to say after enumerating the powers conferred upon trust companies by the Legislature of that State that, "It is evident from this enumeration of powers that trust companies are not banks in the commercial sense of that word, and do not perform the functions of banks in carrying on the exchange of commerce."

The powers granted by the statute authorizes trust companies to receive moneys on trust, but does not authorize them to conduct a banking business, to make loans on personal notes, or to discount or purchase negotiable paper.5

Rule determining authority or power.

To determine whether trust companies have banking powers reference must be had to the charter of the company; if incorporated under a special act, and if such act does not authorize the conducting of a banking business, the charter cannot confer such a power, though it is set out and grafted therein The statute is the measure of authority.

Where there is no special statute empowering and authorizing the formation of trust companies, such corporations may be formed and organized under the general incorporation laws of the State; and may conduct any lawful business permitted by law; but where there is a special act of the Legislature, authorizing the formation of trust companies, the incorporation must be formed under and controlled by its provisions.

In the absence of authority in the act authorizing the business of banking in connection with its business of executing trusts, the law, as previously stated, does not imply such authority.

5 Jenkins r. Neff, 186 U. S. 230.

CHAPTER XLVIII.

INSPECTION AND EXAMINATION OF BANKS.

$359. Checking up a bank.

Section 5240, Revised Statutes of the United States, provide that the Comptroller of the Currency, with the approval of the Secretary of the Treasury, shall appoint suitable persons to make examination of the affairs of all the national banking associations located within the States and Territories.

The Act of February 19th, 1875, provides the compensation of the examiners.

State banks organized or doing business in a State are usually placed under the supervision of a commission designated as, "Bank Commissioners," who are appointed by the Governor and confirmed by the Senate.

A Comptroller of the Currency, in discussing the usefulness of this office, says, "Perhaps no one thing has done more to promote the safety and sound management of national banks than their liability to examination, without previous notice, by an agent appointed for that purpose, and probably no provision of the law was more unpopular among the banks when the law first went into effect; but the good results brought about directly and indirectly by such examinations have fully vindicated the wisdom of the provision."

The position and office of Bank Examiner is one of great value and responsibility. Criticisms are frequently heard and expressed that bank examinations are of no value, that the commission is an unnecessary expense placed upon banks and that the good derived from the examination does not justify the

cost.

It is true that the experience with the adopted system of examination has been unfortunate in many cases. But the great good performed by the examination is seldom given to the general public.

The reason that examinations are regarded as formal and worthless, arises from the fact that where a bank fails the public generally overlook the fact that the failure was brought about by acts which could neither be detected by an expert, or

prevented by an officer of the law, or the prohibition of the law itself.

The largest and most dangerous failures are those produced by the bank's officers falsifying the books and robbing the "tills." These conditions or acts usually occur during the interim of examinations, and therefore could not be detected.

The difficulty is that examinations are made too hurriedly, and the work which the law requires to be done within a given time, compels the examiner to rapid efforts, and some seemingly small matter may be overlooked which, if sufficient time was allowed, could and would have been detected and a great failure averted.

The value of an examination made by a person that has no knowledge of local conditions cannot be wholly relied upon. An examination being made by a stranger who cannot be familiar with the business paper of the place, does not make discounts and assets good which are worthless.

The inspection should be thorough and should amount to an auditing of the entire business of the bank. This would require the appointment of expert accountants. The examinations also should be more frequent and could be more successfully performed if the examiner had full power to call in the board of directors, requiring them to remain in session while the examination was in progress. The directors, if required to be present, could verify the authority for making and discounting loans and be called upon to report upon each transaction, loan, or discount, and its value as a resource of the bank.

To make a thorough and complete examination of the condition and all the affairs of the bank, the examiner should enter the bank either immediately after the close of business for the day, or at such an hour before commencement of the business of the day, as would permit him to take possession of the entire assets of the bank. The first thing to be done is to place the officers or officer in charge of and managing the bank under oath, requiring them to truly answer all questions that may be put to them by the commissioner or commissioners, concerning the affairs of the bank, the character and value of its assets, and amount of its liabilities, neither misrepresenting nor concealing anything relative to the true conditon of the bank.

The cash in the hands of the teller or tellers should then be immediately counted, the amount found to be in the hands of each one should be noted as cash in the hands of first, second, and third paying or receiving teller, etc., and at the same time an itemized list of all cash items held by them should be separately taken and carefully examined, as these form a part of and (if solvent) are added to and counted as cash. Cash items, checks, including clearing-house certificates, in the hands of the tellers having been taken, separately listed, and carefully compared with the ledger statement, each item having been found to be regular, these added to the tellers' cash, together with the cash in the hands of the cashier or cash in the vault, which has been counted, make up the total cash on hand and as shown per general ledger.

If one examiner is making the examination, the bills receivable, together with the stocks and bonds, are immediately after counting of cash taken into his possession, and are placed under seal of the commissioner until such a time, as he may be able to list every piece of paper and loan held by the bank.

The commissioner may then take a skeleton proof from the general ledger of all resources and liabilities and the subsequent examinations can be based upon this statement, taken item by item.

The assets may then be examined and proved as they appear upon the skeleton statement. The real estate owned by the bank taken for debt, including that used as bank premises, should be listed. Title abstract should accompany each piece of property, and these will show the cost of the same, and date. when taken by the bank, and if carried above its value the excess should be charged off. The stocks, bonds, and warrants, are also listed. This should be done so the examiner may determine whether the bank, if it is a savings bank, has violated the law in owning or holding securities which are prohibited by law.

The loans usually are the most important part of the assets of the bank, and a full and complete list should be taken, together with a list of indorsers and collaterals. Each piece of paper should receive the personal examination of the commissioner, and during the investigation and listing one or more of the officials of the bank, who have a personal knowledge of the

genuineness, and value of the same, should be present that the commissioner may have such facts verified.

There are many instances of extensive frauds which have been committed, by means of loans that were never authorized by the board of directors, and during the process of listing the notes, questions directed to the officer as to their genuineness the unauthorized or forged loans may be brought to light.

The examiner cannot detect forged paper where the same appears to be regular upon its face, but he can do his duty by placing the officer in charge of the same, and who had authority in the first instance to accept or make loans, upon oath as to their value and genuineness. By listing the loans and discounts, the examiner can ascertain the amount borrowed by the officers and directors, and for which they are personally liable. From the list it can also be ascertained whether or not the bank (if a savings bank) has complied with the law in making its investments in securities authorized by law.

The stocks, bonds, and warrants when listed, their character, value, and genuineness should be determined. National banks are prohibited by law from purchasing, and holding as an investment stocks of other corporations; likewise savings banks are prohibited by law, from investing in certain stocks and bonds.

Overdrafts as a resource are a dangerous class of loans. The authority for their creation may also be a question, which the examiner should carefully investigate; for example, where a firm or corporation doing business with a bank, overdraws its account, the examiner should in every instance ascertain the authority for creating the same. All overdrafts should be listed; the date of the overdrafts and the amounts drawn; and the person creating the same should be called into the bank to verify the correctness of the account, and be required to secure the bank against the sums so drawn, as overdrafts are unlawful, unless granted upon collateral security deposited with the bank.

Resources, due from banks, are assets that may be accurately verified and proved by writing, or wiring, correspondents; stating the balance shown to be due from them on a certain day, and requesting a verification.

When all of the bank's assets have been listed, proven, and verified, with the books, and the sum total of their value is