THE UNION BANK OF AUSTRALIA (LIMITED).

Globe, Volume XXII, Issue 1896, 22 March 1880, Page 4

THE UNION BANK OF AUSTRALIA (LIMITED).

The following is extracted from the “ Insurance and Banking Bccord” of this month, ns a matter in which a large portion of onr readers will be interested. The Union Bank of Anstralia is one of onr oldest established Banks, and derives a large share of support from depositors in New Zealand. The alteration about being made in its constitution will, it will be observed, place it in the position of having a reserve capital of .£3,000,000, exclusive of the accumulated reserve funds, amounting to ,£816,500, thereby affording the most perfect protection to all who have funds in the hands of the Bank: In our December issue _ was placed before our readers some explanation of the Banking Companies Act, which became law in the lass session of ths British Parliament. The text of the measure was also _ supplied. and we anticipated that its provisions would probably bo availed of to a considerable extent. This is already in course of verification. The London and Westminster, which must be ranked as the leading English joint-stock bank, has determined to come under its provisions, and other important banking institutions are following in its wake. We may here repeat that registration under the new Act is a matter optional with each institution, and this gives assurance that the management taking the important step of changing a Bank’s constitution, only does so after careful consideration, and with the absolute conviction that it is one that will conduce to the strength of the institution and the advantage of ts customers. The first idea that suggests itself is, that an unlimited Bank must necessarily furnish a better security to its depositors than one with a defined limit. But this is only one of those half truths which, we think, gives way under examination. The unlimited banks, although having upon their registers many moniel men, have failed to secure as shareholders a large and cautious class of capitalists who will not touch anything of which they cannot see the end. The option thus lies between a middling list of shareholders without limit to their responsibility and a far superior register, containing the names of men who, although their responsibility be limited, would doubtless be able to meet the claims upon them to the last shilling of what they undertook. And the strong point for the security of depositors in banks coming under the prtvisions of new Act is the reserve or guarantee capital, which cannot bo called up under any circumstances by the directors, for banking purposes, but must remain exclusively as a guarantee for the general creditor*. In an excellent letter which appeared in the “Banker’s Magazine” of January last, the arguments in favor cf limited liability are put forward with force and moderation. Upon the point of the deterioration of the share registers of unlimited Banks, and with the failure of the City of Glasgow Back in remembrance, the writer says , “ We may assume that failing the adoption of limited liability, the gradual withdrawal of the richer (and, probably, poorer shareholders as well) will continue. If so, the basis of the company will be narrowed, the social status and wealth of tho whole body of proprietors will gradually diminish, aud, being the security imagined, unlimited liability may in the end bo no security at all. “ That this may be the probable result is generally acknowledged. It was, perhaps, foreseen iy the Government in 1826, which would have granted charters to the joint stock banka of that time but for the opposition of the Bank of England.” He then appositely quotes a “ careful and thoughtful ” memorandum addressed to the Banking Commission in 1874 by Mr J. W. Gilbart, so well known in connection with the Loudon and Westminster—now changing its constitution. That veteran banker and writer said : “I believe it is undoubtedly true that many wealthy men abstain from becoming shareholders in joint stock banks in consequence of unlimited liability, and that, though friendly to the principles cf joint stock banking, they take shares only in those banks which have charters limiting their liability. “ I think it desirable that wealthy men should be encouraged to become shareholders in joint stock banks, because, by their influence, they bring business in the bank ; because the bank has then a greater number of persons from whom to choose suitable directors ; and because, when such shareholders address the directors, either privately or at public meetings, in the language of caution or advice, their social position gives greater weight to their admonitions.” This is valuable testimony, and it adds to its weight that Mr Gilbert’s life-long connection was with an unlimited Bank, and he would therefore speak from the consciousness of experience as to the drawbacks of the svstem. Again, so far back as 1365, Lawson, in his “ History of Banking,” says : “ It is this undefined liability that prevents many wealthy and influential individuals from connecting themselves with joint-stock Banks, or becoming shareholders in sueh institutions; and this state of things will continue until the law of partnership undergoes that revision which the importance of the subject so imperatively demands.”

Thera is much pertinence in the following from the pen of the “Bankers’ Magazine” correspondent, whom we have already quoted:— ‘ ‘ I thus assume in favor of limited liability, that a Bank so constituted will have a richer proprietary to enable it to meet any calls ; that it may have a reserved liability only available in case of liquidation ; that the accounts must be duly audited and published ; that sueh Banks have not suffered from the effects rf panics more than those on the older system ; that their transactions will be scrutinized more severely, and he curtailed if found to be beyond their legitimate business ; and, lastly, that they have grown in the confidence of the pnblie to such an extent, especially in the country, that the limited Banks would object to exchange the word ‘ limited ’ for any other term.” It has been already intimated that the Union Bank of Australia, which is amongst the moat successful hacking institutions of this or any other country, intends to avail itself of the new Act and to como under the limit. Hitherto it has stood alone in the colonies as an unlimited Bank. Under its new constitution it will be in harmony with tho principle of limitation which, whether under charter, or special act of incorporation, or the colonial limited liability acts, is universal in the colonies of the Australasian group. Within a few days the necessary formal notices will be issued to the customers of the Bank, and as such are generally dry and formal documents, it may not be inopportune to show what the position of the Bank will be in relation to its depositors and others when the proposed alteration is carried out. Tho effect of the change will he to increase the amount of the shares from £25, the present paid-np amount, to £75 each, the additional £SO per share being intended to be exclusively guarantee or “ reserve ” capital. Thus two thirds of the subscribed capital is reserved against contingencies, being twice the usual proportion which most other Banks deem sufficient. Under tho intended registration, the paid-up capital will he as at present, £1,500,000; the paid-up reserve fund, £816,500 —together £2,316,500 ; the new reserve or guarantee capital, £3,000,000. The total paid-up and subscribed capital will be £5,316 500. The shareholders will thus know precisely the limit of their responsibility, and the pnblie will be guaranteed to the extent of £3,816,500 over and above the paid-up capital of he Bank. In speaking on this matter last January in London, the chairman of tho Bank expressed his belief that the proposed reserve liability was not only sufficient but too large. Whether this be so or not, as regards the proprietary, the objection is one which is all in favor of those whose confidence the Bank justly enjoys. For the more extended comments of the chairman, we refer to the published report of his speech at the meeting. It is now a known fact that the intention cf the Union Bank to register under the new Act has already brought in some wealthy proprietors who had previously held aloof, and the public approbation of the step is shown by the greatly enhanced value of the shares in the market.

Not the least advantage of the intended change is, that it will, under the provisions of the Act, necessarily inaugurate a system of independent audit. Up to this time the audit has been performed by Bank officers. But, however competent and inflexible these gentlemen may be, and doubtless arc, there is no assurance to the public so convincing as that which comes from auditors elected by the shareholders and independent of the managment.