REPORT OF THE COMMISSION.

Submitted to Governor Hughes December 15, 1907.

Hon. CHARLES E. HUGHES, Governor of the State of New York, Albany, N. Y.:

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DEAR SIR. In your letter dated November 13th last, which we had the honor to receive in due course, you request us as men having expert familiarity with" the conduct and management of banks and trust companies, to act as a Committee for the purpose of collating facts, receiving suggestions and expressing views which, after due reflection, you may entertain with reference to the following question: 'What, if any, changes are advisable in the law of the State relating to the incorporation, conduct and supervision of banks and trust companies.'"

SOURCES OF INFORMATION.

In view of the brief time within which you desire us to report, as well as our want of official power, we assume that nothing in the nature of the taking of testimony was intended. We have, however, collated such pertinent facts as were accessible from public records, which are appended hereto; we have had the advantage of familiarity with current events, and have been furnished information by the State Banking Department, the Comptroller of the Currency, the Attorney-General and the Executive Committee of the New York Clearing House; we have thus been given an inside view of the management, or rather the mismanagement, of the institutions which have recently been involved in more or less difficulty. Superintendent Williams has joined in our labors and rendered us every assistance in his power.

ORGANIZATION.

- Respecting the organization of banks and trust companies, existing laws seem to cover the requirements fairly, except as to the veto power of the Banking Department. The establishment of a bank or trust company, or of a branch of any existing bank or trust company, or the purchase of the control of one banking institution by another, should be subject to the approval of the Superintendent.

It should be within his province to prevent the organization of such institutions by improper men, or their establishment in localities where business conditions do not reasonably assure their success.

The law says (section 40), that "five or more persons may become a bank" by complying with the provisions of the act, and the only responsibility, seemingly, devolving upon the Superintendent in that connection, is to see that the capital is paid in in cash (sections 12, 13, 49).

In the case of the organization of a trust company, the Superintendent, before issuing a certificate, must ascertain whether "the general fitness for the discharge of the duties appertaining to such a trust, of the persons named in the certificate, is such as to command the confidence of the community in which such trust company is proposed to be located, and whether the public convenience and advantage will be promoted by such establishment" (section 153).

The law should be equally restrictive and explicit as to the organization of banks and the establishment of bank and trust company branches, and the duties, powers and responsibilities of the Superintendent should be clearly defined.

It has sometimes happened that banking institutions have been organized for no better purpose than to give employment to the parties bringing about the organization, without regard to the needs of the locality. Because of the very high price that the stock of successful banks and trust companies has commanded, institutions have been organized by promoters whose apparent ultimate object was to realize a profit by selling the same after organization was completed.

Branch banking, in its legitimate exercise, is worthy of

commendation. Where a strong, central institution seeks to utilize its funds by establishing a branch in some locality. where there are commercial interests and business needs to be served, it is a wise exercise of banking privilege and of mutual advantage to the bank establishing the branch and to the locality where the same is located; and in a city like New York, local needs may perhaps be better supplied by branches than by a separately organized institution. On the contrary, however, where a bank seeks to establish branches in various localities, mainly for the purpose of securing an aggregate of deposits all under the control of the parent bank, to be used in furthering the schemes of the parties controlling the same, it becomes an element of danger to the banking and business community.

Trust companies in the city of New York are not allowed to organize with a less capital than $500,000. We think that banks should not hereafter be permitted to have branches unless they possess a capital of $500,000; and we think that both banks and trust companies should be required to furnish an additional $100,000 capital for each branch opened.

Where a group of promoters unite to buy the control of a number of separately organized institutions and utilize the resources these institutions command, by exchanging loans and deposits, a dangerous element is likewise introduced; the law should provide means to prevent or eliminate such conditions. The force of these remarks is illustrated by recent developments.

It is, therefore, in our opinion, incumbent upon the State to empower the Superintendent of Banks to scrutinize very closely not only all applications for the organization of new banking institutions, but also the projects for the establishment of branches of institutions already organized, and the circumstances under which control of other institutions is obtained or mergers of two or more are contemplated. Moreover, he should have the same power to scrutinize the enlargement of the capital stock and its actual payment in cash, as obtains in the case of the original capital.

Where people essay to organize a banking institution, it is

presumed they have money which they wish to invest in the banking business, and unless the Superintendent, by examination, is satisfied of this fact, he should, in our judgment, withhold and refuse the charter or privilege asked. The onus of clearly establishing the financial ability and integrity of purpose of the promoters, as well as the necessity or desirability of additional banking privileges at the place in question, clearly rests upon the parties making the application.

In saying this, we desire to specifically disclaim any opposition to the organization of small banks. Their existence is essential to the proper service of the public; they serve a class of business to which the larger institutions, as a rule, do not cater, except perhaps through branches, and wherever there is a proper demand for them their creation should be encouraged. It is only the organization of banks by people without banking capital, or without a proper motive for seeking such organization, or by people who, from want of good judgment, seek to establish an institution where, even with good management, it could not reasonably hope to succeed, that should be discouraged.

CONDUCT AND SUPERVISION.

The Superintendent of Banks has supervision over all monied corporations chartered under the laws of the State, known as banks of discount and deposit, trust companies, savings banks, safe deposit companies, mortgage loan or investment companies, and building loan associations. The importance of the office is best expressed in figures. The total resources of all corporations of the three classes first named, on January 1, 1907, were $3,398,182,274.

In our judgment the relation between the Superintendent and the corporations under his supervision is not sufficiently direct and intimate, nor is his power to control adequate.

The merits of a well managed supervision are evidenced usually only by the general success of the institutions under control. The good which the supervising officer accomplishes is of a negative character; that is to say, he corrects in time abuses which might otherwise have led to loss, and no wrong

doing having come to the public knowledge, the Superintendent fails to receive special credit for very much of the good which his office accomplishes.

As long as banking institutions are successful, keep faith with the public and meet their obligations, there is, from the governmental standpoint, little ground for criticism. When, however, through mismanagement or misfortune, their financial strength is impaired or menaced, their ability to serve the public lessened, and possible or probable loss impends, it is then that the advantage of good supervision is realized; by enforcing the law and compelling the maintenance of conservative methods, it protects depositors from loss and the public generally from the disturbance in business affairs which usually follows the failure of any banking institution. But unless the Superintendent is clothed with adequate direct power to enforce the law by closing a delinquent institution, the efficiency of the law is obviously lessened. Under existing law he may criticise objectionable practices when they come to his knowledge, and report continued delinquencies to the Attorney-General. His criticism is hence in large measure academic and may be given scant consideration by delinquents. The authority to close offending institutions and appoint receivers therefor should be vested in the Superintendent for this reason and others to be discussed presently. Were he clothed with the power to direct the discontinuance of unsafe practices," no institution would dare continue the same after having been admonished by him.

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LOANS AND INVESTMENTS.

The chief business of banking institutions is the making of loans or investing the funds in their possession, and the State undertakes in general terms to regulate the manner in which this is to be done. Prescriptions too specific in their nature would interfere with legitimate transactions, and it is hence judicious to leave the regulation of details to the officers and managers, subject to the scrutiny of examining and supervisory officials.

The directors are dependent for their knowledge of a cor