BANKING IN SOUTH AMERICA
[196]The special interest in South American banking which exists at this
time is the product of at least four distinct factors:
First. It has been evident for some years that the trade between North
and South America is rapidly developing. In the ten years, 1903-1913,
the exports from the United States to the ten Republics of South America
increased 274 per cent. against an increase of all our exports during
the same period of 73 per cent. In spite of inexperience, crude methods,
lack of banks and of ships we have made notable gains in South American
trade. There seems to be no reason to question the probability of a
continued rapid increase during the next few years.
OUR GROWING SURPLUS FOR FOREIGN INVESTMENT
Second. Other forces have gradually been bringing this country more and
more into the position of looking for investment opportunities abroad.
While it is true that the United States is a debtor nation in the sense
that a large amount (estimated at $3,000,000,000 to $6,000,000,000) of
European capital is invested here, it is also true, on the other hand,
that the national income has for some years been sufficient to meet
annual payments abroad, to make large fresh investments in our own
enterprises, and still to leave a considerable surplus for investment in
neighbouring countries. It is estimated that American capital in Mexico
and Canada amounts approximately to $1,500,000,000. In South America
there are already American investments of perhaps $300,000,000 to
$400,000,000.
As the national income and savings expand and as the opportunities for
exceptionally profitable investment within this country decrease, it is
clear that there must be a stronger and stronger tendency toward
investment abroad. The immense sums, for instance, that have been
flowing into railroad construction and rebuilding will not be needed to
so great an extent in future. A considerable proportion of this overflow
of capital may certainly be expected to spread into South America.
GREATER LENDING POWER OF BANKS
Third. The adoption of the federal reserve system has made a remarkable
improvement in the handling of gold and of credit. It has released and
made available for other forms of financing great sums which were
formerly tied up in scattered reserves. We have only to look at the
monetary history of the German Empire during the last forty years to see
how powerful an influence on industry, trade, and investment is exerted
by the centralisation and control of bank reserves. The London _Statist_
has calculated the ultimate increased lending power of American banks,
under the federal reserve system, at $3,000,000,000.
EUROPEAN WAR
Fourth. The European war has suddenly stimulated the tendencies which
were previously evident. It has temporarily cut off a considerable
amount of European trade in South America, thus leaving an opening for
even more rapid development of our trade than would otherwise have taken
place. It has deprived South America for a period of several years of
the steady inflow of European capital. It has enormously increased the
exports and decreased the imports of this country, thus placing suddenly
at our disposal greatly enlarged financial power, possibly as much as
$1,000,000,000 per annum above normal. Its ultimate effect, we may
safely assume, must be to increase considerably rates of interest the
world over, thus stimulating the tendency toward an enlarged outflow of
capital from the United States into neighbouring countries.
By reason of the war the same kind of a situation that would otherwise
have developed slowly in a period of years now confronts us suddenly
when we are as yet in a state of financial unpreparedness. The new
machinery provided by the federal reserve act is not yet fully utilised
or adjusted in its final form. It will require careful study, combined
with prompt action, to utilise the financial opportunities now before us
with greatest advantage to all concerned.
ENGLISH BANKS IN SOUTH AMERICA
Although English interests have share holdings in other institutions,
there are only five banks in South America that stand out as
unmistakably British. In the order of their development, these are the
London and River Plate, London and Brazilian, British Bank of South
America, Anglo-South American Bank, and Commercial Bank of Spanish
America. Each institution, with one exception, has concentrated on one
country, in which it has established most of its branches and to which
it has devoted its first efforts. The exception is the British Bank of
South America, which has followed the contrary policy of having only a
few branches strategically located in important cities; in other words,
this bank has concentrated on selected cities rather than on a given
territory.
ENGLISH TRADE AND BANKS DEVELOP TOGETHER
The development of commercial banking by British interests has
everywhere gone hand in hand with the development of British investment
and British trade. The accounts of the railways, mercantile firms,
steamship lines, public utilities, and other enterprises conducted by
their fellow countrymen form the great bulk of the business of the four
leading institutions; the Commercial Bank of Spanish America is,
however, operating under different conditions. Indeed, it may even be
said--again speaking in broad terms--that the English banks have made
comparatively little effort to secure the accounts of domestic
enterprises. It is certainly safe to say that they have not made efforts
in this field at all comparable with the efforts of the German, Spanish,
French, and Italian banks. It is interesting to note also in this
connection that the management and even the clerical force are, with
few exceptions, brought over from England. After more than fifty years
the three leading institutions remain as distinctively British as they
were at the beginning.
