mand deposits and 10% of its time deposits as a reserve. State commercial banks in Ohio must maintain a reserve of 15% against all deposits. A loan will do one of two things, or a combination of them. To the extent that the checks written against the credit cause money payments to individuals, or other banks, the reserve is diminished; to the extent that the checks written go to the credit of other customers, or are not used, the deposits are increased. If a bank's reserve falls below the right proportion to deposits, it must cease to lend until the payments of loans, deposits of money, and receipts from other sources, cause that proportion again to be reached. When the reserve of a bank which is a member of the Federal reserve system becomes inadequate it restores it by remitting to the reserve bank, or by rediscounting or borrowing. (2) Banking laws restrict the amount that can be loaned to one person, firm, or corporation. Even if the law made no limit, safe banking practice would place its own limit. No state bank can lend to any of its officers, or any one firm, or individual, an amount in excess of a certain per cent of its unimpaired capital and surplus. Ohio has the following limitations upon loans:9 "A bank doing business as a commercial bank, shall not lend, including overdrafts, to any person, firm or corporation, more than twenty per cent of its paid-in capital and surplus, unless such loan be secured by first mortgage upon improved farm property in a sum not to exceed sixty per cent of its value. The total liabilities including overdrafts, of a person, company, corporation, or firm to any bank, either as principal debtor or as security or indorser for others, for money borrowed, at no time shall exceed twenty per cent of its paid-in capital stock and surplus. But the discount of bills of exchange drawn against 9 Ohio Statutes, Section 9754. LIMIT OF BANK'S LENDING POWER 169 actually existing values, and the discount of commercial or business paper actually owned by the person, company, corporation, or firm negotiating it, and the purchase or discount of any note or notes secured by not less than a like face amount of bonds of the United States, or certificates of indebtedness of the United States, shall not be considered as money borrowed within the meaning of this section." Pennsylvania has a 10% limit as to state banks and provides further that the total of loans to officers and to firms in which those officers are interested shall not exceed 25% of the bank's capital and surplus. Mutual savings banks cannot lend at all to their officers, or trustees. The value of such restrictions is seen when bank failures show the violation of their spirit. One bank had a loan of $37,000 standing in the name of a poor clerk, while one of the officers had been the real borrower and had used the money. Another bank with a capital and surplus of $1,600,000 had direct and indirect loans to one man of $1,337,000. As to the restrictions of the national banking act on the loans of national banks the Comptroller of the Currency made the following interpretation: 10 Character of loans A) Accommodation or straight loans. The law expressly provides that this (a) Drafts and bills of exchange (b) Demand obligations, when se- (c) Bankers' acceptances of the Amounts loanable Maximum limit, 10 per cent of bank's paid-up and unimpaired capital and surplus. No limit imposed by law. The inclusion of "drafts" will bring within the exception drafts drawn by an agent on his principal if secured as indicated and a sale of commodity is not a necessary basis. "Actual process of shipment" does not mean actually loaded on cars, but covers good faith assembling and delivery to the carrier without unnecessary and unavoidable delay. 10 Report of the Comptroller of the Currency, 1919, Vol. 1, p. 139. (C) Commercial or business paper (of No bank may make any loan under (b) Unless the property is fully (E) Notes secured by not less than a like face amount of bonds or notes of the United States issued since Apr. 24, 1917, or by certificates of indebtedness of the United States. No limit imposed by law. 15 per cent of bank's capital and surplus, in addition to the amount allowed under (A); or if the full amount allowed under (A) is not loaned then the amount which may be loaned in the manner described under (D) is increased by the loanable amount not used under (A). In other words, the amount loaned under (A) must never be more than 10 per cent but the aggregate of (A) and (D) may equal, but not exceed, 25 per cent. 10 per cent of bank's capital and surplus in addition to the amount allowed under (A), or if the full amount allowed under (A) is not loaned, then the amount which may be loaned in the manner described under (E) is increased by the loanable amount not used under (A). In other words, the amount loaned under (A) must never be more than 10 per cent but the aggregate of (A) and (E) may equal, but not exceed, 20 per cent. . Some examples of what a national bank may lend at any one time to any one customer under the amendment to sec. 5200, approved Oct. 22, 1919, expressed in terms of percentage of the bank's capital and surplus. LIMIT OF BANK'S LENDING POWER 171 The largest amount of obligations which a national agricultural credit corporation may hold against one person or corporation is 20% of its paid-in and unimpaired capital and surplus. An exception is made in the case of notes, drafts, etc., which are secured by warehouse receipts for readily marketable and non-perishable agricultural commodities. For such paper the limit the corporation may lend is 50% of its paid-in and unimpaired capital and surplus. (3) Even when a bank has available funds, it must be prudent. It should not make too many loans in proportion to its capital and surplus. It cannot take the risks an individual might assume. A bank is a trustee, so to speak, of its depositors' money. Unsettled conditions warrant a bank in going slowly, although money is easy. A bank's lending power is increased according to its ability and willingness to rediscount. In rediscounting a note of Brown's for $20,000, a bank recovers its funds and is able to lend someone else $20,000. Or if a bank must call a loan, or refuse it, it can grant the accommodation in so far as it is able prudently to rediscount. Smaller banks may rediscount at the larger banks with whom they have accounts. Banks which are members of the Federal reserve system are usually able to rediscount. While the Federal Reserve Board has not placed a maximum limit upon what a member bank may borrow, it has established theoretically a fair line of accommodation for member banks. This line is based upon the ability of the Federal reserve banks to lend without discrimination to each member bank if each member bank tried to borrow all it could. What determines each bank's fair share? It is the amount which each bank contributes to the assets of the Federal reserve bank of its district. Each bank has paid in a part of the capital. Each bank has deposits in the reserve bank.. deposits have to be held in Then the paid-in subscrip Thirty-five per cent of the reserve by the reserve bank. tion to capital plus 65% of its deposits is a measure of each bank's rights as to loans. Since the reserve bank has to keep a reserve of 40% against its issue of notes, fair normal line of borrowing for each member bank is two and one half (100% divided by 40%) times the amount obtained by adding 65% of a member bank's reserves to its paid-in subscription to the capital stock of the bank. Suppose a bank to have a capital and surplus of $1,000,000 and deposits of $8,000,000. If it has $800,000 on deposit with the reserve bank, 65% of this is $520,000. Three per cent of its capital and surplus has been paid in on its subscription to the capital stock of the reserve bank. That equals $30,000. Two and one half times $520,000 plus $30,000, equals $1,325,000 which is the normal line of rediscount for this bank. As a matter of fact some banks do not rediscount very often while others borrow in excess of the normal amount. At times the reserve banks have placed a restriction on the amount of rediscounts by a requirement. that a bank to rediscount must offer collateral along with its eligible paper. In such cases a bank cannot rediscount beyond its own investment in securities. In 1921 the Comptroller of the Currency 11 reported that the Federal reserve banks with one exception "require collateral from banks rediscounting eligible paper." The maximum amount which a national bank, state bank, trust company, or savings institution may rediscount at a Federal intermediate credit bank is fixed by law. It cannot exceed twice the paid-in and unimpaired capital and surplus of the borrowing bank; nor can it exceed such an amount as will cause the total liabilities of the bank to exceed the limit allowed by law. The total 11 Report of the Comptroller of the Currency, 1921, p. 3. |