any of its officers, directors, or employees shall make any loan or grant any annuity to a bank examiner under penalty of imprisonment not exceeding one year, or a fine of $5,000, or both, in addition to a fine equal to the sum loaned or gratuity given. Any examiner accepting a loan or gratuity from a bank examined by him shall be liable to imprisonment for not exceeding one year or a fine of not more than $5,000, or both, and may be fined a further sum equal to the loan or gratuity; and shall thereafter be disqualified from holding a position as national bank examiner. 142. Unofficial examinations.-The report of the national bank examiner is made to the Comptroller of the Currency and is seldom, if ever, seen by the officers of the bank. Yet it is the officers and directors who are held responsible if anything goes wrong with the bank. Most banks, at least those in the large cities, find it advisable, therefore, to have a thorough examination made by expert accountants or auditors employed by the stockholders or board of directors and reporting to them. The principal feature of the official examination is the appraisal of the bank's assets to determine its solvency. As a result of such examination the bank may be advised by the Comptroller or by the state banking department to reduce or "write off" some bad debt, but it seldom gets any suggestion for an improvement in its accounting system. The expert accountant, on the other hand, is not concerned primarily with the appraisal of assets; his duty is to ascertain and report the exact condition of the affairs of the bank. By so doing he paves the way for changes in the accounting system where it is necessary and for other improvements which will further safeguard the interests of stockholders and depositors.1 The Comptroller of the Currency for years has been urging the directors of national banks to supplement the work of the examiner with examinations by a committee of the directors, and he has submitted suggestions as 1 Moxey: Practical Banking, p. 233. to the points that such examinations should cover. Some banks have a system of internal examinations by committees made up from their own clerical force. Clerks are selected who have no part or responsibility in the work of the particular department to be scrutinized, and who carefully examine all the books, records and details of the department to ascertain how accurately and efficiently the work is being done. In order to keep the clerks constantly alert and up to their work some banks have a practice of shifting them from one division of the ledgers to another. In several of the large cities the clearing house association employs independent examiners who periodically make searching examinations of the affairs of member banks. 143. Bank failures.-Banks may be closed either by voluntary retirement or by involuntary retirement or failure. Since the national bank act went into effect over 500 national banks have been placed in the hands of receivers and have had their affairs wound up. Sometimes it happens that the business of a bank dwindles and becomes unprofitable, and it is thought desirable to liquidate. A national bank may go into voluntary liquidation on a vote of the owners of two-thirds of the stock. Notice of the proposal to liquidate is certified to the Comptroller of the Currency. Notice must also be published for two months in a New York City newspaper and in one where the bank is located, calling upon all creditors to present their claims. When a national bank fails the Comptroller of the Currency is charged with the duty of closing its affairs. He appoints a receiver who takes possession of the records and assets and collects all debts due the bank. Bank failures are due to a variety of causes-bad management in making loans; dishonest officials who have used the bank's funds for their own speculations; rumors of insolvency which start a "run" by frightened depositors; panics, affecting the whole country; or violation of the laws under which the banks operate. In the annual report of the Comptroller of the Currency for 1911, the following analysis of national bank failures was made: 60 per cent of the failures were caused by violations of the banking laws; 23 per cent by injudicious banking; 13 per cent by shrinkage in values and general stringency in the money market; and 4 per cent resulted from the failure of large debtors and other minor causes. Criminal violations of the law caused 37 per cent of the failures, 23 per cent being caused by fraudulent management, 7 per cent by defalcations, and 7 per cent were wrecked by the cashier or other employee. Excessive loans caused 20 per cent of the failures, and heavy investments in real estate or mortgages about 3 per cent. Former Comptroller Ridgely once said: "The most frequent cause of bank troubles, in fact the almost invariable cause of bank failures, is the granting of credit far beyond the legal and prudent limits to the officers or to one concern or group of allied concerns generally owned and managed by the officers and directors of the bank, or in which they have, directly or indirectly, some large pecuniary interest." One of the most common causes of closing is the impairment of the bank's capital by losses. If the examiner finds that by reason of bad loans the capital and surplus have been seriously impaired, the interests of the depositors may require that the business be taken out of the hands of those who have brought the bank to this dangerous condition. If it be a national bank, the Comptroller of the Currency appoints a receiver, who is usually a bank examiner. The receiver makes an inventory of the assets and liabilities. This may show that the bank is solvent and has only been temporarily embarrassed because of scarcity of cash. In the course of a few weeks or months, it may be possible to convert enough of the assets into cash to meet the demands of depositors, and the bank may then be opened again. 144. Liquidation. If the bank is hopelessly insolvent the receiver proceeds to wind up its affairs, and in so doing he seeks to protect the claims of the depositors. All available assets are converted into cash, and if these are not sufficient to pay the creditors, the receiver of a national bank may assess each stockholder in an amount not exceeding the par value of his stock. In settling claims against the bank the United States Government is in a sense a preferred creditor. The circulating notes of national banks, which are promises to pay money to the holders, are protected by bonds deposited in the Treasury. The Comptroller sells enough of these bonds to pay off the failed bank's notes as they are presented. To the depositors of a failed bank the receiver issues as promptly as possible a "certificate of proof of claim," which certifies that the holder is a creditor of the bank to a certain amount. From time to time as the assets are realized upon by the receiver, "dividends" are paid to the depositors. The receiver's certificate issued to the depositor is usually negotiable and can be sold or discounted like a note. Loan agents are always on hand to buy up these claims, usually at a great discount. Sometimes other banks are willing to accept these certificates on deposit, giving the depositor immediate credit for, possibly, two-thirds of the amount represented by the certificate. When state banks fail the procedure of liquidation is much the same as with national banks. Until recently, however, the receivers for failed state banks were appointed not by the banking department but by the courts. Frequently the receiver of a state bank or trust company is not a trained man but gets his appointment for political or personal reasons. Then, too, instead of receiving a fixed salary as a national bank receiver does, he gets a percentage of all the money handled. In many cases the fees thus received are very large. There is a growing feeling that the liquidation of state banks should be placed under the control of the bank supervisors. READING REFERENCES Bolles: Money, Banking and Finance, Ch. XXVII. Howard and Johnson: Money and Banking, Chs. XVII, Moxey Practical Banking, Ch. XIX. : CHAPTER XVIII SAVINGS BANKS 145. Functions.-The function and the methods of the savings bank are very different from those of the commercial bank. The latter, as we have seen, serves the business man who needs current funds or credit to carry on his business. The savings bank serves the man of small earnings and without capital by providing a safe place to keep his savings and an experienced agency for investing them so as to yield him an income. The savings of the average wage-earner are usually not large enough to admit of his investing in bonds, mortgages, and other forms of investment open to the man of means, nor is the man of small income qualified by experience in such matters to select a safe and profitable investment. But the savings bank takes these small savings of scores of individuals, which collectively amount to very considerable sums, and invests them for the depositors in such ways as to insure safety and a fair return. It thus encourages among the masses habits of thrift and industry, and accumulates for productive uses money which otherwise would lie idle or be squandered in unwise expenditures. From the standpoint of the employment of funds also there is a wide difference between savings banks and commercial banks. The function of the savings bank is primarily that of investment, while the commercial bank makes advances to business concerns for current needs. The savings bank invests the depositor's savings to bring |