GERMAN BANKS IN SOUTH AMERICA
To understand the energetic development of German banks in South America
during the last forty-five years we must consider the conditions
prevailing in Germany during that period and the strong forces working
toward industrial and banking expansion.
Beginning immediately after the Franco-Prussian War of 1870-71, German
industrial interests, with the strong support of the German Government,
began to struggle more vigorously and more effectively than ever before
for a larger share of trade in international markets, particularly in
the Far East and in South America. It was clearly realised that Germany
needed a large and rapidly growing export trade in order to maintain her
own prosperous development. In order to get this trade it was necessary
to follow a definite programme which included the provision of better
shipping facilities and of better facilities for financing. Up to that
time Germany had been fully as dependent as the United States is to-day
upon foreign ships and foreign banks.
It was also clearly realised that the tendency was toward large scale
production in most industries and that those concerns which could secure
large sales in the world-wide markets would soon come to enjoy an
overwhelming advantage over smaller competitors. The German industries,
in conjunction with the great German banks, began to follow, therefore,
a programme of concentration, which has since gone steadily forward.
These two forces--expansion in foreign markets and concentration at
home--have had a controlling influence on Germany's foreign trade, and
incidentally on her foreign banking.
OTHER INFLUENCES IN BANK EXPANSION
Another influence of importance is the fairly well-marked division of
German industrial interests into a small number of groups, each one of
which centres about and is allied to one of the great banks. To some
extent this is true in other countries, especially where banking is
centralised--notably in Canada, for instance--but it is especially clear
and well recognised in Germany. Hence each one of the great banks is
under especially strong pressure to foster and develop the interests of
its important clients, even at the expense of some temporary risk or
sacrifice for itself. This is doubtless the primary motive which has
induced the great German banks one after another to enter foreign
fields.
There is a wide-spread notion outside Germany that the German Government
has itself actively intervened for the purpose of stimulating foreign
trade expansion and has brought pressure to bear on German banking
interests, leading them to push ahead more rapidly than their private
business interests would have required. This idea may or may not be
correct; so far as the writer is aware there is no special evidence
pertaining to South American banking development to sustain it. At any
rate, it is easy to explain the policy of these banks as being based
upon purely business considerations.
As a matter of fact, there has probably been much exaggeration of the
thought that the German banks are primarily self-sacrificing instruments
of an ambitious national programme rather than ordinary business
enterprises. The statement is frequently repeated that the English banks
in South America aim first and all the time for profits, while the
German banks aim for development of their national interests.
Of the four large German banks in South America only one is remarkable
for energetic and successful expansion. The others have been moderately
successful. The difference is to all appearances chiefly due to
management.
Although these four banks were presumably designed primarily to advance
the business interests of the banks which organised them, they have
incidentally had a powerful influence on investment of capital and on
trade. The German manufacturers of machinery, steel products, and the
like, have been especially helped by the ability of the German banks,
both in South America and at home, to help in finding capital and in
financing.
The German banks have not found political or economic conditions in
South America which were insuperable obstacles to sound or profitable
banking.
OTHER BANKING INSTITUTIONS
Other nationalities besides the English and the Germans have invaded the
banking field in South America. The French, the Italians, and the
Spanish have all been active, particularly on the east coast, and are
represented by large institutions.
AMERICAN BANKS
Only after the federal reserve act went into force in November, 1914,
was it possible for any bank organised under the national-bank act of
the United States to establish branches abroad. The act restricts this
privilege to institutions having capital and surplus of $1,000,000 or
more, and gives the Federal Reserve Board discretion to withhold its
consent. Up to this writing the only institution which has taken
advantage of the powers granted by the federal reserve act to enter
South America is the National City Bank of New York, which has
established branches in Buenos Aires, Montevideo, Rio de Janeiro,
Santos, and Sao Paulo. Other branches will probably be established in
the near future. Especial attention is being given to the collection of
credit information. The bank also maintains a foreign trade department,
which gives information and advice to its depositors as to building up
business abroad. This department is now equipped to make specific
reports on trade openings in Argentina, Uruguay, Brazil, Colombia, and
Venezuela.
