"equally and ratably and not for another." In fourteen states the shareholders are liable "jointly and for each other." Sixteen other states are more lenient, imposing no statutory liability whatever. With reference to the regulation of loans the state banking laws are in general more liberal than the federal law. The national-bank act limits the amount of any single liability due a national bank to one-tenth of its capital and surplus and to 30 per cent of its capital stock. With the exception of two states the state banking laws are far more liberal. Some twenty-two states allow from 15 per cent to 30 per cent of capital and surplus as the limit to each individual liability to a bank, and ten states have no limitations whatever. The national-bank act permits an excess if it consists of advances on bona fide bills of exchange and commercial paper actually owned by the negotiator. The state laws, in addition to these, make exceptions in favor of loans on real estate mortgages (six states); loans on bills of lading and warehouse receipts (eight states); loans on collateral security (fifteen states), and loans approved by a vote of the directors (four states). This greater liberality may be accounted for by the smaller size of most of the state banks and the difficulty of enforcing restrictions. Even in the national system enforcement is not easily accomplished, for as late as September, 1909, over one thousand banks (or 15 per cent of the total) voluntarily reported excessive loans. Several of the eastern states have recently set limitations as to the amount of any one loan irrespective of the individual's liability. Another important contrast between national and state banks is the power conferred upon the latter and denied the former to loan upon real estate. A few states limit the amount to be put into realestate loans. The prevailing practice is to limit these loans to 50 per cent of the capital or capital and surplus. A few place the limit at from 15 per cent to 40 per cent of the assets, and some at 20 per cent of the loans. State laws define the character of these loans as to the location of the property, the character of the lien, or the proportion which the value of the real estate must bear to the amount of the loan. Holdings of real estate are limited to a five-year duration following a foreclosure sale. These real-estate loans are a larger proportion of the total loans in the smaller towns and cities. And "notwithstanding the disadvantages of real estate as a convertible asset, the power to loan on the security of real estate is a valuable one to many of the state banks." On April 28, 1909, 20.6 per cent of the total loans and discounts of state banks were based upon security of this character. In so far as the deposits of state banks are time deposits, this form of lending cannot be troublesome, though it is not suitable for active commercial banks in large centers of population. The third great difference between national and state banks is found in the reserve requirements. Here, also, the state banks and territorial laws are the more lenient. At present (1910) in ten states no reserve whatever is required for incorporated banks. In fourteen states a reserve is required only against demand deposits. The amount ranges from 10 per cent to 25 per cent, although 15 per cent is commonly required. In six other states a lower reserve is required against time deposits than against demand deposits. This ranges from 4 per cent to 15 per cent for time deposits as against 15 per cent to 25 per cent for demand deposits. In sharp contrast the national-bank act requires from 15 per cent to 25 per cent of all deposits. This example has been followed in but thirteen states. Not only in regard to the amount of reserve, but also as to its form, do state and national laws differ. All states permit balances in other banks to be counted as a part of the reserve. The amount of redeposit so authorized varies from one-half to three-fourths. A few states distinguish between the amount to be redeposited of the reserve against demand and time deposits. As high as elevenfifteenths of the latter are so redeposited. In seven states "the banks determine for themselves what part of their reserves shall be cash in bank and what part shall be in the form of bank balances." In four states bonds may be counted in the reserve. In the choice of depositaries the state banks are practically unrestricted. In but five states are distinctions made between the reserves required of ordinary banks and reserve agents. II2. THE FUNCTIONS OF TRUST COMPANIES1 The functions of a trust company may be divided into two classes: general and special. The general functions are: (1) the execution of corporate trusts, (2) the execution of individual trusts, (3) the care of securities and valuables, and (4) banking. 1 Adapted from an unpublished article. The company often acts as trustee under corporate mortgages and trust deeds, looking out for the interests of the bondholders. As fiscal agent the company dispenses coupons and makes interest payments on bond issues and dividends of stocks. It receives funds set aside as sinking funds, or when the bonds are subject to redemption draws a specified amount by lot, and pays the principal. As registrar the company authenticates certificates of stock in order to prevent overissues and to reduce the chance of loss or theft. As transfer agent it attends to the perfecting of transfers of ownership for stock and bond issues or parts of them. As manager of underwriting syndicates it issues a prospectus and markets the securities of corporations which are being launched, or, if established, are issuing new securities. In railroad and other reorganizations the company takes a prominent part, acting both as a depository for, and as a representative of, the