PROUD RECORD.

Auckland Star, Volume LXIV, Issue 91, 19 April 1933, Page 4

PROUD RECORD.

ENGLAND'S BANKS. REASONS FOR STABILITY. NO FAILURE FOR 13 YEARS. LONDON, March 2. "You.know as well ae I do the defects of our ■ over-individualised banking system and the need for reorganisation which is long overdue. I shall only say, therefore, that, as one who has had a long experience in American banking, I am fully confident that this is a temporary crisis and that American banking will profit by the reforms that will undoubtedly come as the result of the difficulties through which we are passing at present." Ambassador Andrew Mellon uttered these words in a valedictory speech at a farewell luncheon given in his honour by American newspaper men in London yesterday. , They are useful words with which to begin an article wherein some attempt will be made to explain just why no bank has failed in England since 1920, when one, a minor institution, closed its doors. If the question is put to London bankers—why is it that in ten years of steadily intensifying trade depression there have been no bank crashes in England, whereas in the United States many hundreds of banks have failed since 1929, the answer is invariably that in England the type of bank which fails in America, the small local bank, operating alone and with no backing but its own resources, does not exist. The old local banks, usually family institutions, which abounded in the English provinces in large and small cities a generation agro, have all been peacefully eliminated £>y absorption in one or other of a dozen or so great banks with hundreds and _in some caseg thousands of branches, which hold between them practically all the money of the country. That there should be thousands of separate banks in America is incomprehensible to English bankers. The "Big Five." England is well served with banks. There is not a sizeable village which has not a branch of at least one of the "Big Five." Usually there are two. The branch, of course, attends to local busjuesg, but it is not a local bank. Behind it are all the resources of the entire institution. The " Big Five," that is, Barclay's, Lloyd's, the Midland, the Westminster, and the National Provincial Banks, do business on such an enormous scale and they figure so largely , in the national calculations, that panic cannot come near them. The most nervous depositor knows c thafc if his money is not safe in the keeping of one of the Big Five, it is hot safe anywhere. If one of these institutions failed it would cause an unimaginable catastrophe, and the public is rightly convinced that neither the State nor the other big banks would allow such a thing to happen. England could no more afford to allow one of these great banks which hold the small man's money to. crash . than she could afford to lose a war. It is for this reason that there has not been a bank failure in Britain since September of 1920, when Farrow's Bank closed its doors. For the same reason, although the" suddpn' announcement that the country was. going off the gold standard on September 21, 1931, profoundly shocked England, the banks •-eceived the news without even a tremor. No one doubted that they would meet thejr obligations, even ."Uhoufeh they might be forced to pay t'iem in currency depreciated by no fault of their own. Liquidity of Reserves. The principal of the big bank, that banks, like individuals, should not live alone, ie the main difference between British and American banking systems, it is not claimed that British methods in detail are superior to American, or that they differ very much from them. British banks are subject to no special laws compelling them to maintain a definite ratio between the amount of their deposits and their reserves. Their policy, voluntarily adopted, is to_ maintain a high degree of liquidity of their reserves. The great banks keep with the Bank of England cash balances amounting to from 10 to 12 per cent of their liability for their own deposits. About 5 per cent of their holdings is invested in short call loans to the Stock Exchange, which can be called in mostly at seven days' notice, or at most at 14 days. About 5 per cent is l always represented by commercial bills realisable in three or four months, or at most six months' time. British banks never lend except on full security; and they do not finance industry in the manner of the German banks. With some.2o per cent of their deposits available either at once or at short call, the British banks are well prepared to meet emergencies. It is not pretended, of course, that in the case of a run any of them could return the whole of their deposits at once, but a run that started on any one of the big banks would certainly be stemmed with the help of the others. Consequently, however bad business may be, a panic situation does not arise, nor can in happen, as it does sometimes in America, that a banker, having- lent his depositors' money on land mortgage, finds himself compelled to suspend payment b?c"ause ■ the mortgagees are hit by the repression and unable to meet their bills. If the manager of a branch lends unwisely, the accounts of that branch may read unfavourably, but the loss is, at the worst, to be written off against the earnings of the hundreds : ,of branches wliich . have not been led astray. (N.A.N.A.)