The Buenos Aires branch, which was the one first established, is
understood to have done a satisfactory amount of exchange business. It
stood ninth in volume of clearings in January, 1915, among the
twenty-odd commercial banks of that city. The other branches have not
been in operation long enough to show clear results. The branches in
Argentina (including the subbranch at Montevideo) and Brazil have each
$1,000,000 allocated to them--though this is purely formal, as the
bank's whole capital and surplus are behind the obligations of every
branch.
The expansion of the National City Bank in South America has been much
more rapid than that of any preceding institutions, including even the
aggressive German banks. As a natural result, there is apparently less
effort at this stage to build up local connections and influence in each
city. So far the policy of the National City Bank appears to be to
furnish foreign trade facilities to American exporters over as wide a
territory as possible, rather than to concentrate its activities in any
restricted region.
Other national banks in this country are known to be desirous of aiding
in the financing of foreign trade, but have not up to this time found it
practicable to take action under the provisions of the banking law as it
now stands.
DOMESTIC BANKS
There are many important and successful banks in South American
countries which are strictly domestic institutions, not only
incorporated under the laws of the country in which they do business,
but owned and managed by local interests. The notion sometimes seriously
put forward that South American banking is almost wholly in the hands of
foreigners is quite unfounded. It is true that trading operations are
generally handled either by foreign houses or by houses in which there
is a strong foreign influence and that the financing of nearly all
foreign trade and of much local trade is likely to go to foreign banks.
But the accounts of the rest of the domestic trading firms, of land
owners, and of governmental corporations, as a rule, gravitate toward
the domestic banks.
Following is an approximate statement of the total of deposits and
credits in account current in each South American country on or about
December 31, 1913, and an estimate of the distribution between foreign
and domestic institutions:
---------------------+-------------+------------------+------------------
Countries. | Total bank | In | In
| deposits. | European banks. | domestic banks.
---------------------+-------------+------------+-----+------------+-----
| | Amount. | Per | Amount. | Per
| | |cent.| |cent.
| | | | |
Brazil | $190,000,000| $78,000,000| 40|$112,000,000| 60
Uruguay | 42,500,000| 14,000,000| 33| 28,500,000| 67
Argentina | 626,000,000| 173,000,000| 28| 453,000,000| 72
Paraguay | 3,500,000| | | 3,500,000| 100
+-------------+------------+-----+------------+-----
Total, east coast | 862,000,000| 265,000,000| 30| 597,000,000| 70
| | | | |
Chile | 104,500,000| 29,500,000| 28| 75,000,000| 72
Bolivia | 8,800,000| 1,500,000| 17| 7,300,000| 83
Peru | 28,500,000| 7,500,000| 26| 21,000,000| 74
Ecuador | 4,000,000| | | 4,000,000| 100
+-------------+------------+-----+------------+-----
Total, west coast | 145,800,000| 38,500,000| 26| 107,300,000| 74
| | | | |
Colombia | 5,800,000| | | 5,800,000| 100
Venezuela | 6,200,000| | | 6,200,000| 100
+-------------+------------+-----+------------+-----
Total, north coast | 12,000,000| | | 12,000,000| 100
| | | | |
Total, South America |1,019,800,000| 303,500,000| 30| 716,300,000| 70
---------------------+-------------+------------+-----+------------+-----
The great Banco de la Nacion Argentina (Bank of the Argentine Nation) is
an official institution, all the shares of which are owned by the
National Government. It is a successor of the former national bank,
which was driven into insolvency in the great financial crisis of 1890
and was afterwards liquidated. Although it was organised during a period
of disaster and there were many prophecies of its certain failure, the
Bank of the Argentine Nation has had a wonderful development and to-day
ranks as the seventeenth in size among the great banks of the world.
