially so in
“call and short money,” where the proportions vary from 5·4 per cent,
to 25 per cent, and in “investments,” where they vary from 11 per cent
to 31·5 per cent.
The figures given are those of one particular day, and that a day on
which, according to popular belief, some of the banks indulge in what
has been called by the Press “window dressing”—that is, adjusting to
a greater or less extent the amounts held in the respective classes
of securities, with a view to the presentation of more impressive
figures in the balance sheet to be published as at that day. Had we
the actual daily records of the various banks at our disposal, it is
not improbable that a greater variation would be shown in the items of
“cash” and “call money”; but these figures are not available. It is
true that most of the banks now publish monthly statements as to their
position, and it is a noticeable fact that while some banks issue these
monthly statements as on the close of business of the last day of each
month, others vary the day on which the statements are made up; and it
is open to conjecture that this variation of date is with the object of
making a better showing.
It must not, however, be inferred that such a course as this (“window
dressing”) is the usual one adopted by our banks; but it is a method
of business which is possible, and which rumour has it is pursued in
certain cases. This explains such remarks in the money articles as,
“Money was in request to-day, owing to a large amount being called off
the market by the banks for window-dressing purposes.”
As regards “call and short” money, it is possible that in time of
actual panic a considerable portion of it would not be repaid when
“called,” especially as regards the “short” money. It is generally
believed, though not stated in any balance sheet, that a large part
of this “short” money is not lent to the bill-brokers, but to the
Stock Exchange—that is, to stock-brokers. Loans to the Stock Exchange
are fixed from one account to the next (about a fortnight ahead), and
are then supposed to be paid off if required. In time of difficulty,
however, would—or rather could—this money be repaid by the various
brokers to whom it is lent? Supposing a broker had a loan of £100,000
secured on American railroad shares, and a crisis suddenly developed,
from where could the broker obtain the money to repay the advance if it
were called in? He would not be able to sell the shares without serious
loss, if at all; and he would have great difficulty at such a time to
induce another banker to make him a fresh loan. In all probability
the loan would _not_ be repaid, however much the lending banker was
desirous, or in need of regaining possession of his money.
Therefore such loans to the Stock Exchange (excepting, perhaps, amounts
secured on Consols or such like) cannot fairly be entered under the
heading of “call and short” money in a balance sheet. It is desirable,
for these reasons, that balance sheets should give more explicit
information than is usually the case; and more particularly they should
specify separately the amounts lent to the bill-brokers at “call” and
“notice,” and the amount lent to the Stock Exchange from account to
account.
Turning to the question of “investments,” it may be noted in our table
that those banks which show only a small proportion of “call” money,
in most cases show a large proportion of “investments”; while, on the
other hand, those which show a large amount at “call” hold only a small
amount in “investments.”
The table exhibits a wide divergence in the proportions of
“investments” held. These proportions vary from 11 per cent, to 31·5
per cent. The actual proportion of investments held, however, is not
of so much concern as the nature of the securities which compose the
investments; that is, whether or not they are readily realisable in
case of need. The classes of investments are fairly shown in most bank
balance sheets, and from a study of these some useful information can
be gained. As an illustration of this, bank E in the table on page 94
shows in its balance sheet approximately the same holding in Consols
as bank I, but the latter bank has deposits from its customers of
twice the amount shown by the former. Now if bank E were to reduce its
Consols by one-half (giving the same proportion as I), and put the
proceeds in “cash” and “call money,” its position would appear thus
(using the actual figures of Consols shown by the balance sheets of the
two banks)—
Cash and call money 23 per cent.
Investments 24 per cent.
while bank I (as shown by the table) stands—
Cash and call money 32 per cent.
Investments 11 per cent.
This somewhat reduces the wide disparity at present shown in the
respective figures, and it is quite possible that this difference could
be still further reduced if we knew the actual amount held by each
of these banks in securities, other than Consols, guaranteed by the
British Government, and made the same assumptions with regard to these
as in the case of Consols. As a matter of fact, considerably more than
half of the 26·6 per cent. of investments held by bank E appears in the
balance sheet of the bank as being composed of such securities, and
these might prove a more valuable asset in time of trouble than so much
money nominally at “call” or “short notice.”
From this example we can see that in examining the balance sheet of
any bank, particular attention must be paid to the composition of the
investments, whether they are of such a character that one may fairly
rely on being able in time of stress to realise them immediately, or,
in the alternative, borrow from the Bank of England on their security.
We may repeat, as the matter is of importance, that the actual amount
of securities held, or the proportion which they bear to the total
balances, is not of such importance in the case of a bank, as the
nature of the securities which form the investments. One London bank’s
investments simply consist of a large holding of Consols; and though
times might conceivably come when it would be impossible to realise
even such a holding at short notice, yet such an investment forms a
backbone and reserve which cannot be overestimated.
