CHAPTER XIX

SAFEGUARDING THE BUSINESS OF BANKING

227. Regulation promotes confidence. It is a function of government to supply business with the money it needs. Bank credit has largely superseded money. Bank credit rests on confidence, not merely in one bank, but in banks. To give confidence, to protect the public, regulation is necessary. Each individual bank profits not merely from confidence in its credit, but from the confidence the entire people have in the banking structure or credit situation as a whole.

228. How and by whom national banks may be organized. - A national banking association may be formed by five or more natural persons. The word natural prevents corporations from counting among the five. These persons must subscribe for capital stock at least to the amount of $200,000 if the bank is to be in a city of over 50,000 people, or $100,000 if in a smaller city. The Secretary of the Treasury, however, has the authority to permit a bank of at least $50,000 capital to start in a town of 6,000 or less people, or a bank with only $25,000 capital in a place that has not over 3,000 population. The shares of stock must be $100 each. The stock is all of one class as banks do not issue preferred stock. The stockholders first frame articles of association which specify the object of the organization and provisions for the regulation of the business. The organizers sign these articles and send a copy of them to the Comptroller of the Currency. An organization certificate must be made and acknowledged before a judge of some court of record, or a notary public.

This certificate has to be sent to the Comptroller. The certificate gives the name of the bank which is subject to the Comptroller's approval, the place where business is to be conducted, the amount of the stock and what each shareholder holds, the residence of each shareholder, and the declaration that the certificate is made to enable the organizers to avail themselves of the privileges of the national banking act. When these two documents have been filed the bank is a body corporate. Five or more directors, and a president, vice-president, cashier, and other officers, must be elected, but no business except that which is incidental to its organization can be transacted until the Comptroller of the Currency has given the bank his certificate of authority to commence business. Large city banks have twenty to thirty directors. Each director must be a citizen of the United States during his whole term of office and own in his own right at least ten shares of stock. If the bank has only $25,000 capital stock each director needs to own only five shares. Three-fourths of the directors must have resided in the state, territory, or district in which the bank is located or within fifty miles of the bank, for at least one year prior to their election. Three-fourths of the directors must always satisfy this qualification as to residence. When a bank sends in its organization certificate and notifies the Comptroller that 50% of the subscribed capital has been paid in, he makes examination to see that the organizers have complied with every provision of the law. He requires from the majority of the directors, the president, and the cashier, statements under oath as to any facts, and he can make any other kind of investigation he wishes. He has the right to withhold his permission to begin business if he has reason to suppose that the stockholders have in view purposes other than the legitimate objects contemplated. Just what would be illegitimate objects? As a matter of practice

MAINTENANCE OF CAPITAL AND SURPLUS 295

the Comptroller has denied applications to organize banks if he receives the wrong kind of information as to the financial standing or general character of the applicants, or if he finds that the existing banking facilities in the vicinity are sufficient. Many states give the state commissioner of banking or a board specific authority to refuse approval of any bank unless its organizers are of high character, and unless it is needed in the community and bids fair to succeed. The charter of a national bank now extends for 99 years from its organization, or from July 1, 1922, if it was organized before that date. Congress has the power to terminate the charters of national banks.

229. Maintenance of capital and surplus. The bank must have at least one half of its capital paid in at the beginning. The other half may be paid in installments of not less than 10% of the entire capital as frequently as at the end of each succeeding month from the time the bank is authorized to do business. The president and cashier are required to certify under oath to the Comptroller the payment of each of these installments as they are paid. A number of states require that all of the subscribed capital stock must be paid in before banks organized under their laws may begin business. There are provisions for the increase or decrease of the capital but no bank is allowed to reduce its stock below the minimum required for the organization of a bank, nor below the amount of notes which it has outstanding. If a bank with $500,000 of notes in circulation wished to reduce its stock to $400,000, it would first have to retire $100,000 of its notes.

As additional protection to depositors, noteholders, and other creditors, a surplus must be reserved from profits. Before any dividend is declared, one-tenth part of the bank's net profits for the preceding period must be carried to surplus until that reserve amounts to 20% of the bank's

capital stock. If a state limits the amount of a trust company's capital stock, the company is likely to create a large surplus to avoid the handicap. If the capital stock ever becomes impaired by losses or otherwise it must within three months after notice from the Comptroller make the impairment good by an assessment upon its stockholders. Many states require that the capital stock and surplus of a bank be increased if the average deposits are a certain multiple, say 5 to 10, of the capital and surplus. The Comptroller of the Currency has repeatedly asked Congress to require national banks to limit their deposits to 8 or 10 times the unimpaired capital and surplus of the bank.

230. Duties and responsibilities of stockholders, directors, and officers. The stockholders have annual meetings on some date in January. Each is entitled to one vote for each share of stock. He may vote in person or by proxy, but no officer, clerk, teller, or bookkeeper of the bank can act as proxy. Shareholders owning not less than two-thirds of the stock must consent to an extension of the charter of the bank, or an increase or decrease in the stock of the bank, or a change in the name and location of the bank, or a decision to go into liquidation and be closed. Each stockholder is held individually responsible for all contracts, debts, and engagements of the bank to the amount of his stock at par value, in addition to the amount invested in such stock. The additional liability of stockholders in a bank with $2,000,000 capital is $2,000,000. If the capital were $1,000,000, and the surplus and undivided profits $1,000,000, the additional liability would be only $1,000,000. In recent years a bank declared a dividend of $3,000,000 from surplus, which was used by the stockholders to increase the capital stock that amount. It advertised that it was increasing the security of its depositors and others by $6,000,000. If a state bank

STOCKHOLDERS AND OFFICERS

297

which existed at the time of the passage of the national bank act in 1864, had a paid-in capital of not less than $5,000,000 and a surplus of 20%, became a national bank its shareholders have no additional liability beyond the amount invested in their shares, but such a bank was required to add an additional surplus of 20%.

If a shareholder transfers his stock within 60 days before a bank failure, or with knowledge of the coming failure, he is also liable unless the person to whom he transferred the stock makes good his liability.

The directors elect the officers, prescribe their duties, adopt by-laws for the conduct of business, and perform, or delegate the power to do, all those things necessary to carry on its business according to law. No person at the same time can be a director, officer, or employee of more than one bank, banking association, or trust company, if either of them has deposits, capital, surplus, and undivided profits aggregating more than $5,000,000; or if the banks. concerned are located in the same city and it has more than 200,000 inhabitants. Trusteeship of a mutual bank, and a class A directorship of a Federal reserve bank are excepted from the provisions of the statute, and the Federal Reserve Board has the authority to give its permission to a director or officer of a member bank to serve more than one bank if the other bank or banks is not in substantial competition with the member bank.

Directors are required to supervise closely the work of their own officers especially as to loans. They may meet once a month or once a week, in some banks they meet every day. For closer supervision the loans are subject to the approval of an executive committee or a loan committee consisting of three or more members.

No compensation is received by the directors of the majority of banks- some banks pay their directors a nominal fee for attendance at meetings. This fee ranges