The bank pays no dividends, but carries 50 per cent. of its profits to
the credit of capital account and 50 per cent. to reserves. Entirely
through this process the capital and reserve funds have increased from
approximately $22,000,000 in 1892 to over $100,000,000 at the present
time. During the same period deposits have grown from $21,000,000 to
$205,000,000, and discounts and advances from $47,000,000 to
$208,000,000. There are now more than 150 branches.
The bank differs from most other governmental institutions in that it
carries on distinctly a commercial banking business more or less in
competition with private commercial banks. Until the crisis of 1914 it
did no rediscounting for other banks, and even during the crisis its
activities in assisting other banks were much restricted.
LAND MORTGAGE BANKS
In several of the South American countries there is a well-organised
system of land-mortgage banks following European models. In some cases
the banks are owned and operated by the National Government and in other
cases receive some special support or guarantee. The plan under which
they all operate is the following: The owner of land who desires to
raise money on mortgage approaches the bank and requests an
investigation and appraisal, the expenses of which he usually pays. If
the property is shown to be unencumbered with prior claims and meets
other conditions, the bank delivers to the owner the mortgage bonds in
convenient denominations up to a given proportion, usually 50 per cent.,
of the appraised value. These mortgage bonds are part of a series and
are themselves secured, not by any specific piece of property, but by
all the property covered by the series; they are also backed by the
credit of the issuing bank. The owner of the property then offers the
bonds for sale through a broker, and in this way obtains the desired
funds. He pays the bank a small commission, from one-fourth of 1 per
cent. to 1 per cent., for its services.
In Argentina, where this system is developed to its highest extent,
these land-mortgage bonds are known as "cedulas," and are issued by the
Banco Hipotecario Nacional (National Land Mortgage Bank). At the present
time the Argentine "cedulas" tend to sell on a 7 per cent. basis, more
or less.
Uruguay, Brazil, and Chile all have similar issues, which sell on bases
ranging from 7 to 9 per cent. or even higher. Broadly speaking, and
without attempting to assign a definite value to any one of these
issues, they are sound, conservatively issued, well protected, and under
normal conditions readily marketable. The more important issues have
been widely sold in England, France, and Belgium. If they were properly
introduced and made well-known in the United States, there is no reason
to question their finding a good market here also.
Side by side with the land-mortgage banks there are operating in the
Argentine a number of English mortgage companies, which directly invest
their own funds in land mortgages and have earned highly satisfactory
profits.
In several countries there are state-owned savings banks, a large
portion of the funds of which also go into land mortgages.
CONDITIONS OF COMMERCIAL BANKING
A banking business, like any other, must adapt itself to surrounding
conditions, including laws, business customs, precedents created by
older banks, and the like. In South America these conditions differ in a
number of respects from those which prevail in the United States.
Probably the first impression of most observers gives an exaggerated
idea of the differences. However, they should be fully and carefully
considered.
The chief differences that directly affect banking operations are the
following: (1) Comparative absence of banking regulation on the part of
governments or associations; (2) national colonies; (3) social character
of business relations; (4) lack of highly developed economic
organisation; (5) relatively high and stable rates of interest; and (6)
in some countries fluctuating currencies. The first five of these
circumstances call for brief comment.
LITTLE CONTROL OR CO-OPERATION
Not only is there a marked absence of laws directly applicable to
banking concerns, but there is also an equally noteworthy absence of
control exercised either by the Government or by associations among the
banks. Even the large governmental or semi-governmental banks in Brazil,
Uruguay, Argentina, Chile, and Bolivia are competitive with the other
banks. Whatever influence they exercise is secured through their active
and direct competition, not through any special authority over the other
banks conferred upon them. In the fall of 1914, for the first time,
there was some rediscounting of the paper held by other banks on the
part of the Bank of the Argentine Nation and of the Bank of the
Republic of Uruguay; but this tendency did not go far. The other banks
objected to placing information as to their relations with customers in
the hands of the governmental institutions. In other countries there has
not been even this much of an attempt toward fulfilling the functions of
a central bank of rediscount.