Having considered the securities which constitute the “liquid assets”
of bankers, we will now briefly turn our attention to the manner in
which the remainder of bankers’ funds are usually utilised. As we have
already seen, this remainder is used mainly in discount operations
and advances to customers, while a certain amount is generally sunk
in premises, etc. These three items have been classified together in
our table, as the necessary information is not given in some of the
published balance sheets to enable us to specify them separately.
As regards “premises,” it may be repeated that though they form a
valuable asset, yet they are not an available one, and would, generally
speaking, only be realised in the event of a winding-up.
The bills held under discount comprise bills which are discounted for
the customers in the ordinary course of business, and also bills bought
from bill-brokers; and they constitute a fairly available asset.
The “Advances” to customers is a security of a very fixed nature. In
times of trouble it is the asset most difficult of realisation, and it
is the rock on which the majority of banks which have come to grief
have struck.
No information respecting this asset is vouchsafed in any balance
sheet beyond the bare total. It is a known fact that banks are lenders
on practically any kind of security which has a fairly steady value,
and in which there is a “market”; stocks, shares, produce, houses,
lands—all are offered as security, and all are accepted under various
conditions. But it is of the utmost importance that bankers should
closely watch and scrutinise the aggregate of advances which they may
make upon any one kind of security, so as to keep the amount within
due limits. If too large a sum is advanced on one kind of security,
and that security should become much depressed in value, the banker
may be caught between two fires: on the one hand, the customers who
have deposited this security will, from its fall in value, have become
financially weakened, and perhaps not be in a position to repay the
advances; and on the other hand, if the banker wish to repay himself
by realising the securities, he may find that the margin of value has
run off, and what can be obtained by selling the securities in the
market will not cover the advances, or possibly, for the time being,
they will prove to be unsaleable. Thus he will be left in the dangerous
position of having a considerable proportion of his assets indefinitely
locked up, and a certain number of his customers in a weak and reduced
condition financially.
Neglect of the precaution of spreading advances over different
suitable classes of investment has brought many banks to ruin in the
past, and under similar conditions would do so in the future. This
danger is not now so pressing as in former times. Owing to the present
custom of establishing branches, and to amalgamations, the operations
of banks are now frequently spread over wide areas, and therefore
automatically their advances tend to spread over many more industries
and securities than was formerly the case. When banks were more local,
their prosperity rose or fell with the industry and conditions of their
particular district.
We see then there is danger in locking up too large amounts in advances
on any one class of security. But there is an equal danger in advancing
too large sums to a few customers. A firm may be of very good standing
and report, and keep a first-class and highly remunerative account with
its banker. From time to time it has advances from its banker, which he
is very glad to make, and which are regularly repaid. But a time may
come when an advance may not be repaid when due; instead, a further
advance is asked for. This is made without question, and probably
further advances, always increasing and never reducing. After a time
the banker may become a little fidgety, and cautiously suggest a
reduction, but will probably be told that ample funds will come to hand
shortly. When this time comes the funds may not have been received,
and the customer may insist that he _must_ have further help, or he
will not be able to meet his obligations. The banker should require
ample cover before advancing further sums; but if he is weak and yields
to pressure, matters will go from bad to worse, until the customer
may practically rule and command the bank, the two concerns will be
involved together, and when the customer “goes” the banker will go too,
or at the best suffer a big and weakening loss—not only loss of money,
but loss of credit, which will affect him seriously in the future, and
may ultimately cause his fall.
This danger is not a hypothetical one. It is unfortunately founded on
fact. It was this cause which led to the disastrous and all-reaching
failure of the City of Glasgow Bank. When the position of that bank
was examined it was found to have lent as much as six million pounds
among four customers. Gilbart says: “Almost every bank that has failed
can point to some one, two, or three large accounts to which it mainly
attributes its failure.”
On looking at the last column of our table we see that all the banks
hold assets in excess of liabilities to the public; the excess is in
respect of the capital and reserve fund. As an additional security for
the depositors, each bank has only a part of its subscribed capital
paid up. The remainder, the uncalled capital, constitutes an extra
reserve for the benefit of the depositors.
The profits made by joint-stock banks are high, the majority of
dividends varying between 10 and 20 per cent.; and notwithstanding such
satisfactory dividends, large reserve funds have been accumulated from
undivided profits. These reserve funds in some cases equal, and even
exceed, the total of the paid-up capital. It may be added that many of
the banks are popularly credited with holding other reserves which do
not appear in their balance sheets.