BRITISH BANKS.

Auckland Star, Volume LXIV, Issue 99, 29 April 1933, Page 4

BRITISH BANKS.

WHY NONE CLOSED.

STRIKING CONTRAST WITH U.S.A

VALUE OF CONSOLIDATION.

(By a Special Correfiiwrnlent.) LONDON, Marcli 21. ! "You know, as well as I do, tlie defects of our over-individualised bank- | ing system aiul the need for reorganisation which is long overdue. I shall only say, therefore, that, as one who has liad 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." When Ambassador Mellon uttered these words, in a speech in London recently, they 'suggested themselves as a useful opening to a dispatch seeking 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 banks have failed since 1929, the answer is invariably that in England tlio type of bank which fails in America, the small local bank, operating alone and with no backing* but its own resources, docs not exist. The old local banks, usually family institutions, which abounded in the English provinces in large and small cities a generation ago have all been peacefully eliminated by absorption in one or other of a dozen or so great banks with hundreds, anrl in some cases thousands, of tranches, which hold between them practically all the money of the country. That there_ should be thousands of separate banks in Amcrica is incomprehensible to English bankers. 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 arc two. The branch, of course, attends to local business, but it is not a local bank. Behind it are all the resources of the entire institution. The "Big Five." Tho "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 that if his money is not safe in the keeping of one of the Big Five, it is not 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 theso great banks which hold the small man's money to crash than she could aiforcl to lose a war. It is for this reason that there has not been a bank failure in Britain sinco Farrow's Bank closed in September, 1920. For the same reason, although tho sudden announcement that tho country was going off the gold standard on September, 21, 1931, profoundly shocked England, the banks received the news without even a tremor. No one doubted that they would meet their obligations, even although they might be forced to pay them in currency depreciated by no fault of their own. Farrow's was a bank with about seventy branches in London and other towns and a capital of £4,000.000. It failed in a year not of depression but of active speculation and over-confidence. Its disappearance lent strength to the prevalent financial doctrine in England that banks, like individuals, should not live alone. This principle of the big bank with hundreds of branches, so well established in the public* eye that it is immune from panic, is the main difference between the British and American banking systems. It is not contended 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. Stability Factors. 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 tho Stock Exchange, which can be called in mostly at seven days' notice or at most at 14 days. About 5 per cent is always represented by commercial bills realisable in three or four months' or at most six months' time. I

British banks never lend except on full security, and they do not finance industry in (he manner of the German banks. "With some 20 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 it happen as it does sometimes in America, that a banker having lent his depositors' money on land mortgage finds himself compelled to suspend payment because the mortgagees are hit by the depression 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 which have not been led astray.

It is observed in this country that there are uo bank failures in Canada, either, although the slump has hit that Dominion with very great severity and affects every sector of its economic life. The relative strength of the Canadian banks seems to lie in the fact that Canada also has eliminated the small local banker and adopted the system of a few big banks with hundreds of branches operating throughout the country.— (N.A.N. A.)