It is difficult to secure in most of the South American cities even the
most elementary kind of co-operation among the banking institutions. How
is it possible that they should continue to stand apart when they would
obviously gain so much by coming together? A partial answer is to be
found in the peculiarity that has already been pointed out, namely, the
fact that many of the more powerful institutions are the offspring of
European countries. Each one is fighting to support the trade of a
certain well-defined group of clients. The national antagonisms among
them are deep-seated and sometimes virulent. All this was true even
before the European war. It will be tenfold true for a number of years
to follow.
NATIONAL COLONIES
This leads to mention of the second condition, one which operates in
favour of European-owned banks to the relative disadvantage perhaps of
American banks. This condition is the presence in some of the large
South American cities, notably Buenos Aires, of a large colony
representing each one of several important European nations. Naturally
the tendency of each colony is to support banks of its own nationality.
On the whole, although this matter of national affiliations is
undoubtedly a factor to be reckoned with, it appears to be by no means
decisive. The German banks, for instance, have been able to expand with
much greater rapidity than we should have been justified in expecting on
the basis of their national trade and national colonies alone. This is
true likewise of the Italian and French banks. A great proportion of the
business men of South America, even those of foreign origin, are
governed less by their national sentiments than by their business
interests.
PERSONAL CHARACTER OF BUSINESS DEALINGS
To an observer accustomed to European or American methods, one of the
most striking features of business life in the South American cities is
its strongly personal and social flavour. We are accustomed in this
country to emphasise the principle that friendship is not a safe guide
in business dealings. In South America the contrary is more nearly true.
Family ties are apt to be a controlling factor in choosing partners and
employes. If one's ultimate object is to have business dealings with a
firm, he must first cultivate the personal friendship of the head of the
firm. Social relations and business relations become confused, and it is
hopeless to expect the purely impersonal view of a business proposition
that is considered correct in this country. Like all sweeping
statements, this one is subject to exceptions. There are many American,
German, and English firms, especially in Buenos Aires, which prefer what
we denominate "businesslike methods," but they are not numerous enough
to give the tone to business life.
This is a condition which directly affects banking practice. It makes it
very difficult, for example, to introduce the custom of securing full
financial statements from all applicants for credit. The request for a
statement is apt to be construed (as was the case in this country not
many years ago) as a reflection on the personal honesty and credit
standing of the applicant. For the same reason it is difficult, and may
frequently be poor policy, for a bank officer to ask a customer a direct
question as to the status of his business. He is likely not to take an
impersonal attitude toward the question, but to resent it as if it were
an attempt to pry into his purely personal affairs. Consequently, all
business men, including bankers, are forced to rely to a great extent in
estimating the credit standing of individuals and firms on their
personal impressions, on such information as they are able to secure
through indirect hints and questions and on the business gossip which
they pick up. It must be remembered that, except for Buenos Aires, most
of the business communities are comparatively small and isolated. There
is little opportunity, therefore, for long-continued fraud. A man who
shows traces of dishonesty is much more plainly marked than in larger
communities. As a consequence, the lack of the machinery and the customs
that we consider indispensable in extending credit does not prevent the
formation of correct ideas as to the wealth and character of a business
man.
UNDEVELOPED ECONOMIC ORGANISATION
Most of the South American countries, we should keep in mind, are still
sparsely populated and have no need for the elaborate machinery of trade
and finance which exists in Europe and North America. The region
farthest advanced in its economic development, the River Plate Basin,
may be roughly compared to agricultural States like Iowa, Kansas, and
Nebraska as they were thirty years ago. Farming methods are usually not
economical. The small farmers have little money of their own, their
lands are heavily mortgaged, and they are "carried" from one crop to
another by the local general retailer, who makes advances to them both
in goods and in money. The retailer must in turn secure liberal credits
from wholesalers, who are in their turn partly "carried" by the banks.
There is no clear-cut distinction between dealers in commodities and
bankers, for the dealers are forced to finance most of their own sales.
Such an arrangement of course favours extravagant credits, high prices,
speculation, and crises, just as it did in the United States. It is
rapidly giving way to a more complex organisation, in which the farmer
has funds of his own, does his short-term borrowing at a bank, and pays
cash for his purchases.
