THE BANKING SYSTEM

Evening Post, Volume CX, Issue 73, 23 September 1930, Page 8

THE BANKING SYSTEM

WEALTH AS AN ASSET

ESSENTIAL TO INDUSTRY

(By "Scrutator.")

I have followed with considerable interest tho recent correspondence in the "Evening Post" relating to our banking system. As the b»nks are public institutions, it only proper that their actions should come under public criticism, and I feel certain that the recent controversy will do some good, even if it only interests our people in the banking problem, and makes them feel that it is their problem as well. I am not interested in the specific points that have arisen in the controversy. Both sides have been fully stated. Neither am I interested in the political aspect of the controversy. When a Government approaches or exceeds the limits of taxable capacity it must expect the sort of trouble that it is now experiencing with the banks and picture interests. I should, however, like to make a few observations based on ascertainable fact and not on prejudice.

A common complaint made is that the banks are wealthy corporations. So they are. But is it in the interests of New Zealand that they should be poor or weak? In a heavily indebted country like New Zealand, where the public authorities, both national and local, are up to their eyes in debt, and where so much of our industry and commerce is nnder-capitalised and leaning on the banks, would we be in a safe position if the banks themselves were i not strong? As a perusal of business balance-sheets will show, the banks have to carry a heavy load which, if they -were weak, they could not bear. In other words, if our banks were not powerful and wealthy corporations, they could not extend the aid that they at the present time can to our industry and commerce. Critics along these lines seldom clearly face the issue. Do they want our banks to be financially strong, or would they sooner see them weak? If the' latter, such critics ai'e merely fools; if' the former, their objection to the banks on these, grounds must necessarily go by the board. It will be a poor day for New Zealand when the acquisition of wealth in industry, commerce, and finance is generally regarded as a crime. ' SMALL SHAREHOLDERS. Who are these wealthy banking corporations? A scrutiny of their share lists shows that they are very largely groups of our own people, and largo groups with small average holdings of bank shares. This L common to both New Zealand and England. The share capital of tho so-called "Big Five" in England, amounting to over sixty million sterling, is held by about 275,000 shareholders, on an average holding of under £220 each. Surely democratic ownership could go no further than this. Executive control, moreover, is entirely in the hands of the staff, who are the paid servants of the owners'; and the directors either represent the Government, that is,.the people direct, as in tho caso of tho Bank of New Zealand, or are elected by the body of shareholders, the vast majority of whom are small * people. In the case of one important New Zealand bank there are 6149 shareholders. Of these IS7B hold less than 100 shares each, 1223 hold between 101 and 200 shares, and 5417 hold 1000 shares or less; while the numbers of heavier holdings are small, and of very large holdings very much smaller still. This is typical of the distribution of bank shares. The banks are the property of a' large body of thrifty investors of moderate means, scattered all through the community. The profits made by the banks are grossly over-estimatod an popular opinion. Dividends are assessed on share capital, but they are earned on total shareholders' funds, which very greatly exceed the nominal paid-up capital. On looking at the last.issue of the "Wild Cat," the well-known Australian financial review, I find in the case of one' bank trading in the Dominion that at last balance the position was as follows: — £ Paid-up capital 4,040,749 Boserves ... 2,160,000 Profit and loss carried forward 95,549 Total, shareholders' funds £6,296,298 Not pro,fit was £389,841 for the year, which gives a return on shareholders' funds of a little over 6 per cont. There is nothing excessive-about this. The following is an extract- from the annual report of the Bank of Now Zealand for 1928, page 15:— "The chief auditor has supplied the following figures showing the rate of interest earned by this bank on its interest-bearing advances in the Dominiou for tho years ended 31st March. 1897, 1907, 1914, 1917, 1927. (The figures for 1928 have not yet been worked out.) 1897 1907 1914 1917 1927 6.56 5.79 0.00 6.00 6.C7 . "It will be seen that the difference between the highest and lowest point is less than 1 per cent. Eemembcring the heavy increase in income tax, salaries, and other overhead expenses of the bank between 1907 and 1927, one may recognise that the bank has not passed on to its borrowing customers a proportionate share of its increased operating charges." PROFITS AND RESERVES. It may be .rejoined that the banks do not necessarily disclose all thoir profits, and in some measure this may be so." But it must also be remembered that against this the banks have undisclosed capital iii the' form of premises heavily written down out of profits, and sums set aside'for contingencies, and if earnings on this were taken into consideration the position would not be substantially altered.. Banks are sometimes . criticised because it is believed, and I think correctly, that they hold secret or undisclosed reserves. • Probably they do. It is essential for sound finance and in tho public interest that they should. Take, for example bank premises, which are usually written down drastically in the bank's books. Such premises, while' essential for the business of the bank, are unrealisable in emergency to meet tho claims of note holders and depositors; and even if they were 'ultimately sold on liquidation they would be of much less value to the purchaser than they are to the bank, since;the cost of remodelling them for ordinary trade and commerce purposes would be very large. In some places bank premises would be of little value for any other purpose, and therefore sound finance demands that they should be very heavily written down. If the bank carried such premises at cost or present value as a going concern on its books, it wouid be, rightly accused of inflating its assets, aad would damage its credit. A bank* credit is its most important asset, because, in the main, its customers.are its creditors and not its debtors. To stigmatise such wilting down of premises as creating secret reserves in a sinister sense is ridiculous, and betrays ignorance of the elementary principles of sound finance. An ordinary trading or manufacturing firm may carry fixed assets on its books at cost or present value, even though everybody knows that such yalue do-

pends on the earning power of the business as a going concern, but it is well known that at a forced realisation such fixed items might be very nearly valueless.

It is further said that the banks keep some of their funds available under such items as bills payable, contingencies, and so on. So they do. Again this is sound finance. A bank does not care to trench upon its disclosed reserves to meet fluctuations of business, as to do so would impair1 its credit. When reserves are declared and carried into the books of a bankj to all intents and purposes they become part pf the bank's permanent capital, and fluctuations of business must be adjusted on some other item, notably depreciation of securities, and provision for doubtful accounts. The criticism of banks on the grounds that they keep secret reserves, therefore, is merely a display of financial ignorance on the part of the critic.

SATETY OF DEPOSITS,

The bank is responsible to the public for the deposits lodged with it, and for the ultimate repayment of its circulating notes. Those arc in part guaranteed by the capital and disclosed reserves of the bank. No other form of ultimate guarantee would bo satisfactory. Take, for example, the case of the bank already referred to; At last balance its deposits are shown at £22,165,235, and its note issue at £230,137. This is a huge sum, and total proprietors' funds at £6,296,298 are the ultimate security offered, from the long run point of view, that these deposits and notes are safe.

In a. second article to be published to-morrow, "Scrutator" will deal with the effect of taxation on. banking business.