Second. Such as shall be mortgaged to it in good faith by way of security for debts previously contracted. Third. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings. Fourth. Such as it shall purchase at sales under judgments, decrees, or mortgages held by such association, or shall purchase to secure debts due to said association. (National Bank Act, June 3, 1864.) Such associations shall not hold the possession of any real estate under mortgage, or hold the title and possession of any real estate purchased to secure any debts due to it for a longer period than five years. (National Bank Act, June 3, 1864.) "Any national banking association not situated in a central reserve city may make loans secured by improved and unencumbered farm land, situated within its Federal reserve district, but no such loan shall be made for a longer time than five years, nor for an amount exceeding fifty per centum of the actual value of the property offered as security. Any such association may make such loans in an aggregate sum equal to twenty-five per centum of its capital and surplus or to one-third of its time deposits, and such banks may continue hereafter as heretofore to receive time deposits and to pay interest on the same." (Federal Reserve Act, December 23, 1913.) The Federal Reserve Board shall have power from time to time to add to the list of cities in which national banks shall not be permitted to make loans secured upon real estate in the manner described in this section. (Federal Reserve Act, December 23, 1913.) b) To one person or corporation: The total liabilities to any association, of any person, or of any company, corporation, or firm for money borrowed, including, in the liabilities of a company or firm, the liabilities of the several members thereof, shall at no time exceed one-tenth part of the amount of the capital stock of such association actually paid in and unimpaired and one-tenth part of the unimpaired surplus fund, provided that the total of such liabilities shall in no event exceed thirty per centum of the capital stock of the association. But the discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper actually owned by the person negotiating the same, shall not be considered as money borrowed. (National Bank Act, as amended June 22, 1906.) c) On security of own stock: No association shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith; and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale; or, in default thereof, a receiver may be appointed to close up the business. (National Bank Act, June 3, 1864.) 107. OBJECTIONS TO LOANS ON REAL ESTATE1 The prohibition against loans on real estate is a feature of the National Banking Law which has been much criticized in some quarters; and as evidence that this restriction upon the powers of the national banks is unreasonable and unnecessary, it is urged that real estate is the best kind of security; that savings banks, trust companies, and insurance companies are authorized to make such loans; and why, therefore, should not the national banks be permitted to do the same? But, by the great majority of bankers, the restriction is deemed wise and salutary. The objection to real estate security is not to its sufficiency, but to the kind. As the obligations of the banks are largely payable on demand, it is necessary that the securities it holds should be readily convertible into money; and while a mortgage upon real estate may be good security, it cannot be made immediately available, in case of an emergency. Personal securities of the kind usually taken by banks can be quickly assigned and promptly realized upon; but the transfer of any interest in real estate is always attended with more or less delay. It has not infrequently been the case that banks have been compelled to suspend when their assets were more than sufficient to pay their debts simply because a large portion of the assets were real estate securities, upon which it was impossible to realize at the proper time. In the case of insurance companies, trust companies, savings banks, and similar corporations there is not the same necessity for having the assets in a convertible form, but it is rather desirable that a large portion of the investments shall be of a more or less permanent character; and, therefore, real estate loans are well adapted to their purpose. 108. ARGUMENT FOR LOANS ON REAL ESTATE BY O. M. W. SPRAGUE For banks all of whose obligations are payable upon demand the real estate loan, quite regardless of its safety, is wisely considered unsuitable. Such loans are commonly wanted by borrowers for a considerable period of time, and therefore they cannot readily be 1908). Adapted from Digest of National Banking Laws, p. 28. (A. S. Pratt & Sons, 2 Adapted from "Proposals for Strengthening the National Banking System," Quarterly Journal of Economics, XXIV (1909-1C), 204-5. reduced in amount even by an individual bank. In other words, they are not liquid. But the importance of this quality in all its assets disappears when a bank begins to acquire time or savings deposits as well as those payable on demand. Some of the advantages which the banks would derive if they were able to lend on real estate are so evident that they require little more than mere mention. It would give them more of the most profitable kind of business, that which has its origin in the neighborhood of the bank. The immediate return is generally greater than can be secured from the employment of funds in the money centers or in the purchase of paper from note brokers. Moreover, in fostering the growth of wealth and population in its locality a bank is laying a solid foundation for the future expansion of its own business. Finally, the ability to lend on real estate will often enable a bank to secure valuable customers who would otherwise go elsewhere. It has been the unpleasant experience of many a national banker to be obliged to refuse a loan to a would-be borrower who has nothing but real estate to offer as security and see him enter a neighboring state bank or trust company where there was no legal obstacle to the transaction. Relations once established are pretty certain to continue even after the borrower has security which falls within the provisions of the national law. In order that such loans may be made with safety, however, it is necessary to establish time savings departments, segregating the deposits. 109. CAUSES OF NATIONAL BANK FAILURES1 Sixty per cent of the failures of national banks were caused by violations of the national banking laws; 23 per cent were caused by injudicious banking; 13 per cent by shrinkage in values and general stringency in the money market, while 4 per cent resulted from the failure of large debtors and other minor causes. Criminal violations of law caused about 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. I Adapted from Report of Comptroller of the Currency, 1911, p. 27. |