Without attempting to comment on intermediate grades of organisation we
may consider briefly the manner in which trade and finance are conducted
in the north coast countries. An officer of a bank there asserts that
banking in the north coast countries is not to any great extent a matter
of handling currency or money funds. The intermediary system of brokers,
merchants, and other middlemen between the producer and his market, to
which we are accustomed, is lacking, and the banker must take the place
of all of them. He must himself inspect and sell produce. Loans are
made, for instance, secured by growing crops; the bank sends a man to
the plantation to look over the coffee or cocoa, or whatever the crop
may be, and report on its condition and prospects; to protect itself the
bank sees that it is properly prepared for shipment, and takes care of
the sale in the New York, London, or Hamburg market. The bank collects
the proceeds and credits the customer with his share. Interest rates run
from 8 to 15 per cent. and commissions for selling from 1 to 3 per cent.
INTEREST RATES
Interest rates average considerably higher--even making allowance for
increased risk--in South America than in the United States. They are,
however, much more stable and more uniform over the whole continent. The
uniformity is no doubt to be ascribed chiefly to the large English and
German banks, with their branches in several different countries and
their ready access to European financial centres. The stability in rates
over a period of years is presumably due in part to the relatively
gradual development of banking, commerce, and production, so that sudden
shifts in the demand for and supply of banking capital are not frequent.
There are, however, a number of exceptions to the general stability. In
Argentina the crop-moving season creates, though to a much smaller
extent, the same kind of extra demand for currency as in the United
States, and tends to make some seasonal variations in discount rates.
They vary from as low as 6 per cent. to as high as 12 per cent., but do
not normally move far from 8 or 9 per cent.
COMPENSATION OF DIRECTORATE
The German, French, Italian, Spanish, and many of the domestic banks,
especially in Argentina and Peru, follow the European custom of
compensating the home office directorate by allowing them a fixed
percentage of the net profits. The president, manager, founder, and
others may also be compensated in the same way. The net profits of the
Banco Espanol del Rio de la Plata are distributed: 2-1/4 per cent. to
certain specified charities, 1 per cent. to the founder, 12 per cent. to
the reserve fund, 2 per cent. to the directors and managers, 2-3/4 per
cent. to the fund for employes, 80 per cent. to the shareholders for
dividends and dividend reserves; those of the Banco de Italia y Rio de
la Plata: 1/2 per cent. to charity, 5 per cent. to the reserve fund, 7
per cent. to the directorate, 1-1/2 per cent. to the fund for employes,
86 per cent. to the shareholders. There is apparently no general rule
which governs the distribution except possibly that the larger the bank
the smaller is the percentage for the directorate and management. In
England the directors are more likely to receive a fixed compensation.
Whether this plan of having a paid directorate works better than the
American method of having a directorate made up usually of some of the
larger shareholders, whose payment is purely nominal, is an open
question. It is largely a matter of national custom.
CLASSES OF BUSINESS OF FOREIGN BANKS
First. The foreign banks in South America usually start by devoting a
large proportion of their energy and capital to operations in exchange.
Second. In this connection they purchase and make advances against
commercial bills drawn on importers in the countries where they are
doing business.
Third. At the same time the home office in London, Hamburg, or Berlin is
probably developing a business in acceptances which involves
comparatively little direct expense and allows considerable profits.
Fourth. All South American banks are called upon to handle collection of
drafts and sometimes to take care of ordinary mercantile transactions,
both on a commission basis.
Fifth. An activity which may be of some importance from the beginning
consists of underwriting and selling securities.
Sixth. As quickly as possible the foreign banks build up a local account
current and loan and discount business.
Seventh. Some of the banks, especially the German banks, have
participations in syndicates and in industrial enterprises.
Eighth. In some branches they receive money and securities for
safekeeping or rent safe-deposit boxes.
Ninth. Many banks have savings and mortgage-loan departments.
None of the distinctively foreign banks in South America has as yet
issued circulating notes; this is being done, however, by some of the
domestic banks in which foreign capital is heavily interested.
There may, of course, be other miscellaneous activities.
FOOTNOTES:
[196] Adapted from William H. Lough, _Banking Opportunities in South
America_, Department of Commerce, Special Agents Series, No. 106.
Washington. 1915.