committees which formulate and execute the plans. As assignee and receiver the company acts in the same capacity for corporations as for individuals and partnerships, assisting in winding up insolvent business and in conducting embarrassed ones. The original function was the work of the present individual trust department. All other functions have been added. As executor appointed by will the company sees to the carrying out of the terms of the will. As administrator it performs similar duties. As trustee under a will it carries out the provisions of the will, investing or managing the estate or particular funds in accordance with the directions. In this case it may hold real or personal property. As trustee under deed a contract is entered into, and the title of the property is vested in the company. Marriage settlements are often made in this way. The trust company often acts as guardian, curator, or committee of estates, and in some states of persons of minor age, insane, spendthrifts, drunkards, and others not legally fit to conduct their own affairs. As agent the company takes charge of property for its owner, but does not have the power to sell it. As assignee the company takes possession of the property assigned, for the purpose of carrying out the terms of the deed of assignment, in the interest of both the assignor and his creditors. As receiver appointed by court the company has much the same to do as in the case of assignee. It must preserve the property for the creditors. As custodian the company holds property the title of which is in dispute, delivering the same when the dispute is legally settled. The company acts as representative for living or dead in practically every legal relation in which an individual can act. It must not only keep intact the estate of which it has charge, but must safeguard the interest of every beneficiary. The special functions are life insurance, title insurance, and fidelity insurance. Life insurance was formerly a part of a trust company's business, but has now been delegated in large degree to special life insurance companies. Title insurance is often found to be one of the functions. The company insures the purchaser of property because of illegal titles and guarantees the sale to be legal. Fidelity insurance, which insures an individual or corporation against loss by reason of dishonesty and non-performance of obligations or contracts, is gradually passing into the hands of special companies. 113. THE BANKING FUNCTIONS OF TRUST COMPANIES1 By F. B. KIRKBRIDE AND J. E. STERRETT The banking functions of trust companies may include any or all of the following: The receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. Interest is usually allowed on all deposits above a fixed minimum amount or on the total sum. Money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property. Real estate loans, secured by bond and mortgage. It is customary to loan not over two-thirds of the value of improved property; when the property is unimproved, not more than half. Discounting paper is engaged in principally by companies transacting a commercial banking business. The purchase of unsecured paper is permitted in some states where discounting is not allowed. The purchase and sale of securities. Trust companies sometimes guarantee issues of bonds, or at least set their stamp of approval upon them. The issue or guarantee of letters of credit and the transaction of a foreign exchange business. I Adapted from The Modern Trust Company, p. 6. (The Macmillan Co., 1913.) The care of savings deposits. For this purpose a separate department is usually maintained. 114. CAUSES OF THE GROWTH OF TRUST COMPANIES1 BY CLAY HERRICK Regarding the causes of the growth of trust companies, the easiest thing to say is also probably the truest-that they are found in the tendencies of our age and nation. The trust company marks, not a revolution, but an evolution in our methods of handling financial matters, and we cannot understand its development without taking into account the great changes which our civilization is undergoing. There is, to begin with, the accumulation of individual wealth-the increase in the number of persons and families having large interests to care for. A still more important influence has been the tremendous increase in corporate wealth, both in number of corporations and in the amounts under their control. Here are phenomena that are peculiar to the United States and peculiar to this age. Nothing like the huge corporations formed in recent years in the United States has ever been known before since history began. To care for these institutions some special agency was needed. The trust company proved equal to the emergency. Says one writer: "Without their [the trust companies'] agency some of the transactions in modern corporate business would be both cumbersome and difficult. For the success of schemes of reorganization of railroad interests and the financing of vast industrial consolidations their intervention has grown to be at least an invaluable convenience, if not altogether a necessity." Coincident with this tendency to great consolidations, the growing recognition among all classes of people of the value of associated effort has had a marked influence in favor of trust companies. Here again the trust company finds itself in harmony with the times. It is an intermediary between great enterprises and the group of individuals who constitute its customers. It takes the amounts, large or small, contributed by the latter, in trust; and the result is a large amount which it can invest in any corporate undertaking to the mutual advantage of all concerned. Surplus funds, useless in small amounts, are Adapted from Trust Companies, Their Organization, Growth and Management, pp. 31–32. (Bankers' Publishing Co., 1909.) |