The last group composed of the bank's building, equipment, and ground is a distinctly fixed asset.

The liability accounts may best be grouped according to the parties who have claims against the bank-namely, (1) stockholders, (2) depositors, (3) other banks, (4) general public.

The stockholders are really the owners of the capital, surplus, undivided profits, and unpaid dividends. The depositors may be individuals, banks, or governments, and they have claim to balances which may be payable on demand or on time. The bank is also debtor to outside institutions which have loaned on bills payable or rediscounts, and to persons who are holding its obligations in the form of circulating notes, cashiers' checks, certified checks, acceptances, and letters of credit.

VI. ANALYSIS OF A BANK STATEMENT.

The statement of a bank reveals its condition on a certain date, and when several past statements are compared its record over a given period of time may be ascertained. The various items will gradually come to bear certain more or less definite relations to one another. Their relations will vary in considerable manner among banks, both according to the section in which they are located and the type of business which they handle, and for banks in general they will also vary in response to changes which take place in general business conditions. Banks, especially in the larger centers, which regularly lend to other institutions, consider carefully the statement of condition which a prospective bank borrower furnishes before a loan is granted. They regularly analyze the statement and study the relations which certain of the items bear to one another. While these relations, as just indicated, are by no means absolute, certain general limits have become established.

In analyzing the bank's statement several tests are applied. On the one hand, the profitableness of the account of the institution is considered. This is supplemented by an analysis of the character of its assets, especially for the

purpose of seeing if the bank is in a sufficiently liquid condition.

The profitableness of the prospective borrower is shown in several ways. The primary test is to consider the ratio which deposits bear to the capital investment, including in the latter term capital, surplus, and undivided profits. It is generally accepted that a bank which shows a ratio of less than five to one between deposits and capital investment is conducting too small a volume of business, for the capital investment. On the other hand, a bank which shows a ratio of more than ten to one is conducting too large a business and should increase its capital, as the high ratio does not provide sufficient margin of safety in the event of the bank's failure. This test may be supplemented by observing the ratio which loans bear to deposits, to discover any tendency toward overlending. Such a test is less satisfactory because the ratio varies greatly according to monetary conditions, decreasing as stringency is noted. A third test lies in comparing the growth of surplus and undivided profits over a series of years as well as the dividend record of the institution.

In studying the character of the assets, attention is directed to the proportion of fixed assets, such as bank building, real estate, furniture, and fixtures. The amount which a bank invests in its premises should be proportioned to the volume of its business and to its capital, while similarly it should not hold real estate other than that which is necessary to conduct its affairs. Other assets which may possibly become slow are also considered-for example, unlisted stocks and bonds. Of primary importance with respect to liquidity is of course the reserve position of the institution, and attention will always be given to the reserve ratio which the bank's statement shows.

Supplementing these two types of information, a lending bank considers the past record of the applicant with respect to borrowings. The lending institution is often furnished with a statement of the total borrowings of the applicant from other sources as well as from itself. This serves to indicate how the applicant has been conducting its affairs

and also to show whether it has borrowed only for seasonal and extraordinary needs and has followed the usual practice of "cleaning up" its indebtedness to the banks each year. Another source of information will be the manner in which the borrowing bank has in the past conducted its accounts with the lending institution, especially whether it has made a practice of overdrawing against uncollected items or whether it has been conservatively and carefully managed.

CHAPTER XIII

BANKING COSTS

I. ADJUSTMENT OF COST IN GENERAL BUSINESS.

EVERY business institution has to consider the rate of charge which it will be able to make for its service or product, and the establishment of such rates is often one of the most serious problems in business management. The retailer is constantly faced with the necessity of keeping his charges at such a level as will net him a profit above cost, while at the same time he avoids loss through excess of expense over income. The appcrtionment of different items of operating cost to the different charges for service or goods is a special phase of the general problem herein referred to and is itself highly technical. It always offers serious difficulties as an element in practical business policy.

In banking the same problems have to be met, and while they present some peculiar phases or elements of difficulty, they are in the main identical with the questions of the same description which are encountered in ordinary business. Still it is true that business enterprises are not all interested in this problem in precisely the same way. Contrast, for example, the case of a municipal street railway which has entered into a contract to carry passengers at a five-cent fare. The problem of profit for it is largely a problem of keeping down expenses, since the rate of its charge is practically stable. True, it may be possible, by proper adaptation of service, to adjust its charges in an indirect way, as when special cars are run for long-distance traffic on an express basis, thus avoiding the cost of intermediate stops, while other cars are run for local traffic, but in the main the problem is very simple. At the other extreme of the problem of price adjustment is the case

of a manufacturer who has to fix his charges on, say, one hundred different items or kinds of products, adapting his accounting so as to apportion overhead costs as well as individual costs to the several items. Intermediate is perhaps the problem of the railway which carries both passengers and freight and which possibly divides its passenger traffic into two or three classes, while its freight is classified on a very complex schedule designed to adapt the rates to the different freight movements.

II. INFLUENCE OF COMPETITION IN DETERMINING BANK CHARGES.

The bank corresponds probably more nearly in its pricefixing problem to the public-service corporation than to any single type of industrial business. While within certain limits the bank can establish its own scale of charges, it cannot fix these in any one instance very differently from the rates which are established in the open market unless it wants to cut itself off from business. Banking is a highly competitive enterprise and is not ordinarily monopolistic in any sense of the term, so that the bank is always obliged to face the question of competition and of market rates. When the banker goes into business he has to recognize, therefore, that his rates must under ordinary conditions conform to those which prevail in the community at the time, and that he will not ordinarily be able to raise them very much merely because of his own costs or expenses. Good management in banking-assuming that only sound paper is bought and that no losses are incurred-is thus a problem which involves two factors that of costs and that of investment of funds in such a way as to get the best return from them.

III. INTERNAL ELEMENTS OF COST.

Speaking generally, the elements of cost may be summarized as follows:

1. Fixed expenses-rent (or the interest on investment in building and equipment), insurance, surety bonds, taxes, light, heat, etc.